What Are the Best Loans and Programs for First-Time Homebuyers?

By Realty Times Published Oct 17, 2023 05:25 am

If you’re a first-time homebuyer or you’d like to be, things aren’t necessarily easy out there. Many expected that with the increasing interest rates over the past year, the housing market would slow a bit, and prices would go down. While the slowdown in sales has happened, the pricing declines most were waiting for haven’t.

There are a lot of reasons for that, including the fact that there’s still a low inventory of homes, and current owners are staying put because they’ve locked in much lower interest rates than they’d have available if they were to move now.

If you are trying to buy your first home, there are some programs and options that can make it a reality a little more easily, including the following.

An FHA Loan

FHA stands for the Federal Housing Administration, and these loans require only 3.5% down. They’re a good choice as such for first-time buyers. The most recently available federal data shows that almost 73% of FHA borrowers put down less than 10% when they purchased a home for loans that originated in the fall of 2021. If you have a credit score of less than 580, an FHA loan will require that you put down at least 10%.

The loan limits for this program are based on where you live.

You can technically qualify for one of these loans if your credit score is in the 500s, but approved borrowers usually have significantly higher scores. From January to November of 2021, average FHA borrowers had credit scores 678.

If you get an FHA loan, remember it will require mortgage insurance.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac work with local lenders, offering conventional mortgage loan products. Some of these loans carry low down payment requirements.

One example is the HomeReady loan from Fannie Mae, which is for low-income borrowers with a minimum credit score of 620, although 680 or higher is preferred. A HomeReady loan requires just 3% down, and you can qualify to eliminate mortgage insurance after you have 20% equity in your home. This is not true with an FHA loan—you can cancel your mortgage insurance only after 11 years and if you put 10% down originally.

The Home Possible loan is a program through Freddie Mac with a minimum 3% down payment and is meant to be available to first-time buyers, move-up borrowers, and retired individuals. You can apply funds from gifts, loans or grants towards your down payment and closing costs. You can also apply sweat equity.

USDA Loans

The U.S. Department of Agriculture has a program geared towards helping home buyers, and you don’t have to live on a farm to use a USDA loan. The program is typically geared toward buyers in rural areas, but often suburban areas are included. The program offers 100% financing because the USDA guarantees the mortgage with lenders.

There are regionally driven income limitations, and the number of people in your household affects this too.

VA Loans

The Department of Veterans Affairs has a home loan program to help military veterans, service members, and some surviving spouses purchase homes. A VA loan doesn’t require any down payment and, uniquely, no mortgage insurance. If you’re a veteran who qualifies for the program, you can have a higher debt-to-income ratio and qualify for a larger mortgage than you would with most other loan programs.

The VA doesn’t set income requirements or credit limits, but lenders will do so individually. The average credit score of a VA borrower from January to November 2021 was 722.

State Programs

Finally, don’t overlook the options available at the state level if you’re a first-time buyer. Most states have a variety of programs that can make ownership a reality for you. Depending on where you plan to buy, there may even be more localized options.