Thinking about purchasing your first home?
It might be more doable and more affordable than you’d think.
Qualifying first-time homebuyers have access to special mortgage products that other homebuyers don’t. You may even be able to finance your first residence without any down payment.
Below, we’ll walk you through first-time homebuyers loans (FTHB), including their benefits and what to know before borrowing.
What is a First-Time Homebuyers Loan?
A first-time homebuyer loan helps people become homeowners. Specific criteria and benefits of a first-time home buyer loan vary depending on the loan you choose and your geographic location. In general, though, this type of loan assists qualified borrowers who have at least a decent credit score and meet income restrictions.
First-Time Homebuyer Loan Programs
Although not all are exclusively just for first-time home buyers, the following loan programs make owning your first home more affordable.
- Insured by the Federal Housing Administration
- Great for individuals with low credit scores
- As low as 3.5% down
- Backed by the U.S. Department of Veterans Affairs
- For military personnel, veterans, and their families
- No down payment required
- Guaranteed by the U.S. Department of Agriculture
- For low-income borrowers moving to qualifying rural areas
- No down payment required
- Backed by the U.S. Department of Housing and Urban Development (HUD)
- For teachers, EMTs, firefighters, and law enforcement officers
- Provides a 50% discount on selected homes in revitalization areas
- Must live in the property for 36 months
Fannie Mae or Freddie Mac Loan Program
- Conventional first-time home buyer loans
- For borrowers with strong credit
- Requires a 3% down payment
Local or State Programs
- Varies depending on where you live
- Typically provide grants for a down payment or help with closing costs
Home Renovation Loan Programs
- Finance home purchase plus improvements in one loan
- Energy Efficient Mortgage Program
- FHA 203(k) Loans
- CHOICERenovation Loan
- HomeStyle Renovation
You might also qualify for First Time Home Buyer Grants.
Benefits of a First-Time Homebuyers Loan
When you borrow a first-time home buyers loan, you receive several perks that you wouldn’t get with a normal mortgage. Why? Because the whole point of the loan is to make purchasing a home more affordable for people who otherwise wouldn’t qualify for a traditional mortgage.
You May Not Need to Make a Down Payment
With most conventional mortgages, you need to save up a 15% to 20% down payment. First time home buyers can sometimes borrow and purchase a home with 0% down. That means a major obstacle to homeownership is now off the table. You won’t need to save up thousands of dollars for a down payment.
Whether you qualify for 0% down or not depends on the program you go with. For example, VA Loans and USDA Loans don’t require a down payment.
If you’re able to, you can always put down more than the minimum. Doing so would lower the amount you need to borrow, the overall cost of the home, and your monthly payment.
If You Do Need a Down Payment, It’ll Be Small
Other programs still require a down payment, but it’s a lot smaller. The amount is usually around 3% or 3.5%. For example, an FHA loan requires only a 3.5% down payment if your credit score is below 580.
On a $250,000 house, that’s only $5,250 you’ll need to save up. It might seem like a lot, but it’s much less than the $22,500-$30,000 you’d need with a conventional mortgage.
You Might Save Money On Fees
FTHB loans limit how much a lender can charge in fees. Your savings will vary depending on the program you choose. For example, some state programs provide borrowers with a grant that covers closing costs, which are often two percent to five percent of the purchase price.
It Frees Up Your Savings to Pay Down Other Debt
Do you already have substantial savings? If so, a first-time home buyer loan gives you flexibility. You can put your savings toward other financial goals instead of a large down payment.
Financial advisors like Dave Ramsey recommend paying off debt from student loans, credit cards, and medical bills before paying down a mortgage. Since mortgage interest rates are at a record low in 2020, it’s likely any other debt you have has a much higher interest rate. In other words, that debt is more expensive, even if it’s a smaller dollar amount than your mortgage.
What to Know Before Borrowing a First-Time Homebuyers Loan
First-time home buyer loans are riskier for a bank than a regular mortgage because you don’t own very much equity in the home. For that reason, these loans come with more restrictions than a conventional mortgage might, including limitations on the home you can purchase.
Make sure you’re aware of the following restrictions if you’re planning to go through a first-time homebuyers loan program:
You Might Not Be Able to Get the Home You Want
The loan programs restrict the type of house you can purchase. Some programs put a dollar limit on your purchase, so you may not be able to afford the nice expensive home you had your eye on.
On the flip side, you can’t purchase a rundown home either (unless you go with an FHA 203k rehabilitation loan or another renovation loan). The home must be in good condition and free from safety hazards like loose railings, lead paint, broken steps, etc.
For borrowers interested in the Good Neighbor Next Door Program, you can only purchase homes listed on the HUD database.
Not Every Seller Will Accept Your Form of Financing
Some sellers are wary of first-time home buying programs, especially FHA. Here’s why:
Sellers Fear Their Home Won’t Meet Health & Safety Standards
For FHA loans, the home needs a regular appraisal and a property evaluation. The appraiser must ensure the home meets HUD’s health and safety requirements. The requirements are stricter than just the typical appraisal a conventional mortgage lender requires.
A seller who doesn’t think their home can meet those standards as-is simply won’t accept FHA offers.
Sellers Also Fear FHA Loans Will Fall Through During Underwriting
A loan can then fall through during underwriting for a number of reasons, including a bad credit score, insufficient funds for closing costs, or too high of a debt-to-income ratio.
Sellers fear FHA loans will fall through because FHA borrowers have lower credit scores on average than conventional loan borrowers do. In a seller’s eyes, that increases the likelihood that an FHA loan would fall apart during underwriting.
Looking at the numbers, though, an FHA loan and conventional loan have similar success rates.
According to data from Ellie Mae’s Origination Insight Report from September 2020, FHA loans have a 74.9% closing rate, and conventional loans have a 77.6% closing rate. There’s only a 2.7% difference.
You Need to Live in the House
The goal of the loan program is to help people become homeowners, not landlords. You must live in the home you purchase, and it must be your primary residence for a specified amount of time. That being said, you cannot rent out the house right away.
You Might Need to Pay PMI
Most homebuyers who put less than 20% down when they purchase their home need to pay private mortgage insurance (PMI). It’s a fee equal to 0.5 to 1% of the mortgage that’s added to your monthly payment. PMI protects the lender if you stop paying your mortgage because it guarantees they’ll still get paid.
With some loans, you stop paying PMI as soon as you have 80% equity in your home. For other programs, you must pay PMI until you pay off the loan in full—or refinance.
First-Time Homebuyer Programs & Student Loans
If you have student loans, you’re probably wondering how those fit into the homebuying process.
Assuming you have a stable job and plan to stay in your area for a while, buying a home with a low-cost first-time homebuyer program vs. renting usually makes sense for student loan borrowers.
Here’s why:
- A no or low down payment frees up your savings to pay down your student loans, which generally have a higher interest rate than a mortgage
- In most areas, paying a monthly mortgage is cheaper than renting, freeing up your budget for paying off student loans or other financial goals
Of course, just because it might make sense to buy in your area doesn’t mean you’ll be able to.
The main obstacle student debt holders face is having a debt-to-income (DTI) ratio that’s too high. Lenders like to use the 28/36 rule. No more than 28% of gross monthly income should go toward your housing expenses. No more than 36% should go toward total debt, including housing. If you already have a high DTI, you may need to pay down your loans more before purchasing a home.
At the very least, knowing your DTI ratio will help you decide on a feasible budget for your first home.
For more details on buying a house with student loans, check out these articles:
- Should I Pay off Student Loans or Buy A House?
- Buying a House with Student Loans: Everything You Need to Know
- Getting a Mortgage With Student Loans
Final Thoughts on First-Time Homebuyer Programs
As you can see, first-time homebuyer loan programs making homeownership more affordable for a larger number of Americans, including student loan borrowers. Just make sure you understand the ins and outs of whichever program you choose so that you know how much you’ll need to put down, whether you need to pay mortgage insurance, and what types of homes you can purchase.