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First-time homebuyers have multiple options to finance the purchase of their first home. Be sure to review the available federal and state programs designed specifically for first-time homebuyers, as well as the variety of low down-payment financing options offered by lenders, so you can enjoy the satisfaction of connecting first home to first loan.
What a first-time homebuyer needs to qualify for a home loan
The most common type of home loans available are conventional loans. These are loans that are financed by the private market, rather than a government program. Some conventional loans allow for a down-payment as low as 3%. These loans usually require a minimum credit score of 620 and they charge more as your credit score falls below 740 or if your debt-to-income (DTI) level rises. And they typically won’t lend to a borrower with a DTI above 50%.
First-time homebuyers should also consider several government-backed loan programs for their low or no down-payment options.
FHA Loan Programs
The Federal Housing Administration (FHA) operates under the Department of Housing and Urban Development (HUD). The FHA single-family mortgage program provides access to safe, affordable mortgage financing for American families. FHA does not lend money to homeowners. Instead, FHA insures qualified loans made by private lending institutions. FHA will insure single-family loans with down-payments as low as 3.5% and also provides financing for condominiums and renovation loans. FHA does not require a minimum credit score and offers more flexibility when it comes to DTI ratios, but individual lenders might have their own requirements. Fees can be higher compared to conventional loans and FHA has a limit on the loan amount they will insure.
VA Home Loan Guarantee Program
The Department of Veterans Affairs (VA) Home Loan Guarantee Program is another government program that insures qualified loans made by private lending institutions. VA loans provide zero down-payment mortgage financing to eligible veterans and surviving spouses. The VA loan is considered a benefit of service and borrowers must meet VA eligibility requirements. VA does not have a minimum credit score requirement or DTI ratio, but individual lenders might have their own requirements. There are limits to the fees the VA borrower can pay to the seller and VA has a limit on the loan amount they will insure.
USDA Rural Housing Loans
The U.S. Department of Agriculture (USDA) Rural Housing Service (RHS) offers Americans in rural areas and small towns zero down-payment mortgage financing in areas where private lending is often limited. RHS loans can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. There are two different programs: the guaranteed program, and the direct loan program. Guaranteed loans are insured by RHS and funded by private lenders. Direct loans benefit very-low-income or low-income borrowers with funds loaned directly by the Rural Housing Service, without the use of private lenders. USDA does not impose a minimum credit score requirements but does have income limits for borrowers.
How to find home loans for first-time homebuyers
When thinking about a conventional loan product, know that many lenders provide incentives for first-time homebuyers. REALTORS® should use their network of lenders and mortgage brokers to help clients understand current levels of available programs. If possible, provide a summary or range of available programs. Remember that having a strong relationship with several lenders will help you provide your client with alternatives if one lender does not have the best mortgage terms.
You should be aware that not all lenders offer FHA, VA, and or USDA loan products. Make sure to develop relationships with lenders that can provide government-insured financing for clients who choose to explore government lending programs.
It is beneficial to any first-time homebuyer to consider housing counseling services before entering into any mortgage financing agreement.
How to find state-funded grants for first-time homebuyers
Many states have programs specially devoted to help first-time homebuyers. These programs may include mortgages with lower rates and better terms than conventional loans or they may even include help with down payments. You should contact your state’s housing financing agency to find out more. Most state housing finance agencies are independent entities that operate under the direction of a board of directors appointed by each state’s governor. They administer a wide range of affordable housing and community development programs.
How to find down payment assistance for first-time homebuyers
So, you found a loan, but still need down payment assistance? Many local governments and non-profit organizations offer down-payment assistance grants and loans, targeted to area borrowers and often with specific borrower requirements. Reach out to your local REALTOR® association to find out if they recommend any specific programs or partners.
