First Time Home Buyer Guide: Programs and Requirements
People looking to purchase their first home usually have a wide range of home loans to choose from. We are happy to offer multiple types of first time home buyer programs that should fit almost every potential need.
We offer many First Time Home Buyer programs including:
- Government Mortgage Loans
- FHA Loans
- FHA 203K Rehab Loans
- HomeStyle Renovation Loan
- VA Loans
- USDA Rural Housing
- WHEDA (WI only)
- Conventional Loans
- Jumbo Loans
- Combo Loans
- No Money Down Loans
- Fannie Mae HomeReady®
- Freddie Mac Home Possible®
- Less Than Perfect Credit
Government Mortgage Loans
The United States Federal government oversees 3 popular lending agencies; FHA, VA and USDA. The government does not loan money for mortgages and neither do the aforementioned agencies. Instead, each agency has its own set of rules and guidelines for offering a mortgage. Lenders are allowed to offer the government loans as long as
- They are approved by the agency for mortgage lending
- They follow the guidelines set forth by each agency
FHA is an acronym that stands for Federal Housing Authority. FHA loans have been around for a long time and are quite popular among the first time home buyer crowd. When using an FHA mortgage, buyers are asked to pay 3.5%* of the sales price as a down payment. However, FHA is different from most other loans because it will allow the down payment to be a gift from a member of the borrower’s family. It is also possible to use grant money from either local or state agencies in various states.
Another distinguishing fact about FHA is their ability to approve loans for borrowers that have less than perfect credit. It is possible to get approved for a mortgage with FHA if the borrower has a credit score all the way down into the 600s. Compared to many other programs, this one fact is a huge help to numerous borrowers.
FHA will also allow the seller of the home to pay the closing costs for the mortgage. This can be a great feature for a first time home buyer and it can save the buyer thousands of dollars at the closing.
FHA 203k Rehab Loans
For a moment, picture all of the benefits of an FHA loan. Now, add to that the ability to borrow extra money to either renovate or repair an existing property. In a nutshell, that is an FHA 203k rehab loan.
FHA 203k will allow borrowers (including a first time home buyer) to finance the purchase of a home as well as finance the renovation and repair of the home with one single mortgage. This mortgage has a low rate and can be financed on a fixed term for up to 30 years.
The types of repairs and improvements allowed under this program are numerous. Some examples include
- Improving the property’s landscaping
- Repairing any type of structural damage to the home
- Adding an entire room to an existing home
- Moving one of the load-bearing walls of the property
- Adding energy efficient appliances
- Improving the utility efficiency of the home by replacing windows, ceiling, roof, doors, etc.
- Improving the plumbing, electrical or HVAC system
- Replacing the HVAC system
If you are a first time home buyer considering this type of loan, it is wise to seek out a contractor and a mortgage lender that have experience with the 203k loan. This will ensure the proper paperwork is completed and make the process smoother.
VA is an acronym for Veterans Administration. As the name implies, these loans are offered to qualifying members of the military. The VA has a list of qualifications for people that either served actively in the military or in either the reserves or National Guard. Your loan officer can go over your service time and determine your eligibility.
One of the main attractions of the VA mortgage program is the zero down payment. For qualified borrowers, VA will allow a mortgage up the home’s selling price or appraised value, whichever is lower.
Another major selling point is that there is no mortgage insurance on VA loans. Most loan programs will charge mortgage insurance to borrowers if they pay less than 20% down at the time of purchase. However, VA has no such rule.
The VA guidelines for credit are also quite forgiving. Typically, the loan underwriter will analyze the most recent 12 months of credit history for the qualifying borrower to determine eligibility. This can be especially helpful if you are a first time home buyer.
Please Note: The VA mortgage program is available to eligible Veterans only
USDA Rural Housing Loans
USDA is an acronym for United States Department of Agriculture. The USDA offers a mortgage known by many names such as Rural Home loan, USDA Rural Housing mortgage, Section 502 mortgage or USDA loan. All of them refer to the same loan.
USDA allows qualified borrowers to finance up the home’s asking price or the appraised value, whichever is lower. This means that there is no requirement for a down payment.
The primary distinguishing factor of the USDA mortgage is the property eligibility. In order to qualify for a USDA loan the property must be located within an area considered rural by USDA. However, that term is a bit misleading. The vast majority of large cities in the United States actually have rural areas designated by USDA within a few miles of their downtown area. In fact, many states have entire counties that are labeled as rural by the USDA.
Another distinguishing factor of the USDA loan is the borrower income eligibility. In order for USDA to approve a loan the borrower’s household income cannot be higher than 15% of the average household income for the area. Based on recent income data compiled for various areas of the country, a large percentage of residents in any one area will meet the income eligibility requirements.
Please Note: For all USDA mortgage loans, property and income restrictions apply.
Conventional loans are mortgage loans have the lowest mortgage rate. These loans typically require at least a small down payment. The down payment must come from the borrower’s own funds. Generally speaking, it takes a high credit score to get approved for conventional loans.
Conventional loans have the lowest rates for one simple reason; lower risk. Since the people that get approved for these loans generally have high credit scores there is less chance that the buyers will stop paying on the mortgage. The lower risk translates to a lower interest rate.
Conventional loans can be offered as a fixed term loan with terms ranging from 10 to 30 years. They can also be offered with adjustable rates. This means that the initial interest rate will be fixed for specific period of time and then adjust over the life of the loan. The fixed specific period of time can be as low as one year and go all the way up to five years.
Featured Conventional Loan Blog Posts:
Converting Your Primary Residence to a Rental Property
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Gift Of Equity Convenitonal Loans
A jumbo loan is a mortgage higher than $510,400. These loans are not offered through any of the government programs nor are they offered as a conventional loan. Private lenders offer jumbo mortgage loans and have their own guidelines.
Typically, a lender that offers a jumbo mortgage will require at least 10% down payment and possibly as much as 20% down. They may also require a bit more documentation to prove income and assets compared to the documentation needed for other first time home buyer loans.
Jumbo loans are often offered with adjustable rates in the 3 to 7 year range. This means that the mortgage interest rate would be fixed for the first 3 to 7 years, depending on the loan, and then adjust once a year.
Featured Jumbo Loan Blog Posts:
Could a Jumbo Mortgage be a Wise Move for High Worth Individuals?
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Various lenders offer combination loans, also called piggyback mortgage, as an alternative to home buyers in order to avoid paying mortgage insurance. The buyer, or buyers, would apply for two mortgages at the same time with a single lender. The first mortgage will be 80% of the sales price of the home. The 2nd mortgage will usually be 10% to 15% of the home’s sales price. The left over portion would then be required as a down payment from the buyer.
This does mean that the buyer(s) will have 2 separate mortgage payments to make each month on their new home. However, all of the money being paid is going towards either interest or principal on the loan rather than paying extra money for mortgage insurance.
In certain situations, the rates of the two mortgages effectively offer an overall lower payment for the borrower when compared to a loan with mortgage insurance.
No Money Down Loans
No money down loans is a general term that refers to several mortgage programs. Most notably, the following 3 mortgages can be used with no money down from the buyer
- FHA mortgage
- USDA mortgage
- VA mortgage
For the FHA mortgage, the buyer is required to pay 3.5%* of the homes price as a down payment. However, the money can be a gift that was given by the buyer’s relative. Also, the buyer may qualify for a local or state grant for the down payment rather than rely on help from family.
If you are a first time home buyer, getting approved for a mortgage without a down payment can be a huge help. Money that may have been saved up by the buyers can be used for updates to the home or simply remain in savings for tougher economic times.
In an effort to provide home financing to people with moderate to lower incomes, Fannie Mae started its initiative called the HomeReady® Mortgage. This program is similar to the FHA program and has several appealing features.
First and foremost, the loan program only requires a 3%** down payment from the buyer. While this does mean that the homeowner will need to pay mortgage insurance on the loan, the rates for HomeReady® Mortgage are lower than conventional loan mortgage insurance.
Secondly, as mentioned above, the borrower’s income must be either below are equal to the median income for their area. The income limits are published by HUD (Housing and Urban Development) and can be found at their website.
Third, the borrower may purchase a single family home or they can buy a multiple unit property up to a 4-unit dwelling.
Freddie Mac Home Possible®
Freddie Mac offers the Home Possible® Mortgage loan to aid borrowers with moderate to low income. The program is similar to the FHA program.
The Freddie Mac Home Possible® requires a 3%** down payment from the buyer. Gifts from family members can be used for the down payment money.
The mortgage insurance rates are reduced, compared to conventional loans, in order to keep the payments low for the buyer.
The Home Possible® Mortgage can be used to purchase a single family home or a unit in a planned unit development or a condo.
The buyer’s income must be equal to or less than the median income for the area.
Less than Perfect Credit
Potential first time home buyers sometimes have less than perfect credit. Often times they resort to renting a home or apartment because they are afraid that their past will stop them from buying a home. Most of the time, this is not the case.
Many programs, such as the FHA and VA programs, focus heavily on the last 12 to 24 months of a person’s credit history. This can mean that someone who has made the effort to get caught up on their obligations and paid everything on time for the past year can usually get affordable financing.
Until they speak to a mortgage lender, most first time home buyers are truly in the dark about what they can afford and when they can buy a home. It is best to speak to an experienced mortgage loan officer and let them help in making the decision.
Top 5 Tips for First Time Home Buyers
Signing on the dotted line and getting that first home can be filled with a lot of emotions. Excitement, nervousness and even a little anxiety can creep into the hearts of first time home buyers. Most of the negative feelings come from a lack of preparation. Here are a few tips to get you on the right path and hopefully avoid some of the bad emotions.
Improve Your Credit As Much as Possible
Your credit score will have a huge impact on the interest rate that you pay for the home. Spending the next 6 to 12 months improving your credit score can save you thousands in interest over the life of the loan. This is a big deal and deserves a lot of attention.
First and foremost, pay down credit cards as much as possible. The closer your balance on open cards is to zero, the higher your score will go.
Second, do NOT close any existing credit cards. Simply pay them down as much as you can.
Third, avoid any new debt. Keeping existing debt down, while hopefully paying off some of your debt, will help you in qualifying for a mortgage.
Fourth, and this is the most important item, make all payments on time on all debts. Don’t be late on anything.
Save Up A Nest Egg
You may qualify for a low-down or even a zero-down payment mortgage. You may also find a seller that is willing to contribute towards the closing costs. But it is a bad idea to assume you can purchase a home with zero money out of pocket. It is wise to save up money that can be used towards the down payment as well as closing costs and moving expenses. Finding out that your credit and income are strong enough to get a mortgage approval is all in vain if you also learn that you need some money for necessary expenses that exceeds your current budget.
Get Pre-Approved for the Mortgage
Following on the heels of the last tip, it is best to get pre-approved for a mortgage before looking for a home to buy.
A quality mortgage lender can review your credit report, income and asset documents and determine the best loan for your needs. The lender can also pre-approve you for the loan, pending an appraisal on a home, and provide you with a letter of approval.
This letter gives confidence to real estate agents that you are not only serious about your desire to buy a home but that you are also financially able to put a contract on a house.
Get Your Very Own Real Estate Agent
Real estate agents have two primary jobs: (1) list a home for sale on behalf of a client or (2) help a client find a home to purchase.
The agent that is working on behalf of a home seller is trying to assist their client with getting the best price possible for that property. This means that the agent is not keenly interested in helping to lower the price to help a buyer. This is the main reason why any first time home buyer should use a real estate agent.
Using a buyer’s real estate agent puts someone in your corner and ensures that a person is looking out for your best interest during the home buying process.
Consider the Future When Buying a Home
Too many people buy a home that will fit perfectly with their existing situation but becomes a burden when things change. For example, a young couple that is expecting their first child may be able to find a budget-friendly 2 bedroom home that is great when the baby arrives. But what happens if they have 2 more kids over the next 6 years?
It is wise to sit down and consider how things may change in the next 5 to 10 years and buy a home that fits with your future plans as well as your current plans.
- Important Disclosure
*3.5% down payment on $193,000, 4.125%/ 5.713% APR, 640 FICO, 30-year fixed rate mortgage. Mortgage insurance is required. Rates subject to change. Subject to credit approval.
**3% down payment on $250,000, 4.000%/ 4.815% APR, 740 FICO, 30-year fixed rate mortgage. Mortgage insurance is required. Rates subject to change. Subject to credit approval. At least one borrower must be a first time home buyer. Borrowers who have not held interest in a property in the last three years are also considered first time home buyers.
HomeReady® is a registered trademark of Fannie Mae.
Home Possible® is a registered trademark of Freddie Mac.
The VA mortgage program is only available to eligible Veterans only
USDA mortgage program – property and income restrictions apply