It isn't very often that you get to choose your home. So once you arrive…
There will come a time in your life when you will want to buy a home, and for many of us who won’t have the cash for upfront payment, the options are not always clear.
Did you know that you can avail of a first-time home buyer loan? The federal government has set up a good option for first-time homebuyers so that they can be able to move into their preferred houses even with lower than average credit.
Today, let’s learn about all the things you need to find out if you will buy a home for the first time. Everyone needs help sometimes, and when it comes to home loan programs, you’ve come to the right place!
Which mortgage type is good for a first-time homebuyer?
As we have already mentioned, the ideal mortgage option for first-time homebuyers falls under the government-backed loan type. Aside from asking you to pay for mortgage insurance premiums, conventional loans, which private mortgage lenders offer, are not ideal for first-time homebuyers, especially if they do not have stellar credit scores. The minimum credit score to qualify for a conventional loan is usually 620. However, this requirement varies with each mortgage lender, and a good number does ask for even higher credit ratings.
For a first-time home buyer, the best option would be an FHA loan.
A mortgage that’s secured through the Federal Housing Administration is called an FHA loan. These home loans were created specifically with first-time homebuyers in mind, although it is not exclusive to those who have never bought houses in the past.
The main reason why an FHA loan is good for a first-time homebuyer is because of its low minimum credit requirement. With a credit score of 500, you would already be qualified to borrow up to 90% of your house’s purchase price. Improve your credit score just a bit more to bring it up to 580, and you’ll be allowed to borrow 6.5% more because you’ll only be asked to make a down payment of 3.5 percent. This is great for first-time homebuyers because a home purchase is sometimes one of those things you cannot wait too long to make. Through FHA loans, young people who would otherwise have to build more savings would not have to delay buying a home. As they grow their money, they’ll also grow their home equity as they improve their credit history.
Furthermore, the money for a down payment does not have to come from the savings of the first-time homebuyer. The FHA allows for this payment to be taken from grants or even cash gifts from relatives. There are also down payment assistance programs that potential borrowers can approach for help.
What qualifies someone as a first-time homebuyer?
Although FHA loans will not require you to be a first-time buyer of real estate, you may want to take advantage of buyer programs that do. Assistance programs can help with down payment and closing costs which can mean hefty fees for young people in their early working years.
According to the U.S. Department of Housing and Urban Development, these are the official points or definitions an individual needs to fulfill to be considered as someone who will be buying a home for the “first time”:
- The real estate that will be purchased will become the individual’s principal or primary residence.
- The individual must not have been the official owner of a primary residence during the immediate three-year period before the purchase of the new residence.
- If the individual is married, he or she can still be considered a first-time homebuyer even if the spouse has been named as the owner of a principal residence.
- A single parent or displaced homemaker can also be considered a first-time homebuyer even if he or she has owned a home together with the previous spouse.
- An individual who has only owned property that is not compliant with state and local building codes or property is not attached to a permanent structure such as a mobile home.
Tips for First-Time Home Buyers
Even if it seems like there are not a lot of opportunities for borrowers who have low credit scores, there’s always a good side and a bad side for every situation. Sometimes, you also just have to become more aware of the wider world of opportunities out there.
Even if you are not a first-time home buyer, the following tips might still apply to you. Read on if you want to start on the important preparations for buying your dream home.
1 – Learn about other loan programs
Not all first-time buyers may have a low credit score. In fact, the average American’s credit score has been hitting all-time highs with 710 as of 2020.
Even first-time homebuyers might be able to afford a conventional loan. And if you can make a down payment of at least 20 percent, you can skip private mortgage insurance altogether.
What is private mortgage insurance (PMI)?
Unlike other types of insurance that protect the individual paying the premiums, PMI for conventional loans protects the lenders, not the borrowers. When you make a down payment of 20% when you buy a home, you have 20% home equity. For lenders, this lowers the chances that you will default on your debt. There’s still a chance you won’t complete your payments in the same logic as long as you have less than 20% ownership of your house. That’s why mortgage lenders require PMI to protect them from the worst-case scenario.
On the flip side, borrowers who require conventional loans usually need a much higher loan amount. The loan limits are higher for this type of mortgage than for government-backed loans.
Like FHA loans, USDA loans are secured by the federal government. Unlike FHA loans, however, you do not need to make a down payment in order to secure a loan through the U.S. Department of Agriculture. The only main requirement? That you are buying a home in a rural area, and you don’t have to be in the farming industry either in order to qualify.
Another good thing about USDA loans is it gives consideration for disadvantaged citizens. It would be better for a smoother application experience if you have a credit score of at least 640. However, if your rating falls below this number, the USDA can still consider your application if you can explain your personal financial circumstances.
Aside from the USDA, the U.S. Department of Veterans Affairs also offers a loan program that requires zero down payment. As is expected, though, you have to be a veteran or a military service member in order to take advantage of this opportunity. The minimum score for a VA loan is 580.
VA loans also consistently offer the best interest rates in the market, which makes them ideal for those with low to moderate-income.
2 – Build good credit
Now that you have a good idea about your different loan options, we hope you are also learning about how important credit scores are when borrowing money. Your credit score is really just a number, and it also changes all the time, but it is very important to lenders because this will paint them a good picture of your behavior as a potential borrower.
Don’t worry, though; it’s never too late to boost your credit. In the months leading to your mortgage application, you can try doing the following things:
Get your free credit report.
You can request this here. This is important because mistakes can happen all the time, and if there is an error in your credit report, it’s better to know sooner rather than later so you can have it corrected fast. When you know your credit score, this also gives you a benchmark to know where you need to improve and how much you need to raise to qualify for the mortgage program you want.
Always pay your bills on time.
More than a third of your credit score will rely on how responsibly you pay your bills. Even one missed payment can heavily impact your mortgage application, so always mark your calendar, or better yet, pay your bills as soon as they arrive in the mail.
One application at a time
Every time you apply for a loan or a financial institution takes a look at your credit report. Credit bureaus will also record this. As much as possible, spread your applications over a wider period and try to avoid opening too many accounts all at once. This presents as risky behavior, which is the worst image you want to reflect on your application.
There Are Buyer Programs For Everyone
If you truly are on the cusp of this exciting new period in your life, congratulations! We hope you have a smooth and enjoyable transition. These moments in life do not happen frequently, and while there will be ups and downs, we hope that everything works out with the help of all the information we have shared in this article.
Remember that the mortgage experience is not the same for everyone, and each borrower arrives here in their own time and with their own set of circumstances. You are just following in the footsteps of millions of people who have been in this place, so read on, and we hope you learn a lot from these experiences!