Owning a home is part of the American dream. However, barriers like not having a big enough down payment or good enough credit can keep people from obtaining a mortgage to buy their first home. A first time homebuyer loan puts a mortgage and homeownership within reach of more people by removing some of the obstacles that typically stand in the way of new buyers. If you’re in the market for your first home and haven’t had any luck getting approved for a standard mortgage, a first time homebuyer loan might be a good option for you.
Smaller down payment
The ability to make a smaller down payment can make a first time homebuyer mortgage appealing. The down payment can be as low as 3.5 percent. Some first time buyers put down up to 5 percent. Along with not having to put down a large amount to get the loan, you can also get help with getting the funds for the down payment. Your family can give you money to cover the costs of the payment, for example.
Bigger mortgage insurance payment
You might be able to put less down with a first timer’s loan, but you do have to make up for it in some way. Loans with down payments of less than 20 percent require private mortgage insurance, which protects the lender in case you don’t make your payments. Usually, you’re responsible for paying the premiums on the insurance until the amount left on your loan’s principal is less than 80 percent of the value of your home. Private mortgage insurance might seem like a small price to pay for a loan, but remember that it’s not actually helping you pay down the mortgage and, in the end, is just another fee.
Lower credit requirements
Since first time buyer loans are guaranteed by an agency such as the Federal Housing Administration, the credit requirements on such loans are usually a little less stringent. You might find that you can get prequalified for a first time buyer loan even if your credit score is in the low 600s. Some loan programs will also accept alternative credit histories or scores. Although the programs accept people with less-than-excellent credit histories, most first time buyer programs don’t charge higher-than-usual interest rates.
Loose definition of “first”
Even if you don’t think you qualify as a first time buyer, you might. The U.S. Department of Housing and Urban Development has a pretty flexible definition of a first time homebuyer: anyone who hasn’t owned a home in three years, or a single person who has only previously owned a home with a spouse.
First time homebuyer loan programs can be a great way to get your foot in the door of homeownership. As with any loan, it’s worth weighing the pros and cons to find out if a first time buyer mortgage is right for you.
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