2017 First Time Home Buyers Guide to Choosing the Right Mortgage

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In the last two years, mortgage lenders have finally started to seriously ease lending restrictions for first time home buyers. A few years back, after the last recession, it became very difficult to get a first time home mortgage unless you had a 20% down-payment and 740 credit.

  • Record Low-Interest Rates for First Time Home Loan Options
  • Flexible Guidelines and Easier Credit Standards for Many of the First Time Home Buyer Mortgage Programs Today
1st Time Home Buyers have many attractive mortgage programs to choose from in 2017.

1st Time Home Buyers have many attractive mortgage programs to choose from in 2017.

Both the Bush and Obama Administration did a commendable job in keeping interest rates low for Americans looking to buy or refinance their home. However, in a matter of 10 years, we went from the highest to the lowest home ownership rates in over 50 years. Being a first time home buyer with bad credit remains challenging but is more realistic with new house buying opportunities arising all the time.

How does the Trump Administration reverse course and stimulate the housing sector starting making things more attractive first time home buyers?

We have seen there are many new first-time mortgage choices available. But if you are a new home buyer, how do you know which is the best deal for you?

Below is a basic buyer’s guide to the first time home buyer mortgage products available as of 2017, and how to choose the best one for you.

30 Year Fixed Rate Mortgages

The 30 year fixed rate mortgage constitutes the majority of the mortgage loans done in the United States. The rate is fixed for 30-years, and the monthly principal and interest payments do not change.

If you get a fixed rate mortgage, what you are getting is consistency and a guarantee: Your payment is not ever going to change in that 30 year period. This first-time home buyer mortgage is a good choice for people who like less risk and want consistency.

The price for consistency is that you will pay a slightly higher rate. As of 2017, the rate for a 30-year mortgage for someone with 700 credit is about .75% higher than a comparable adjustable rate mortgage.

Even though the rate is higher, the fixed rate loan accounts for 90% of mortgage loans in the US since 2010.

The 30 year loan has become even more popular after the financial crash; many people with adjustable, five year loans ended up in foreclosure when their monthly payments went up 30% or more and the economy was bleeding jobs.

Adjustable Rate Mortgages

An adjustable rate mortgage can be a good choice for certain types of buyers. ARM loans typically have a five year or seven year fixed period, and then the rate can re-adjust. While most of these loans can only increase so much in interest at one time, it is possible for the rate to increase by four or five points in some cases. This is enough of a payment shock that it could make the loan less affordable for many people.

But the ARM loan can be a good choice in some cases. Are you thinking about moving in three years? You may then decide to opt for a lower payment before the home sells.

Do you anticipate that you will be making more money in three or four years when you get your master’s degree? Or will your child graduate from college and you will have fewer financial obligations? Then an ARM could work well for you.

If you are considering an ARM loan, look for a loan that cannot increase the rate by more than two points the first time the loan resets.

15 Year Mortgages

Another viable option is to get a 15 year mortgage instead of a 30 year. The big plus here is that you will pay a fraction of the interest that you pay on a 30 year loan. Naturally, your payment will be at least 25% higher, but you will save often hundreds of thousands in interest.

A 15 year mortgage is a more serious financial commitment. You really need to be sure that you can handle the higher payment.

Another factor – you have to be able to qualify in underwriting for the 15 year payment. Not everyone will be able to do this.

Interest Only Loans

These are not as common as a decade ago. The initial payment period of up to 10 years is only interest payments, so the initial payment is low. But when the rate resets, you can get a payment shock.

Many people who had interest only loans in the market crash lost their home. Today, interest only loans are usually for more wealthy buyers, such as those who get compensation through year-end bonuses.

FHA Mortgage Loans

You also need to consider the exact type of lender that you are going to select. The most common are FHA and conventional lenders.

FHA  lenders have a guarantee from the FHA that the federal government will pay back the lender if you fail to make payments. FHA continues to be appealing as the first time home buyer down payment is only 3.5% of the purchase price.

See Rates and Terms for FHA Home Loans

This guarantee allows the lender to offer you low interest rates and low down payments. You may be able to get into a loan with an interest rate under conventional rates. Also, you may be able to put down just 3.5%, and have a credit score in the low 600’s to qualify. If you have average to poor credit, an FHA 1st time home loan could be the best for renters who are contemplating  becoming a homeowner. Ask about bad credit first time home buyer loans from approved FHA lenders if you have a credit score between 500 and 600.

Conventional Home Loans

Conventional lenders typically have higher down payment requirements, although you can find conventional loans with a 5% down payment. You will also need to have a better credit score to qualify.

If you have credit above 700, many experts advise looking towards conventional loans. Many new buyers are attracted to the no-money down mortgage loans, but make sure you factor in the monthly mortgage insurance payment, unless you are getting VA financing.

Something to Consider before Buying Your First Home

Today there are more mortgage loans available, and the lending criteria is less strict. You need to look closely at your finances and your needs to determine which kind of loan is the best choice for you. For most Americans, the 30 year fixed loan is the most popular, and FHA first time home loans allow many millions more Americans to become homeowners.

first time home buyer with bad credit

The time may have never been better to become a first time home buyer with low credit scores, as FHA, Fannie Mae, Freddie Mac and the VA have announced expanded guidelines for home-ownership.

How to Get a First Time Home Buyer Loan with Low Credit Scores

Your credit score is one of the most important factors that lenders consider when you apply for a first-time home mortgage. If you find that you are on the lower end of the credit scale, do not worry too much. It is still possible to get a first-time home buyer loan.

And 2017 is a great time to buy your first home! Rents are going up, home values are up, and mortgage rates are going down. If you are a first time home buyer with bad credit, do not let a low credit score dissuade you from applying from a mortgage, as there are several programs available if you speak with right lenders.

Know the Score You Need for 1st Time Home Buyer Programs

Your credit score with the three major credit bureaus will give you an idea of how likely you are to be approved for a loan, and what your rate will be. Generally, the higher your score, the more home loan options you have.

For a conventional loan, you will want to have a credit score of 660 or higher. This score will give you the greatest number of loan options as a first-time home buyer.

But there are other options for you if your score is not that high. The most popular first time home buyer program for people with low credit scores is the FHA loan. These loans are backed by the Federal Housing Administration. This means that FHA mortgage lenders are able to provide you with a lower rate than you could otherwise expect.

For a bad credit first time home-buyer loan, you only need to have a credit score of 580 to get a down payment of 3.5%.

As always, the higher your credit score, the better. But don’t think that you have to have a high score to get a home loan. Programs for first time home buyers with bad credit are often insured insured by the Federal Housing Administration and widely considered to be a great option that you should ask about if you have credit below 660.

Make Payments on Time

For loan programs such as FHA, your credit score is not as critical as you think. What IS important is that you have a steady payment history for your debt obligations for at least the past year.

FHA and other lenders want to see that you are on your feet financially and are making payments on time.

We recommend that you have a good payment history going back at least a year, and two is better.

Put More Money Down to Qualify for First Time Home Buyer Loans with Poor Credit

If your credit is really poor, you will have a better chance of approval if you put more money down. FHA requires a 580 score for a 3.5% down payment. If you are lower than that, you can still get approved if you put down 10%.

So, save up more money for your down payment and your credit score can be lower. Talk to first time mortgage lenders that offer a clear for buying a home with bad-credit.

Don’t Be Afraid to Wait

It is true that 2017 is a great time to get a mortgage. Rates are dropping and home prices are appreciating. But if your score is too low, you certainly should consider continuing to rent and increase your credit score.

Make all of your debt payments on time, and you can pay a credit repair company to help to increase your score. In a year’s time, you may be ready to buy your first home.

Talk to mortgage lenders about first time home buyer programs. See Rent to Own Home Loans.

Take a Higher Rate on a Bad Credit First Time Home Buyer Loan

If your credit score is too low to get the best rates, there is nothing wrong with taking a higher interest rate. You may have to pay that higher rate for a year or two until your credit is improved. Then, once your score is higher, you can refinance and get a lower interest rate.

Many mortgage experts expect the interest rates to stay quite low for the foreseeable future. Even though the Fed has raised rates three times in the last 18 months, first time home buyer mortgage rates have not changed a great deal.

Talk to a First Time Home Buyer Mortgage Lender

If you have a lower score than you want, be up front with your lender about it. Some people have a low score because they had a negative credit event in the last few years. Perhaps you had a bankruptcy or foreclosure.

The good news is that negative event does not necessarily prevent you from getting a home loan. You just need to show the lender that you have a good enough income to pay your bills now. You also should show that you have been making on time debt payments for the last 12 months to 24 months.

Interest rates are low. Home prices are higher. And lending is much loose than it was five or seven years ago. Even if you have a credit score as low as the high 500’s, you still may be able to buy a home. Sure, you might have to pay a higher rate or put more money down, but you still are usually better off than paying rent.

Green ecological house in empty field concept for construction and real estate

Top 7 Down Payment Programs for First Time Home Buyers

Buying a home is not an easy process for many people. From the worries about all of the paperwork to the fees and the sheer number of people involved, it is easy to be overwhelmed. If you are a first-time home buyer, you also may not have a lot of capital available for buying your home.

But there is plenty of good news! Today the US mortgage market has many mortgage loan programs that can help the first-time home buyer to get into their first property. Below are the best 7 down payment programs for those who are buying their first home.

FHA

This is without a doubt the most popular affordable, low down payment home loan program on the US market. It is especially designed for people with shaky credit or are buying their first home. The Federal Housing Administration provides a guarantee of most of the balance of the home loan. This allows lenders to make their acceptance criteria more flexible. FHA continues to insure first time home buyers with b ad credit scores as long as they can check the other boxes of being a borrower.

With a loan that is backed by FHA, you may be able to get a loan with only 3.5% down. This low-down payment makes it much easier to get a home loan if you are not bringing any equity to the table from your last property.

FHA programs can be had by first time home buyers with only 3.5% down if you have a credit score as low as 580.

FHA financing has no income limits; whether you make $30,000 or $300,000 per year, you may be able to be approved for this program. There is a maximum amount that your home can be work if you want to qualify this program. It varies depending upon the city and region. For most areas of the US, the maximum amount for a home underwritten by FHA is $424,100.

USDA

There are not a great number of 100% financing loans left on the US mortgage market. USDA is one of them, however. This program is backed by the US Department of Agriculture, and has been specially designed for lower income and lower credit borrowers who are buying in a rural area. You do not have to be buying a farm either. There are some homes in suburban areas outside of large cities that can qualify for a USDA loan.

There are income limits on this program, so you should check with your mortgage lender.

This program also features very flexible credit standards, and it ok if you have a foreclosure or even a bankruptcy in your past.

VA

This is another 100% financing program that is available for first time home buyers. This program is sponsored by the US Department of Veterans Affairs, or VA. The 100% financing program is available to those who were or are in the US military. It also is made for the surviving spouses to buy homes as well.

It is made for military veterans, so as you may expect, it is very generous. You can get a 100% financing loan with very flexible credit standards, generous debt to income standards, and no mortgage insurance. If you can qualify, this is one of the best, most generous first time home buyer loans with bad credit made for eligible military applicants.

Fannie Mae and Freddie Mac

These government entities currently back a large percentage of the US mortgage underwritten in the United States each year. There are more first time home buyer programs available today with Fannie and Freddie. These government programs only require a first time home buyer down-payment to be 3-5%, in most instances.

Note that you generally need to have a credit score above 640 and ideally 680 or higher to qualify. If you have a credit score that is below this, consider the FHA program mentioned above.

203k Home Improvement Loans 

Another advantage of the FHA program is that you can combine your FHA loan with a HUD 203k loan for doing repairs on your property. This is ideal for the first time home buyer who wants to buy a fixer upper. This FHA-backed loan will consider what the value of the home is after the repairs are done. You can then borrow the funds needed to complete the approved repairs.

This is a great deal for buyers because you can borrow your rehab funds at a very reasonable rate.

Dollar Homes

It might sound too good to be true. But there are HUD homes that are made available to buyers for as little as $1. These homes are taken over by FHA after the foreclosure process. There are only a small number of homes available for the most part, but buyers who are interested in buying an affordable home in certain cities in the US should check it out.

Good Neighbor Next Door

This program was once called the Teacher Next Door Program. Today it has been expanded to include firemen, police, EMTs and other critical workers for the public health. This is a HUD program that provides the buyer with up to a 50% discount that are located in an urban revitalization area.

It is required to live in the home for at least three years. You can find available home listed on the Good Neighbor Next Door website.

first time home buyer bad credit

Check out the new opportunities from government and private money lenders for first time home buyers.

Top 19 Checklist for First Time Home Buyer Loans

Switching from renting to owning your home is exhilarating for many Americans. But buying a home is a complex process. If you follow the checklist below for the year before you buy a house, your first home purchase process will be much smoother.

Lending Requirements to Buy a House in 2018

12 Months Out

  • Get your credit score. You should get a copy of your credit report from the three major credit bureaus – Equifax, Experian and TransUnion. Each of them have to give you a free report each year. This is worth doing: An FTC study found that 25% of Americans have found errors in their credit report, and 5% had mistakes that could lower their score. Being first time home buyer with bad credit can be challenging, but it helps to know where you are at with credit before speaking with lending professionals.
  • Figure out what you can afford. You should know well in advance how much how you can buy. Lenders generally will want to see that your total debt load is no more than 43% of your gross monthly income. This is called your debt to income ratio or DTI. This ratio includes your mortgage and all other monthly debts, such as car payments and credit card payments.
  • Plan for your down payment. Most conventional mortgages want to see a 20% down payment, but there are other options available. Generally, it is recommended to put down as much as you can afford. This will lower your monthly payment and reduce the interest you pay. However, you should not let the inability to save 20% prevent you from buying. There are conventional loans with 5% down payments, and FHA offers great programs with only 3.5% down. Whatever you need to save up, banks like to see that the money has been in your bank account for at least 60 days before you apply for the loan.

9 Months Out

  • Decide your priorities. What is most important for your home? Do you need to be close to work? Do you need a big backyard? Do you want an open floor plan, or to have a quiet street. You will make a better decision on your first home if you determine priorities early on. If you are deciding with a partner or spouse, now is the time to get differences ironed out.
  • Research neighborhoods. Use websites such as realtor.com and zillow.com to get a feel for neighborhoods, cost of living and public transportation. Also go to open houses to get a feel for the homes in your price range in neighborhoods you want. Looking at real houses can motivate you to cut debt and save.
  • Budget for home purchases expenses. Buying your first home is fun but it’s expensive. You should have cash saved for the home inspection, title search, survey, and home owner’s insurance. Start saving now.
  • Save for home maintenance. It is a good idea to put aside money every month to pay for maintenance on your new home. Having to call a plumber isn’t fun, but it’s less fun if you have to put it on a credit card.

6 Months Out

  • Get your home loan paperwork together. These days, you have to have all of your documentation together to be approved for a home loan. Be ready with W-2s, tax returns for the last two years, pay stubs, credit card balances, bank statements, addresses for the last seven years, 401k statements, profit and loss statement for the year if self-employed. Have them all together now so you can easily apply for mortgages.
  • Research realtors and first time mortgage lenders. We recommend that you interview several buyers’ agents. A buyer’s agent will help you to find the best home for you. He or she will represent you to ensure that you get the best deal and home for you. Also talk to several mortgage lenders. We recommend a mortgage broker who can offer you products from many lenders.

3 Months Out

  • Get pre-approved. If you have been following the above steps, you should have your credit score, loan paperwork and down payment in order. You also have researched agents and mortgage lenders. Now you need to get pre-approved. Work with your lender to run your credit and see if you can get a pre-approval for the loan that you want. You should borrow less than you can afford so that you are not house poor.
  • Shop for a home. Once you have been pre-approved, you can work with your buyer’s agent to help you find your dream home in your price range.

2 Months Out

  • Make an offer. It can take one or two months to close on your home. If you have a date that you need to move out, be sure to allow enough time to deal with any potential delays in closing.
  • Get a home inspection. Once the offer is accepted, you should have the home inspected. If something is found that needs to be repaired, this could delay the closing.

Last Month

  • Check that all financial documents are in order. If you have all of your documents together and a down payment saved, these steps are the simplest. Going over the mortgage document can be a process, but your agent can help you.
  • Get home owner’s insurance. You need to have home owner’s insurance in effect to close.
  • Do your final walk through. You should do a last walk through a day or two before you close. Make sure the home is in the same condition as when you first looked at it.
  • Get a cashier’s check for cash needed to close. Check that you have the exact amount of cash needed to close. This exact number can fluctuate from day to day. You cannot close a real estate transaction with a personal check, so make sure that you have a source lined up the day before closing to get the cashier’s check.

By following our checklist above, you will ensure that your first-time home buying experience is a smooth process.

The Bottom Line on First Time Home Buyer Loans

There is help available if you are buying your first home and have a limited down payment available. Talk to your mortgage lender today about the above programs. Buying your first home could be much closer to reality than you might think.

References: Bundrick, H. 7 Programs That Help First Time Home Buyers. (2015, May 20). Retrieved from https://www.nerdwallet.com/blog/mortgages/programs-help-first-time-homebuyers/ First Time Home Buyer’s Guide. (n.d.). Retrieved from  https://www.houselogic.com/buy/first-time-home-buyer/first-time-home-buyer-guide/

 

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.