A look at the most attractive financing options for new buyers
by Janet Thomson Oct 31, 2016, 12:30pm EDT
Over the last few years, many reports, studies, and articles have proclaimed that homeownership is no longer a key part of the American dream. It’s true that millennials are delaying buying homes, but other studies show that younger generations do want to own a home, they just can’t afford it yet. Crossing from renter to owner is a big, expensive step, but there are a variety of mortgage options designed to make this process easier for first-time buyers.
By offering low down payment requirements or flexibility with credit scores, special loan programs are often the key to homeownership for new buyers. Although the research and paperwork can be tedious making the homebuying process hard, finding financing for low- to-moderate, even high-earning, borrowers isn’t quite that complicated. Here are five programs first-time borrowers should know about when shopping for a new home.
The Federal Housing Administration (FHA) insures loans so that lenders can offer first-time homebuyers better deals. The FHA allows a down payment of 3.5 percent—significantly less than the typical 10 to 25 percent. Whitney Fite, president of Angel Oak Home Loans, a retail mortgage lender, points out that the FHA is also much more flexible when it comes to to credit score requirements. You can get an FHA loan with a credit score as low as 500, but you’ll be required to make a downpayment of at least 10 percent.
Another popular allure is that the FHA allows for the down payment funds to come from gifts from family members, grants, or assistance programs. The agency is also lenient when it comes to your debt-to-income ratio, making this an ideal choice for someone with student loan debt.
However, with government loans there are going to be additional guidelines, says Brian Betzler, a regional sales manager at TD Bank. FHA requires two types of mortgage insurance premiums—one that’s paid upfront, and another that’s paid on a monthly basis—and your home has to meet certain standards.
Fannie Mae Home Ready
The Home Ready loan program isn’t limited to first-time homebuyers, but it is an attractive option because it allows for down payments of as little as 3 percent. Home Ready doesn’t have the upfront mortgage insurance premium that FHA requires, so the initial cost is a little bit less as well.
The program is designed to help low- to moderate-income buyers, so it has income requirements based on the county you reside. For instance, throughout Georgia, it ranges from $67,000 to $72,000 as a max, while for much of New York City, the maximum you can earn is $81,400. If you earn more than that, you won't qualify for the loan.
When it comes to the Home Ready program, Betzler says that buyers can have a credit score "as low as 620, where some of the other products out there do require a higher score to put that small amount down." Betzler adds that TD Bank’s $2,000 closing cost credit allows a first-time buyer to get into a home for the same amount it would cost "for first, last, and security down when they are going to rent."
Freddie Mac Home Possible
Home Possible is similar to Fannie Mae’s Home ready program in that it offers flexible credit terms to families living in underserved communities with low to moderate incomes. Borrowers can use gifts from family or friends towards the down payment, which ranges between 3 to 5 percent of the home’s purchase price.
Generally, Home Possible requires that a borrower’s income level be equal to or less than the area median income of the location where he or she is buying, but there are a couple exceptions. No income limit applies for borrowers buying a home in an underserved area; this is determined by the area’s income level, minority population, and whether or not the location is a designated disaster area. In high cost locations, a borrower’s income can be greater than the AMI by a set percentage.
Veteran loan (VA)
If you are a veteran or currently serving in the military, and you are a first-time homebuyer, it’s possible that you qualify for a VA loan through the Department of Veteran Affairs. The great thing about VA loans is that they require zero money down, no monthly private mortgage insurance (PMI), and offer rates as low as 3.25 percent for a 30-year fixed loan.
The USSA outlines eligibility requirements for veterans, service members, and their spouses. For veterans, it’s generally required that you served at least 181 days straight, while active members need to have served 90 days total.
Conventional 30-year fixed
This isn’t a specific program, per se, but a conventional 30-year fixed loan can be an attractive option for some first-time buyers if you’re planning on staying in your house for at least five years. Your interest rate and monthly payment will stay the same with this type of loan, regardless of inflation or rate changes, but if you know you’ll be moving in three years, you’ll likely end up overpaying with a 30-year program.
The Fannie Mae 30-year fixed program has undergone some changes in the last few years. Today, borrowers are allowed to use gifts towards their down payment, but previously, the purchaser had to have at least 5 percent of the money in their account. Then they could get a gift for anything above and beyond that, according to Fite.
Gifts are now allowed as down payments, but you do have to put 5 percent down rather than the 3 or 3.5 percent that is required for Home Ready and FHA, respectively. Granted it’s a larger down payment, but "if you have the ability to put a larger down payment and your credit score is north of 680 or 700, your interest rate and monthly payment and mortgage insurance would be much lower on this option," added Fite.