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Loan Options for First Time Homebuyers

4-minute read
January 22, 2021

For many, becoming a first-time homeowner means accomplishing a life-long dream. With every step in the mortgage process, the excitement builds and leads up to the moment you make it official — closing day!

But before you sign on the dotted line, it’s important to understand and weigh your options.  Learning about home loans for first-time buyers can help you get the most out of your mortgage. 

Home Loan Types

Conventional Loans

Conventional loans are home loans offered through private lenders like banks or mortgage lenders. One of the key differences between conventional loans and other options (like FHA or VA loans) is that these loans aren’t backed by a government institution. First-time buyers with excellent credit can often expect lower interest rates than what’s typically offered for government-insured loans.

Conforming Loans

Conforming loans are conventional loans that adhere to the loan limits established by the Federal Housing Finance Agency (FHFA). These limits are an important part of the purchasing criteria for Fannie Mae and Freddie Mac — government-sponsored enterprises that acquire mortgages to encourage homeownership. The FHFA sets loan limits based on home prices within each county, which helps homebuyers acquire a mortgage that matches the market. In most areas across the country, the 2020 loan limit for a single-family home is $510,400, with a maximum of $765,600 allowed for high-cost areas. 

Non-Conforming Loans

Non-conforming loans are loans that don’t meet the requirements of GSEs like Fannie Mae and Freddie Mac. These loans can’t be purchased by Fannie Mae or Freddie Mac, and usually, come with higher interest rates than conforming loans. Non-conforming loans can be an option if you have credit history issues, a low credit score, or too much debt in relation to how much you earn. Or, if you are looking to purchase a home with a price tag too large to fit conforming loan limits.

Jumbo Loans

Non-conventional loans above the conforming loan limit are known as Jumbo loans. Mortgage lenders take on a larger risk with these loans, and the qualifications for approval are higher as a result. If you’re a first-timer with a high credit score and the income to match, a jumbo loan can help you live large. Specific thresholds on jumbo loans can differ based on where you plan to live, but your local mortgage broker will know exactly where they start and end. 

Government-Insured Loans

FHA Loans

FHA loans are backed by the Federal Housing Administration and are usually approved with smaller down payments and lower credit scores than a conventional loan. The leniency of FHA loan qualifications makes them a great option for first-time buyers who are improving their credit but don’t want to delay their purchase. If you plan to make a down payment of less than 20%, you’ll need to add private mortgage insurance (PMI) to your costs. But don’t worry, you can stop making PMI payments once you have 20% equity in your home. 

VA Loans

VA loans are home loans backed by the U.S Department of Veterans Affairs. Eligible members of the U.S military — veterans, active duty, and qualifying family members— have access to home loans that come with lower interest rates, and don’t require a down payment at all. 

If you’re planning to purchase your first home and you’ve served or are serving in the military, the advantages of a VA loan may be just too good to pass up.

USDA loans

USDA loans are insured by the United States Department of Agriculture and are geared towards buyers who plan to live in rural or low-income areas. If your vision of a dream home is a bit more rustic, a USDA loan could be perfect for you. These loans have some great advantages, but they do require that you meet income and location limits. Discussing the options with a local mortgage broker may help you find a faster route to approval. 

Rate-Based Repayment Options

Fixed-Rate Loans

Fixed-rate mortgages tend to be more popular than other loan types because of the consistency they offer borrowers. Your mortgage rate and monthly payment won’t change unless you decide to refinance, and a more predictable budget can help you ease into ownership more comfortably as a first-time buyer. 

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) offer a flexible rate that may go up or down as you progress through the life of your loan. ARMs usually start with a fixed interest rate for a set number of years, with the interest rate becoming a variable that can change each following year. If you know your first home won’t be your forever home, an ARM loan could be a great option as the interest rates tend to start on the lower end (and you’ll likely refinance or move before your initial fixed interest rate loan period ends).

There are plenty of home loan options for first-time buyers, and choosing the right one will largely depend on your unique situation and goals. But once you connect with a local mortgage broker, you’ll have an expert who’ll handle the loan shopping and help you find the perfect fit. 

Ready to get started? Search for a local mortgage broker today.