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Buying your first home can feel both exciting and completely overwhelming. The time, the research, and the investment involved is an immense undertaking for a first-time home buyer. We’ll help make the process less daunting by breaking down the best loan programs for someone making their first home purchase.

Understanding First-Time Home Buyer Loan Programs

First-Time Home Buyer (FTHB) Loan Programs were initially created to encourage people to become homeowners. The goal of the loan programs are to financially assist people with low to moderate incomes purchase their first home. To be qualified for the loan, a buyer must have a strong credit score and meet the income restrictions. 

Some of the best loan programs offer different benefits, including lower down payments, smaller interest costs, grants, loan forgiveness, help with fees, and deferred payments. Typically the down payment for a home is 20% of the closing price, but FTHBs allow buyers to pay as little as 0% of the price. Next we will break down the four best loan programs for first-time home buyers. 

1. Federal Housing Administration Loans (FHA)

Person holding terms and conditions paperFHA loans are insured by the Federal Housing Administration, in collaboration with local lenders, to provide people with the ability to afford a mortgage. These loans are popular for first-time buyers, as it only requires a minimum credit score of 580. FHA loans offer a 3.5% down payment of the purchase price. If you have a credit score of at least 500, you may qualify for a FHA loan by paying a down payment of 10% of closing price. Additionally, you can still be eligible for a FHA loan while having a higher debt-to-income ratio, your monthly debt payments divided by your monthly gross income. 

It’s important to consider that FHA loans require you to pay a mortgage insurance premium (MIP). This premium can be paid in your scheduled mortgage payments. This premium policy protects the mortgage lenders in the case of the borrowing defaulting on payments.  

2. Conventional Home Loans

Conventional loans are the most commonly used mortgage loans. They are not backed or insured by the government. These loans allow for more flexibility because they are backed by the lender. In addition, the borrower must have a debt-to-income ratio of 36% and is required to purchase private mortgage insurance. Conventional mortgages are options for people with good to excellent credits scores (at least 620). These loans are available to anyone; you are not required to be a first-time home buyer. First-time home buyers have the choice between the two kinds of conventional loans: conforming and nonconforming. 

Conforming Loans

Mortgage lenders must conform to the standards or requirements set by government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to be eligible for backing by these GSEs. The amount of these mortgages are regulated by the Federal Housing Finance Agency (FHFA). These lenders have to conform to these mortgage limit standards, thus creating conforming loans. To be eligible for a conforming loan, you must meet the credit score limit, debt-to-income limit, and be able to pay at least a 3% down payment.

Nonconforming Loans

Woman explaining to young man while pointing at tablet

Nonconforming loans are conventional loans that exceed the mortgage amount limits and standards set by Fannie Mae and Freddie Mac. For that reason, they are not backed by GSEs, but rather lenders and banks fund them. Without GSE assistance, lenders are at risk if a borrower defaults. Nonconforming loans require borrowers to have a higher credit score, pay a larger down payment and higher interest rates, and have a lower debt-to-income rate. 

3. Veteran Affairs Loans (VA)

The U.S. Department of Veteran Affairs backs lenders by offering guarantees on loans for those with military experience, through VA loans. You must first apply for certification of your eligibility through the Department of Veteran Affairs. Once you receive your certification you may request a loan from a lender. Those eligible are not required to make a down payment on their house; the VA loan offers 100 percent financing guaranteed. VA loans also have low interest rates and require no mortgage insurance. 

It should be mentioned that VA loans are mainly given out to those with ready to move-in homes, not homes that require numerous improvements. Additionally, a VA Funding Fee is issued to the buyer which can be paid or rolled into your total loan amount. 

4. USDA Loans

The United States Department of Agriculture offers three home loan programs: guaranteed loans, direct loans, and home improvement loans. Each of these loans are designed to help people with low to moderate incomes have assistance to buy homes in rural areas. 

Guaranteed loans are given out by lenders and backed by the USDA in case of borrower default. To qualify for the loan your household income cannot exceed 115% of the U.S. median household income. Those approved for the loan can receive up to 100 percent financing. 

Unlike guarantee loans, the USDA, rather than a bank, lends money out through the direct loan. These loans are designed as a repayment assistance, or a government subsidy, for people with low incomes. Depending on the area in which you live, the income restriction limits for eligibility vary. Interests rates for direct loans can be as little as 1%. 

You may be eligible for a home improvement loan depending on the location of your home and your income level. These loans are created to aid people with low incomes repair or upgrade their house through a combination of loans and grants. 

For More Home Buying Information

Home & Auto Resources is a team of professionals with expertise in home and auto insurance with even more information on the best loan programs. We are here to help answer any questions you may have. Check out the rest of our resources!


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