If you’re new to real estate and getting ready to make an offer on a property, you may be wondering which mortgage is best for a first-time homebuyer.
This is especially important now that mortgage rates have essentially doubled, putting budgets front and center.
This also means that 30-year fixed mortgages are no longer the default option for homebuyers, with cheaper adjustable-rate mortgages now a consideration.
While experienced homeowners and first-time buyers may end up getting the exact same home loan, there are additional options to consider if you’ve never bought a home before.
Let’s explore the many loan options available today to determine what might be best in the current environment.
Types of home loans to consider if you are a first-time buyer
- Fannie My Home Ready (3% down payment)
- Freddie Mac Home Possible (3% Down Payment)
- FHA (3.5% down payment)
- VA Loans (0% down payment for qualified homebuyers)
- USDA Loans (0% down payment for qualified homebuyers)
- State Housing Finance Agency loan programs (down payment assistance and closing cost assistance)
- Also look for local and national first-time home buyer grants and mortgage credit certificates (MCCs)
I’ve listed the most common loan types available to first-time homebuyers, many of which are also an option for current homeowners.
These generally don’t require much in terms of a down payment, which seems to be a major need/desire for first-time buyers who don’t have bullish buyers’ equity.
Personally, I prefer to put down 20% on a home to avoid expensive mortgage insurance and get a lower mortgage rate, but I understand that this is not always realistic.
If you are a veteran/active duty, there are VA loans that require a 0% down payment and come with lower mortgage rates compared to other types of loans.
If purchasing in a rural area, USDA loans also allow for a 0% down payment and competitive mortgage rates.
There are fewer restrictions on FHA loans, which require a 3% down payment but allow credit scores as low as 580.
Additionally, conforming loans backed by Fannie Mae and Freddie Mac require only a 3% down payment.
Note that for Fannie/Freddie loans, you can get a waiver of loan-level rate adjustments (LLPAs) if you are a first-time homebuyer with a qualifying income of ≥100% Area Median Income (AMI) or 120% AMI in high-income areas. the cost.
Or if the loan is HomeReady/Home Possible, meets duty-of-service requirements, is in a high-needs rural area, a loan to a Native American on tribal land, or a loan issued by a “small financial institution.”
So, for those who lack assets, the above programs may be a good starting point, especially if you qualify for LLPA exemptions.
Is your first home a starter home or a forever home?
- Always think about how long you will spend in the property
- It may be possible to save money by choosing an ARM if you plan to move soon
- Many first-time buyers move to larger properties within a few short years
- Your expected tenure is also a key consideration when it comes to paying points
Once you choose a loan type, you can select a specific loan program, such as a 30-year, 15-year fixed loan, or ARM.
While most first-time buyers will eventually opt for a 30-year fixed, let’s discuss how the property itself can dictate your financing decision.
the Firstly The thing to think about when buying your first home is how long you plan to keep it. Many people buy what are known as “starter homes” initially, then move on to larger homes within a few years.
For example, if you have just gotten married and want to buy a house next, you may also consider starting a family shortly afterward.
This often results in the first home being outgrown, and the need for a new, larger property. Depending on your timeline, all of this could happen in just a few years.
In this case, it may make sense to use a hybrid adjustable-rate mortgage (ARM) such as a 5/1 ARM or a 7/1 ARM.
Although fixed mortgage rates are not much more expensive than interest rates at the moment, this is not always the case. Sometimes it is much cheaper to use an ARM.
These hybrid ARMs offer a fixed rate period for the first five or seven years before you have to worry about the interest rate adjusting.
In other words, it works just like a 30-year fixed-rate mortgage until its first adjustment — by which time you could have already sold and moved to a new property.
advice: It may be easier to skip a starter home because entry-level homes tend to be the most in demand. You can even avoid having to move a second time!
Pay attention to paying points upfront
Another consideration is whether or not you pay mortgage points – again, how long you plan to stay has a lot to do with it.
These points are a form of prepaid interest that lowers the interest rate you receive on your loan. In short, you pay today (when the loan closes) to get the discount while you keep the loan.
For example, you might pay 1 point for a 0.375% discount on the rate over the next 30 years.
However, there’s no point (no pun intended) in paying points on a mortgage you’ll only have for a few years. It often takes many years to break even on discount points paid.
Even if you stay in the home, you may be able to refinance your mortgage sooner rather than later, making points a losing proposition.
Consider the current mortgage rate environment and where interest rates could go after your purchase.
An exception to this would be a temporary purchase, especially if it was paid for by a lender or seller, as you get the full value for the first two years. Or possibly a refund if you refinance/sell early.
You don’t want to be poor at home
- You may experience a payment shock or become house poor when you purchase your first home
- This means going from paying a relatively small amount to a large amount each month
- Also consider other bills you’ll need to pay such as homeowners insurance and property taxes
- Don’t look at a mortgage as bad debt, it is often the cheapest debt you will enjoy paying off
It may be tempting to use a shorter-term mortgage such as a 15-year fixed mortgage, as it can significantly reduce your interest expenses. But it will also nearly double your monthly payment.
One of the things mortgage lenders take into consideration when offering home loans to first-time buyers is payment shock.
Simply put, if you go from paying $1,000 a month for rent to $3,000 for a mortgage, they may worry that you’ll have a hard time adjusting to the higher payments.
And they have good reason to worry because it’s all backed by data.
Even if you’re approved for a short-term mortgage, it may be better to take things slowly rather than stick with the mortgage.
Sure, it’s great to pay off a large debt quickly, but a mortgage can be good debt, and is often the cheapest debt you have.
Although a 30-year fixed yield is closer to 6.5% or higher today, it is still relatively cheap compared to other debt such as credit cards, etc.
It is always possible to make additional mortgage payments if you want to pay off your mortgage early, regardless of the loan program you choose.
So you can get the flexibility of a 30-year loan with the option to prepay as a 15-year loan if you choose.
Check out our home loan programs exclusively for first-time buyers
- Visit your state’s housing finance agency to find out what special programs they offer
- It may be possible to get a no down payment mortgage if you don’t have a lot of money saved
- Also look for first-time home buyer grants and mortgage credit certificates that may be available to you
- Compare traditional and first-time buyer loan programs to determine which option is best
While it is possible to apply for any home loan, some loan programs are only intended for first-time homebuyers.
They are intended to be more convenient for those who may have difficulty qualifying, often because of the down payment.
If you check your state’s housing finance agency (HFA) for home buyer assistance, you should see loan programs specifically geared toward first-time buyers.
This can include down payment assistance, closing cost assistance, or both, which is helpful if you haven’t saved much before purchasing.
A recent example is the Dream For All Shared Appreciation Loan, which requires no down payment but works as if you made a 20% down payment.
NB: These housing agencies are not lenders, so you will need to research them and then use their “Find a Loan Officer” section to see which lenders offer their products.
You can also do this in reverse if you’re already working with a lender. Ask about the HFA programs they offer to first-time homebuyers.
It may also be possible to obtain a first-time homebuyer grant from a large bank, local credit union, or direct mortgage lender.
Make sure to look for local grants as they are often forgivable, meaning they don’t have to be repaid!
One example is the U.S. Bank Home Access Loan, which offers up to $12,500 in down payment assistance and a lender credit of up to $5,000.
The only caveat to some of these loan programs is that you may need to complete a homeownership class, although that can be helpful and is usually very basic and doesn’t take all that much time.
Another benefit that first-time buyers may be able to take advantage of is a Mortgage Credit Certificate (MCC), which can reduce your tax liability, thus indirectly saving you money on your mortgage.
It may also allow you to qualify for a larger loan amount in some cases.
Finally, look beyond first-time loan programs. You may not need any special loan program, and it may actually be cheaper to stick with a traditional program instead.
Who are the best mortgage lenders for first-time buyers?
I don’t know of a single bank or lender that specializes in financing first-time homebuyers, although there are companies that cater solely to homebuyers, like Tomo.
With mortgage rates soaring today, most lenders are turning to homebuying specialists anyway.
Look for special offers and incentives as the mortgage market becomes largely purchase-driven.
In the end, you’ll probably find many of the same loan programs no matter where you look, except for some of the unique offerings discussed in the previous section related to grants and government housing agencies.
This means that you will be able to get an FHA loan, USDA loan, or VA loan from most banks/lenders out there. The only difference may be mortgage rates and/or lender fees.
You should also be able to get a Fannie Mae HomeReady or Freddie Mac Home Possible loan from almost any lender.
As mentioned, both require only a three percent discount when purchasing a home and come with other potential price discounts.
Consider using a mortgage broker if you are a first-time home buyer
Instead of focusing on one lender, it may be better to reach out to an experienced mortgage broker, especially if you are a first-time buyer.
These individuals can guide you through the loan process and compare rates and programs from dozens of lenders at one time.
Or structure your loan to provide mortgage insurance and/or mortgage rate with specific down payments.
They can be helpful if you have a lot of mortgage-related questions, which is often the case for someone buying their first home.
You may not get the same level of service with a large bank or call center lender.
Alternatively, you can reach out to a HUD-certified housing counselor if you need one-on-one assistance or aren’t sure where to turn for financing.
An experienced real estate agent may also be helpful, as many of them are well-versed in mortgages.
Just be sure to do your due diligence and look beyond their own recommendations. You don’t have to use “their person.”
Ultimately, educating yourself about your mortgage before reaching out to others may be the best way to start your home buying journey. Being knowledgeable means being financially empowered.
Perhaps the “best mortgage” for a first-time home buyer is simply the one they offer Completely understood.
Read more: What is a good price for a first time home buyer?
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