If you’re a first-time homebuyer there are a few things you need to know. Gone are the days of needing perfect credit and a 20% down payment. There are no down payment and low credit mortgage loans available today.
In this article, you will learn everything you need to know about getting a home loan as a first-time homebuyer.
Types of Loans for First-Time Buyers
First-time home buyers love FHA loans. No only do they allow for low credit scores, you don’t need a large down payment. With just a 580 credit score and a 3.5 percent down payment, you may qualify for an FHA home loan.
FHA stands for the Federal Housing Administration, a Government agency that was created in 1934. FHA loans were made to encourage homeownership in America. Offers low credit, down payment, and income requirements than conventional mortgages. This is why they have become known as the perfect mortgage loan for first-time homebuyers.
- Low 3.5 percent down payment
- 580 credit score required
- Easier to qualify for
- Low-interest rates
- Streamline refinances available
- Requires mortgage insurance
- Lower loan limit than traditional mortgages
- Cannot buy a fixer-upper
The U.S. Dept. of Agriculture created the USDA housing program to help low-income homebuyers in rural areas of the country achieve home ownership If you buy a house in a USDA approved location you may qualify. No down payment is needed for this loan, you can finance 100% of the purchase price.
Another great benefit of USDA loans is that mortgage insurance is lower than any other type of mortgage program. MIP is just 0.35% of the loan amount which is a half percent lower than FHA loans. USDA loans require a minimum credit score of 640.
If you’re a Veteran then you may be eligible for a VA loan. VA loans are only available to Veterans. Like USDA loans they do not require a down payment at all. VA mortgage does not require mortgage insurance, which can save you thousands of dollars per year.
Technically there are no minimum credit requirements for VA loans, however, the private lenders that offer the loans set their own minimum requirements. Most lenders require at least a 620 score.
A conventional mortgage is not a Government insured loan. These loans are insured by insurance companies and you will pay private mortgage insurance, or PMI, monthly. Conventional loans require a larger down payment than FHA loans, somewhere between 5% – 20%.
The minimum credit requirement is higher than most Government loans as well. Most lenders want to see you have at least a 640 credit score. Some of the benefits of these loans are that the loan limit is higher than FHA loans and there are fewer restrictions on the home you’re buying.
Credit Score Requirements
The minimum credit score requirements will depend on the lender and the type of loan you’re using. The FHA will insure a mortgage if the borrower has a minimum credit score of 500 with 10% down. However, lenders have their own credit guidelines and they vary lender to lender. While some lenders may be able to work with a credit below 580, it is risky business.
It is very difficult to get a home loan with a score of 579 or lower. It is highly recommended that you work on increasing your FICO score above 580 before you apply for a mortgage.
Many lenders will not go below a 620 credit score for FHA loans, however, there are some lenders that can work with a 580 score and up.
Down-Payment Assistance and Grants
As a first-time buyer, you may qualify for down payment assistance or other Federal and State Grants. You can check your local county or city website for available programs in your area. You can also find state programs on the HUD website.
Increasing your Score Before Applying
Before you go to a mortgage company and fill out a loan application you will want to ensure you’re maximizing your credit rating. Here are a couple tips to quickly raise your score before applying for a loan.
Pay Down Credit Card Balances – The amount of available credit you are using makes up 30% of your overall credit score. If you have high balances your credit score will be much lower than it can be if you were to pay down the balances below 15% of the credit limit.
Don’t Apply for New Credit – If you want to buy a new home in the near future, it’s a good idea to hold off on opening new accounts. New accounts make up 10% of your credit score, and new inquiries also account for 10% of your overall score. If you want to maximize your scores, you should refrain from having creditors run your credit until after you close.
As a first-time buyer, you have many loan options.
No reason to feel overwhelmed, an experienced loan officer can help you through the process. The first step to becoming a home owner is to get pre-approved for a mortgage.
Do you think you’re ready to buy your first home?
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