First-time home buyers are often at a larger disadvantage than subsequent homebuyers. They may have lower credit; a shorter credit history; or little money to put down on a home. Luckily, none of these factors prevents consumers from buying their first home.
The government offers a variety of guaranteed programs that help people, including first-time buyers get a home. These programs often have flexible guidelines and lower requirements than conventional loans.
If you don’t have high enough credit scores or low enough debt ratios for conventional financing, consider one of the following options.
FHA Loans for First-Time Home Buyers
FHA loans are probably the most commonly known program for first-time homebuyers. While it’s not restricted to just those that have never bought a home before, it’s certainly useful for this purpose. The FHA loan has low credit score requirements and flexible DTI requirements. They are as follows:
- 580 credit score
- 29% housing ratio
- 41% total debt ratio
Compare this to the conventional loan and you can see the flexibility they offer. FHA lenders can accept credit scores as low as 580. Conventional lenders usually require a score of at least 680, if not higher. Conventional loans also require a 28% housing ratio and 36% total debt ratio. FHA loans offer the flexibility you may need buying your first home.
FHA loans only require a 3.5% down payment and it does not have to be your money that you put down. You can accept gift funds from family, close friends, your employer, or a charitable organization. The only requirement is that you can prove that it’s a gift and not a loan that you must repay.
FHA lenders can offer these flexible guidelines because the FHA guarantees the loans that meet their guidelines. If you stop making your payments and the house goes into foreclosure, the FHA will pay the lender back a portion of the money they lost from your default.
VA Loans for First-Time Homebuyers
If you are a veteran of the military, you may have an exceptional benefit at your disposal. The VA loan offers you the chance to buy a home with no money down. In addition, it has similar flexible guidelines to the FHA loan because it’s a government-backed loan as well.
The VA requires the following for the VA loan:
- Minimum 620 credit score
- No maximum housing ratio
- 41% maximum total debt ratio
- Meet the disposable income requirements for your area
The VA does not focus on debt ratios when approving a veteran for a loan. Instead, they focus on the disposable income you have at the end of the month. The VA has specific standards regarding how much money you must have left based on the size of your family and where you live. They feel this is a better judge of whether you can make your mortgage payments or not.
The VA also guarantees these loans for lenders, which is how they are able to offer 100% financing with such flexible requirements. The VA provides lenders with a 25% guarantee. On a $150,000 loan, this means the VA will pay the lender $37,500.
USDA Loans for First-Time Homebuyers
If you don’t mind living in a less populated area, the USDA loan is a great loan for first-time homebuyers. As the name suggests, you must buy a home in a rural area. But, the USDA’s definition of rural is much looser than what most people consider rural. You might be able to buy a home right outside the city lines and get the flexible guidelines of the USDA loan. This includes no money down on the home.
The USDA’s guidelines are right along the lines of the other government-backed loans including:
- Minimum credit score of 640
- Maximum housing ratio of 29%
- Maximum total debt ratio of 41%
The USDA has one unique requirement, though. You have to be a low to middle-income borrower to qualify for this loan. In other words, you can make too much money and not qualify. The USDA also takes into consideration the income of everyone in your household. Any adults that make money, whether or not they are on the loan, must include their income for eligibility purposes. This is so the USDA can keep the program for those that need the help rather than providing the financing to everyone.
If you are a first-time homebuyer, you have plenty of opportunities to finance your home with little money down and flexible guidelines. Determine which program suits you the best and find a lender offering the program. It’s best if you apply with at least three lenders so that you know which one offers the best rate and terms for your loan.Click to See the Latest Mortgage Rates»