Navigating the range of home loans to find the one that best meets your needs can be difficult, particularly if this is the first home you’re buying.
To make things easier, the federal government and most states offer insured home loans tailored to first-time homebuyers. These loans offer attractive benefits that can make the home-buying experience less costly and less restrictive. But they aren’t for everyone.
What Is a First-Time Homebuyer Loan?
First-time homebuyer loans offer a low down payment, reduced interest, limited fees and the possibility of deferring payments. These types of loans are offered at a federal level by the Federal Housing Administration and by most states.
The FHA defines a first-time homebuyer as a person who has not owned a home for three years. This includes single parents and displaced homemakers who only owned a house previously with a spouse.
The FHA insures lenders against potential default and requires a minimum credit score of 580 or above for a loan with a down payment of 3.5%. Most lenders, though, require a credit score of 620 or 640 and above to approve an FHA loan. In addition to your credit score, you will need to provide full documentation of your income and assets and meet the lender’s debt-to-income ratio, which is typically a maximum of 41% to 43% of your monthly gross income that goes toward the minimum payments on all of your revolving and installment debts.
Pros of First-Time Homebuyer Loans
The comparatively lower restrictions on these loans make them ideal for first-time homebuyers. You might want to consider these loans if:
- You don’t have enough money saved up for a large down payment.
- You have a limited ability to meet high interest payments and fees.
- Your credit score is not high enough to qualify for other loan types.
But even if you do have funds saved for a large down payment, the low interest rates on first-time homebuyer loans could be too good to pass up.
Cons of First-Time Homebuyer Loans
The downside of FHA loans is that they have higher mortgage insurance requirements than conventional loans. The mortgage insurance payments must be made for the entire life of the loan unless you make a larger down payment. However, FHA mortgage rates are comparable to conventional loans regardless of your credit score, so you won’t be stuck paying a higher-than-average mortgage rate.
If you are looking to buy a really expensive home in an affluent area, you might have to look elsewhere. On Jan. 1, the federal Housing and Urban Development department reduced the “national ceiling-loan limit” to $625,500 for most affluent of areas. Loan limits vary depending on the median income in that area, so be sure to check with your real estate agent or lender.
Another potential drawback is the requirement that the home you buy will be your primary place of residence. In other words, if you were looking to buy the property with the intention of renting it out, you probably won’t qualify for the loan.
Some other potential drawbacks include:
- If you sell your home soon after purchasing it, you could lose some of the loan benefits.
- If you want to refinance at a later date or otherwise change the terms of your debt or your collateral, this may not be possible with a first-time homebuyer loan.
- While some of these loans don’t require you to purchase private mortgage insurance, you may be required to take out insurance provided by the loan program, and this insurance policy could have higher fees and longer payment terms than a private insurance option.
Despite these drawbacks, a first-time homebuyer loan could still be the most attractive type for you. Take a step back, evaluate your financial situation, consider the home you’re looking to buy and consider your options.