Loan Options For First-Time Home Buyers

Purchasing your first home is one of life's big milestones, and it can be a very exciting time. However, it can also be an overwhelming process as you try to navigate the many options available for financing this big purchase.

Thankfully, there are several different options available from lenders and government sources that can help make your home ownership dreams a reality, even if you do not meet the requirements for a conventional mortgage. Here is a look at six useful loans and programs that first-time home buyers may wish to consider.

Conventional Loans

A conventional loan is the type of mortgage offered by banks and other lending institutions that people are most familiar with. These typically have a fixed interest rate, which means that you will have a predictable monthly payment throughout the duration of the mortgage.

Many people choose this option because they have an existing relationship with the bank offering the mortgage and prefer to do all of their banking in one place. However, these are some of the most difficult loans to qualify for because they tend to have more stringent requirements than other types of financing.

For example, borrowers will typically need a credit score of 620 or greater, while those with credit scores of 740 or higher may be given the chance to make lower down payments and receive more favorable loan rates. In addition, most lenders will require a debt-to-income ratio under 36 percent. A typical down payment is 20 percent, but you may be allowed to make a lower down payment if you pay for private mortgage insurance.

FHA Loans

An FHA loan has backing from the Federal Housing Administration, and it's geared toward first-time homebuyers who cannot meet the requirements of a conventional loan. Most borrowers only need to put 3.5 percent down when using an FHA loan, but those with credit scores less than 580 may be required to make a 10 percent down payment. However, borrowers with credit scores in the 500s can usually qualify for an FHA loan.

With an FHA loan, you will be required to pay for mortgage insurance. This means this type of loan may cost more money in the long run than a conventional loan, but it is nevertheless a good option for those who might otherwise be unable to secure funding to buy their first home.

VA Loans

For service members in the US military as well as veterans and surviving spouses, the Department of Veterans Affairs offers a generous loan program. In many cases, you may not have to make a down payment or purchase mortgage insurance. You can also qualify for this loan even if you have a higher debt-to-income ratio than other loan programs will accept.

USDA Loans

Many people are unaware that the US Department of Agriculture offers an excellent homebuyers’ assistance program, and there is no need to live on a farm in order to qualify. Instead, this program is geared toward people looking to purchase homes in rural and certain suburban areas and can allow for 100 percent financing.

However, there are some income limitations associated with USDA loans. Although these vary by region, households with fewer than five members had a standard income limit of $91,900 in 2022.

First-Time Buyer Programs Through Freddie Mac & Fannie Mae

Freddie Mac and Fannie Mae are companies that work with local lenders to offer conventional loan products geared toward first-time buyers. The Home Possible loan from Freddie Mac requires a minimum down payment of only three percent to certain borrowers, and they allow gifts and grants to be used toward the loan’s down payment and closing costs.

The Home Ready loan from Fannie Mae, meanwhile, is aimed at low-income borrowers and requires a three percent down payment. The minimum credit score needed to qualify is 620, although preference is given to those with a minimum credit score of 680. Once a borrower has built 20 percent equity into their home, they may choose to end their mortgage insurance, which can lead to savings on their monthly mortgage payments.

State Programs

Some state and local governments provide assistance to first-time home buyers, so it is worth researching what programs are available where you live.

Contact Your Community Bank To Learn More About Financing For First-Time Home Buyers

At Woodsboro Bank, our community bankers can guide you through the process of obtaining a mortgage to fund the purchase of your first home. Our experienced professionals are dedicated to helping you find the right loan with terms and rates that suit your needs.

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