First-Time Home Buyers
More home loan options and opportunities are available for new homeowners than ever before. These loans range from zero down payment options to flexible qualifying programs that allow less-than-perfect credit, even programs that accommodate recent grads without an extensive job history. The truth is, a wide variety of mortgage options and programs are available specifically for first-time homebuyers, such as:
- 100% financing, no-down-payment programs
- Down Payment Assistance Programs
- Fannie Mae’s Community Home Buyers Program
- Programs that allow gift funds from friends or family
- Nonprofit organization grants
- Seller contributions and concessions
Lower Down payment vs. Mortgage Insurance (MI)
The benefits of a larger down payment include lower monthly payments and fewer challenges to qualifying for the loan. The drawback is that home prices may increase while the potential homebuyer is saving additional funds.
The down payment on an FHA loan can be as low 3% - 3.5% vs. the 20% required for a traditional fixed rate loan. Many homebuyers prefer to put less money down and allow more cash after closing for home improvements.
Due to the increased risk, mortgage insurance (MI) is required on all FHA loans as well as a traditional loan with a down payment below 20%. MI insures the lender if the buyer defaults, and increases the monthly payment. However, MI may be removed after 12 months if the borrower can prove via an appraisal that the home’s market value has increased, and they now have 20% equity, or 80% loan-to-value (LTV).
Note: Not all lenders allow PMI to be removed.
Basic Home Loan Options
Fixed Rate Mortgage (FRM)
The traditional fixed rate mortgage is a popular loan of choice because it offers stability. Interest rates and monthly payments are unaffected by fluctuations in the financial markets, and remain the same throughout the typical 15 or 30 year loan term. Benefit: consistency and security. Drawback: A larger down payment is typically required.
Adjustable Rate Mortgage (ARM)
ARMs are another popular loan option. An ARM’s interest rate can change at certain pre-determined adjustment periods. A limit or ceiling is typically placed on the amount the interest rate can rise from one period to the next and over the life of the loan. Benefits: Lower interest rates and reduced monthly payments at the beginning of the loan term can make it easier for a borrower to qualify. Drawback: rates and payments may rise.
Federal Housing Administration Loans (FHA)
FHA loans are guaranteed by the government and were originally designed especially for the first-time homebuyer. More flexible guidelines and lower down payment requirements enhance the new homeowner’s ability to qualify for and purchase a home. Benefits: Lower down payment and income requirements. Drawback: Mortgage insurance is required.
Veteran’s Administration Loans (VA)
VA loans are also government-guaranteed and available for veterans (and surviving spouses) with a history of active military service. Benefits: little or no down payment.
USDA Rural Development Guaranteed Housing Loan
Another government guaranteed option, the USDA mortgage is available to low and moderate income borrowers purchasing a home in a designated “Rural Development” eligible area. Benefits: No down payment or mortgage insurance is required, and less than perfect credit is allowed.