September 5th, 2023 at 11:00 am

Wondering how to get a first-time home buyer’s loan?

Buying your first home is a huge milestone in your life. You’re finally a homeowner. Unfortunately, it can take a while to reach that point. Actually buying a home is a more involved and difficult process than you might think.

Read our comprehensive guide on how first-time home buyer loans work.

Most prospective home buyers have to take out a loan. It’s a standard procedure as a home buyer, but if you rush the process, you may end up harming your long-term financial well-being. Thankfully, several loan options are available for first-time home buyers. Read on to learn how to get a first-time home buyer’s loan below.

What is a first-time home-buyer’s loan?

First-time home-assistance programs are designed to ease new homeowners into the process, making things as easy and beneficial to them as possible. These programs include grants, loans, and other forms of aid. Some of these are offered on a federal level, while others are offered at state and local levels.

The exact terms can vary from loan to loan, program to program, but most first-time home-buyer loans operate by offering a combination of lower down payments, a lower interest rate, or more lax requirements. They are essentially much easier to qualify for than conventional loans.

Types of first-time home-buyer loans

The good news is that first-time home buyers have a huge range of loan options available. Navigating those options can be difficult or confusing, so here are some of the most common options available.

FHA loan program

The go-to loan program for just about every American, FHA loans are a type of mortgage that is insured by the Federal Housing Administration. The FHA insures mortgages for about 8 million single-family homes. Essentially, it’s a type of insurance that protects lenders in the event that borrowers default on their loans, which allows FHA lenders to be more confident about providing money to potential borrowers.

FHA loans are easier to qualify for than a conventional loan, particularly those with less-than-satisfactory credit histories. The minimum credit score to qualify for an FHA loan is 500. These loans are also more relaxed about gifts of down payment money from employers, family, and charitable organizations. You can also qualify for down payments as low as 3.5 percent, though if your credit score is between 500 and 579, you may be required to put more money down.

The one drawback to the FHA loan program is that they require mortgage insurance premiums. This is an upfront and ongoing cost that is built into the loan structure, but it’s the mechanism that protects the approved lender in the event that you do default. The FHA also requires an appraisal to ensure that the property meets its minimum property requirements. This is separate from a home inspection, and it’s a way for the FHA to determine the home’s basic safety and livability standards, as well as how good of an investment it is.

To apply for an FHA loan, you will need to provide personal and financial documents, including:

The total amount that you receive from an FHA loan will vary from county to county. In 2021, FHA loans can be from $356,362 to $822,375.

VA loan

Guaranteed by the U.S. Department of Veterans Affairs, the VA loan is a mortgage specifically for qualified veterans, active-duty military personnel, and some surviving spouses and families. The loan is still issued by a private lender, like a bank or credit union, which can set its own requirements, but the VA itself doesn’t set any minimums for credit score or an income limit. You will also have to pay a VA loan funding fee, which covers the cost of foreclosure should you default on the loan. The funding fee ranges from 1.4 to 3.6 percent of the loan amount.

VA loans can be extremely helpful for first-time buyers. They generally require no down payments or mortgage insurance. The interest rate here is generally lower for VA loans than with the FHA loan program or a conventional loan. These loans also limit the closing cost. Lenders can’t charge an origination fee over 1 percent of the total loan amount.

USDA loan

It might be a surprise, but the U.S. Department of Agriculture has its own program to help home buyers, specifically those who live in rural areas. Similar to the above loan option, the USDA loan guarantees a conventional mortgage from a private mortgage lender for a low interest rate and no down payments, though you may have to pay mortgage insurance premiums.

To apply, you must have:

A credit score of 640 and above allows for a faster, more streamlined process. Anything below that, and you might have to go through stricter underwriting standards.

For low-income applicants, the USDA actually offers direct loans with interest rates as low as 1 percent. These mortgages are for applicants who are deemed to have the greatest need. That generally means someone with low income who is unable to secure a home loan from other sources. These direct loans are usually offered for properties that are no more than 2,000 square feet, and the market value of the property must be below the area loan limit. That can vary based on your location. The loans may go as low as $100,000 in some areas, while buyers living in more expensive states (like California) may receive a home loan up to $500,000.

Fannie Mae and Freddie Mac

These government-backed enterprises are two of the main lending groups in the country. Among other types of loans, Fannie Mae offers a HomeReady program, which allows for a 3 percent down payment on conventional home loans. While this normally comes with limitations, the loan does not have any restrictions if the borrower is a first-time home buyer.

Freddie Mac offers a similar program in the form of its Home Possible program. As the company’s affordable mortgage product, Home Possible provides loans for just 3 percent down, specifically to low- and moderate-income borrowers.

Good Neighbor Next Door

This program initially started as the Teacher Next Door program, but it has since expanded to include firefighters, emergency medical technicians, and other first responders. Backed by the U.S. Department of Housing and Urban Development, the Good Neighbor Next Door program essentially lists certain homes at a 50 percent discount.

California-specific programs

Every state has its own programs that provide assistance to first-time home buyers. The California Home Financing Agency (CalHFA) provides several loan programs designed to help first-time home buyers obtain a fair mortgage payment. In California, you are considered a first-time buyer if you have not owned or occupied a home of your own in the past three years.

These programs do come with some requirements. The property must be located in California, and it must not exceed 5 acres. While the programs mainly focus on single-family homes, they can also be applied to some condos, manufactured homes, and properties with guest houses. You must also have a minimum credit score of 660, and you have to meet the income requirements of both the lender and the mortgage insurer. You must take an approved home-buyer education course and get a certificate of completion.

The MyHome Assistance Program is best for low- to moderate-income buyers or those who need assistance with a down payment or closing costs. The program provides a deferred-payment subordinate loan that can go toward either a down payment or closing costs when taking out a CalHFA mortgage. As a subordinate loan, this does not have to be paid off until the home is sold, paid off completely, or refinanced. These loans are fairly low in amount, limited to just 3.5 percent of the home’s total purchase price or appraised value (whichever value is lower), and the program sets a cap at $10,000. Still, that can be helpful, and most borrowers can combine the MyHome Assistance Program loan with other grants and assistance programs for further financial help.

CalHFA also offers a Zero Interest program that is designed for closing-cost assistance. Used in conjunction with CalPLUS Conventional and CalPLUS FHA loans, this payment-assistance program offers up to 3 percent of the total loan amount as a second, interest-free loan. As long as you live in the house, any payments on the Zero Interest program loan are deferred. However, if you sell your home, refinance, transfer the title, or default on the initial loan, you are required to pay the amount back in full.

How to get approved for a home loan: first time buyer

As you start to navigate your next steps in securing a first-time home buyer loan, there are more nuances to understand that can help with what to expect.

Elevating your credit score: Monitor your credit score closely and address any discrepancies or issues that might hold you back in the buying process, as this is an important metric that speaks to your reliability as a potential buyer. 

Validating your income: Lenders need assurance that you can comfortably manage your mortgage payments. In order to show your ability to pay, you often will have to show pay stubs, tax returns, and income records. 

Balancing your debt-to-income ratio: Lenders assess your ability to manage debt through your debt-to-income ratio. You can help improve your chances of approval by lowering your debt burden before applying for a loan. 

Ready to get a first- time home buyer’s loan and buy your first home?

Navigating mortgages can be a huge hassle and largely confusing for even the most seasoned home buyer. If you are a first-time home buyer, consult with our Southern California real estate agents at Berkshire Hathaway HomeServices California Properties to determine the best options for financing the home of your dreams.

determine the best options for financing the home of your dreams. Our knowledgeable team of California real estate agents can guide you through the process and connect with you valuable resources, such as our mortgage lending partner Prosperity Home Mortgage. We are here to help make sure that you have everything that you need to make a thoughtful, informed decision.

Sources: Investopedia, Nerdwallet

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