What are the Financing Options for First-Time Home Buyers?

Option 1: Federal Housing Administration (FHA) Loans

 

Many first-time homebuyers consider going with an FHA loan, but it’s important to know that this isn’t necessarily your only option. They are popular among first-time homebuyers because they can be easier to qualify for, but they do have some setbacks. Below are some key features of FHA loans.

 

  • Ideal for first time home buyers or low-to-moderate-income buyers
  • Government-insured by the FHA but offered through FHA-approved lenders
  • Require lower down payments (as little as 3.5 percent of the home’s purchase price)
  • Lower credit score requirements
  • Require a mortgage insurance premium (MIP)

 

Typically, conventional loans offer better interest rates than FHA loans. It’s also important to note that all FHA loans require mortgage insurance for the duration of the loan. The cost of this varies depending on your situation and the cost of your home, but it can be up to a few hundred dollars a month.

 

Credit score requirements also vary depending on your down payment amount. You can get approved for an FHA loan with a score as low as 500 with a 10% down payment, or you can put as little as 3.5% down if you have a score above 580. But other factors will also determine your eligibility. Not sure if an FHA loan is right for you? Check out our article Should I Choose an FHA Loan to Buy My New Home? to find out.

 

Conventional Loans

As their name suggests, conventional loans are the most common. These loans are not government-insured, which typically means that they require a higher credit score to qualify for. There are other, stricter requirements to consider. Below are a few requirements for a conventional loan.

 

  • A minimum 3% down payment, but at least 20% down to avoid PMI
  • Good-to-excellent credit
  • Stable employment and income histories
  • Debt-to-income (DTI) ratio of no more than 45 to 50 percent

 

Conventional loans that only require 3% down are typically backed by Fannie Mae or Freddie Mac—government-sponsored enterprises that buy and sell conventional mortgages. But this is not always the case. On whole, there are a number of differences for a conventional vs FHA loan that can impact which loan type is right for you, so it is important to do your research.


Private Mortgage Insurance (PMI)

Similar to MIP, private mortgage insurance is a type of insurance that protects lenders when a borrower defaults on a loan. It’s often required when borrowers don’t have a 20% down payment, though it’s possible to get a conventional loan that doesn’t require this. The advantage of PMI on conventional loans over MIP on FHA loans is that you are typically only required to pay it until you have accumulated enough equity in your home to no longer be considered high-risk. This typically occurs once you have paid off about 20 to 30 percent of your loan.

 

Achieving the Lowest Interest Rate

Typically, the lowest interest rates are offered on conventional loans, and most conventional loans provide a fixed rate with more options for terms. You can choose to take out either a 30-year, 20-year, or 15-year mortgage.

 

A shorter-term mortgage could be a good idea if you can afford higher monthly payments. You can sometimes get a more competitive rate on a shorter-term loan. And of course, you’ll pay less interest overall because you’ll be paying it for a shorter period of time. However, a 30-year mortgage is the most popular and you usually have the option to pay your mortgage off sooner if you decide later on that you can afford higher monthly payments.

 

While FHA loans may not offer as competitive of rates, they can make buying a home more achievable—especially for first-time homebuyers. And investing in a home could still save more money in the long-term overpaying rent.

 

All of these loan options are available to first-time home buyers, but you do not have to be a first-time homebuyer to qualify for an FHA loan. There are also other loan options to consider in addition to down payment assistance programs and other state-led programs that can make it easier for first-time home buyers to afford their dream home.

 

Buying a home should be an exciting time in your life. Try not to get overwhelmed by the process and make sure that you partner with people that you trust. From handy checklists like this home loan checklist to complete guides for first-time home buyers, Pulte Homes is here to support you as you consider the purchase of your first home.

 

 

Looking for more tips, ideas or inspiration? Return Home here.

Published  12.09.21

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