All About Home Loans for First-Time Home Buyers

Being a first-time home buyer is a glorious time in your life. You’re on a solid path with your career, you’ve managed to save a little money, and maybe (dare we say it?) you’ve come to enjoy tracking your credit score. As a responsible, independent adult, you’re tired of living under the rule of your landlord -- so now it’s time to get out on your own and buy a home!

You probably have a lot of questions. But the biggest of all may be this: what actually are my mortgage options as a first-time home buyer? Let’s start by addressing this.

What Is a First-Time Homebuyer?

First-time homebuyers are a bit of a nebulous group. It’s worth defining them because many lenders create unique products for people who have never owned a home. Having that said, a first-time homebuyer can sometimes be someone who has owned a house -- but not in the last three years. 

And alternately, if you’ve married a homeowner but never actually owned a house on your own, you actually may not be considered a first-time homebuyer.

To keep it simple, we’ll say that a first-time homebuyer is someone who is interested in purchasing a home, but hasn’t yet. They’ve never rented with the intention of purchasing the home they were in, and they’ve never paid on a property that was owner-financed. 

These are folks who are brand new to the process and, because of high real estate prices, may need a little help getting into that first house. There are tons of programs across the country available to help you obtain a down payment, but first, you have to qualify for a mortgage. Mortgages designed for first-timers like you are some of the more forgiving home loans anywhere, but they’ll cost you a bit more.

The Top Mortgages for First-Timers

Depending on your credit score and ability to conjure up a downpayment and closing costs, you could use any old loan as your first mortgage. Since the typical first-timer is a bit too cash poor and credit-strapped to have the world as their oyster, we’re going to limit the top mortgages to those with low down payment and flexible credit qualifications. These are mortgages created with you in mind:

• VA Mortgages. Ok, this is not technically a first-time homebuyer program at all, but if you’re a military vet or on active duty and ready to buy a house, VA home loans are the way to go, hands down. There’s no downpayment required, no upfront fees needed, no monthly mortgage insurance and no minimum credit score or maximum debt-to-income ratio (though banks can apply their own rules over this, which is an additional set of rules known as an overlay).

• FHA 203(b). This is what everybody calls an “FHA mortgage.” It’s the standard-issue purchase mortgage from FHA. You’ll need a 3.5% down payment, but there are endless combinations of local and state programs that can help you come up with much of your downpayment. The seller can pay up to 6% of the price of your home as closing costs on your behalf, too.

• Fannie Mae’s HomeReady. Provided your credit score is 620 or above, the HomeReady program could be a good fit. Not only is the required downpayment less than that of the FHA, at 3%, none of it has to be your own funds. That means gifts, grants, or other community programs can help cover the costs. You will have to take the HomeReady Framework course, which costs $75. In addition to all of that, your income has to be equal to or below your area’s median in many parts of the country.

• Fannie Mae’s HomePath. For the true budget buyer who isn’t as picky as many new homeowners, there’s Fannie Mae’s HomePath. Like HomeReady, HomePath requires you to take the homeownership course, but there’s another caveat: you have to buy a home listed on HomePath.com, which are all owned by Fannie Mae (likely they’re repossessed homes, but the site doesn’t make that clear). There aren’t as many of these bank-owned properties as there used to be, so the pickings may be pretty slim. If you can jump through all the hoops, though, you can also get a gift of 3% down through the program.

First-Time Homebuyer Mortgages Aren’t Always the Best Option

There are a lot of great things about first-time homebuyer loans, but they’re not always the best choice for everyone. Some require a lot of fees be paid over the lifetime of the loan, while others have high mortgage insurance premiums. So even though they sound pretty awesome, they might just be so-so once you’ve compared first-time homebuyer specific loans to more generally marketed products.

If you have a profile that more closely matches the table below, there are other (potentially more desirable) home loan options to consider:

Again, VA loans are your absolute best bet, if you did the military service it takes to have earned one. Short of that, though, you’ll do well with a conforming conventional loan. These loans are inexpensive, they are fast to close, and when you’re in a negotiation, they give you an advantage since conventional loans don’t require extensive inspections that make sellers nervous.

Since you have your own cash, there’s no waiting for third parties to come through with funding, or learning at the very last possible minute that the funding you were promised has dried up. The more organizations and people involved in a mortgage transaction, the more complicated they become and the more potential failure points that develop.

When to Buy a Home

The first thing every first-time homebuyer really needs to consider is if now is the time to buy. Sure, buying now means you’re buying now and checking another box off your list of milestones, but it’s not always the best move. Many first-time buyers have gotten into mortgages wholly unprepared for the responsibility and shift in lifestyle that was involved.

Suddenly you’re responsible for everything, both good and bad. Is your fence broken? You have to fix it. You don’t have the money to fix it? Your bank could accelerate your note for lack of maintenance. You can’t pay the note off? The bank repossesses your home.

With housing prices climbing the way they have been, some of you first-timers will make out like bandits by buying today, but some of you will put your financial futures at serious risk trying to jump in too soon.

How Do You Know You’re Ready For a Mortgage?

Until you jump, you never really know that you’re ready for a mortgage, but there are a number of good signs that you can totally nail homeownership. Those include:

• Job security. Job security may be the absolutely most important thing on this list, and not for the reasons you’re thinking. Sure, it’s important to be able to pay for the place you’ll be living in, but it’s also important to know that your home will be within a reasonable distance from your work. The morning commute gets ugly if you’re still job-hopping and suddenly you find you’ve added an extra hour on the road five or six days a week.

• Family stability. Are you happy with your family size or can you afford to buy the home now that you’ll want later to house all those children and pets? If you can only afford the two-bedroom condo, but you’ve got another baby in mind, don’t jump in now. Selling a home can be very stressful and there’s no guarantee you’ll be able to get out from under your mortgage if the housing supply increases before you can pay down your mortgage enough to sell.

• Low consumer credit debt. Low consumer credit debt is a double-edged sword. On one hand, you’ll not have problems with your debt to income ratio, but on the other, you may lack the proper credit mix to really have a great credit score. If you can, try to establish an unsecured credit line like a credit card and a secured note, like a car loan, along with that student loan you almost certainly have.

• A ready source of emergency funds. When something breaks, it can break big and your homeowner’s insurance likely won’t pay.to fix it. If you have a home warranty, you may have some percent of a big expense covered, but things like roots in sewer lines (quite pricey to fix permanently) are excluded almost universally. Have a rainy day fund before you go looking for a home.

• An appreciation for insurance. Your coverages are about to climb dramatically. Besides your vehicle insurance, you’ll have homeowner’s insurance, which covers your structure and belongings, unless it’s too windy (in some states) or it floods. Wind damage and flood policies aren’t terribly expensive, but they are extra. Oh, and don’t forget the mortgage insurance that you’re likely going to be paying to protect the bank from your potential default.

• A lack of wanderlust. Buying a house means putting down roots in your community and neighborhood. Your ramblin’ days are over. Now, it’s planned vacations for two weeks a year, evenings on the sofa, and a lot of routines. Routine can be good, but if you’re still prone to suddenly running off to Taiwan for fun, homeownership isn’t the right road for you.

Pros and Cons of Waiting to Buy

There are financial considerations, as well as lifestyle considerations when it comes to using a loan designed for first-time homebuyers. Specially designed first-time homebuyer loans can be quite expensive because of the risk associated with that category of borrowers. Here’s a financial break down of mortgage insurance (one of your biggest costs) between the FHA loan, a hugely popular option for first timers, and a comparable conforming conventional loan, based on credit scores.

Comparison of Mortgage Insurance Across Programs and at Different Credit Ratings

(Assuming $312,400 purchase price with 3.5% down @ 4.75%, PMI rates based off this table)

As you can see, you can save over $20,000 by simply waiting a few years to obtain a better credit score when you get your first home loan.

The Costs and The Benefits

Buying using a first-time homebuyer program can be costly, as you can see from the chart above. The mortgage insurance alone is murder. However, there are good reasons to go ahead and pull the trigger, and find a first-time program that’s going to be the best for your needs.

Let’s say that you’re still early in your credit experience and that’s the only reason you have a 620. You’ve not done anything wrong, you just don’t have enough credit yet. If you are certain now is the time to buy, but that you’re not going to stay put for more than a couple of years, you’re far better borrowing using an FHA product, in spite of costly mortgage insurance.  However, if you’re planning on staying put, you’re likely to be better off waiting a few years to build your credit (rather than opting for an FHA) so you can qualify for a home loan without mortgage insurance..

Why? Let’s look at the first scenario, in which you aren’t going to stay put, and you’re buying with an FHA. This can often translate into a natural appreciation in the value of your home, especially if you’re in an area that’s growing. The right home in the right area can gain a substantial amount of equity rapidly in today’s volatile market. 

And even if you don’t live in a real estate hotspot, you’ll see incredible value in having a place of your own (with no rent hikes), which may make it worth the extra $119 you’ll be spending each month on mortgage insurance. Your credit score will thank you, too, since having a mortgage in good standing is an excellent way to boost your buying power.

However, image you want to stay in your house and pay it off, which is becoming a more attractive option for a lot of people. In this case, your lifetime mortgage insurance would be far too much to bear when compared to waiting a bit and establishing better credit. You almost certainly would have to refinance in there somewhere, which, depending on the rate and terms you selected, might mean a whole new loan with 30 years of payments.

Many first time homebuyers end up paying extra in fees because they lack the credit scores or have too much debt to qualify for the best rates on everything from mortgage insurance to homeowners insurance. Thankfully, taxes aren’t on a risk-based pricing model.

Speaking of taxes, if you can itemize your federal income tax, you can deduct your that mortgage insurance, so that helps a bit in both scenarios. If you have enough of other types of things you can itemize, then you may not mind paying a lot of extra mortgage insurance. 

First-Time Home Loans for Poor or Nonexistent Credit: In Review

If your credit is lacking and you’re likely to move within the next couple of years, it may be smart to buy with an FHA because:

• You won’t be subject to rent hikes

• You’ll only have to pay mortgage insurance for a few years (until you move)

• You’ll build your credit simply for having a mortgage and paying it on time

If your credit is lacking and you’re likely to stay put through the duration of your mortgage, it may be smartest not to use an FHA, but rather to wait and save up, because:

• Paying 10+ years of mortgage insurance can become very costly

• You’ll likely have to refinance your mortgage

• You’ll have to pay extra in fees upfront because of your lack of credit

Home Loans for First-Time Homebuyers: Wrapping It All Up

First-time homebuyers are far from a homogeneous group of buyers, though many lenders would have you think they were. Instead, some of you are ready right now -- you have savings in place, you have a steady source of income, and you work at a place you don’t mind to show up to regularly. Others aren’t there yet and really aren’t even sure why they’re buying, except that it’s on their list of things to do.

Taking out a mortgage is a big deal, it’s expensive, and owning a home isn’t like owning a lamp. Your lamp breaks, you send it to the recycler. Your house breaks and you have to fix it, because where else are you going to live?

Want Guidance?

If you want to look deeper into buying your first home, even though you’re not positive where you really are on the curve, touch base with us here at Home.Loans. Our loan experts can walk through your financial picture, as well as your future plans, and help you find the loan that makes the most sense for you -- if it does make sense to buy today.