What is The Best Mortgage Program for First Time Home Buyers?

Mortgages for first time home buyers

There are a few mortgage options that make sense for first time home buyers to help finance their very first dream home. Choosing the best mortgage program for any first-time home buyer will depend upon the borrower’s personal financial situation. There are conventional, government and niche mortgage programs to choose from. Each program has unique attributes that may be right for you.

First Time Home Buyer Challenges

Many first-time home buyers are typically challenged financially. They are often younger home buyers who may find themselves with one or more of the following common challenges:

  • Low income
  • Low down payment
  • Poor credit scores
  • Student debt
  • Recent car purchase with a monthly payment
  • New baby on the way
  • Uncertainty due to possible job relocation

Each of these challenges can be dealt with if you have a discussion with a loan officer early in the process.

Why is Income a Problem for First Time Home Buyers?

It is no secret that students are graduating from college and they are having difficulty finding a job that pays well enough to qualify for a mortgage. Home values are a lot higher today and the salaries earned just out of school are usually not high enough for qualification purposes. It usually takes two incomes (co-borrower) on the first-time home buyer mortgage application to qualify. The borrowers who are able to get themselves into their new home early are the ones who were saving and planning for a while. If you are not sure whether your income is sufficient, then just contact us and we will let you know.

Why is The Down Payment a Problem for First Time Home Buyers?

Young buyers have not been working long enough to save enough on their own in many instances. There are a few first time home buyer programs detailed below which require a very low-down payment. However, you don’t want to sink most of your money into the actual purchase of the home leaving you with nothing to make renovations, customize or even money for a safety net in the event of a job loss. The down payment amount also has an impact on your interest rate. 

Why Are Credit Scores Important for First Time Home Buyers?

Credit scores are often the key to whether you get approved at all for a mortgage, or what your rate will be. Maintaining a good credit standing is extremely important and something you need to be working on well before you decide to apply for a mortgage. Your scores also impact your rates when it comes to buying a car and auto insurance companies have been known to use credit scores as one small factor in how they price their insurance premiums. If you know that your credit scores are low and would like help in improving them, then read this article on how to improve your credit scores. It teaches things that you can do on your own without having to pay a credit repair company.

Why Student Debt Prevents First Time Home Buyers from Buying Their Dream Home

The problem with student debt is that it often results in a large monthly payment. The interest rates are often too high but that is another topic completely. That monthly payment shows up on your credit report and it is factored into your ratios during the qualification and mortgage underwriting process. To understand how back end ratios work when qualifying for a loan, the maximum debt to income ratio (on average) is about 43%. So, for every $43 dollars of monthly payments for student debt (or any other debt that shows up on your credit report), you need $100 monthly of income to offset it. So, if your student loan payment is $500 per month, then you need an additional $930 per month of gross income to offset it. Make sense? Of course, you can call us if you would like to discuss.

Recent Car Purchase Before Applying for a Mortgage

I see this constantly and it actually “drives” me crazy. Too many people are thinking for today and not for tomorrow. They want a new car now, so they just go and get it. They are not thinking about the fact that they are going to be buying a home in a few months. This poor decision causes the same debt to income problem that I talked about above with student debt. You now have a large monthly payment that will get factored during the approval process. Do NOT buy that car until after you buy the home. Just don’t do it unless you are absolutely positive that you can qualify. This is why I suggest that you speak to us months before you are looking to buy a home. We may actually tell you that yes you have some room to buy a car now. It is easier to still get qualified for an auto loan after you already closed on your new home.

Buying a First Time Home Buyer Home with a New Baby on The Way

I recently wrote about whether it is a good idea to buy a home right before or after you have a baby. The reality is that is a personal decision and one that no lender should weigh in on. All we can do is inform you of your options, so you can make the best decision for yourself. The challenge occurs when the loan is approved using two salaries but then after the baby is born, one parent decides to be a stay at home mom or dad making it more difficult financially with the loss of income.

First Time Home Buyer Mortgage Program Options

  • First Time Home Buyer FHA – This is a government loan that as a minimum down payment of 3.5%. You will also have a monthly mortgage insurance premium, but the rates will be extremely competitive. This is a very popular option for first time home buyers. If you are interested in a home that needs a bit of updating, then you can apply for the FHA 203k loan. With this program, you will be able to borrow the purchase amount plus the funds needed to make the updates or repairs.
  • First Time Home Buyer VA Loans – The VA mortgage is possibly the best loan program period. It is for veterans or active military only. There is no down payment requirement and no mortgage insurance. The rates are great too. The only downside is there is some additional paperwork needed. However, well worth the effort. Take advantage of this if you are in the military or a veteran.
  • First Time Home Buyer Self Employed Loans – Many first time home buyers are self-employed and cannot document their income. Or, their tax returns show a very low net income or even a loss. The bank statement loan program is a great way to use the average monthly deposits into your bank accounts as income on your mortgage application. We are helping people with loans every day. The rates are not bad and the minimum down payment depending upon your scenario is 10%.
  • First Time Home Buyer USDA Loans – If you are a first time home buyer living in a rural area then you may want to consider a USDA loan. This program also has no down payment requirement and will also come with a decent rate. You can look up the property address in the USDA lookup tool to see if the property is located in a USDA designated rural area.

So, what is the best mortgage program for first time home buyers? There are many more programs out there and we did not even get into conventional loans which are the most common. The programs referenced above are the ones that first time home buyers typically go with based upon their financial situation.

You can follow the links above and read about each program in full detail. However, you really should connect with one of our lenders to have a conversation and talk about what you are trying to accomplish. They will be able to help make sense of the options for you.

Related Questions

Can first time home buyers buy a home with bad credit? Yes, there are some poor credit options available for first time home buyers. Our lenders have programs for individuals who have credit scores as low as 500. You should know that with scores that low, it may require a larger down payment or may also come with an interest rate that is slightly higher.

Are there first time home buyer loans with zero down?
There are a few options for a zero down mortgage. The best one is the VA loan for veterans or active military. There is the USDA loan for those whose future home qualifies as being in a USDA approved area? Finally, I wrote about how you can get an FHA loan without using any of your own money out of pocket.

Are there special mortgage rates for first time home buyers? If you are looking for a special rate because you are a first time home buyer, you probably will not find it. You may be able to find a down payment assistance program in your state which could help if you are struggling to come up with the funds needed for that. A special rate for first time home buyers is not something we have seen.

What is the best mortgage program for first time home buyers?
The best program for each first time home buyer will vary depending upon your personal situation. If you are a veteran or active military for example, a VA loan will always be the best option.

Can I buy a multi family home as a first time home buyer? You absolutely can buy a multi family building. In fact, that is a very smart move if you are considering it. Buying and living in a multi family dwelling is a great way to build wealth quickly.

Are there first time home buyer programs for people with bad credit? Although not specific to first time home buyers, there are programs for individuals with bad credit. Read about bad credit mortgages.

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