Many such programs are administered at the state, county, and local levels, so the specific terms and requirements can vary, depending on where you live. If you qualify, there are a lot of benefits of using a first-time homebuyer program—but there are some drawbacks you should consider as well.
Pros and Cons of First-Time Homebuyer Loans
Pros Explained
Low down payments: First-time homebuyer programs usually come with much lower down-payment requirements. For instance, if you take out a U.S. Department of Agriculture (USDA) loan, there are no down-payment requirements.Lower credit scores accepted: These programs may be an easier way to qualify for a mortgage, especially if you’ve struggled with poor credit. If your credit score is above 500, you’re eligible to apply for a Federal Housing Administration (FHA) loan, for example.Help with closing costs: Some programs also will assist with closing costs. And if you take out an FHA loan, you can use a gift from friends or family to help cover your closing costs.
Cons Explained
Minimum property requirements: Many first-time homebuyer programs have minimum property requirements designed to protect the homebuyer and the lender. For example, Veterans Administration (VA) loans come with certain conditions to determine whether a home is safe and structurally sound.May come with mortgage insurance: Although you’ll pay less money in the form of a down payment, you may be required to take out mortgage insurance. When you accept an FHA loan, you’re required to pay an upfront premium and monthly insurance in addition to your mortgage payment.Income limits: To qualify for some of these programs, your household must meet certain income requirements. USDA loans, for one, come with very specific income limits, depending on where you live and how many people are in your household.
Special programs exist for veterans and public-servant occupations such as teachers, first responders, and doctors. For instance, the Good Neighbor Next Door program provides 50% off the home’s purchase price for teachers, firefighters, and emergency medical technicians (EMTs) willing to live in a targeted revitalization area.
What You Should Consider About First-Time Homebuyer Loans
Buying a home may come with many unexpected costs, and the process may feel overwhelming for first-time homebuyers. However, every state offers some type of first-time homebuyer program that can help you save money on things like your down payment and closing costs. You can ask your real estate agent or mortgage lender if they know of any first-time homebuyer programs you may be eligible for. You also should check with your employer to see if any programs are available for your profession. One thing to keep in mind about first-time homebuyer programs is that there will be specific requirements you have to meet to qualify. Some programs require that your income is below a certain limit, while others require you to take a homebuyer education course. Find out what the specific rules are and whether you meet the requirements. Also consider any additional costs that may come with that program. For example, you may be granted a lower down payment, but you may have to purchase mortgage insurance. So you’ll pay less money upfront, but this will add to your monthly costs. But if you sign up for an FHA loan, your down payment could be as low as 3.5% if your credit score is 580 or higher. If your credit score is 500-579, you’ll have to make a 10% down payment because you’re seen as more of a lending risk. Home Mortgage Insurance,” Page 7.
