Being a first-time buyer can be very confusion at time with all the different types of mortgage programs there are to choose from.
How do you know which type of loan is best for you?
Well it all really depends o your own unique situation.
We’re going to dive into all the different types of home loan programs for first-time buyers so you can choose which is best for you.
Types of Mortgage Programs
A few decades ago you needed to have a large down payment and flawless credit to qualify for a mortgage loan. The Federal Housing Administration was created to help increase homeownership. FHA mortgage loans have low credit score and down payment requirements making it easier for borrowers to qualify for.
The minimum credit score the FHA requires to insure a mortgage is a 500 score with a 10% down payment. If the borrower has a 580 credit score they may qualify with just a 3.5% down payment.
Not all lenders follow the credit guidelines the FHA has, many have their own minimum credit standards they adhere to. A 620 credit score is typically required from most mortgage companies, however some lenders do go down to a 580 credit score.
Pros to FHA Loans
- 580 credit score can qualify
- 5% downpayment
- Low interest rates
- They’re assumable
- Can refinance in 270 days
Cons to FHA Loans
- Low loan limits
- Require more documentation
- Mortgage insurance required
- Upfront MIP
USDA loans were created by the US department of Agriculture to help low income families in rural areas of the country become homeowners. USDA home loans come with lots of benefits including no down payments and low mortgage insurance.
Almost 97% of the country is located in a USDA eligible location. Pretty much anywhere about 30 miles outside of a major metropolitan city is eligible.
In order to qualify your total household income cannot exceed 115% of the average income in your area.
USDA loans have the lowest mortgage insurance premium of all types of mortgages at just 0.35% of the loan amount. If you qualify for this program it is definitely work looking into.
Veterans have many benefits, the best of all is the VA home loan. VA loans are for all eligible Veterans and their spouses. They require no down payment at all and do not require mortgage insurance. You must have a certificate of eligibility in order to qualify. Your loan officer can get this for you, or you can go to the Department of Veteran Affairs website to obtain your certificate.
Are you looking to buy a fixer-upper home? Then an FHA 203k loan may be a very viable option for you. 203k Loans give you the money to purchase the home plus up to $35,000 in additional funds for repairs and renovations. 203k loan is synonymous with a rehab loan.
The guidelines to qualify are very similar to FHA loans. However, since the lender is often lending more than 100% of the purchase price of the home you will need a higher down payment to reduce the Bank’s risk. A 640 minimum score is needed for these types of mortgages.
A conventional mortgage is a loan that is not backed by the Federal Government. These loans are issued and funded by private banks and later sold to Freddie Mac or Fannie Mae, the two biggest buyers of mortgages. Still unknown to many, these two giant property moguls both offer a refinance program called the Freddie Mac Enhanced Relief Refinance Program (FMERR) and the Fannie Mae High Loan-To-Value Refinance Option (HLRO). Both programs are provided to homeowners who have little to no equity in their homes, which can help many millions of Americans reduce their payments per year!
Conventional loans require a higher credit score when compared to Government loans. A 620-640 score is the typical minimum requirements. You will also need to have a much higher down payment closer to 10%-20% of the purchase price of the property.
The advantages of conventional loans is that mortgage insurance is not required if you’re putting at least a 20% down payment. If you don’t have 20% down PMI is still quite a bit cheaper than FHA loans. And unlike FHA, once you pay down your loan-to-income ratio below 78% mortgage insurance is automatically removed.
The bottom line…
As a first-time buyer you have lots of options. It’s recommended you speak to at least 3-4 different mortgage lenders, not just to compare rates but to get a different opinion on which loan is best for your specific situation.