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Best Loan Options for First Time Home Buyers

When it comes to buying a home, there are several things to consider, and financing is one of them. Luckily, there is a myriad of financing options that first time home buyers [1] can access to make home-owning easier. If you’re thinking about owning your first home, this guide will help you select a suitable financing option:

1.  USDA Loan: Excellent for Low-Income Earners in Designated Areas

The United States Department of Agriculture provides USDA loans at low-interest rates [2] to help people buy homes without making down payments. This financing option primarily targets rural areas. The USDA guarantees your lender-issued mortgage and allows you to access very low mortgage rates with zero down payment.

2.  FHA Loan: Suitable for Home Buyers With Poor Credit History:

Unlike most other home financing options that only serve buyers with impressive credit scores, Federal Housing Administration (FHA) loans are available to buyers with low credit scores. With an FHA loan, you can make a small down payment (as low as 3.5%) and own your home. However, you’ll be required to pay mortgage insurance which includes annual premiums and a 1.75% upfront fee. Nevertheless, it’s a home financing option worth considering.

3.  VA Loan: For Military Members and Their Families

If you’re actively in military service or have retired honorably and are looking to buy a home, VA loans backed by the U.S. Department of Veteran Affairs are an excellent choice. They have lower interest rates, no mortgage insurance, and do not require a down payment. Also, a Veteran Affairs loan won’t restrict a homeowner from selling their property partway into their loan term or impose prepayment penalties or exit fees.

If your prospective home buyer is VA eligible, you can transfer your existing VA loan to that person. Nevertheless, you’ll need to pay a funding fee based on your loan cost and other factors.   

4.  EEM: Great for Home Buyers That Care About Energy Efficiency

An energy-efficient mortgage (EEM) allows you to buy a home that meets specific energy-efficiency requirements. Usually, it is backed by the U.S. Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA). The downside of this financing option is that you must obtain an energy assessment to qualify. If you qualify, you can get up to 15% of your home’s appraised value for upfront energy-efficient upgrades without additional down payments. 

5.  Good Neighbor Next Door Program: For Home Buyers in Specific Public Service Professions

This financing option allows firefighters, emergency medical technicians, law enforcement officers, and teachers employed full-time to buy homes at significantly discounted rates. It is sponsored by the U.S. Department of Housing and Urban Development and can allow homebuyers to get up to 50% discount in a ”revitalization area.” If you get this loan, you’ll have to live in it for at least three years, and it must be your sole residence.

6.  Freddie Mac and Fannie Mae: For Home Buyers With High Credit Scores but Small Down Payment

Freddie Mac and Fannie Mae are home mortgage companies created by the U.S. Congress and backed by the federal government. They don’t service their own mortgages but buy and guarantee mortgages given through secondary mortgage market lenders.

It is suitable for first-time homebuyers with high credit scores of at least 620. These programs allow buyers to get their homes with a 3% minimum down payment. But if you are making a down payment of less than 20%, you’ll need private mortgage insurance (PMI). 

7.  FHA 203(K) Loan: For Buyers Interested in Homes That Need Fixing

An FHA 203(K) loan is a government-backed mortgage that allows a first-time buyer to take out a loan for purchasing their home and renovating. This type of loan centers around repairs or rehabilitation to a home that will serve as the borrower’s primary residence.

This is best for middle and low-income families buying homes in old communities. Therefore, house flippers and real estate investors do not qualify for this loan. The repairs must not extend past six months. The renovation amount is placed in an escrow account, and when the work is completed, it is disbursed to the contractors. The repair budget is capped at $35,000.   

8.  Native American Direct Loan (NADL): Suitable for Native American Veterans

Nave American Veterans and their spouses can access NADL to build, buy, or improve a home on federal trust land. Unlike other VA (Veteran Affairs)-backed loans, the VA is the mortgage lender in this case. NADLs offer low-interest rates and limited closing costs. If you’re using this funding option, you won’t require private mortgage insurance or a downpayment. Nevertheless, you must have an impressive credit score and meet specific eligibility requirements [3]

9.  State First-Time Homebuyer Programs: Best for Buyers Needing Down Payment Support

Several states and local governments offer low-interest mortgages and grants to first-time homebuyers. If you’re thinking about buying your first home, find out the financing opportunities in your area so you can take advantage of them. Most state programs have income limits; that is, they are reserved for households with a specified maximum income. They also require buyers to attend counseling courses and present certificates of completion.

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