Buying Your First Home? These Are the 5 Best Mortgages for You

Buying your First Home

First-time homebuyers have long made up a significant portion of the overall number of homebuyers in the country. According to the National Association of REALTORS®, those first-timers accounted for 33% of all homebuyers at the end of 2019.

With a strong job market and mortgage interest rates at historic lows, many first-time homebuyers seem to be in a great position to buy.

Affordability is often the key driver of how many first-time homebuyers decide to make a purchase. In addition, it is also the key driver of how first-time homebuyers decide (or need) to finance the purchase of their home.

Because most first-time homebuyers are in a different position than those who are buying their second, third (or more) home, they often require extra assistance or allowances to qualify for financing. Generally speaking, these people:

  • Entered the full-time job market less than 10 years ago
  • May have just gotten married and have young children
  • Don’t have a long history of credit (or have lower credit scores)
  • Don’t have a lot of money saved for a down payment

These facts sometimes mean first-time homebuyers won’t qualify for a conventional mortgage, which has a higher credit score requirement and a higher down payment requirement than some other mortgage programs.

The good news for first-time homebuyers, though, is there are a number of mortgage programs they can take advantage of that may allow them to qualify for a mortgage. Here are five of the most popular mortgage programs for first-time homebuyers.

1. Federal Housing Administration (FHA) Loans

Behind conventional loans, an FHA-insured loan is the most popular type of mortgage in the country — for first-time homebuyers and others alike. The FHA backs these loans, which gives lenders the confidence to offer mortgages to first-time homebuyers who qualify.

FHA loans are extremely flexible, which is why they are so popular with first-time homebuyers. You may be able to qualify for an FHA loan with a credit score as low as 580, although you will likely get a better interest rate if you have a higher score.

Perhaps the biggest benefit to FHA loans is the down payment requirement. Unlike other types of mortgages, you can make a down payment of as little as 3.5%. In addition, your entire down payment can come from a gift, so you won’t need to prove that you earned the money you are using and that you’ve had it for a while.

FHA loans do come with a requirement to pay both an upfront and monthly Mortgage Insurance Premium (MIP), regardless of how much your down payment is. And, in most cases, you will have to pay MIP for the life of the loan.

2. FHA 203(k) Loans

First-time homebuyers are sometimes faced with purchasing a home that requires a bit of work. The challenge, of course, is that these buyers may not have enough money in the bank to pay for home renovations.

As such, another popular mortgage program for first-time homebuyers is the FHA 203(k) loan. With this loan, which is also backed by the FHA, you can finance the cost of rehab, renovations, and/or repairs to your home in the same loan as your home purchase. There are two main types of FHA 203(k) loans: FHA Full 203(k) and FHA Streamline 203(k).

To qualify, you must meet the same requirements as a normal FHA loan. The biggest difference is FHA Full 203(k) loan allows you to borrow up to 110% of the after improved value of your home to pay for upgrades you want or need to make to the home. These can include:

  • Roofing, gutters, and downspouts
  • Structural alterations
  • Flooring
  • Appliances
  • Elimination of health and safety hazards
  • Modernization improvements

The FHA Streamline 203(k) is available for more minor remodeling projects, like roof repairs, interior and exterior painting, and weatherization; this loan is not for structural renovations. With this type of loan, buyers can borrow up to $50,000 in additional financing.

FHA 203(k) loans are a great option for first-time homebuyers who may be purchasing an older home that hasn’t been updated in a while. This loan type allows them to not only purchase the home but bring it up to today’s standards.

3. VA Loans

Veterans and active-duty military personnel have the option of financing the purchase of their home through a VA loan. Backed the U.S. Department of Veterans Affairs, VA loans were created to give back to military personnel who give so much for our country.

There are many benefits to VA loans. They have no down payment requirement, and you can finance the funding fee, even if you are at 100% financing for the property. If you qualify, you’ll never be required to pay monthly mortgage insurance — even if you don’t make a down payment. VA loans also tend to offer better interest rates than other loan programs.

To qualify for a VA loan, you must be:

  • Current or formerly on active duty for either 181 days during peacetime or 90 days during wartime
  • Guard or Reserve member for at least six years
  • Surviving military spouse

You’ll need to prove you meet these criteria by providing a Certificate of Eligibility, which can be done using your DD-214.

In addition to these requirements, the home you are purchasing must be used as your primary residence.

4. USDA Loans

Another popular mortgage program for first-time homebuyers is the USDA loan. This program is backed by the U.S. Department of Agriculture and seeks to help homebuyers purchase homes in designated rural areas of the country.

Guaranteed USDA loans don’t require any down payment, and while there is no monthly mortgage insurance, there is a small annual guarantee fee of .35% of the loan amount that is paid over the 12 months each year.

To qualify, you must have a credit score of at least 620 and have a minimum of two years of steady employment. You have to occupy the house as your primary residence, and both you and the home must fit into the USDA’s requirements.

You must meet income eligibility requirements, which the USDA sets by county. You can view whether you qualify for a USDA loan by clicking here. In addition, the property you are purchasing must be located in a designated rural area, which generally means it is not located near an urban area and has a population of 20,000 or less low- and/or middle-income residents. You can see whether your home qualifies for a USDA loan by clicking here.

5. Freddie Mac and Fannie Mae

Two other entities offer popular mortgage programs for first-time homebuyers. Fannie Mae (the Federal National Mortgage Association) offers a HomePath Ready Buyer™ program. To qualify, you must complete an online education course about homeownership.

Once you do, you can receive up to 3% of the purchase price of your home in the form of a rebate. This will come as a check written to you.

Freddie Mac (the Federal Home Loan Mortgage Corporation) offers a mortgage program called Home Possible® that requires a down payment of only 3%. While it’s not designated for only first-time homebuyers, it’s a mortgage program that many first-time homebuyers take advantage of because of its benefits.

Consult with a Trusted Mortgage Professional to Finance Your First Home

Just because you are a first-time homebuyer doesn’t mean there aren’t resources available to you. In fact, there are plenty of mortgage programs, resources, and incentives at your disposal. Finding out which of these programs is the best for you can be difficult, though.

When you are ready to purchase your first home, it’s very important to work with a trusted mortgage professional. At Embrace Home Loans, we have more than 35 years of experience working with first-time homebuyers and the most popular first-time homebuyer mortgage programs. Visit us online or call us today at (888) 907-6261 to begin the process of purchasing your first home.

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