First-time homebuyers have one distinct disadvantage – the down payment. Without another home to sell, you have to come up with the down payment on your own. This is the obstacle many first-time homebuyers experience. They don’t have enough cash to get their foot in the door, even if they can afford the monthly payment.
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Luckily, there are a few government programs available to help first-time homebuyers get a home.
FHA Loans are a Great First-Time Homebuyer Program
FHA loans used to have the nickname ‘first-time homebuyer loan.’ Today it’s really an option for any borrower, but first-timers definitely benefit.
FHA loans have flexible underwriting guidelines starting with the down payment. You only need to put down 3.5% of the purchase price of the home. For example, a home selling for $200,000 would require a $7,000 down payment.
This may still sound like a lot of money when you don’t have equity in another home. But, there’s more. The FHA allows you to use gift funds for your FHA loan down payment. You can get money from your parents, employer, or a charitable organization. If you are lucky enough to receive 100% of the money needed for the down payment, the FHA doesn’t require you to put any of your own money down on the home.
In addition to the low down payment requirements, FHA loans have the following flexible guidelines:
- Minimum 580 credit score
- Maximum 31% housing ratio (mortgage payment vs your gross monthly income)
- Maximum 41% total debt ratio (your total monthly debts vs your gross monthly income)
- Stable income for the last two years
- Stable employment for the last 12 – 24 months
FHA loans also allow credit scores as low as 500, but you’ll need a larger down payment of 10% of the purchase price. It may be a bit more difficult to find a willing lender with a 500 credit score, but with compensating factors and a good explanation, it may be possible.
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USDA Loans are Great for Rural Homebuyers
If you don’t mind living out in rural areas, rather than in the hustle and bustle of the city, USDA loans offer a great option for first-time homebuyers. With the USDA loan, you don’t need a down payment. The USDA allows you to borrow 100% of the home’s purchase price.
Here’s’ the catch, though. You can’t make more than 115% of the area’s median income. This means your total household income cannot be 15% higher than the average income for your area. The USDA includes the income for all household members (18 years old and up) to determine eligibility. But, they do allow certain allowances:
- If you have kids under the age of 18, you can deduct $480 for each kid
- If you have kids over the age of 18 but in school full-time, you can deduct $480 for each kid
- If you have any disabled relatives living with you, you can deduct $480 for each person
- If you have any elderly relatives living with you, you can deduct $400 for each person
Your net income after the allowances is what determines your eligibility. You can check your income eligibility here.
If you are eligible, you must meet the following requirements for USDA loans:
- Minimum 640 credit score
- Maximum 29% housing ratio (mortgage payment vs your gross monthly income)
- Maximum 39% total debt ratio (your total monthly debts vs your gross monthly income)
- Stable income for the last two years
- Stable employment for the last 12 – 24 months
- You can’t own another property
VA Loans for Veterans
If you are a veteran or are active in the military, you may be eligible for the VA loan. If you served any of the following, you may be eligible:
- 90 days during wartime
- 181 days during peacetime
- 6 years for National Guard or Reserves
Veterans and eligible active military members don’t need a down payment. The VA allows 100% financing for veterans along with the following flexible guidelines:
- Minimum 620 credit score (this is the average score required by VA lenders)
- Maximum 43% total debt ratio (the VA doesn’t have a maximum housing ratio)
- Stable income for the last two years
- Stable employment for the last 12 – 24 months
- Proof of entitlement from the VA (you served enough time and have an honorable discharge)
Each of these loans, FHA, USDA, and VA loans are government loans, but the government doesn’t underwrite or fund the loans. Instead, you obtain the loan from an FHA, USDA, or VA-approved lender. Each entity has lenders they approved to write loans in their name. As long as the lender follows the guidelines set forth by the government agency, the appropriate agency will guarantee the loan. This means the government will pay the lender back a portion of the money they lose if you default on the loan. This allows lenders to move forward with the flexible guidelines and low fees without worrying about losing their business if too many buyers default on their loan.
Government loans are a great way to get your foot in the door as a first-time homebuyer. As is the case with any loan, shop around to get the best deal. Each lender may have different guidelines, different fees, and charge different rates. We recommend securing at least three quotes to find the loan that is just right for you.