Loans for First-Time Homebuyers
Buying your first home is an important moment in your life. Unfortunately, far too many people get caught up in the excitement and don’t choose the best loan option based on their financial situation. While your mortgage lender will vet you to ensure you can repay the loan, different loan options will provide you with more flexibility than others. There are tons of options available for first-time homebuyers, so taking the time to research your options and find the right one for you is a great first step to getting approved. This article will discuss loans available for first-time home buyers to help you understand the different options available to you.
Types of Loans
There are many residential loan programs available for buyers of all types. Since first-time home buyers are typically younger individuals, there are loans designed to help these buyers purchase their first home with less money down and flexible requirements. However, you must meet your lender’s requirements to be approved for a mortgage. So if you’re trying to get approved as a first-time buyer, you need to meet that definition. A first-time homebuyer is someone who has never owned a principal residence, but it can also be someone who hasn’t owned a primary residence for more than three years. Other definitions include:
- A single person who owned a home with a spouse
- An individual who has only owned a residence not affixed to a foundation, such as a mobile home
- An individual who has owned a property that was not in compliance with building codes
Requirements vary by lending and loan program, but you’ll be required to provide proof of income for at least two years and a down payment of at least 3.5% unless you’re a veteran, in which case you don’t need a down payment. Your credit score should also be at least 620, but different lenders and loan programs may allow for lower scores. These are a few of the most popular types of home loans for first-time buyers.
Conventional Home Loans
Conventional mortgage loans are provided by a mortgage lender and are not insured or guaranteed by the government. They’re typically fixed-rate mortgages, so you’ll pay the same amount every month. However, they’re one of the most difficult types of loans to qualify for and have strict requirements, including a 20% down payment, higher credit scores, and lower debt-to-income ratios.
If you don’t have the 20% down payment, you may still qualify for a conventional loan with the need for private mortgage insurance (PMI), which increases your monthly mortgage payment. However, conventional loans typically cost less over the life of the loan compared to other loans, including those guaranteed by the federal government.
Federal Housing Administration (FHA) Loans
FHA loans are part of the US Department of Housing and Urban Development (HUD). They’re often a great choice for first-time home buyers because they have a lower down payment requirement and are easier to qualify for. FHA loans have lower upfront costs and more flexible requirements. For example, you can make a down payment as low as 3.5% or higher if you want to pay less every month. All FHA borrowers must pay mortgage insurance, but the more you put down on the home, the less you’ll pay in total. The mortgage insurance is meant to protect the lender in case the buyer defaults or cannot meet the mortgage terms before paying it off completely.
VA loans are guaranteed by the Department of Veterans Affairs (VA). While the VA doesn’t make the loans, they guarantee the mortgages from qualified lenders, allowing veterans to purchase homes with great terms, including no down payment required.
VA loans are easy to qualify for, but lenders limit the maximum amount. To qualify for a VA loan, you must be a veteran or spouse of a veteran with eligibility requested by the VA. If you’re accepted, you’ll receive a certificate of eligibility that allows you to apply for the loan. Without the eligibility certificate, you won’t be able to complete the application process.
Fixed Rate vs. Floating Rate Home Loans
There are two types of mortgages to consider when taking out a home loan: Fixed rate and floating-rate mortgages. Fixed-rate mortgages are popular because they allow for a fixed monthly payment, so you’ll always know how much you’ll pay toward your mortgage. This rate will not change over the life of the loan as long as you don’t refinance. If the interest rates are low when you apply for the loan, you’ll have a good rate until you pay off the loan or decide to refinance for even better terms.
A floating-rate mortgage is available in two types: interest-only mortgages and adjustable-rate mortgages (ARM). These are designed to help first-time homebuyers who expect their incomes to increase throughout their homeownership. Floating rate lows can help you get lower introductory rates during the first few years, helping you save money. If your income doesn’t grow, this option can be risky because the interest rate increases over time. Additionally, market interest rates fluctuate, potentially rising dramatically.
Are There Specialty Programs for First-Time Home Buyers?
There are many special programs designed for first-time homebuyers apart from traditional sources, including ReadyBuyer, a program designed with 3% assistance towards closing costs when purchasing a foreclosed property. Additionally, there are downpayment assistance programs and programs designed for self-employed individuals, such as bank statement mortgage loans, that help self-employed individuals who don’t meet the requirements of conventional loans.
There are many options for first-time home buyers, but if you want to save money over the life of the loan, the best thing you can do is save as much money as possible for a down payment. No matter which loan program or lender you choose, a higher down payment can save you money in the long run and allow you to save more while paying off your new home. Additionally, raising your credit score can help you get the best interest rates and lock them in once your application is approved.