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First-Time Home Buyer Loans and Programs

Where Should a First-Time Home Buyer Start?

Couple with keys to home | First time home buyers

Buying your first home is a major decision, but along with that first home comes some major benefits. A home gives you the ability to find the space that suits your needs. It offers potential tax benefits, the option to refinance later, and it could eventually produce a long-term financial gain by increasing in value. If you want to enjoy the benefits of homeownership, you may wonder where do you begin the process? There are several first-time home buyer programs that offer low rates so you can afford the house of your dreams.

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What First-Time Home Buyer Loans Are Available?

Here are some of the options that you can discuss with an experienced loan consultant:

30 Year Fixed Rate Mortgage – If making steady monthly payments over a 30-year repayment term makes the most sense for you, then you might want to consider a 30- year fixed-rate mortgage. Because your payments are spread out over a longer time, monthly payments are more affordable as compared to mortgages with shorter terms.

15 Year Fixed Rate Mortgage – With a shorter payment period, a 15-year fixed-rate mortgage is set up to help you pay off your mortgage faster and reduce your interest payments over the life of the loan.

VA Loan – These loans are guaranteed by the U.S. Department of Veterans Affairs (VA) and offered to veterans or the surviving spouse of a veteran. A VA loan can be obtained without a down payment and does not require PMI (Private Mortgage Insurance), although it does require payment of a Guarantee Fee unless exempt. 

FHA Loan – This loan type is a popular choice among first-time home buyers. Insured by the Federal Housing Administration (FHA), this loan gives the flexibility of buying a home with a lower down payment and credit score.

Conventional Loan  Because conventional loans generally have fewer restrictions than government-guaranteed loans, lenders may have more discretion to offer their borrowers more flexible terms and features. Buyers with a stronger credit profile will typically find conventional loans a more economical choice than a government-backed loan. Benefits include the possibility of a down payment as low as 3%. With a down payment of 20% or more, the borrower doesn’t have to pay mortgage insurance.

Adjustable Rate Mortgage – Unlike a Fixed Rate Mortgage, this variable rate mortgage features an interest rate and loan terms that adjusts to the market after a set period. The overwhelming benefit is the upfront savings of a lower rate and monthly payments in the initial fixed-rate period. This could provide possible relief to help with financial goals and fixing up a new home. Conversely, the variable rate increases may result in higher monthly mortgage payments, which makes it a riskier product in a rising interest rate environment.

Jumbo Loan – If your first home requires you to obtain financing that is more than what a traditional loan may permit, a Jumbo Loan can help. It offers greater financing flexibility for higher-priced homes that require loan amounts that exceed the maximum amount for a conventional conforming loan set by Freddie Mac and Fannie Mae. In 2020, the baseline conforming loan limit for most counties is $510,400. However, in some areas due to higher home prices, the conforming loan limits are as high as $765,600. Anything above these maximum amounts is considered a Jumbo mortgage.

Interest-Only Loan – With this loan, a borrower makes monthly interest-only payments due on a mortgage for a preset term, which is usually between 5 to 10 years. Some first-time home buyers like such advantages as it provides lower monthly mortgage payments, additional cash available to pay towards higher-interest debts, more control over cash flow and the entire monthly payment during the interest-only period may potentially qualify as tax-deductible. Be sure to consult your tax adviser. It’s best to keep in mind that this loan is not without risks and the mortgage payment could increase substantially.

I CAN Mortgage – Looking for the flexibility of customizing your loan with a broad array of available terms from 8 to 30 years? With the flexibility of the I CAN mortgage, you can choose from a variety of repayment terms over a shorter period of time to potentially pay off your loan earlier, save on interest, and build home equity faster.

USDA Loan – No down payment is required on this loan type. USDA loans are for home buyers in eligible rural areas of the country but can also include properties in the suburbs just outside of densely populated cities.

Non-Qualified Mortgage (Non-QM) Loan – If you don’t qualify for a traditional mortgage because of fluctuating or lump sum incomes and/or are self-employed or retired, then a Non-QM loan might be for you. With this loan, non-traditional borrowers may qualify for a mortgage through alternative income verification methods based on bank statements as opposed to tax returns. 

Buydown Loan – With this type of loan, qualified borrowers can reduce their mortgage payment rate by paying a one-time upfront additional charge (called a "point") in exchange for a temporary lower interest rate and lower payment on their mortgage. This allows qualified borrowers to ease into their mortgage with a more affordable payment before the buydown payment rate expires. This can help with more time to pay down bills, buy new appliances, or make home upgrades.

Energy Efficient Mortgage  For energy efficiency, the potential of lower utility bills and a greener lifestyle, an Energy Efficient Mortgage (also known as an energy-improvement mortgage) is used to finance a home that is energy-efficient (i.e., an Energy Star-Certified home). This type of loan also allows a qualified borrower the opportunity for a larger mortgage than they might otherwise be eligible for and/or a lower mortgage rate.

Questions to Ask Before Buying Your First Home

Purchasing a home is one of the biggest decisions you will make during your lifetime, and you may be feeling anxious and a bit overwhelmed by the process.  Make the process even easier by taking the following steps when applying for a first-time home loan.

1. Do I need a credit report?

You can find a copy of your credit report at annualcreditreport.com at no cost to you, but only one time a year.  In addition to the credit reports, you will need your credit score which you can find out by going to Credit Karma or other free websites.

You will want to examine your credit reports from the three major credit bureaus (TransUnion, Experian, and Equifax) to look for mistakes and contact the bureaus if you find any errors to file a dispute.

Mistakes can include:

  • Incorrect employers
  • Mistaken account information
  • Accounts that don’t belong to you
  • Late payments you actually made on time
  • Credit injuries which you did not authorize
  • Wrong current and former phone numbers and addresses

If your credit score is not as high as you would like it to be, there are steps you can take which can dramatically help. This includes keeping your credit card balance to below 15% of its limit, do not apply for new lines of credit, credit cards, or loans, and always do your best to pay your bills on time.

2. Do I need to get pre-approved?

Getting pre-approved for a mortgage is a must before you start looking for a home, which means speaking to a lender. The loan officer will look over your credit, and verify your income and assets according to your W2s, tax returns, bank statements, and paychecks.

Having your pre-approval letter is almost a requirement for a realtor to show you houses or have sellers accept any offers you may make.

This letter will likely include the maximum amount they will lend you. This does not mean, however, that you should spend this amount (see point #6).

3. How does my loan relate to my down payment?

How much you will need for a down payment depends on the kind of mortgage you have.  Loans with lower or no down payment required like FHA loans are typically popular among first-time home buyers.  With an FHA loan, you only need 3.5% of the purchase price of the home as a down payment.

Here are the down payment requirements for other types of home loans:

  • Conventional 97: 3%
  • Conventional loans: 5% - 20%
  • VA loans: no down payment
  • USDA loans: no down payment

4. Do I need a Real Estate Agent?

While many think not hiring a realtor will save them money, in reality the cost of hiring one is factored into the price of the home.  A good Real Estate Agent, on top of helping first-time home buyers through the often complex process, can also negotiate on your behalf.

5. How can I create a smart homeownership budget?

On top of paying your monthly mortgage, you also need to account for paying homeowner’s insurance, mortgage insurance, closing costs, and HOA fees.

FHA loans require mortgage insurance, no matter how much you put down, which is between 0.8% and 1% depending on how much the loan is and how much you put down.

Conventional loans don’t require private mortgage insurance if you can put down 20% or more.

6. What is a debt-to-income ratio?

Your debt to income ratio (DTI) is your monthly income compared to your debt obligations each month.
The most your DTI should be prior to factoring in a mortgage loan is 28%, while it should not exceed 50% when you include your mortgage loan.

First-Time Home Buyer Checklist

 

First-Time Home Buyer Programs

Need down payment assistance? You may be able to get help through bond and grant programs offered in your local area. We have several options that are administered through local, state and non-profit agencies. The money could be used to cover your down payment or closing costs. Check out First-Time Home Buyer Programs to review your options.

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Tips for First-Time Home Buyers

1. Research, Research, Research!

You want to know how much you can afford to spend before a loan officer tells you how much you qualify for. Why? You want your investment to be a sound one, made with premeditation and an understanding of your buying power.

If you are barely starting out, research can help you determine what you need to do now to purchase a home in the future, in essence research can help you create a home buying blueprint for yourself.

On top of the federal programs which offer beneficial terms to first time home buyers such as FHA and VA loans, certain states have their own assistance programs which may offer assistance with closing costs, down payment assistance, tax credits, or discounted interest rates.  It may be well worth your time to also research what your state or county may offer.

2. Stay on Top of Your Credit

Since credit is such a huge factor in buying a home, monitoring your credit is vital. Monitoring your credit shouldn't only be a priority when you are thinking about purchasing a home, overseeing your credit is something that should be done as soon as you start using and building your credit.

You want to make sure that everything on your credit report belongs to you and installment payments have no late fees.

Keep your credit score from dropping once you apply for a mortgage by not opening new credit accounts such as a credit account or an auto loan until your home loan closes.

Did you know you can access your credit report free once a year? Visit: Annual Credit Report

3. Assets & Liabilities

Assets are another important aspect of purchasing a home. It's all about understanding your monthly cash flow. Lenders will focus on how you spend your money, focusing on how much money you have left over every month based on your debt–to–income ratio.

4. Organize Your Paperwork

Sometimes the home buying process is delayed for less obvious reasons. If you do your research mentioned as mentioned above, you will likely find that lenders ask for proof of income and taxes. Having this documentation on hand can make the process a lot smoother and stress-free.

A good rule of thumb is to save 2 months' worth of bank statements, paystubs, and 2 years of tax returns and w-2s in an easily accessible place (for you). Make sure you update your bank statements and paystubs every 2 months and your taxes and W2s every year.

5. Get Pre-Qualified

After following the above tips, your next most important step before thinking about purchasing a home, is finding a lender to pre-qualify with. It's never too early to consult a lender.

If you need to make any corrections on your credit report, or gather a little more money for the down payment you want to make sure you aren't pressured or running against the clock to work out any kinks. Getting pre-qualified lets you and home sellers for that matter; know that you are serious buyer with real numbers and figures, not a lookie-loo.

First-Time Home Buyer Mistakes to Avoid

Estimate What You Can Afford

To determine the amount you can afford to spend on monthly payments based on your current income and expenses, you can use our handy mortgage payment calculator.

If you're unfamiliar with mortgages, we have resources like first-time home buyer programs and a Mortgage Glossary that can help educate you on the home buying process.

 

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