First-Time Homebuyer Loans

First-time homebuyer loans (FHA)

You don’t have to be a first-time homebuyer to get an FHA Loan. You do, however, have to be using the loan on your primary residence and the terms of an FHA Loan tend to accommodate many of the limitations first-time buyers have. 

FHA Loans come with good interest rates and 30, 25, 20, 15 and 10-year loan terms. Borrowers with credit scores above 580 will only need to put 3.5% down. Homebuyers who have a credit score below 780 will have a significantly lower credit score adjustor fee by going FHA rather than Conventional. A FHA Loan is a great opportunity for these same borrowers to get financing at a reasonable rate and without drastically higher fees. 

The major drawback to an FHA Loan is the mortgage insurance premium (MIP). This is an additional insurance expense that you will have to pay both up-front (financed through the loan rather than paid at closing) and monthly (in a decreasing amount over the life of the loan). If you are securing an FHA Loan with the minimum down payment, the monthly mortgage insurance will continue throughout the life of the loan. 

Something to note here is that there may be other restrictions depending on the lender or investor. For instance, CapCenter requires a minimum 620 credit score across all products, including FHA loans.

What to know:

• 3.5% down payment (if credit score is 580 or higher)
• Credit scores as low as 500, depending on the lender (minimum down payment of 10%)
• Up-front and monthly mortgage insurance
• Lower credit score fees if credit score is below 780

The US Department of Veterans Affairs (VA) is a government agency that guarantees certain loans (“VA Loans”) for qualified Veterans, service members, or surviving spouses. VA Loans are intended to serve qualified borrowers who need a low-down payment.

You don’t have to be a first-time homebuyer to get a VA Loan. You must, however, be eligible to receive a VA Loan. The Lender can pull the Certificate of Eligibility to confirm your eligibility for this loan type. You must also be using the loan on your primary residence.

VA Loans come with good interest rates and 30, 25, 20, 15, and 10-year loan terms. In most cases, you can buy a home with no down payment! Unlike FHA and some Conventional loans, there is also no private mortgage insurance (PMI) on a VA Loan. Homebuyers that have a credit score below 780 will have a significantly lower credit score fee by going VA rather than Conventional. A VA Loan is a great opportunity for these same borrowers to get financing at a reasonable rate and without a down payment.

The major drawback to a VA Loan is the VA Funding Fee. This is a one-time payment that can be financed into the loan amount instead of being paid as cash at closing. In most cases, first-time homebuyers will pay a 2.15% funding fee. There are certain situations, though, where the Veteran or service member could be exempt from this funding fee. Your Certificate of Eligibility will confirm whether you are exempt from paying the VA Funding Fee.

The VA does not impose a minimum credit score requirement, however lenders likely will. For instance, CapCenter requires a minimum 620 credit score across all products, including VA loans.

What to know:

• 0% down payment in most cases
• No credit score minimum, though most lenders have one
• No monthly PMI
• Lower credit score fees if credit score is below 780
• One-time funding fee (unless exempt)

Fannie Mae and Freddie Mac have their own unique programs to help first-time homebuyers get into their home.

A Conventional loan — backed by Fannie Mae and Freddie Mac — is arguably the best loan to get for primary residences. Conventional loans have lenient PMI (private mortgage insurance) requirements and reward homebuyers who can make a higher down payment and/or have good credit history. 

The standard Conventional loan, however, requires at least a 5% down payment on a home, which can make the home purchase more expensive up-front. To help alleviate this burden, Fannie Mae and Freddie Mac have introduced a few alternative options. Enter Fannie Mae’s HomeReady, Freddie Mac’s Home Possible and Fannie Mae’s Fannie 97.

These are programs within the typical Conventional loan umbrella. They follow the same interest rates and loan term options as a Conventional loan. There are slight differences between the three programs, with the biggest being that Fannie 97 is the only one that requires you to be a first-time homebuyer. The other two do not have that requirement. For all three, you must be using the loan on your primary residence.

Fannie Mae’s HomeReady, Freddie Mac’s Home Possible, and Fannie Mae’s Fannie 97 all allow homebuyers to secure a Conventional loan with only a 3% down payment.

The major differences are:

HomeReady –

• Do not need to be a first-time homebuyer
• Possible income restrictions depending on the area you’re buying in
• Lower monthly PMI rates than typical Conventional loan
• Loan level price adjusters are waived
• An education course will need to be taken prior to closing and a certificate will need given to the Lender (takes an average of 4 hours)

Home Possible -

• Do not need to be a first-time homebuyer
• Possible income restrictions depending on the area you’re buying in
• Lower monthly PMI rates than typical Conventional loan
• Loan level price adjusters are waived
• An education course will need to be taken prior to closing and a certificate will need given to the Lender (takes an average of 4 hours)

Fannie 97 -

• Must be a first-time homebuyer
• No income restrictions
• Standard loan level price adjusters apply. There is an exception if the income is below 100% of the AMI (area medium income) for the area you’re buying a home in. This tool can be found online here: Area Median Income Lookup Tool (fanniemae.com)
• Standard PMI rates and coverage requirements
• An education course will need to be taken prior to closing and a certificate will need given to the Lender (takes an average of 4 hours)

Owning a home has plenty of benefits, but the home-buying process can be daunting and intimidating. It doesn't have to be.

Working with a knowledgeable loan consultant is the best way to make sure you end up with the right loan product. Without the help of a mortgage loan consultant, you could end up leaving thousands of dollars on the table.

When you are ready to buy your first home, let CapCenter help. We have helped thousands of first-time home buyers throughout the mid-Atlantic. With our experience and expertise, we can help make sure you get the best rates and terms available. If you would like to learn more about the homebuying process in general, we encourage you to check out our Home Buyer’s Guide. With the right mortgage, you can rest easy knowing you have made a sound investment that will give you years of enjoyment, security, and a financial return.