Purchasing a home is a daunting process, and doubly so for a first time home buyer. For most people, buying their first property is the biggest investment they’ll ever make–not to mention all the lender payments and fees to worry about. The purpose of this website is to help you understand what to look for in a mortgage lender and how to find a suitable first time home buyer program.
First-time homebuyers are often at a disadvantage to other buyers, due to having low funds, student debt, or other financial issues. Thankfully, being a first-time buyer has some benefits too, such as being eligible for lower interest rates, smaller down payments or even down payment assistance.
According to the Department of Housing and Urban Development, the following qualify as first-time home buyers:
For many first-time home buyers, the primary barrier to buying a home is not having the money for a down payment. Low down payment loans are one solution, because they allow first-time buyers to get into a home with just a 3% down payment, instead of the standard 20%. In this section, we outline other first home buyers loan and program options.
Depending on where you live, assistance for housing may be available from state or local government agencies, private entities, or nonprofits. One form of down payment assistance available to first-time borrowers across the country (except New York) is the Chenoa Fund. This program is administered by CBC Mortgage Agency, a federally chartered government agency. Provided you meet certain eligibility requirements, the Chenoa Fund may offer up to 3.5% down payment assistance.
HomePath homes are foreclosed homes offered for sale by Fannie Mae, one of the two government-sponsored enterprises that guarantee qualified mortgage loans via the secondary market. Benefits of a HomePath mortgage include low down payment, quick financing, and below-average sale prices.
HomePath homes are foreclosed homes offered for sale by Fannie Mae, one of the two government-sponsored enterprises that guarantee qualified mortgage loans via the secondary market. Benefits of a HomePath mortgage include low down payment, quick financing, and below-average sale prices.
The most common form of mortgage is a conventional mortgage, also known as a conforming loan. This type of home loan involves two parties: the borrower (you) and the lender. Most lenders require at least a 20% down payment on a conventional mortgage, e.g. if the home costs $300,000, the lender requires at least a $60,000 down payment and loans out the remaining $240,000. The good news is that an increasing number of lenders are offering first home buyers programs with down payments of as little as 3 percent.
Jumbo loans are loans that exceed the legal conforming loan limits set by the Federal Housing Finance Agency (FHFA). Because jumbo loans involve more money and therefore greater risk to mortgage companies, they typically have stricter qualifying requirements. In 2022, the conforming loan limit is $647,200 in most U.S. counties and as much as $970,800 in high-cost areas such as the greater New York, Washington, D.C., San Francisco, and Los Angeles areas.
This is a low income home buyer program backed by the government and offered by private lenders. FHA loans come in two forms: 3.5% down payment for borrowers with credit of 580-619, or 10% down payment for borrowers with 500-579 credit. The catch with an FHA loan is that it requires monthly private mortgage insurance (PMI), which you can usually stop paying once you reach 20% equity.
VA loans are government-backed loans offered by mortgage lenders to service people and veterans. VA loans don’t require any down payment, making this a suitable first home buyers program for eligible borrowers. The following people may apply for a VA loan: veterans who have served at least 90 consecutive days of active service in wartime or 181 days of active service in peacetime; members of the National Guard and Reserve who have served at least 6 years; and spouses of veterans who died in the line of duty or as a consequence of a service-related injury.
Like other government-backed loans, lenders may only offer USDA loans to borrowers who meet the qualifying requirements–namely, purchasing in a rural or semi-rural area. USDA mortgages offer 100% funding but do require monthly PMI until you reach 20% equity.
Whenever a lender provides a mortgage loan to a borrower, they take on a certain amount of risk because there is never a 100% guarantee that the borrower will have the ability to pay back the entire loan. The best protection for the lender is the property itself, which the lender can seize or foreclose if the borrower defaults on payments. The other way lenders protect themselves is by running a background check on the borrower.
When assessing a borrower, the lender is likely to take into account credit score, income, expenses, and the size of the down payment. In order to run an assessment, your lender is likely to ask for the following:
The monthly payments on a mortgage comprise principal, as in the amount remaining on your loan, and interest, as in the money the lender collects for providing the loan. Your APR, or annual percentage rate, consists of the interest rate plus certain other lender fees. The lower the interest rate / APR, the lower your monthly payments to the lender.
The repayment term, or loan duration, is another important factor when comparing mortgages. The typical repayment term is 15-30 years although some lenders offer mortgages with terms as short as eight years. There is no right or wrong when it comes to repayment terms; what’s best for you depends largely on how much you can afford to pay each month. The shorter the term, the higher your monthly payments but the less you’ll pay in interest over the life of the loan. The longer the term, the lower your monthly payments but the more you’ll pay your lender in the long run.
Closing costs are the fees and charges owed to the lender when the loan begins and usually range from 2-6% of the loan value. Therefore, if you take out a $300,000 loan and your closing costs are 3%, this means you’ll pay the lender $9,000 in upfront fees. Closing costs may include origination fees, property appraisal, title fees, taxes, and various other costs–some of which go directly to the lender and some which the lender collects on behalf of third parties. Closing costs vary from lender to lender, so knowing each lender’s approximate closing costs can assist you in doing a proper comparison.
Gone are the days when you had to walk into a physical branch to apply for a mortgage. These days, many mortgage lenders let you apply online, sometimes through a fully automated online mortgage platform and other times with phone assistance from a loan agent. If convenience is important to you, then keep an eye out for digital-friendly lenders.
Customer service is always important, but even more so when we’re talking about six-figure deals. Always search for a lender that’s transparent about rates and fees, open about the requirements, and has good reviews. Be suspicious of lenders that hide or make it difficult to find important information.