If you are ready to buy your first home, chances are good that you are already looking into locations and styles that you are most interested in living in. While those are very important topics to consider, for sure, one very important thing that you might not be thinking about is your mortgage.
Believe it or not, your mortgage should be one of the very first things you are thinking about. After all, it will be a major deciding factor in how you actually obtain financing for your home, and how much you have to pay for your home month to month.
Just like you want to research neighborhoods and homes on sale, you should also want to research the mortgages that are available to you as a first-time home buyer. Before we go into the very best mortgages for your home, let’s break down what you should be looking for in a mortgage lender.
This will help you narrow down options when you are going through the all-important search.
What to look for in a mortgage lender
One of the very first things that you should look for is to make sure that lenders you are thinking about going with meet all licensing requirements to operate in your state before issuing you a loan. Use the NMLS Resource Center as a valuable gateway to the Nationwide Multistate Licensing System and Registry which offers valuable information when it comes to licensing requirements for each state.
From that point, you will be able to find a link to your state’s site and be able to look up a list of licenses and authorized lenders.
- One major thing to look out for is to be sure if you are dealing with a virtual lender or a brick and mortar option. There is no right or wrong here, and it is simply a matter of preference. That being said, it is an important factor to keep in mind when based on what kind of company you would be more comfortable working with.
- Another thing to look out for is to know if you are interested in dealing with credit unions or more traditional lenders. A credit union is a nonprofit institution that has the goal of offering loans and other banking services to its members.
- Existing memberships is another thing to keep in mind. Take a look at the memberships you already have with financial institutions. For example, a bank that you already have accounts with might be able to offer you a special deal.
- Of course, one of the most important things to keep in mind when shopping for a mortgage is the actual interest rate they are offering. This will depend on a lot of things but shopping around for the best rate that you can find will potentially save you lots of money over the course of your entire loan. The rate you borrow at will be represented in the APR or annual percentage rate. While it is simply a percentage of the principal amount the lender offers you, getting an APR that is even fractions of a percentage point lower than other options could save you thousands.
Hopefully this quick breakdown has helped clarify some things to keep in mind when looking for the best mortgage loans for first-time buyers. Now, let’s go into the specific loan and program options that you should be considering in 2020.
Best loan and program options for first-time buyers in 2020
First-time homebuyer programs are helpful to become an owner of a home by offering financial assistance. These programs and grants will allow you to own your first real estate property, but they come with certain requirements and income restrictions.
Let’s go ahead and start reviewing some first-time homebuyer programs to take you to the next step to purchase a home.
FHA loans are insured by the Federal Housing Administration, these loans are great for buyers who have low credit. FHA loan requirements include a lower credit score and it comes with smaller down payments.
FHA loan benefits for first-time home buyers are low interest rates and a 3.5% minimum down payment requirement as well as flexible income guidelines. This program requires a credit score of 580 to quality for the 3.5% or at least 10% down with a score of 500 to 579.
Compared to other programs, it’s considered to have the lowest credit score requirements. FHA loans also require mortgage insurance, and it comes with a fee that you are required to pay upfront as well as annual premiums. This program protects and reimburses the lender if any problems occur and the borrower fails to fulfill the obligation.
The Conventional 97 loan
The conventional 97 loan is a great option for first-time home buyers who want a low down payment as you only need 3% down to become a homeowner.
The requirements for conventional loans include a credit score 620 to qualify and an annual mortgage insurance, just like FHA loans. The good news is that it allows buyers to cancel the mortgage insurance once they build 20% equity.
If you have a poor credit score, FHA loans are a better option for you.
Fannie Mae HomeReady and Freddie Mac Home Possible Loans
Both of these programs are government-sponsored enterprises that have a set of guidelines for loans. The programs are best for borrows who have strong credit and want minimal down payment.
Credit score of 620 or higher and a minimum of 3% down payment aren’t the only similarities these programs have to the Conventional 97. HomeReady and Home possible loans also require mortgage insurance to qualify, but it can be canceled once the loan-to-value ratio is 80% less.
Fannie Mae HomeReady and Freddie Mac Home Possible allow you to use roommate income to help you qualify.
USDA loans are guaranteed loans by the U.S. Department of Agriculture for eligible areas. It’s best for borrowers with low income who are looking to buy a home in a USDA-eligible rural area.
The USDA loans offer great benefits for first-time home buyers such as zero down payment, low interest rates, and affordable mortgage insurance. You typically need a minimum credit score of 640 or documentation showing your payment history to qualify.
VA loans are only for qualified U.S. military members such as active duty, veterans, and eligible family members. These loans are offered by the U.S. Department of Veteran Affairs and it’s the best option for eligible first-time home buyers.
The benefits of choosing VA loans are zero down payment, lower interest rates and low closing costs, and they accept low credit scores. You also won’t need to pay for mortgage insurance, as the VA will help with payment issues.
Good Neighbor Next Door
If you’re a teacher, law enforcement officer, firefighter, or an emergency medical technician, then this program is a great option for you. The Good Neighbor Next Door is sponsored by the Department of Housing and Urban Development to financially help buyers by making it more affordable to purchase a home.
To qualify for the Good Neighbor Next Door program you will need to be a full-time pre-K through 12th grade teacher, a law enforcement officer, a firefighter, or an emergency medical technician.
You must purchase a home in a revitalization area determined by the HUD and you have to make an offer within 7 days through the HUD Homestore. Other requirements include living in the home for at least 3 years and signing an annual certification to verify your primary residence.
If qualified, you can be given a discount of 50% on homes listed in the revitalization areas.
Energy-efficient mortgages or EEM loans are insured through the FHA or VA programs and it’s great for first-time homebuyers who want to make their home green and save money on utility bills but can’t afford it financially.
The EEM loan allows homeowners to turn their available income towards mortgage payments instead of spending a lot of money on utility bills.
FHA Section 203(k)
If you have your eye on a beautiful home that has been abandoned for years or is for sale but needs a lot of fixing and you don’t have a lot of cash for renovations, the FHA Section 203(k) has made it possible.
The 203(k) loans are guaranteed by the FHA and it brings a peace of mind to lenders who are willing to take a risk. The government-insured loans allow it to become possible for borrowers to improve properties in nice locations or properties that have major potential after the rehabilitation.
You will need a credit score of 640 or higher to qualify and a 3.5% down payment is required. You might also receive extra money for cosmetic renovation such as wall painting and window repairs, and you can borrow money to make mortgage payments for up to 6 months.