Know the Different Types of Loans for First-Time Home Buyers

Loan Basics for First-Time Home Buyers to Know

If you’re trying to accomplish the goal of becoming a homeowner, but you keep running into the issue of not being able to afford to buy a house, you’re not alone. In fact, you have something in common with many other hopeful first-time home buyers. A recent survey found that 51% of millennials said the number one detail stopping them from buying a home is a lack of money for a down payment. After all, it turns out not everyone has tens of thousands of dollars lying around! If this sounds like you, you don’t necessarily have to give up your dream of buying a house. In fact, you shouldn’t, because there is help available in the form of different types of loans for first-time home buyers. Take a look at what this type of loan means for you and where to find the right one.

What to Look for in Loans for First-Time Home Buyers

There are many different types of loans for first-time home buyers, and each type has its own advantages. But one thing they all have in common is that they exist to make your first home as affordable as possible.

That could mean several things. For example, you’ll find that most loan programs for first-time buyers request a down payment that’s much lower than average. So instead of requiring 20% or 10% down, they ask for just 3% or even 0%. If you’ve been putting off buying a home because you don’t have much money for a down payment, you’ll want to look for loans that have extremely low down payment requirements.

Other perks you’ll find with different types of loans for first-time home buyers include low interest rates and lower requirements for your credit score and income. So if you don’t make a very high annual salary or your credit score isn’t perfect, you might be able to find a home loan that you can qualify for anyway. You should let your real estate agent know about your concerns, as they can steer you toward mortgage brokers who will help you apply for the different types of loans for first-time home buyers.

What Are the Most Popular Different Types of Loans for First-Time Home Buyers?

When you talk to your real estate agent or mortgage broker about the loans available to you, you’ll find that a handful keep coming up in conversation. That’s because there are some well-known first-time buyer programs that you should know about. The following are the most trusted programs available to most first-time home buyers.

FHA Loans

FHA home loans are typically the most popular loans for first-time buyers because they’re the easiest to qualify for. Provided by the Federal Housing Administration, FHA loans are ideal if you don’t have much money for a down payment, since they only require you to put 3.5% down. This should appeal to first-time home buyers who have put off buying a home because they assumed they had to have around 20% for a down payment.

Another benefit of FHA loans is that you don’t need to have good credit to qualify. As long as you have a score of 580 or above, you have a chance to buy a house with just 3.5% down. If your score is not quite there, you may still qualify with a score of 500 as long as you put 10% down.

Plus, interest rates on FHA loans are often lower than average rates, keeping your monthly mortgage payment affordable! Granted, you’ll have to pay some extra costs at closing, along with private mortgage insurance (PMI) premiums every month, so be sure to work with your broker to compare the benefits of FHA loans with other types of loans for first-time home buyers.

VA Loans

Another type of loan that appeals to first-time home buyers is the VA loan. Backed by the Department of Veterans Affairs, you or your spouse must be associated with the military—either a veteran or active duty—to qualify for the VA loan.

If you’re eligible, you’ll have the chance to qualify for a loan with no down payment. This alone can save you thousands of dollars, allowing you to become a homeowner even if you haven’t been able to save money for years.

Not only can you finance the total price of the home, but you can also get access to very low mortgage rates and avoid PMI, making your monthly mortgage payment rather affordable! And you don’t have to worry about extra closing costs since they stay pretty low with this loan. Basically, if you’re a first-time home buyer who is affiliated with the military, you’ll likely find that the VA loan is your best bet.

USDA Loans

Among the most popular types of loans for first-time home buyers is the USDA loan, which is backed by the U.S. Department of Agriculture. This is another loan that lets you buy a home with no money down.

This loan comes with low interest rates and more affordable mortgage insurance, keeping payments as low as possible. So, what’s the catch? Well, there are technically two.

The first is that you can only buy a home in a designated rural area or suburb with a population that’s lower than average. So, you’ll need to check the map to find cities you can use the USDA loan in—meaning you shouldn’t plan to use this loan in a big city or popular suburb.

The other detail to know is that there’s an income maximum on USDA loans, as this program is meant for people with low to moderate incomes. The most you can make is 115% of the median household income in your area. If you make more than that, you might need to explore different types of loans for first-time home buyers besides the USDA loan.

Fannie Mae and Freddie Mac Loans

Among the most popular different types of loans for first-time home buyers are Fannie Mae’s HomeReady and Freddie Mac’s HomePossible. Both of these programs are known for offering conventional loans with low down payments and flexible qualification guidelines. In fact, the down payment required is as low as 3%.

Other benefits these programs offer first-time home buyers include:

  • The option to cancel PMI
  • The ability to use gift funds for the entire down payment
  • A chance to qualify for a conventional loan with a credit score of 620

So if you really want a conventional mortgage with a low down payment—and don’t want to worry about limits on where you can move—look into the HomeReady and HomePossible programs. Your mortgage broker can help you decide which option is right for you before you apply.

As you can see, there’s a wide range of different types of loans for first-time home buyers. Each loan option has its own pros and cons, but you should be able to find at least one that’s right for your situation, especially with the help of your real estate agent and broker. If you need some guidance on the loans available to you—or if you’re ready to get pre-approved for a home loan—contact LemonBrew Lending today for help from our experienced team!