First Time Home Buyer Mortgage Guide

First Time Home Buyer Mortgages

First Time Homebuyer Programs

There are five major first time homebuyer program categories.

The first three are backed (insured) by federal government agencies. They include FHA, VA and USDA programs. Each is broadly available to borrowers in any state.

Conventional first time homebuyer programs make up the fourth category. They are not backed by the U.S. Government, rather they are offered by Government Sponsored Entities (GSEs). Make no mistake about it, GSEs are private companies in spite of how they sound. They are more or less sanctioned by the US Government. Conventional first time homebuyer programs are also available nationally, in any state.

Lastly, State and City Programs provide a plethora of educational and counseling services for first time homebuyers. They are offered by region.

We're gonna cover 'em all.

Federal First Time Homebuyer Programs

1. Federal Housing Administration (FHA) Loans

FHA insures loans made to low and middle-income families. Just so you know, lenders make the loans. FHA just insures them. FHA's mortgage insurance assures lenders that they will recoup money should their borrowers default. With that backing, lenders are able to relax their requirements a little, essentially lowering the hurdles to homeownership. FHA makes the mortgage market more accommodating.

FHA Purchase Loan (203b)

The FHA Purchase Loan is really popular first time homebuyer program because of the very generous 3.5% down payment requirement. This is relatively small compared to many loan products where 20% of the purchase price needs to come from the buyer. The down payment varies a bit depending upon the borrower’s credit score:

  • Credit scores from 500 to 579 require a 10% down payment
  • Credit scores at 580 or better require only a 3.5% down payment

Here’s a nice bonus: family members can gift 100% of the down payment funds to borrowers. Other loan programs tend to be less gracious with their gifted funds policy; those other programs require at least some of the down payment come from the borrower. What’s more, with FHA loans, the seller can also contribute to closing costs.

FHA Renovation Loan (203k)

Did you find a perfect first home to buy you really like but just can’t stand the kitchen? Or maybe you’re eyeing a home that sits on a great piece of land but needs a major overhaul? Then you’ll love the FHA 203k, also known as the FHA Renovation Loan. This program has a really unique and compelling characteristic; they allow folks to buy a home and finance its renovation at the same time.

The same accommodation underwriting guidelines (down payment amount, gifted funds, etc.) still apply. So you can still buy a home with a relatively small down payment but also get the funds for rehabilitating a house.

There are two types of FHA Renovation Loans – the Standard 203k is for large projects, like rebuilding from the ground up. There's also a Limited 203k which is for medium-sized projects like repairing a roof or remodeling a kitchen.

2. US Department of Veterans Affairs (VA) Loans

The VA insures loans made to active military or veterans. VA Loans play a huge role in the first time homebuyer market. In fact, they’ve historically been one of the best deals (there have been over 20 million of them) going all the way back to 1944. Why?

  • Because they are “zero down” loans, meaning no down payment is required
  • Your income doesn’t have to be as high as it would be for other loans (as measured by debt-to-income ratio)

The catch? It shouldn’t come as a surprise since “VA” is right in the name, but borrower eligibility is based on service in the U.S. Military. You may be eligible if you:

  • Are currently active military
  • Served 90 consecutive days of active service during wartime
  • Served 181 days of active service during peacetime
  • Served more than 6 years in the National Guard or Reserves
  • Are the spouse of a servicemember who has in the line of duty or as a result of a service-related disability

3. USDA Rural Development Program

The United States Department of Agriculture (USDA)’s Rural Development program is another 100% financing option. Just like VA Loans, USDA loans require “zero down” from the borrower. And like other government-insured loan programs, the USDA backs (insures) loans made by private lenders.

The catch? The property must meet the USDA’s definition of “rural”. You can pretty much exclude major cities. But there are pockets near cities (or along much of the I-5 Corridor) in California, Washington and Oregon that will qualify. So don’t let the word “rural” scare you off. In fact, there are still areas that qualify for a Rural Development loan even in high-priced areas like Camas, Washington. If you already know where you want to buy your first home, you can search and get a map view of eligible areas on USDA’s site.

USDA program highlights for first time homebuyers:

  • No down payment
  • Sellers can pay closing costs as concession or gift
  • Accommodating credit history guidelines

Conventional First Time Homebuyer Programs

4. Fannie and Freddie

As you read above, FHA, VA and USDA loans are insured by the federal government. Conventional loans are not guaranteed by a department of the US Government. Instead, conventional loans are offered by Government Sponsored Entities (GSEs). You may have heard their names, Fannie Mae and Freddie Mac. Fannie and Freddie also offer their own versions of first time homebuyer programs.

In general, borrowers need higher credit scores to get a conventional loan than an FHA Loan. Without the backing of a federal agency, conventional lenders have a smaller appetite for risk. If your credit score is between 580 and 620, an FHA loan may be your only option. If your credit score is higher than 620, you may qualify for a program like the Conventional 97 below.

Conventional 97 is a Fannie Mae loan program for low and moderate-income borrowers and it is designed to compete directly with FHA purchase loans.

  • 3% down
  • Borrower must be a first time homebuyer
  • No income limit
  • Must meet conforming loan limits
  • Can only be a fixed-rate loan

HomeReady is another Fannie Mae loan program for low and moderate-income borrowers. HomeReady is more flexible than other conventional loans. For example, household income from non-borrowers (i.e. family members and roommates) may be considered as a compensating factor. This accommodation reflects the composition of many American households where extended families live under one roof.

  • 3% down
  • Borrowers do not need to be a first time homebuyer
  • Borrowers must take a homeownership course to qualify
  • Income limits apply
  • Family and roommate income may be used
  • Only fixed-rate loans allowed

Home Possible and Home Possible Advantage are two low down payment mortgage programs from Freddie Mac. Home Possible mortgages are ideal for first time homebuyers, millennials and move up borrowers (folks who’ve previously owned a home).

  • 3% to 5% down
  • First time homebuyer and repeat buyers OK
  • Borrowers must take a homeowner education course to qualify
  • No income limit if the home is located in an underserved community
  • Loan limits capped at conforming limit, no high-cost area adjustment allowed

A major benefit of a conventional loan — if you can qualify — is that the mortgage insurance you’re required to pay will eventually go away. When the property loan-to-value (LTV) reaches 80%, mortgage insurance is no longer required. Conventional loans are structurally configured to handle the future removal of mortgage insurance.

Conversely, for FHA loans, you need to refinance to get rid of the annual mortgage insurance premium. And refinancing a mortgage costs money, which can be a bit of a drag.

Keep in mind, borrowers need to stay in their homes long enough that the loan to value (LTV) eventually reaches 80%. If the plan is to live in a home for a short period of time, the point about mortgage insurance could be moot.

Regional First Time Homebuyer Programs

5. States and Cities

In addition to the federal government-insured first time homebuyer programs, individual states have programs, too. While varied in their approach, states generally follow a few common homebuyer assistance themes. It’s fairly typical to see versions of the following:

  • Down payment Assistance Programs (DAPs)
  • Closing cost assistance programs
  • State tax credits
  • Grants
  • Job specific programs (e.g. for teachers, firefighters)

In addition to state-level programs, some cities and regional housing authorities also provide homebuyer education programs, workshops and credit counseling.

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