Best Home Loans for First-Time Buyers

When you’re ready to buy your first home, you may be feeling an assortment of emotions. You’re excited at the prospect of becoming a homeowner, but you might be uncertain how to navigate all the different lending options. The good news is that there are many types of home loans available for first-time homebuyers.

From lower down payment requirements to more flexibility with credit scores, these mortgage programs offer a number of benefits designed to make homeownership a reality for more Americans.  Here are four of the top home loans for first-time buyers:

FHA Loans

These loans are very popular for first-time homebuyers. They are secured by the Federal Housing Administration (FHA) and require a down payment of just 3.5 percent for the traditional loan. Additionally, FHA loans only require a minimum credit score of 580, making them an ideal choice for prospective homeowners who may be building or rebuilding their credit. While the FHA can approve homeowners with a credit score as low as 500, the down payment will be at least 10% of the home purchase.

FHA loans also allow for higher debt-to-income ratios (DTI) than you might see with some other lenders. The FHA qualifies people based on two ratios: one for housing-related debts, like the mortgage and property taxes, and one for all monthly debts, including the mortgage loan, credit cards, and auto payments. As of 2019, the DTI is limited to 31% for housing debt and 43% for total debt.

Since this is a government loan, two types of mortgage insurance premiums (MIP) are required. These protect the lender in the event that you stop paying on the loan. One premium is paid upfront at closing and is set at 1.75% of the loan amount. The other is an annual premium based on the base loan amount and loan term. This premium is usually paid monthly with the mortgage payment.

Another attractive feature of FHA loans is that they allow the down payment to be paid by grants, assistance programs, or gifts from family members. A mortgage broker can point you to different programs that might be available to reduce your down payment amount.

If you’re a first-time buyer with minimum savings and a fair credit score, an FHA loan might be the right option for you.

VA Loans

VA loans are guaranteed by the U.S. Department of Veterans Affairs. Former and current military members and their spouses are eligible to apply. Veterans must have served a specific length of time to obtain a loan. Active members can apply after 90 days of continuous duty.

These are great for first-time homebuyers because they don’t require a down payment or private mortgage insurance (PMI). Since these loans are backed by the government, lenders are also able to offer competitive interest rates compared to conventional mortgages. Additionally, the seller is allowed pay for the closing costs, so it’s possible to purchase a home without the buyer having to pay much out of pocket.

The VA itself doesn’t have a set credit score requirement, but the lenders they work with will have a minimum standard. Typically, you need at least a 620 credit score to get approved for a VA loan, but you’ll receive a better rate with a higher score. You’ll also need to meet other underwriting requirements, such as good payment history over the past 12 months. Anyone with late payments or defaulted accounts within the last year would likely not be approved for a VA loan.

VA loans are an excellent choice for military members with decent credit but not a lot of cash to put down or toward the closing costs.

Conventional Fixed-Rate Loans

Many first-time homebuyers enjoy the convenience of a fixed-rate loan. Unlike with a variable loan, you won’t have to worry about your interest rate and monthly payment inflating so much that your home becomes unaffordable. Regardless of the economy, you’ll have the same set payment each month through the life of the loan.

Conventional mortgages are offered through Fannie Mae or Freddie Mac, two organizations that are sponsored by the government. They have higher standards than other loan types. Buyers can typically qualify with a FICO score of 620-640, but for the better terms, you’ll want a score over 700.  While you may be able to put down as little as 3% on the home, you will have to pay for private mortgage insurance until you have 20% equity in the home.

The most common fixed-rate loans run either 15 years or 30 years. If you have good credit and plan to stay in your home for a long time, a conventional loan could be a good option for you.

Fannie Mae HomeReady Loans

This is a type of conventional loan that many first-time buyers might find more appealing than an FHA loan because they can qualify with a down payment as low as 3%, and they also won’t be required to pay an upfront insurance premium. Like FHA loans, borrowers can use gifts and grants to pay for the down payment and closing fees.

The HomeReady program is designed for low-income buyers, so it places a cap on income based on their county of residence. For example, the income limit for Kern County is $46,320 as of 2019. You will need at least a credit score of 620 to qualify for a loan through the program, but borrowers with credit scores above 680 will get better rates. Homebuyers must purchase private mortgage insurance and keep it until they’ve earned at least 20% back in home equity.

The HomeReady program could be a great fit for anyone who meets the income and credit requirements and wants to reduce the out-of-pocket costs associated with a home purchase.

Your Real Estate Partner

Making the transition from renter to homeowner is a huge step that can be made easier with the help of a real estate broker. At Premier Realty, we have an experienced team ready to help you through each phase of buying your first home. Contact us today to set up a meeting with a local agent.

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