Which loan is best for first-time homebuyers?

For any first-time homebuyers looking to buy a home, there are various loan options available. 

This is partly because the US Government encourages homeownership countrywide, especially for first-time buyers. 

There are two main types of mortgage loans likely to be available: loans backed by the government and conventional loans which are not.

So, what are some of the loans a first-time buyer can obtain?

  • Federal Housing Association (“FHA”) loans (or government-backed loans): typically, first-time buyers struggle with saving enough money for the initial down payment to buy a house. This may be because they may find it difficult to save when they still have student loans or a car loan to pay off. 

Or they may just be starting a career and earning a relatively low income. As a result, saving 10-20% for purchasing a home can be daunting and may amount to thousands of dollars.

FHA loans have lower requirements in respect of down payments and lower credit and debt-to-income ratios. First-time home buyers may qualify for those who haven’t purchased a home in the last three years.

How to buy a house with bad credit?

The FHA guarantees a portion of all FHA loans to be more flexible with loan requirements. Indeed, with FHA backing, borrowers can qualify for loans with a down payment of as little as 3.5%.

FHA loans do, however, have certain upfront and ongoing additional costs built in such as mortgage insurance premiums which serve to protect the loan if the lender defaults;

  • USDA and state loans: the US Department of Agriculture (“USDA”) also offers assistance to first-time homebuyers via a program that mainly targets rural dwellers. These concessions are explicitly offered to encourage people to stay, live and work in rural areas.

In some cases, 100% financing or no deposit schemes may be available as the USDA offers mortgage lenders certain guarantees. There are income limitations that vary according to the region.

In addition to Federally backed national programs, it’s not unusual for many state and local governments to assist first-time home buyers. These have similar themes of lower down payments and subsidized mortgage interest rates. The exact terms and conditions vary according to the state or local government;

  • Conventional loans: various government-sanctioned companies such as Fannie Mae work with local mortgage lenders to offer attractive options on traditional loans. Some of these offers down payments of as little as 3% and concessionary mortgage interest rates for at least the first few years after a mortgage is granted.
  • Other popular loans for eligible first-time buyers include.
  • Home renovation loan programs for buyers who seek to buy a property with energy-saving improvements (so-called “Energy Efficient Mortgage”) or upgrade a home’s green features. Other mortgages help first-time buyers who purchase a property that needs extensive renovations or repairs. This particular FHA-backed loan assesses the value of the property after improvements and allows a buyer to borrow funds to complete the project as part of the primary mortgage.
  • Loans for military personnel, veterans, and surviving spouses often require no down payment or mortgage insurance.