There are many loan options to compare and consider for your first loan, such as, a Conventional, FHA, VA, or USDA insured loans. To make matters even more complex, if your qualify, you can even layer most loan programs with a below-market rate or Mortgage Credit Certificate (MCC) from your State Housing Finance Agency (HFA). So, as you can see, sorting through your financing options is complicated. Your eligibility for the programs can be impacted by your income, the location of where you want to buy, your credit score, and many other factors.
Selecting the right and experienced mortgage lender will be critical in helping you sort through your financing options prior to making a final decison. To get you started though, here are some are some of the best home loan options for first-time homebuyers.
A Conventional Loan is a loan product that conforms to Fannie Mae and Freddie Mac's guidelines. Fannie Mae and Freddie Mac are nicknames for the two Government Sponsored Enterprises (GSEs) that were created by the federal government to purchase mortgage loans from lenders. After most lenders make a loan, they sell the loan to Fannie Mae or Freddie Mac. In partnership with Private Mortgage Insurance (PMI) companies, these loan types can have a low downpayment and offer good terms. In some cases the downpayment on a conventional loan can be as low as 3%.
Federally regulated banks are required to make an effort to lend to low and moderate income clients in their service area as a part of the Community Reinvestment Act (CRA) of 1977. As a result, most of the larger federally regulated banks and mortgage lenders in our country have created CRA home loan programs. These CRA home loan programs offer those who meet the required income limits savings, flexibility, exceptional terms and other benefits making these financing options worthy of their consideration.
A standard FHA-insured loan product is traditionally one of the best types of home loans for first-time buyers. A FHA loan is insured by the Federal Housing Administration (FHA) and is orginated or funded by a private lender. While mortgage lenders do vary in how they apply FHA underwriting guidelines, FHA standards in general are more flexible than most other types of home loan programs and can be a great fit for those households with lower credit scores. FHA also has a low minimum down payment of just 3.5% (of the purchase price) and it permits a gift from a family member or the seller to pay the remaining closing costs and fees to purchase your first home. These are great features for the typical cash-strapped buyer looking to finance a home of their own.
An FHA 203k Loan is like a standard FHA loan, but with this home loan program you can finance not only the purchase of the home, but also repairs to the home as well. The FHA 203K loan is great home loan product for those who are buying a fixer upper, such as a foreclosure or other property that do not meet a lender's standard property conditions.
The HUD 184 Loan is a home loan program designed specifically for Native Americans who are buying a home on or off Tribal lands. The program is also referred to as "Section 184 Loan Program" or the "Section 184 Indian Home Loan Gurantee Program." Like an FHA loan this loan is made by private lenders, but is insured by the federal government.
To qualify for the HUD 184 Loan, the borrower must be a member of a federally recognized tribe. The program is a great option for Native American homebuyers purchasing a home on or off Tribal lands. It has a low minimum downpayment of 2.25%; it does not include a monthly mortgage insurance premium; and it has very flexible underwriting standards similar to FHA.
If you intend to buy a home in a rural area, you definitely need to check out the United States Department of Agriculture's (USDA) Rural Housing Service. The UDSA offers "Guaranteed" loans that are exceptional because they are 100% financing without monthly mortgage insurance premiums. While they do require an upfront mortgage insurance premium, you can finance that cost just like an FHA loan. So if you are looking to buy a home in a rural town (typically towns of 10,000 people or less) this is a great option to consider.
he USDA also makes loans directly to eligible homebuyers through their regional offices with a loan product referred to a their "Direct" program. With this program, the USDA directly subsidizes the monthly interest rate for the lowest income homebuyers to be as low as one percent! While you may have to pay back the subsidized payments when you sell or refinance, with a rate that low many people who thought they could never buy a home actually can!
State Bond loans are also known as Mortgage Revenue Bond (MRB) loans. Your local State Bond Loan program can be one of the best home loan programs for qualified first-time homebuyers. A State Bond Loan typically provides eligible borrowers a below-market interest rate to purchase a home that they intend to own and occupy. You obtain this lower rate through your local Housing Finance Agency (HFA) which is most often a state-wide agency. The rate you can get with a State Bond Loan is typically below the current market rate. The mortgage rates offered by the state vary, but typically their mortgage rates are 1/2 to 3/4 of a percent below a typical lender's rate for a 30 year fixed rate loan. That lower rate can save you thousands of dollars over the life of the loan! It may even allow you to qualify for a loan if you are having a hard time affording the payments or have limited purchasing power.
In most states the program is combined with Conventional, FHA, HUD 184, VA, or USDA loan programs. Not every mortgage lender offers the State Bond Loan so you need to carefully interview and select from the loan officers who do.
If your are a U.S. Veteran you should definitely ask your lender about federal or state VA loans that are available to you. The federal VA Loan is a great product because it is still one of the rare 100% financing loan options available to cash-strapped first-time homebuyers. Coming up with enough cash to cover the down payment and the closing costs can really add up, so by using a VA loan the amount of cash you need to close will be about as low as you can go. The rates on a VA Loan are also very comparable to standard rates offered by lenders. Of course, you always want to shop around to make sure you are getting the best rate and terms.
As stated earlier, deciding which loan package suits you, can be very confusing! We suggest you attend a homebuyer education class like ours to get all the tough questions answered. Class schedule can be found HERE.