Financing Options for a First Time Home Buyer

In theory, there are numerous financing options available to anyone intending to buy a home. In reality (and perhaps ironically), the richer one is the more financing alternatives they have access to. That means first time home buyers especially those on the lower rungs of the income ladder will find it harder to zero in on financing avenues that they qualify for.

Fortunately, there are a number of possibilities, some well-known and some not as much, that a first time home buyer can pursue while charting their way to finally owning their first home. We look at these options below.

FHA Loan

The Federal Housing Administration (FHA) is an arm of the Department of Housing and Urban Development. FHA loans are referred to as such because the FHA insures the mortgage. The FHA is not the provider of the loan but simply gives commercial lenders the assurance that they’ll cover the cost in the event that the borrower defaults on the mortgage.

FHA loans usually have smaller down payments, attractive interest rates and relatively low closing costs. The better your credit score, the more you stand to gain from an FHA loan. Persons with credit scores of at least 580 could be required to provide as little as 3.5% of the purchase price as down payment.

USDA Loan

Many Americans aren’t aware that the US Department of Agriculture (USDA) has a homebuyer program. Whereas the program is primarily geared towards certain rural areas, you don’t have to be a farm owner to qualify for a USDA loan. Just like the FHA loan, the USDA guarantees the loan.

Loan repayments are fixed and the buyer may not even be required to make a down payment. If you have a credit score of at least 640, you’re likely to go through the approval process quickly. Below that, the lender may ask for additional documentation to further examine your credit history.

Note that there are income restrictions on who can qualify though these will vary from region to region.

VA Loan

The Department of Veterans Affairs (VA) assists veterans, active-duty members of the military, and surviving spouses buy homes. The VA insures part of the loan thus enabling lenders to offer attractive terms.
VA loans have no down payment and have lower interest rates. There’s no minimum credit score for eligibility and applicants won’t be required to pay private mortgage insurance. In the event the home buyer falls on hard times and is unable to keep up with payments, the VA can negotiate new and more flexible terms on the borrower’s behalf.

Freddy Mac or Fannie Mae

Freddie Mac and Fannie Mae are funded by the federal government and work with commercial lenders to offer mortgage alternatives that are convenient for lower income households.

With the backing of Freddie Mac and Fannie Mae, lenders can accept minimal down payments (as low as 3%) and offer friendly interest rates. Through the HomePath Ready Buyer program, Fannie Mae also provides education for first-time homebuyers.

EEM or Green Mortgage

An energy-efficient mortgage (EEM) is designed to finance the refurbishment and renovation of a home in order to make it more environmentally friendly. The US government supports green mortgages by insuring them through VA or FHA programs.

The key benefit of this loan is that it allows the homeowner develop an energy-smart home without the need to make the large down payment that would otherwise be required. The additional cost is aggregated into the primary loan.

Some of the improvements that can be covered by EEM include installation of modern heating-cooling system, new insulation or double-paned windows.

Loan Programs and Grants

The above programs are driven by the federal government. However, first time home buyers may also be eligible for various local financing programs and grants at the state and city level. As these will vary from one state or city to the next, it’s not possible to cover them all here.

Instead, a first time home buyer should spend time examining the relevant state or city department websites for information on housing programs and grants available in the area. If you find this search for information a little overwhelming, it would be best to contact a local real estate agent or housing counseling agency.

For instance, if you are looking to buy property in Dallas (you could start your search here – Dallas Apartments For Rent | Search By Neighborhood), engaging a Dallas real estate agent could help you understand the full spectrum of financing opportunities at your disposal.

In recent years, various news articles, reports and studies have indicated that the dream of owning a home is getting harder to realize. While this is in part due to stagnating wages, a significant part of this struggle is because of a lack of awareness. Owning your first home will require sacrifice but these financing options can make the journey more bearable.

 

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