Mortgage Programs for First-Time Homebuyers
Most home loans require the homebuyer to put down a 20% deposit on the value of the home. If you’re selling one home and purchasing another, that deposit often comes from the profit of the sale. For a first-time homebuyer without a home to sell, a 20% cash deposit can take quite some time to save. But there are many Federal mortgage programs available for first-time homebuyers that require little to no money down. I have outlined below many loan programs in order of least-restrictive eligibility requirements to most restrictive:
#1 – Federal Housing Administration (FHA) Loan
The Federal Housing Administration was created in 1934 to increase home construction and reduce unemployment. When you are approved for an FHA loan
, the FHA backs the loan. However, the money is lent through a separate, independent financial institution. This loan is perfect if you have little to put down and don’t have great credit.
Under an FHA loan program, you only need a down payment of 3.5% of the home’s value at the time of purchase. You need a FICO®
score of 580 or higher, but can get approved for the loan with a score of 500-579, but that requires a 10% down payment.
You are required to have private mortgage insurance, which will slightly increase your monthly mortgage payment. Keep in mind that your front-end ratio (mortgage, mortgage insurance, homeowner’s insurance, HOA fees, and property taxes) must be less than 31% of your gross income. And your back-end ratio (mortgage along with other monthly debt: credit cards, car loan, student loans) must be less than 43% of your gross income. You can still qualify if your ratios exceed these parameters, but only under special circumstances. Take a more comprehensive look at the standard FHA loan HERE
If you are a senior citizen (62 or older) the FHA has other loan options available
for you. There are also loans available through the FHA for mobile homes and manufactured housing
#2 – HomeReady® Mortgage by Fannie Mae
A HomeReady® loan
is perfect for you if your income is low to moderate. This loan requires a 3% down payment, much better than a traditional 20% down payment. This is one of the few programs available to both first-time homebuyers and repeat homebuyers. It can be used to both purchase or refinance a home.
You will need a credit score of 620 or higher (680 or higher will get you even better pricing). You will need to purchase private mortgage insurance, but after your home equity reaches 20%, you may cancel the insurance. The HomeReady®
loan doesn’t have any geographic restrictions and your down payment can come from multiple sources. To learn more about this program, click HERE
#3 – United States Department of Agriculture (USDA) Loan
A USDA loan
(a.k.a. Section 502 Single-Family Housing Guaranteed Loan Program) is designed to help improve the economy and quality of life in rural areas
. To qualify for the loan, the home you purchase must be in a rural or semi-rural area. That may sound like a limitation; however, the USDA considers any area with a population of 35,000 people or less to be rural. This accounts for 97% of the country. To find out if an area is considered rural or semi-rural, click HERE
There is no down payment on a USDA loan and the interest rates are some of the lowest on the market. There also isn’t a minimum credit score requirement, but if you have a score of 720 or higher, you will qualify for the lowest interest rates. A USDA loan doesn’t require private mortgage insurance. You will, however, pay an upfront fee of 1% of the total financed amount when you close and an annual fee (lumped into the mortgage) of 0.35% of the loan’s current balance.
Under the USDA loan program, the home you are buying must be your primary residence. There are income limits (you won’t be eligible if your income is 115% higher than the U.S. median), but these limits can vary depending on your state and county
#4 – Home Possible® Mortgage by Freddie Mac
The Home Possible® loan through Freddie Mac
offers a low down payment to homebuyers with low to moderate income. This program is for home purchases in high-cost or underserved communities. With this loan, you will pay a down payment of 3-5%. You will need private mortgage insurance, but you can cancel it after the loan balance drops below 80% of the home’s appraised value. There is no credit score requirement on a Home Possible®
mortgage. To learn more, click HERE
#5 – VA Loan Backed by the Department of Veteran’s Affairs
This is one of the best loan programs out there, but it is only available to veterans, current or former service members, and their spouses. To find out if you are eligible and what evidence you need to apply, click HERE
With a VA loan, you don’t need a down payment or private mortgage insurance. The loan also places a limitation on your closing costs and gives you up to 4% in concessions. You will receive a lower interest rate than most other loans, and you can pay off the loan early without any financial penalty. You will need a credit score of 620 or higher, and you must pay a VA funding fee of 1.25-2.4% of the loan amount
A great feature of a VA loan is that you have two refinance options: an existing VA loan option to reduce monthly payments with a new interest rate or you can refinance a non-VA loan with a VA loan. You also have the possibility of second tier entitlement: it may be possible to buy another home with VA financing using remaining or restored loan entitlement. A VA loan also offers foreclosure avoidance advocacy if you fall behind.
#6 – Good Neighbor Next Door Program
The Good Neighbor Next Door Program
is solely for emergency personnel (police, firefighters, EMT’s) and pre-K through 12th
grade teachers. However, this program is not a loan. If you meet the qualifications, you get a 50% discount on the value of the home you want to purchase, but you will still need to finance the remaining 50% (or pay cash).
Under the Good Neighbor Next Door Program, you must live in the home for at least 3 years after purchase. If you decide to sell after 3 years or longer, you do get to keep all the equity. The U.S. Department of Housing and Urban Development developed this program to promote revitalization of certain areas. This means the home you want to purchase must be in a “Revitalization Area.”
There are a limited number of properties and the list changes weekly. To see the current listings by state, click HERE
#7 – Native American Direct Loan
Of all the Federal loan programs, the Native American Direct Loan (NADL)
is the most restrictive in terms of eligibility. If you meet the criteria, it’s a great program to check out. The VA provides direct home loans to eligible Native American veterans to finance the purchase, construction, or improvement of a home.
Under the NADL program, you do not have a down payment or private mortgage insurance. It’s easy to qualify and has low closing costs. An NADL has a 4.5% interest rate on a 30-year fixed-rate mortgage with a loan maximum of $424,100. The biggest restrictions is that the home needs to be on Federal Trust Land and you must meet Tribal eligibility. To find out if you meet Tribal eligibility for this program, click HERE
At Home Clicks Realty
, we can help you find the home that’s right for you whether you use one of these mortgage programs or not.