As a first-time home buyer, you have plenty of home loan options. But the most popular options are first-time home buyer loan programs, which are available at the federal and state level.
As you weigh your options, it’s easy to find out about the advantages offered by first-time home buyer loans. But it’s equally important to consider the disadvantages before jumping into this major financial commitment.
Let’s take a closer look at the pros and cons of first-time home buyer loans so you can decide whether or not these are a good fit for your situation.
What is a first-time home buyer loan?
First-time home buyer loan programs are set up at the federal and state level to provide a more affordable entry point into homeownership. In most cases, you are considered a first-time buyer if you haven’t owned a home in the last three years.
Popular first-time home buyer loans
As a first-time home buyer, there are plenty of mortgage options available. But here’s a look at some of the most popular home loans for new buyers.
- FHA loans – You don’t necessarily have to be a first-time buyer to get an FHA loan. But it is one of the most popular options for first-time buyers. Buyers only need to put down 3.5% and you can qualify with a minimum credit score of 500.
- HomeReady Mortgages by Fannie Mae – HomeReady requires a minimum down payment of 3% for first-time and repeat homebuyers. One of the extra perks of this program is that you can use income from a roommate to help you qualify for the mortgage.
- Home Possible Mortgages by Freddie Mac – Home Possible mortgages are designed for first-time and repeat buyers with relatively low incomes and credit scores. Like the HomeReady program, you can use income from a roommate to help you qualify for the mortgage. But you’ll need a credit score of at least 660.
- Local first-time buyer programs – Many states offer specialized mortgage options for first-time buyers through Housing Finance Agencies. Depending on your state, you might find a very attractive opportunity to make your dream of homeownership a reality.
- Specialized non-profit programs – Depending on your location, you might have access to specialized mortgages that offer low costs and attractive terms.
Pros and cons of first-time home buyer loans
As with all financial decisions, there are some pros and cons to consider before taking out a first-time home buyer loan. Here’s what you need to keep in mind.
Pros of first-time home buyer loans
Let’s start with the advantages.
- Lower down payment requirements: If you don’t have the money for a large down payment, first-time home buyer loans offer an opportunity.
- Less restrictive credit score requirements: Typically, you’ll find these loans have lower minimum credit score requirements. However, you cannot have a foreclosure on your report within the last three years.
- Less restrictive debt-to-income ratio (DTI) requirements: For example, the FHA loan generally allows a DTI of up to 43%. That’s a relatively lenient underwriting requirement.
- Low interest rates: Mortgage rates are typically lower for first-time home buyer loans. For example, FHA loans usually offer lower interest rates than conventional mortgages.
Cons of first-time home buyer loans
Now for the downsides to a first-time home buyer’s loan.
- Lower loan amounts: The loan limits on these loans may be lower than a conventional loan. For example, an FHA loan has a lower loan limit than a conventional loan.
- Mortgage insurance requirements: Although the low down payment option is attractive, you’ll be stuck with paying private mortgage insurance if you put down less than 20%. With an FHA loan, you’ll be stuck with PMI for the life of the loan if you put down less than 10% unless you refinance the loan.
- Income limits: At the state level, many first-time homeownership programs have income limits.
- Limited home equity to start: If you only put down 3.5%, you won’t have too much home equity to get started.
When to consider a first-time home buyer loan program
A first-time home buyer loan program isn’t the type of mortgage for everyone. Let’s explore when this home loan option might be right for you.
Although these loans are classified as first-time homebuyer options, that’s not necessarily true. Most federal and state first-time home buyer loan programs will work with you if you haven’t had any ownership interest in a property for the past three years.
If you meet that initial eligibility requirement, then the next step is to consider how much you want to put down for your home purchase. If you don’t have 20% to put down, then you’ll have to pay PMI whether you go with a first-time home buyer program or another loan type. But the more flexible credit requirements of a first-time home buyer program could be the foothold you need to make your homeownership dreams a reality.
Beyond the down payment, you’ll also need to consider the loan limits attached to first-time home buyer programs. These are significantly lower than conventional loan limits. So, if you were planning to buy in an expensive zip code, then a first-time home buyer loan might not be the right fit.
Pros and cons of first-time home buyers loan FAQ
Is it worth using a first-time home buyer loan?
A first-time home buyer loan comes with many financial benefits. First and foremost, the less stringent borrower requirements could help you obtain a home loan even with a relatively low credit score. It could be the difference between landing a new home and sticking to renting.
Beyond that, first-time home buyer loan programs can help you access down payment assistance grants and low-interest loans to cover closing costs. Depending on your situation, that could mean a big boost to your bottom line. Here’s where you can find out more about down payment assistance programs.
What should a first-time home buyer avoid?
The most important mistake first-time home buyers should avoid is buying more home than you can comfortably afford. You don’t want your monthly mortgage payment to eat up too much of your monthly budget.
Another thing to avoid is skipping a preapproval, especially in a competitive market. Preapproval doesn’t guarantee the lender will finalize the loan. But a preapproval can help you stand out from the crowd as a serious buyer that’s ready to close on a home.
In fact, most real estate agents will require this documentation upfront before helping you nail down a search for a home with the right purchase price.
What is the advantage of being a first-time buyer?
As a first-time buyer, you can tap into low down payment loans, down payment assistance programs and grants on forgivable loans. Although your eligibility varies based on your financial situation, first-time buyers have special access to perks that can save them money.
What are the pros and cons of an FHA loan?
An FHA mortgage is a government-backed loan through the Federal Housing Administration. It’s one of the most popular options for first-time home buyers. The major advantages of an FHA mortgage loan include a low down payment requirement, flexible credit standards and better interest rates. However, FHA loans come with higher mortgage insurance premiums and restrictive loan limits.