A Guide for First-Time Homebuyers

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If this is your first time down the path toward home ownership, it can be a bit overwhelming. You’ve saved up, worked on your credit score and checked out the local listings. But now that you’re ready to obtain a mortgage, where do you start? There are a long list of national programs targeting first-time homebuyers, but how do you know which one is right for you?

In this piece, we’ll explain the ins and outs of all the major national financing programs for first-time homebuyers, including Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans, as well as the Energy Efficient Mortgage (EEM) Program and the Fannie Mae and Freddie Mac loan programs.

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Keep in mind, depending on where you live, your state also might have programs targeting first-time homebuyers, including loan programs, mortgage credits and down payment and closing cost assistance. Check here to look into state-by-state programs for first-time homebuyers.

Nationally available first-time homebuyer loans

First: What qualifies you as a first-time homebuyer? According to the federal government, you qualify for these programs if you:

  • Have had no ownership in a principal residence during the three-year period ending on the date of purchase of the property. If either you or your spouse meets this requirement, you are both considered first-time buyers.
  • Are a single parent or “displaced homemaker” who has only owned a home with a former spouse while married.
  • Are someone who has only owned a property that doesn’t meet building codes and can’t be brought into compliance for less than the cost of constructing a new home.

If any of these apply to you, keep reading for more information on the types of loans you might qualify for to purchase your new home.

FHA Loans

The FHA loan is a government-backed, fixed-rate mortgage that requires lower credit scores and less of a down payment than many other types of loans, making them popular with first-time buyers.

  • Eligibility requirements
    • You can qualify for an FHA loan with a minimum credit score of 500, with a 10% down payment. With a credit score of 580, you can qualify with a 3.5% down payment
    • Steady employment history for at least two years; your income will be verified
    • You must put at least 3.5% down
    • Debt should not exceed 43% of your income
    • Mortgage must be for your primary residence
    • Loan limit of $726,525 in high-cost areas
  • Pros of an FHA loan
    • You might be able to qualify for an FHA loan with a lower credit score and less money upfront than other mortgages
    • The interest rate is fixed at a low rate
    • You might be able to qualify for this type of loan even if you’ve been denied for a conventional mortgage
  • Cons of an FHA loan
    • You’re required to pay mortgage insurance premiums (MIPs), which protect the lender in case you default on your loan. These mortgage insurance premiums include 1.75% of the loan upfront, and 0.45% to 1.05% of the loan each year in the form of monthly payments. This adds to the cost of your mortgage.
  • When to consider
    • If you don’t have great credit, you don’t have a lot of money saved for a down payment and/or you weren’t able to qualify for a conventional loan, you might look into an FHA loan.

VA Loans

The U.S. Department of Veterans Affairs backs mortgages through private lenders for service members, veterans and their eligible spouses and survivors.

  • Eligibility requirements
    • You must be an active-duty service member, a veteran, a reservist or a member of the National Guard. If you are a spouse of a service member who died or became disabled in the line of duty, you also may qualify.
    • Maximum loan amount of $484,350
  • Pros and cons of the VA loan program
    • Because these loans are insured through the VA, they don’t require private mortgage insurance (PMI) or a down payment and have less-stringent credit and income requirements than many other mortgages.
    • The VA doesn’t require a minimum credit score, but private lenders often do
    • You must meet the service requirements.
  • When to consider
    • If you’re a member of the military, talk to your private lender about securing a VA home loan.

USDA Loans

The USDA guarantees loans for properties in designated rural and suburban areas.

  • Eligibility requirements
    • Homes must be located in a designated area; see if the home qualifies here.
    • Borrowers must meet low-income standards for their area
    • Applicant must be without “decent, safe and sanitary” housing
    • Homes must generally be under 2,000 square feet and not have an in-ground swimming pool
    • Must occupy the home as primary residence
  • Pros and cons of the USDA loan program
    • The interest rates of USDA loans are very low — according to the USDA website, with applicable payment assistance, interest rates may be as low as 1%. Your home must be located in a designated rural area to get this loan, although many people are surprised at what areas are considered rural by federal standards.
  • When to consider
    • If you are a low- to moderate-income buyer looking outside of cities for your first home, you might qualify for a USDA home loan, which could be a great low-interest, zero-down option. Your private lender can give you more information about this loan.

FHA 203(k) loans

The Federal Housing Administration offers a second option for first-time homebuyers who are buying a home that will need extensive renovation. The FHA 203(k) loan rolls the cost of the home and renovations into one mortgage.

  • Eligibility requirements
    • This loan requires that you have at least $5,000 of renovation work to do on the home and that you complete the repairs within six months of closing
    • Maximum loan amount is 110% of the home’s projected value (requires an appraisal)
    • Mortgage insurance is required
    • Debt should not exceed 43% of your income
    • Must have a credit score of at least 620
    • Requires at least 3.5% down payment
  • Pros and cons
    • This loan is a good option for low- to moderate-income buyers purchasing homes that need significant repairs or renovation, including bedrooms additions, plumbing replacement or electrical wiring
    • Interest rates can be higher than a conventional mortgage but are often lower than rates for separate loans you would take out for repairs.
  • When to consider
    • If you’re buying a real fixer-upper that will need extensive work, the FHA 203(k) could be the right option for you.

Energy Efficient Mortgage Program

The FHA guarantees a loan program designed to help finance energy-efficient upgrades to homes — the cost of these improvements is added to the loan. The borrower must only qualify for the original mortgage amount.

  • Eligibility requirements
    • The energy improvements must be cost-effective. For existing homes, the improvements must pay for themselves over time through reduced energy bills. For newly constructed homes, the improvements meet International Energy Conservation Code standards.
    • Must obtain a home energy assessment
    • This process can be pursued when obtaining your FHA loan as an add-on, so the same eligibility requirements for an FHA loan apply
  • Pros and cons
    • Saves you money in the long run in utility bills
    • The VA loan program and Fannie Mae also offer versions of EEMs, so ask your lender about which program works best for your situation.
  • When to consider
    • If you are looking to make energy-efficient upgrades on an old home, an EEM might be a great way to finance those upgrades.

Fannie Mae and Freddie Mac loan programs

Fannie Mae and Freddie Mac are two private government–sponsored enterprises. They engage in buying mortgages from lenders and selling packaged mortgages to investors. The two companies offer similar programs — dubbed HomeReady® and Home Possible®, respectively — that finance up to 97% of a home’s purchase price and require a 3% down payment for first-time homebuyers.

  • Eligibility requirements
    • For Fannie Mae’s HomeReady loan, you need a credit score of 620 and you must pay PMI until the loan-to-value (LTV) ratio drops to 80%.
    • For Freddie Mac’s Home Possible loan, there’s no minimum credit score if you put at least 5% down. You must hold mortgage insurance until the LTV drops to 80%.
    • Both programs have income limits based on where you live; check Fannie Mae and Freddie Mac for these.
  • Pros and cons
    • Both of these programs offer first-time buyers a chance to own a home with a low down payment, but because these are private mortgages, it’s important to check the loan terms closely.
  • When to consider
    • If you’re a first-time buyer, it’s worth seeing if you qualify for a Fannie Mae or Freddie Mac mortgage loan.

Grants and financial assistance for first-time homebuyers

In addition to federal loan programs, there are several financial assistance options available to first-time homebuyers.

Down payment assistance

The federal government doesn’t provide direct down payment assistance to homebuyers. Instead, it provides funding for states to run their own programs targeting first-time buyers. Down payment assistance is typically in grant form, meaning it doesn’t need to be paid back, but each state’s eligibility requirements, specific grant amounts and terms vary. Start here to find programs in your area.

Good Neighbor Next Door Sales Program

HUD’s Good Neighbor Next Door Sales Program takes 50% off the list price of homes in revitalized neighborhoods for teachers, law enforcement officers, firefighters and emergency medical technicians. In return, HUD requires that you sign a second mortgage note on the discount rate — you won’t be required to pay interest or payments on this second mortgage as long as you live in the home for three years. Eligible homes are listed through the HUD site, but keep in mind the list of properties changes weekly, and if more than one person shows interest in the home, the selection is made by random lottery.

HUD “Dollar Homes” program

The U.S. Department of Housing and Urban Development’s (HUD) “Dollar Homes” program covers single-family homes bought in foreclosure by the FHA. If the houses don’t sell for six months, HUD will list the homes for $1 to local governments. The local governments can fix up the homes and partner with local nonprofits to sell them to low- to moderate-income buyers at bargain prices. Check the HUD site to see if any are available in your area.

Do tax credits still exist for first-time homebuyers?

The First-Time Homebuyer Tax Credit was instituted in 2008 amid the financial downturn to encourage homeownership by providing a significant tax credit to first-time buyers. The program officially ended in 2010, though, so you likely won’t qualify for this credit unless you purchased your first home between 2008-2010 and you haven’t claimed it. Still, some states offer a mortgage tax credit that reduces the amount of income tax you owe, and nearly all states offer some type of financial assistance to first-time buyers.

Conclusion

As you can see, through federal loan programs, and federal, state and local assistance, there are many options and benefits available to first-time homebuyers across the country. A good first step would be to find a trusted lender to help walk you through the options available to you. Owning a home is a big life goal for many people, and now that you’re armed with information about the potential benefits and pitfalls, you’re well on your way!

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