Home Buyer Articles
Best Home Loans for First Time Home Buyers
A first time homebuyer is both people who have never bought a home in their lives, and also someone who hasn’t owned a home in the recent past. According to the U.S. Housing and Urban Development (HUD), a first time homebuyer can be defined as someone who has not owned a home in 3-years (including with a spouse).
There are currently many loan programs available for people who would like to buy a home. In this article I would like to list the “most popular” mortgage options for first time homebuyers.
Federal, state, and local governments give a variety of loans designed for consumers looking to get started in the housing market. The most famous loan for first timers would probably be the traditional FHA loan. With a FHA loan, you do not have to spend a significant wad of cash for a down payment, interest rates remain relatively low, you are able to take advantage of a debt-to-income ratio (DTI) (up to 45%), and you do not have to have the highest credit score.
Costs of a FHA loan
FHA insured lenders are famous for the loans that require only a 3.5% down payment, interest rates that are generally lower than conventional loans, credit scores that range from 580 to 620 (640 in extreme cases), and a maximum DTI ratio of 41% to 43%.
One drawback to FHA mortgage loans is a recent change in their mortgage insurance requirements. First off, FHA loans automatically come with the extra cost of mortgage insurance because their down payment requirement is far below the 20% requirement that all lenders require to avoid the insurance.
Effective April 1, 2013, if the homeowner obtained the loan with an original LTV of 90% or less, FHA will cancel the annual insurance premium after eleven years. For borrowers with less than a 10% down payment, including the well-known 3.5% down payment program, FHA will collect the annual premium for the life of the loan. On the other hand, for loans closed prior to this date, the annual premium costs may be eliminated once the borrower has paid mortgage insurance for five years – as well as an LTV of 78% or less than the purchase price or market value.
Additional drawbacks with FHA loans include:
– The loss of some of your loan benefits if you decide to sell soon after purchasing
– The inability to refinance (including changing loan terms) if you have a first time homebuyer loan
Because FHA loans virtually require very little in some departments, there are some extra costs that one might have to pay. LoanSafe’s daily mortgage report however, has found that FHA interest rates have been below the conventional rate threshold lately, which are also relatively low compared to what was expected for 2014. First time homebuyers for the remainder of the year may want to go for these types of loans.
VA mortgages are similar to FHA financing, in that they are provided by federal entities to provide low cost non-conventional loans to a variety of borrowers such as first time homebuyers. The major difference is that VA loans are specifically designated for veterans, active-duty personnel, reservists/National Guard members, and some surviving spouses.
Cost of VA loans
First time homebuyers are not only constantly informed of reasonable values with this loan type, but the interest rates are often negotiable. There is typically a 0% down payment required, closing costs can vary and may be other than those of other financing types, and the fees are able to be financed.
If you have a credit score of at least 620 or higher, a sufficient income, and a valid Certificate of Eligibility (COE), then you may be able to obtain a primary residence through a VA loan.
Potential borrowers who may be eligible for a VA loan can check out the requirements of service to qualify at this VA link.
VA loans are special because spouses and other beneficiaries could be eligible to obtain the privileges as well. Unmarried spouses of deceased veterans, married spouses of Service members who went missing overseas, surviving spouses of veterans who obtained certain disabilities or whose disability led to their death, and surviving spouses who remarried on or after turning age 57 following December 16 of 2003, all fall under this category.
It is noteworthy that some U.S. citizens who served in the armed forces of an allied foreign country in World War 2, and individuals who have worked in specific organizations such as Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with World War II service, and others, may also qualify.
With mortgage rates at low levels as pointed out before, service members who are first time homebuyers in 2014 should have little trouble obtaining an FHA loan if their household income allows it.
It is impossible to say that there are never first time homebuyers who can afford a conventional mortgage. With this said, potential borrowers who have little experience to home buying should pick a loan that will best suit their intent for housing. What this translates to, is that certain loan types are for very specific borrowers.
The 30-year fixed rate mortgage (FRM)
A fixed rate mortgage (FRM) enables a borrower to enjoy fixed interest payments for the entire life of the loan. With a 30-year term, you’re going to have slightly higher interest rates, but lower monthly payments than a lower termed mortgage. Down payment requirement range from 5-20%.
The 15-year FRM
With a 15-year term, you’re going to be able to get a lower interest rate, but the payments will generally be higher because you’re paying the loan off (mainly interest) in a shorter amount of time. Payments would be even higher on a 10-year FRM, making a 15-year loan the most balanced low term loan for first time buyers.
Some notable benefits to all FRMs are that they are good for first time borrowers who would like to stay in one place for a long time, and allow underwater homeowners to refinance and get access to the federal HARP Program’s unlimited LTV feature. Down payment requirement also range from 5-20%.
The adjustable rate mortgage (ARM)
The first thing to point out about most ARMs no matter what their index is (index is fixed rate period), is that their interest rates will start out much lower than that of a FRM for a reason. ARMs remain fixed for a preset number of years until the interest rates fluctuate based on how the market looks. This obvious benefit dictates that ARMs are good as long as rates decrease over the years. If not, an ARM could cost a first time homebuyer an arm and a leg.
The rate change will be based on a predetermined formula (Margin + Index = New Rate). First time homebuyers who want to buy a home as an investment and move in a couple years, would probably be most comfortable with this loan type.
State funded first time homebuyer programs
To take advantage of OHFA’s special First-Time Homebuyer Loan Program that only requires a .50% origination fee, a $250 funding fee, and an $85 tax service fee; first time homebuyers must meet OHFA income limits, and properties must meet purchase price limits which vary by county. These loans are available in all 88 Ohio counties. For more information on these limits, click here.
The credit score required for this loan is 640 or higher. You must currently have employment. Either way, once you apply lenders will evaluate your entire ability to repay a loan. Lastly, you must have signed a Purchase and Sales Agreement for a qualifying property.
Additionally, OHFA first time homebuyers must have at least one of the following requirements.
– Never owned real estate.
– Not owned or had ownership interest in a primary residence for the past 3 years.
– Currently is an Active Military Member or Veteran.
– Purchase a home in a target area.
Some first time homebuyers may find programs like these to give them limited options. For this specific Ohio based loan program, the properties that can be involved are limited to:
– Two acres within a municipal corporation and five acres outside a municipal corporation unless additional acreage is required by local health or safety code.
– Single family, conforming condominiums, duplexes, and up to four-unit properties that are already built.
– Newly built one-unit single-family dwellings
– One-unit single-family dwellings and permanently affixed to a foundation that are modular/manufactured properties.
The CalFHA offers a vast variety of first time homebuyer programs that range from FHA to conventional mortgages.
CalHFA’s Conventional program for example is a first mortgage loan that is insured through private mortgage insurance on the conventional market. This conventional loan comes packaged in a 30-year loan term for potential borrowers who would like to stay in one house for a very long time.
Another service for borrowers that the CalHFA provides, is the down payment assistance program for borrowers who do not have enough cash. Programs like this are another essential service for first time homebuyers, and should be researched on the state and domestic level. Something special that the CalHFA offers through its programs is subordinate loans. What this term translates out to, is a loan that is postponed so that payments on this assistance are not due until the property is sold, refinanced, or paid in full.
The California Homebuyer’s Down payment Assistance Program (CHDAP) for example presents a deferred-payment subordinate loan in the amount of (3%) of the purchase price or appraised value, whichever is less, to be used for down payment and/or closing costs.
This is just a partial list of the programs available. After you become educated on your options, it is always best to next consult with a reputable mortgage lender about your particular situation to narrow down what loan you may be able to qualify for.
If you have any questions about the above mortgage programs, or if you need help in getting a new home loan, please call me, Erik Sandstrom any time at 1-800-779-4547; or email me at Erik.Sandstrom@CaliberHomeLoans.com. (NMLS# 805941)
Loan OfficerIf you have any questions about home buyer mortgage programs, or if you need help in getting a new home loan, please call me, Erik Sandstrom any time at 1-800-779-4547; or email me at Erik.Sandstrom@CaliberHomeLoans.com. (NMLS# 805941)