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First Time Home Buyer Loans – What you Need to Know

January 6th, 2020 | first time homebuyers, loans

Are you a first-time home buyer? If you are like many others, you have avoided buying a home because of a lack of down payment or because you don’t have perfect credit.

Guess what? You don’t need either of those – there are many flexible loan programs out there today making it easy for borrowers in all stages to buy a home. Check out the top programs available to you today.

FHA Loans – The Original First-Time Home buyer’s Loan

FHA loans have always had the nickname ‘first-time home buyer’s loan.’ While today anyone can use this program (that qualifies), it is a great option for those buying their first home. Here’s why:

– You only need a 3.5% down payment.
– You only need a 580 credit score.
– You may get a loan if you have a credit score between 500 – 579.
– You only need 10% down if you have a credit score lower than 580.
– Your entire down payment can be a gift from a relative, employer, or charitable organization.
– You can have a housing ratio of 31% (your mortgage payment versus your gross monthly income)
– You can have a total debt ratio (all of your debts, such as credit cards, student loans, and car loans, plus your mortgage) of 43%
– The employment history requirement is flexible (2 years is ideal but not mandatory)

If you’ve held off buying because of your lack of down payment, consider your options with the FHA program. The underwriting guidelines are flexible and the down payment requirements are low. You will pay mortgage insurance for the life of the loan, but the cost is minimal. As of today, borrowers pay 0.85% of the outstanding principal balance in mortgage insurance. Let’s say you have a $200,000 balance that means $142 per month.

In addition, the FHA does charge upfront mortgage insurance equal to 1.75% of the amount borrowed. This is a one-time fee that you pay in cash at the closing or wrap into your loan amount if you don’t have the cash to pay it.

USDA Loans – The Rural Home buyer’s Loan

If you live in a rural area, or at least an area deemed rural by the USDA, you have another government loan option. The USDA loan is for low to moderate-income families. Here’s why it’s a great option:

– You don’t need a down payment; the USDA provides 100% financing.
– You only need a 640 credit score.
– You can have a housing ratio of 29% (your mortgage payment versus your gross monthly income)
– You can have a total debt ratio (all of your debts, such as credit cards, student loans, and car loans, plus your mortgage) of 41%
– The employment history requirements are flexible

USDA loans also charge mortgage insurance, but at a much lesser amount. Today, borrowers pay 0.35% of the outstanding principal balance each month. On a $150,000 loan, that means $44. You’ll also pay 1.0% of the amount borrowed at the closing or you can wrap it into your loan amount.

Keep in mind that you must be eligible for a USDA loan, which differs from qualifying for it. The USDA bases your eligibility on your total household income which can’t be higher than 115% of the average income for the area.

VA Loans – The Loan for Veterans

If you served in the military or are an active member now, you may be eligible for a VA loan. Here’s why veterans should consider it:

– You don’t need a down payment, the VA provides 100% financing.
– You may only need a 620 credit score (this varies by lender).
– You may have a total debt ratio of 43% (the VA doesn’t set a maximum housing ratio).
– The employment history requirements are flexible.
– The VA doesn’t charge monthly mortgage insurance.

The VA does charge an upfront funding fee, which is a one-time fee of 2.15% of the loan amount (for most veterans). You can pay it at the closing or wrap it into your loan.

Conventional Loans – More Flexible Than you Think

Most first-time home buyers assume they need a 20% down payment and perfect credit score to secure conventional financing, but that’s not the case today. Conventional loans offer the following benefits:

– You only need a credit score of 680 (sometimes as low as 660).
– You only need 5% down (sometimes as low as 3%).
– Your entire down payment can be gifted from a relative, employer, or charitable organization.
– You can have a housing ratio of 28% (your mortgage payment versus your gross monthly income).
– You can have a total debt ratio of 36% (all of your debts, such as credit cards, student loans, and car loans, plus your mortgage).
– You can have a less than two-year employment history if you have the education/training to prove that you can succeed at the new job.

While conventional loans have ‘stricter’ guidelines, they are more flexible than many people think. Oftentimes, if you have compensating factors, such as a high credit score or very low debt ratio, it can offset other ‘risky’ factors, enabling you to qualify for conventional financing. In addition, if you put down less than 20% on the home, you’ll only pay Private Mortgage Insurance until you owe less than 80% of the home’s original value. The amount you’ll pay varies by loan amount, type, and credit score, though.

Bottom Line

As a first-time home buyer, you have many options. Explore each option to compare how it affects not only your monthly payment, but the loan’s overall cost (cost over the life of the loan). Compare requirements, interest rates, and fees when choosing the loan that suits you the most. Remember that even if you don’t have a down payment, there may be loan options available for you, allowing you to stop renting and to buy the home of your dreams. Call me today for a free consultation!