The largest obstacle many first-time homebuyers face is the down payment. Without a home to sell, you need to save the cash yourself. This obstacle often keeps first-time homebuyers from taking the plunge. Fortunately, there are many mortgage programs perfect for first-time homebuyers today.
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FHA Loans
FHA loans have the nickname ‘first-time homebuyer loan.’ Even though anyone that qualifies can use this financing option, it is great for first-timers.
FHA loans have flexible guidelines. You can get a loan with a 580 credit score and as little as 3.5% down on the home. If your credit score is lower than 580, you may still qualify, but you’d need a 10% down payment and at least a 500 credit score.
First-time homebuyers love this program because they can receive 100% of the down payment as a gift. The FHA doesn’t require borrowers to put any of their own money down on the home. The FHA also allows liberal debt-to-income ratios. This compares your total monthly debts to your gross monthly income (income before taxes). Your housing payment can take up 29% of your gross monthly income and your total monthly debts can take up to 41% of your gross monthly income.
VA Loans
If you served in the military, National Guard, or Reserves, you may be eligible for a VA home loan. This generous loan program doesn’t require a down payment. You can borrow 100% of the home’s purchase price. It also has flexibleunderwritingguidelines.
The VA doesn’t have a specific credit score requirement. Since individual lenders write and fund the loans, they often require at least a 620 credit score, though. The VA also has flexible debt-to-income ratio guidelines. They don’t have a housing ratio requirement, but they do require a maximum 41% total debt ratio.
If your debts take up more than 41% of your gross monthly income, you may qualify for an exception. If you have compensating factors, such as liquid assets on hand or a high credit score, the VA lender may be able to allow up to a 43% total debt ratio.
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USDA Loans
Borrowers that don’t mind living in the countryside versus the city can benefit from USDA loans. Like the VA loan, USDA loans offer 100% financing, so you don’t need a down payment. You do have to buy a rural home, according to the USDA guidelines. Your total household income must also be less than 115% of the average income for the area. You can determine your eligibility using the USDA eligibility guidelines.
Conventional Loans
Many first-time homebuyers assume they won’t qualify for a conventional loan. They often do qualify, though. Conventional loans aren’t as restrictive as many people think. Yes, you need a higher credit score, but usually around a 680 credit score will suffice.
Many people assume you need a 20% down payment on a conventional loan. While a 20% down payment makes it easier to qualify, it’s not a necessity. People get conventional loans all of the time with as little as 5% down on the home. If you put less than 20% down, you will pay Private Mortgage Insurance. This does increase your mortgage payment, but it’s not permanent. As soon as you owe less than 80% of the home’s value, you can request that the lender remove the PMI.
Preparing for a Mortgage as a First-Time Homebuyer
Before you apply for a mortgage, take the time to perfect your application:
- What’s your credit score? Is there room for improvement? Start making changes to your credit as early as possible to give your score time to reflect it.
- How much money do you have saved? You’ll need money for a down payment and closing costs. Don’t get caught empty-handed.
- How much debt do you have? Try eliminating as many debts as possible (especially credit cards). The less debt you have, the less risk of default you pose to a lender.
So how do you know which program is right for you? Take a step back and assess your situation. How much money do you have for a down payment? If it’s less than 5%, you need one of the government-backed programs – FHA, USDA, or VA. If you have at least 5%, see if you qualify for a conventional loan. If you need a government loan, using process of elimination, you can determine which loan may suit your needs the most.