Best Home Loans for First-Time Buyers
The first homebuying process is exciting and stressful. There are many kinds of home loans out there, and it can be challenging to figure out which one is best for your finances. There are often special loan programs for first-time homebuyers that offer lower down payments, less strict credit standards, and other benefits. You can find the best first-time buyer home loans and tips on how to find one here.
1. Federal Housing Administration (FHA) Loan
For people buying their first home, the Federal Housing Administration (FHA) loan is one of the best options. The government backs FHA loans, which aim to simplify housing for individuals with poor credit or modest down payments. You can put down as little as 3.5% of the home’s price with an FHA loan, significantly less than the 20% typically required for a standard loan.
FHA loans also have less strict credit score standards. Conventional loans typically require a minimum credit score of 620, but FHA loans allow individuals with a score as low as 580, or even lower with a larger down payment. FHA loans also have low interest rates, which makes them a beneficial choice for first-time buyers who don’t have a lot of money for a down payment or perfect credit. FHA loans, on the other hand, need mortgage insurance fees (MIP), which can make the loan more expensive overall.
2. VA Loans: Best for Veterans and Active Military Members
A VA loan is one of the best ways to get a home loan for some veterans, active-duty military members, and surviving spouses. The U.S. Department of Veterans Affairs (VA) gives home loans with low interest rates, no down payment needed, and no private mortgage insurance (PMI). Typically, loans with less than 20% down require PMI. For first-time buyers, this can be a big help in terms of saving money.
Not only do VA loans not require a down payment, but they also have less strict credit score standards than regular loans. Any credit score is fine with the VA, but most lenders want you to have at least 620. VA loans also have lower closing costs, which helps veterans afford them. VA loans do have a support fee, though. You have the option to either add this fee to the loan or pay it upfront. A VA loan is a great way for veterans and active-duty service members to get home funding with little money out of their own pockets.
3. USDA Loans: Best for Rural and Suburban Homebuyers
For first-time buyers who want to buy a house in a rural or suburban area, the USDA loan is a beneficial choice. The U.S. Department of Agriculture (USDA) helps qualified sellers in certain rural and suburban areas get home loans with low interest rates and no down payment. Since traditional mortgage lenders don’t always reach these areas, USDA loans aim to assist people in these areas in becoming homeowners.
In order to get a USDA loan, a borrower’s income must be less than a certain amount, which varies by area and household size. For most loans, the USDA wants the borrower’s family income to be no more than 115% of the area’s median income. You must also meet certain standards for the property you want to buy, such as being in a USDA-designated rural area. The USDA loan doesn’t require a down payment, but it does charge a guarantee fee up front and a monthly fee after that. These fees can make the total cost of the loan higher. But because you don’t have to make a down payment, it’s a beneficial option for first-time buyers in certain places.
4. Conventional Loans with Low Down Payment Options
Most conventional loans need a 20% down payment, but many lenders now offer first-time homebuyers with low down payment choices. Some conventional loans have down payments as low as 3% to 5%. This makes them an excellent option for buyers with good credit and steady income who cannot afford the large down payment required by traditional mortgages.
Fannie Mae and Freddie Mac, respectively, run the HomeReady and Home Possible programs, two popular low-down-payment conventional loan options. These programs cater to individuals with low to middling incomes, allowing for down payments as low as 3%. They also have smaller requirements for mortgage insurance than FHA loans, which makes them cheaper in the long run. People with better credit may also be able to get better terms and interest rates on conventional loans. But if your credit score isn’t very high, you might still need to look at other loan choices, like FHA loans, to get better terms.
5. Navy Federal Credit Union Home Loans
Navy Federal Credit Union gives its members, especially military families, excellent home loan choices. There are a lot of lenders that offer VA loans, but Navy Federal Credit Union stands out because of its low rates and personalized service. The credit union offers a variety of home loan options, including VA loans, conventional loans, and even options for members not eligible for VA loans.
Navy Federal is known for having interest rates that are cheaper than average on both fixed-rate and adjustable-rate mortgages. It also helps first-time homebuyers understand the complicated world of home financing by giving them advice and support throughout the loan process. The fact that Navy Federal doesn’t charge fees is great. For many of their loans, there are no application fees or PMI requirements. However, only military personnel, veterans, and their families are eligible to become members. Navy Federal Credit Union is a wonderful place to get a home loan if you qualify.
Government programs that help people buy homes are best for first-time buyers with low to moderate incomes.
6. State and Local Homebuyer Assistance Programs
A lot of states, towns, and cities in the U.S. have programs to help first-time homebuyers with things like down payments and other costs. These programs aim to simplify the process for individuals with low and middling incomes to purchase their own homes. They may offer handouts for down payments or closing costs, low-interest loans, or loans with a payback period. This makes it easier for first-time buyers to get the money they need.
First-time buyers can get help with the down payment and lower mortgage rates through programs like the California Housing Finance Agency (CalHFA) loans, the New York State HomeFirst Time Homebuyer Program, and the Illinois Housing Development Authority (IHDA) loans. Different states have different requirements for these programs, but in most cases, the borrower must be a first-time buyer (with a clear meaning of “first-time buyer”), make less than a certain amount of money, and buy a home within a certain price range. If you are buying a home for the first time, looking into state and neighborhood programs can help you get extra money that makes homeownership more affordable.
7. Online Lenders: Best for Convenient and Streamlined Applications
Online lenders are excellent if you’d rather use your computer at home to fill out your mortgage application. Companies like Rocket Mortgage, Better Mortgage, and LendingTree offer digital mortgage options that make it easier to apply for a loan and get it approved. You can compare loan offers from many of these online lenders in just a few minutes, and many of them offer cheap interest rates.
Online lenders may not have programs just for first-time buyers like FHA or VA loans, but they are still a beneficial choice for people with excellent credit who want an easy way to apply for a mortgage. Because they don’t have to pay as much for fees, online lenders can offer lower interest rates to people who borrow money from them. Most of the time, they can get you pre-approved quickly and give you access to a lot of different mortgage choices, from standard loans to more specialized loan programs.
8. Adjustable-Rate Mortgages (ARMs)
For first-time buyers who don’t plan to stay in their home for a long time, an adjustable-rate mortgage (ARM) may be a good choice. When compared to fixed-rate mortgages, adjustable-rate mortgages (ARMs) often have lower starting interest rates. This can make monthly payments easier to make in the first few years of the loan. The interest rate on an ARM changes based on market conditions after the original fixed-rate period. This means that the payments can change over time.
First-time buyers who want to move or refinance in 5 to 7 years may find an ARM to be a fantastic way to get a low initial rate. It is important to know, though, that rates could go up in the future, which could mean bigger payments. An ARM can save you money in the first few years of the loan if you plan to sell or refinance your home before the rate changes.
Conclusion
The best home loan for a first-time buyer will rely on your credit score, income, where you live, and your long-term plans. First-time buyers can get a lot of help from FHA loans, VA loans, USDA loans, and state and local aid programs. This is especially true for people who don’t have much money for a down payment. People with excellent credit can also get conventional loans with low down payments, borrow from Navy Federal Credit Union, or borrow from online lenders. Understanding your options and finances will help you find a loan that meets your needs and helps you become a homeowner.