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First-Time Home Buyer Loans

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We know how financially intimidating it is to buy your first home. The New York Times reports that the median home price for first-time homebuyers is $182,500, and the National Association of Realtors estimates that, on average, 93% of this purchase price is financed. When you’re signing up for such a large amount of debt, finding the right first-time home buyer loan is crucial. That’s why we’ve created this guide to walk you through the first-time homeowner loans you should know about.

12 Loans and programs for the first-time homebuyer

These loans and programs are intended to help you purchase your first home and navigate the first-time homeowner process. Keep in mind that many programs are open to returning homebuyers as well, but are especially useful to those who have never gone through the process of getting a mortgage.

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1. FHA loan: For homebuyers with low credit

FHA loans are the original first-time homebuyer’s loan, dating back to 1934. They are designed for those with low credit, required you to put as little as 3.5% down. Those with credit scores of 580 or higher are eligible, although if your credit score is as low as 500, you may be approved with a 10% down payment.

The main downside of an FHA loan is that you have to pay an annual mortgage insurance premium, or MIP. This is an amount that goes into a protected account to make mortgage payments in case you default on your loan. The MIP is paid for anywhere from 11 years to the full term of the loan.

2. VA loan: For military veterans, service members, and their spouses

Provided by private lenders and partially guaranteed by the U.S. Department of Veterans Affairs, VA loans are intended to help military members and their families purchase homes. Service members who qualify can benefit from zero down payment options, lower fees, and better rates. This makes it a great first-time homebuyer loan since so little equity is required to get started with homeownership.

3. USDA loan: For those purchasing property in rural areas

The purpose of the USDA loan is to assist first-time homebuyers in purchasing property in designated rural areas. The idea behind the program is that the homebuyer will rehabilitate and improve the property and the surrounding area will benefit.

To be approved for a USDA loan, a homebuyer must fall within the program’s income eligibility and agree to occupy the home as their primary residence. They must also agree only to use the funds made available for a specific set of purposes pertaining to improving the property.

4. Good Neighbor Next Door: For law enforcement, teachers, firefighters, and EMTs

The Good Neighbor Next Door program makes it easier for first-time homebuyers in public service to purchase a property. The program reduces the list price on the property by 50% — as long as the recipient agrees to live there for at least three years.

There are some qualifications that must be met for this program. For example, only law enforcement, teachers, and firefighters/EMTs are eligible and in general, recipients must purchase a home in the jurisdiction in which they work.

5. Fannie Mae HomeReady loan: For low-income borrowers

Fannie Mae HomeReady is one of two very similar first-time homeowner loans by Fannie Mae and Freddie Mac. The minimum down payment required is 3% lower than an FHA loan, and there are no geographic restrictions on the mortgage amount. To qualify, your income must be no more than 80% of the area median income. Borrowers can also choose to cancel their mortgage insurance once they reach at least 20% equity, leading to major long-term savings.

One requirement for first-time homebuyer loan recipients under HomeReady is that at least one person on the mortgage must complete the Framework online education program, which teaches new homebuyers how to calculate what they can afford, shop for the best loan, and navigate closing.

6. Freddie Mac Home Possible loan: For low-income borrowers

Home Possible is another first-time homebuyer loan by Freddie Mac that is very similar to Fannie Mae’s HomeReady. The minimum down payment is also 3%; however, the income limit is less strict. Borrowers need to make less than the area median income, with the limit waived in some low-income areas. Home Possible has some additional interesting features, such as adding co-borrowers to the loan who do not need to occupy the home.

7. Energy Efficient Mortgage: For those who want to reduce their mortgage by investing in energy efficiency

The Energy Efficient Mortgage is an interesting first-time homebuyer loan program run by the U.S. Department of Housing and Urban Development. It allows you to finance energy-saving improvements as part of the mortgage, leading to lower monthly utility bills and overall savings.

Something that you should always do as a first-time homebuyer is think about what will happen when you want to sell your home. The Energy Efficient Mortgage allows you to increase your home’s resale value, so you get a better return on your investment, while simultaneously saving future owners long-term money by reducing the cost of ownership.

8. Native American Direct Loan: For Native American veterans purchasing a home on Federal Trust land

The Native American Direct Loan is one of the more specific loans on this list, but it’s one worth mentioning. Native American veterans can get 30-year fixed-rate mortgages for 0% down payment with a 3.75% interest rate through this program. The caveat is that you must use the loan must to purchase, build or renovate a home on a federally recognized trust. While no specific cutoffs are mentioned, beneficiaries must also show a good credit score and proof of ability to pay the mortgage.

9. FHA 203k loan: For buying and renovating a home

Renovating a home might sound daunting for first-time homebuyers, but the FHA 203k loan makes it possible. Borrowers can get financing for the purchase price of the home and the cost of future renovations, all in the same mortgage. There must be at least $5,000 in work done, and the renovated property must still fall within the FHA Mortgage Limits.

The Federal Housing Administration provides a list of activities that are deemed acceptable under the FHA 203k loan. They include structural alterations, health and safety improvement, adding accessible entrances, and even landscaping.

10. DPA Advantage: For educators, law enforcement, and medical and military personnel

DPA Advantage, overseen by American Financial Resources, is a grant for public service members that can help borrowers navigating a first-time homeowner loan. The grant is equal to 2% of the purchase price, plus up to 6% of closing costs. There are no restrictions on how long the buyer must occupy the home for.

Unlike Good Neighbor Next Door, DPA Advantage has a much more lenient view on who can benefit. Beneficiaries can be “current, retired, volunteer, or non-paid” members of a shortlist of professions, including educators, medical personnel, military members, and civil servants.

11. HUD Dollar Homes initiative: For low- to moderate-income families

The idea of buying a home for a dollar sounds attractive, but unfortunately it’s not quite that simple. The HUD Dollar Homes initiative is a program through which vacant houses with a list price of $25,000 or less that don’t sell after six months can be purchased for $1. However, individuals can’t just go out and buy these houses. They must be purchased by the local government.

The good news: these homes then go to help low-income families who otherwise can’t buy a home, and would otherwise be first-time homebuyers.

12. HUD programs: For state-specific grants

There may be additional first-time homebuyer loans available to you depending on your state. The U.S. Department of Housing and Urban Development maintains a list of these programs. Simply click the link for your home state, where you might find grants, subsidies, incentives, and more.

Frequently Asked Questions:

What is the best first time home buyer loan?

The best loans for first-time homebuyers depend on your credit score, income, profession, and where you live. FHA loans are a great option for those who are struggling to come up with a down payment.

How do you qualify for a loan as a first-time homebuyer?

If you’re worried about qualifying for a loan as a first-time homebuyer, look into loans and programs specifically for first-time homebuyers with low credit. These include FHA, Freddie Mac Home Possible, and Fannie Mae HomeReady.

How much of a down payment do I need for my first home?

These days, you might not need any more than 3% down on your first home. However, you might have to purchase mortgage insurance, at least until your equity in the home reaches 20%.

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