First Time Homebuyer Loans - Available Options
Which Mortgage is Best for a First-Time Homebuyer?
If you’re a first-time homebuyer, finding a loan can be a bit confusing. There are several types of home loans that one can qualify for but understanding the details behind each type and which type is best for you and your first home does take research and careful consideration. Here are some standard first-time homebuyer loan options and details to consider for each.
If making steady monthly payments over a 30-year repayment term makes the most sense for you as a first-time homebuyer, 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.
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. So, if you can afford a larger monthly payment with your first home, consider a 15-year fixed.
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. This is a great option for veterans who are purchasing their first home.
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.
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.
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. So, if you are a good saver and have strong plans of financial growth in the years to come, this is one loan type to consider.
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 2024, the baseline conforming loan limit for most counties is $766,550. However, in some areas due to higher home prices, the conforming loan limits are as high as $1,149,825. Anything above these maximum amounts is considered a Jumbo mortgage.
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.
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 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.
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.
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 first-time homebuyer (or any homebuyer for that matter) the opportunity for a larger mortgage than they might otherwise be eligible for and/or a lower mortgage rate.
Still have questions about what it takes to buy your first home? Be sure to check out our first-time homebuyer resource center for more information.