What Kind of Loan Can I Get as a First-Time Homebuyer?

Image by Canva.com

First-time homebuyers have so many decisions to make–from where to live to choosing a lender. Fortunately, many government programs and loans are designed to support first-time homebuyers.

The Federal Housing Administration (FHA) provides loans with a down payment as low as 3.5%. Both Missouri and Illinois fund programs for first-time homebuyers, and the U.S. Department of Agriculture (USDA) helps people in rural areas become homeowners. 

Several factors help determine which type of loan is best for a homebuyer: 

• How much the buyer has for a down payment.
• The credit score of the loan applicant(s).
• Whether the homebuyer is in the military or is a veteran.
• The type of home that will be purchased.

If the buyer has a solid credit score and money saved for a down payment, a conventional loan might be the best bet. A conventional loan usually is less costly than other types of loans in the long run. Some homebuyers get a conventional loan with a down payment as low as 3%. However, it’s worth noting that borrowers with larger down payments receive better terms on their loans.

Many first-time homebuyers explore other options including:

1. FHA loans: Insured by the federal government, FHA loans make home-buying accessible with low down payments, low interest rates, and less-stringent credit requirements. One downside of FHA loans is borrowers need to pay a mortgage insurance premium (MIP) for the life of the loan.
2.   VA loans: For members of the military and veterans, VA loans do not require a down payment. Not all lenders offer VA loans. Luckily, Berkshire Hathaway HomeServices Select Properties’ partner company, USA Mortgage, is a VA-loan lender. 
3. USDA loans: The U.S. Department of Agriculture Rural Development Service’s home loan program is available to low-income families in rural areas and some suburbs. 
4. Fannie Mae and Freddie Mac: Lenders offer conventional loans with just 3% down with backing from Fannie Mae and Freddie Mac, two private companies that influence the issuing of home loans.  
5. First-time homebuyer programs in Illinois and Missouri: The Illinois Housing Development Authority helps buyers with down payments up to $10,000. Homebuyers can apply directly on the Illinois website. In Missouri, state assistance is provided by individual lenders rather than directly from the state. 
6. Loans for renovation: Many loan programs, like VA and FHA loans, offer funding for renovations rolled into home loans. 

Image by Canva.com

When first-time homebuyers apply for a loan, they must make sure to learn whether the rate is fixed or adjustable. Loans with the same rate throughout the life of the loan are called fixed-rate loans. They usually have repayment terms of 15, 20, or 30 years. With a fixed-rate loan, the monthly payments for principal and interest will stay the same for the entire loan. The only exception would be if the borrower is able to refinance the mortgage for a lower rate later on. This can result in a lower monthly payment.

Adjustable-rate loans, also known as variable-rate loans, are attractive because they have a lower initial interest rate than fixed-rate loans. Thus, the monthly payment is lower. However, the interest rate on the loan will fluctuate based on the market. When interest rates are high, the loan payment will go up. When interest rates are low, the payments go down. Most variable-rate loan agreements stipulate the maximum and minimum rates. Still, the U.S. Department of Housing and Urban Development (HUD) warns first-time homebuyers to carefully consider whether they will be able to manage mortgage loan payments that go up and down over the years. 

First-time homebuyers with a 20% down payment, or better yet, a cash offer, have advantages in a competitive real estate market because sellers are more likely to accept offers from buyers in strong financial positions. However, one does not need a 20% down payment to get into a house. Well-qualified buyers might get a conventional loan for 3% down. 

Those who qualify for government-assisted programs like FHA, VA, and USDA loans might receive a mortgage loan with a minimal down payment.  

In addition to losing an edge over other buyers, if buyers do not put 20% down, they probably will be required to purchase private mortgage insurance (PMI), according to HUD. 

When a buyer talks to a lender, like Berkshire Hathaway HomeServices Select Properties’ partner USA Mortgage, they need to ask:

• How much the lender requires for a down payment.
• How the lender will verify if funds are available.
• Whether PMI will be required and how much it will cost.
• The total of the monthly payment including PMI.
• How long they will need to carry PMI. 

Once a homebuyer determines the down payment details, they need to discuss other costs of getting a mortgage loan with their lender. This can include origination fees, transaction, settlement, and closing costs. Armed with the information they need, they will set out on their house-hunt with confidence!

Less-than-perfect credit does not mean an individual will never get a home loan. People who have no credit history also can get home loans.

Lenders are willing to consider lending to people with minor credit problems who have gotten back on their feet. This includes people who have had a temporary loss of income from sickness or job loss. If an individual falls into this category, they might be able to get a mortgage loan at a reasonable rate. 

On the other hand, those whose credit problems do not have a good explanation might be offered only high-interest rate loans. People in this dilemma can shop around looking for a lower rate. They also can check out the government-backed loan programs–like FHA, VA, and USDA–which are more likely to lend to people with lower credit scores than private lenders.

As for people who do not have established credit, here are some options for getting qualified for a home loan:

• Put down a large down payment.
• Get a cosigner.
• Ask for a manual underwriting.

Several loan programs lend to people without established credit: VA, FHA, and USDA. Conventional loans also are given to those without credit as the lender sees fit. 

Yes, there is a lot for first-time homebuyers to consider. Berkshire Hathaway HomeService Select Properties makes applying for a loan easy because we have a mortgage lender on our team. USA Mortgage loan officers work with our agents to get our clients the best deals possible.