Everything You Need to Know to Qualify for First-Time Homebuyer Loans

First-time homebuyers nowadays face some tough challenges. With student loan debt delaying the average millennial from purchasing a home by seven years, according to a 2017 study by the National Association of Realtors, financing a home can be daunting and seemingly unfeasible.

Luckily, there are many first-time homebuyer programs, including loans and grants, that can bring purchasing a home within arms’ reach.

“For some people, it’s the difference between them qualifying for home and not qualifying for a home or having to wait,” says Beth Steinke, a real estate agent who ranks in the top 1% of Dallas/Fort Worth Metroplex agents.

She explains that if someone has to wait to save a down payment, raise their credit score, or pay off debt before they buy a house, they lose out on the opportunity of gaining equity and run the risk of higher interest rates when they are ready to buy. But while a home loan can help you buy a home much sooner than you could have imagined, if you jump the gun, you could end up losing money — and paying more — in the long run.

According to a 2018 report by the Urban Institute, there are more than 2,500 grants and loan programs nationally, which can make choosing the right one seem overwhelming. Some loans are specific to first-time homebuyers, such as an FHA loan; you just need to find which one is right for you.

We’re breaking down the pros and cons of the most popular first-time homebuyer loans and programs that you could miss if you pick the first one that comes your way. They may help you find some big savings and get you that much closer to achieving this milestone.

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Don’t wait to apply for your homebuyer loan

The best time to apply for a homebuyer loan is before you even begin your home search.

“There is no sense and getting your hopes up, making plans, making decisions, and not knowing what you qualify for or if you qualify,” Steinke says.

A top buyer’s agent can help link you with a lender who is well versed in both local and national down-payment assistance programs. According to Steinke, most lenders can put you on a plan to have a loan ready in as little as a month to three months.

Who is a first-time homebuyer, anyway?

While the definition of a “first-time homebuyer” may seem obvious, it’s actually much broader than you think. Under some programs, it’s defined as someone who hasn’t owned a home for at least three years or more.

In fact, according to Steinke, most programs that are available today are available to any buyer. So, if you’ve gone from owning a home to renting and are once again in the market, you could be accidentally passing up this financial assistance.

However, these loans and down payment assistance programs are more widely used by first-time homebuyers as they don’t have equity in a previous home, so they need help with the down payment and closing costs. On the other hand, a repeat buyer has the ability to use their home equity and is more likely to have more wealth to put toward that next purchase.

“They’re really not limited just to first-time homebuyers, necessarily,” she says. Many of the loans are income-restricted and location-restricted, “but in general, anybody can use them.”

A "special deal" sign with white lettering on red background to represent first time homebuyer loan discounts
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Loans or discounts you can get as a first-time buyer

These are the big opportunities for first-time buyers, and the pros and cons of each.

FHA loan

Pros

This loan is backed by the Federal Housing Administration, and it is a great option for those who have low savings or a not-so-great credit score. You can qualify for loans for as little as 3.5% down if you have a credit score of 580 or more, and if your credit isn’t very strong, they accept a credit score as low as 500 with a higher down payment. In certain cases, you can lower your monthly mortgage insurance payment with an FHA loan.

The FHA also allows for gifts of down payment money from family, employers, and charitable organizations. Plus, the closing costs and mortgage rates are usually lower for FHA loans.

Cons

If your credit score is between 500 to 579, the minimum down payment is 10%. But if you don’t put 10% down, you won’t be able to cancel your mortgage insurance.

Loan limits are also dependent on location, and the limit is lower in the least-expensive housing markets. Additionally, you can’t apply for this loan if you’ve had a foreclosure within the past three years.

VA loan

Pros

Backed by the U.S. Department of Veterans Affairs, the VA loan is limited to service members, veterans, and surviving spouses, and offers 0%-down loans. It also requires no mortgage insurance, has competitive interest rates, and relaxed credit qualifying standards, though some lenders have additional requirements. In Steinke’s words: “The VA loan is the best loan out there.”

Cons

Because of the strict appraisal criteria, a VA loan can take longer to get than other loans, and you’ll need to apply for a VA certificate of eligibility. Additionally, borrowers will sometimes need to pay a one-time funding fee, which can range from 1.4% to 3.6% of the loan balance. Unfortunately, some sellers don’t like VA loans because of appraisal delays and fees for sellers.

USDA loan

Pros

No, you don’t have to be a farmer to apply for the USDA loan. This homebuyer assistance program from the U.S. Department of Agriculture applies to rural areas and offers 0%down loans. They also offer very low interest rates; with subsidies, those rates can be as low as 1%.

If your credit score is 640 or higher, the process is streamlined, but those with scores below that threshold need to meet more strict underwriting standards. The priority for this loan also goes to those with the greatest economic need (for example, those without housing or cannot secure a loan from a traditional source).

Cons

The rates and income limitations vary by county, so depending on where you’re buying, the rates may be higher than expected. To qualify, monthly debt payments you make cannot exceed 41% of your income, which is limiting to some buyers.

Fannie Mae HomeReady and Freddie Mac Home Possible loans

Pros

Government-sanctioned companies will work with local mortgage lenders to give better options on conventional loans with as low as 3% down payments. The Fannie Mae HomeReady and Freddie Mac Home Possible loans vary slightly, but each only requires credit scores of 580, and parents can be co-borrowers without living in the home. Repeat buyers can also qualify for the Freddie loan.

Cons

The Fannie loans are limited to foreclosed homes, which can mean more repairs, and it is only available to actual first-time homebuyers. Additionally, factors like a low credit score and a 50% debt-to-income ratio can push the down payment requirement higher than 3%.

Good Neighbor Next Door

Pros

If you’re an emergency medical technician, firefighter, or law enforcement officer — a.k.a., a “good neighbor” — you can qualify for this loan sponsored by the Department of Housing and Urban Development (HUD). It offers 50% off select properties in revitalization neighborhoods. Yes, you read right.

Cons

These houses are in foreclosure, so it’s slim pickings for a good deal. You also need to commit to staying put for at least 36 months, making moving incredibly difficult.

State first-time buyer programs

Depending on where you’re buying, there are plenty of local and state first-time homebuyer programs, each with its own set of pros and cons. Check to see what programs are available in your area.

Home renovation loans

You can also apply for home renovation loans backed by the VA, USDA, or Fannie or Freddie. There are also a few additional assistance programs for home renovations that are worth checking out.

  • Eyeing a fixer-upper? An FHA 203(k) loans are a great choice as it considers the property value post-reno and adds it to your mortgage. Note that these loans can be stricter about what renovations are allowed, but you’ll still be feeling like Chip and Joanna in no time.
  • Fannie Mae offers a conventional loan option called HomeStyle for remodeling the home you buy. Similarly to the first-time buyers loan, a 3% down payment is available, but this loan can be stingy in regards to the borrower’s credit score.
  • Freddie Mac provides a similar renovation loan known as the CHOICERenovation. If you qualify for this loan, you can wrap the costs of the home and its improvements into one mortgage with down payments as low as 3%.
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Other loans and financial aid assistance for first-time homebuyers

There are a few additional down payment assistance programs and closing assistance programs for first-time buyers that are worth checking out.

Down payment assistance

Many lenders, backed by the programs at FHA or Fannie and Freddie, will issue first-time buyers mortgage loans with as little as 3% down — and not the scary traditional 20%. Additionally, there are other options for bringing down the cost of your down payment, such as second mortgages, deferred payment loans, and forgiven loans which are generally backed by local housing programs .

You should be aware that you’ll have to pay off the second mortgage at the same time as your primary mortgage, and deferred payments will need to be paid off when you move, sell, refinance, or finish paying your mortgage. While loans can be forgiven for several years, if you move, sell, refinance, or finish paying your mortgage, they’ll need to be paid before that agreed-upon date expires.

Grants for down payment assistance — which don’t have to be repaid — can vary from state to state, so check with your local and state government to see what is available to you.

Closing assistance

While closing costs are typically 2% to 6% of the total cost of the home loan, you can find grants or loans from government-sponsored and private programs that can help you out. You can even ask your seller to pay part of the closing costs with seller concessions. They might agree to cover part of certain fees as well as points paid upfront, which could lower your interest rate.

Which loan is right for you?

Loans aren’t one-size-fits-all, but the one you qualify for that has the lowest cost with the best interest rate is the best one for you, according to Steinke. It can vary every time, which is why it’s essential to assess the pros and cons and determine which first-time homebuyer loan, grant, or program you want to use for your home purchase.

“Many people think homeownership is out of reach, but it truly might not be. Until you talk to a recommended lender, you really won’t know,” Steinke says.

“I think a lot of people don’t think that homeownership is in the cards for them. But it can be if that’s a dream of theirs with the right team in place.”

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