First time homebuyers can face unique hurdles to homeownership. This includes saving up for a large down payment, low credit score, or no established credit history.
But there are many options available, including some government backed loans, specifically aimed at helping first-time home buyers.
Conventional and FHA home loans (loans backed by the Federal Housing Administration) are popular choices but not the only ones.
USDA loans and VA loans can also be great choices thanks to their zero down payment options.
Let’s get familiar with the best home loans first time buyers can get.
How do I qualify for a mortgage as a first-time home buyer?
Although specific loan programs may ask first time buyers to meet additional down payment or credit requirements, first time home buyers generally don’t have to meet additional requirements just because it’s their first time buying.
For most loan programs, first time home buyers must meet the same general eligibility requirements that all prospective borrowers do.
The main difference for first time homebuyers often stems from a lack of understanding about the home buying or mortgage process, compared to experienced buyers.
Saving up for a down payment, along with all the other costs associated with a first home is a significant hurdle for those who may have only rented previously.
Save up your reserves
Depending on which home loan you pick, your lender might ask you to provide an amount of money in “reserve.” Reserves are often equal to a few months’ mortgage payments.
Reserves reduce the lender’s risk because it shows that you can cover mortgage payments or unexpected expenses if they suddenly arise.
Typically, first time homeowners must have some money in their bank after their house closes. They can’t have a zero bank balance.
Rather than rushing to buy a home, first time home buyers can benefit from a little planning to boost their credit scores. This helps to get a better interest rate. More time for planning also means extra funds in their bank account.
Credit score requirements vary
Some loan programs have credit requirements. Most mortgage lenders start the mortgage approval process by checking a potential borrower’s credit score.
FICO is the most popular evaluation system for credit scores. But many lenders reach out to Equifax, TransUnion, and Experian—the three main credit reporting bureaus—as well.
The Federal Housing Authority (FHA) requires all borrowers to have a minimum credit score of 580, while many conventional loans ask for a 620 credit score minimum.
Debt-to-income ratio (DTI)
Mortgage lenders need to be sure you can afford your mortgage payments. To do that, most look at your debt to income ratio (DTI).
Your DTI compares how much debt you currently have in relation to how much money you have coming in. While each loan program can require a specific DTI percentage, most conventional loans require a DTI of less than 43%.
In other words, the amount of debt you have—including your mortgage payments—should be no more than 43% of your income. But remember, that’s an average and before taxes.
Each mortgage application is considered on an individual basis. Some FHA lenders are comfortable with borrowers who have a DTI of 57%.
If you’re concerned your DTI may be too high, talk with your mortgage lender about the options available for your situation.
With the right program, your first home purchase doesn’t need to be unaffordable.
Both the FHA loan and conventional mortgage offer down payment assistance programs for first time homebuyers, and VA loans offer zero down payment programs for eligible service members.
Many loan programs also allow down payment funds to be in the form of a gift from family. However, you will need to provide documentation showing where the down payment came from and how you will pay any mortgage closing costs.
The bottom line is that the old misconception of a 20% down payment requirement just isn’t the case any more.
A lower down payment may require private mortgage insurance for some loan products. But this gives first time buyers some relief in the amount they need to save up before starting the home buying process.
Mortgage lenders need to know you’ll be able to pay your monthly mortgage payment for the lifetime of your loan.
That means you’ll need to be able to show lenders you have a reliable income stream.
Most mortgage lenders ask for two years’ proof of continual employment in the same field (although not necessarily from the same company).
What types of loans are available for first-time home buyers?
First-time home buyers who have served in the military can access Veterans Affairs (VA)-backed loans, while USDA loans can help first-time homebuyers in certain rural regions.
FHA loans and conventional mortgages are available to first time homebuyers from mortgage lenders anywhere in the country.
A number of mortgage lenders also offer their own mortgage products, many of which are specifically designed to help first-time home buyers. So it’s worth calling around and speaking to several lenders to see what mortgage options are available to you.
Let’s look at each of four of the best home loans for first time buyers more closely.
Most mortgages in the United States fall under this category.
“Conventional mortgages” refers to any home loan that isn’t backed or insured by a government agency, like an FHA or VA home loan.
Because the government doesn’t back conventional loans, mortgage lenders tend to consider them as higher-risk, and that can translate into stiffer qualification requirements or higher interest rates.
Conventional loans can be a good choice for first-time homeowners with good credit. Some conventional home loans offer down payment options as low as 3% of the property’s purchase price.
A USDA loan is a mortgage backed by the U.S. Department of Agriculture.
Borrowers are eligible to apply for USDA loans if their desired property is in a rural area and the borrower’s income is beneath a specified threshold.
Approved borrowers can get USDA loans for an eligible property with no down payment.
The Federal Housing Administration guarantees FHA home loans for first time buyers, seasoned homeowners, and offers mortgage refinancing.
Thanks to this guarantee, FHA loans generally have easier credit requirements compared to conventional loans, and down payments for FHA home loans can be as low as 3.5%,
FHA loans come with a few drawbacks, like closing costs and mandatory mortgage insurance, but they can be a good way to buy your first home.
A VA loan is a home loan guaranteed by the U.S. Department of Veterans Affairs, the same way the Federal Housing Authority insures FHA loans.
VA loans are available to eligible service members and can be a great choice for first time buyers, or homeowners looking to refinance their current mortgage.
These loans typically have a lower interest rate compared to conventional loans and offer easier credit qualifications. VA loans don’t require borrowers to pay a down payment making them one of the best home loans for first time buyers.
Choosing the best mortgage lenders for first-time home buyers
Once you understand the basics of how home loans work, it’s time to reach out to a mortgage broker—or several.
Completing an application with each mortgage broker you are interested in can help you see the differences between lenders, what loan program they recommend, and the interest rate each one can offer.
This can also be a great way for homeowners to explore mortgage refinancing options in the future.
Reach out to Assist Home Loans for honest and trustworthy loan officers
If you’re considering buying a home and have questions about the best home loans for first time buyers, contact the experienced loan officers at Assist Home Loans today.
Our expert team of experienced mortgage lenders is ready to help you navigate the home buying process, walk you through all the available loan options, and help you get pre-approved.
As a first time home buyer, you don’t have to go through the process alone.
We’ll help as much as you need — every step of the way.