Are you a first-time homebuyer with very little money to put down on a home? You might think you will have a tough time finding a mortgage. Luckily, there are several government programs available to help you get the financing you need. Not only do they have low down payment requirements, but you also get the benefit of flexible guidelines.
Below we help you understand the best government programs for first-time homebuyers.
FHA Loans – The First-Time Homebuyer’s Loan
FHA loans used to be known as the first-time homebuyer’s loan. Today anyone can use them, but they are still a great option if you have little money to put down. FHA loans require a 3.5% down payment. On a $200,000 home, that means $7,000. While even that might sound like a lot, there’s even more good news – you can receive 100% of the down payment as a gift. If you have a relative or employer willing to provide you with funds for your down payment, you can use them as long as you follow the FHA guidelines.
Before you receive a gift for the down payment, you’ll need a gift letter that states:
- The donor’s name and address
- The reason for the gift
- The address the money is meant to be used for
- A statement showing that the money is a gift and not a loan
- Signed and dated
The donor must also provide proof of the funds’ origination. Usually two months of bank statements suffice. But if the donor deposited the money within those two months, they may have to provide proof of where the money came from, such as the sale of an asset. Lenders need to know beyond a reasonable doubt that the money isn’t a loan.
On your end, you’ll have to document receipt of the funds by depositing them in the checking account you’ll use for your home purchase. You must then provide the lender with a deposit receipt and copy of the check.
Aside from the down payment, FHA loans have simple guidelines including:
- 580 credit score
- 31% housing ratio
- 43% total debt ratio
- 2-years stable employment
You may even find lenders willing to accept credit scores as low as 500, but your down payment requirements then increase to 10% rather than 3.5%. If you receive gift money, at least 3.5% of the down payment must come from your own funds.
FHA loans charge an upfront mortgage insurance fee of 1.75% of the loan amount. They also charge annual mortgage insurance equal to 0.85% of your loan amount each year. Your lender will divide the cost up over the year (divide by 12), adding the cost to your mortgage payment for the life of the loan. The insurance premium decreases slightly each year as you pay the principal balance of your loan down.
USDA Loans – The Rural Homebuyer’s Loan
Do you prefer rural life to city life? You may be in luck with the USDA loan as first-time homebuyer then. USDA loans don’t require a down payment – you can borrow 100% off the home’s purchase price. This is as long as the home is considered ‘modest,’ and your household income doesn’t exceed 115% of the average income for the area.
The USDA considers total household income when determining your eligibility for the home loan. This differs from qualifying for it. You qualify based on the borrower and co-borrower’s income. If, however, you have other adults living with you, the USDA will make sure the total household income is modest enough to need the USDA loan services.
Aside from the no down payment requirement, the USDA has the following flexible guidelines:
- Minimum credit score of 640
- Maximum housing ratio of 29%
- Maximum total debt ratio of 41%
- Stable employment for 2 years
The home you purchase must also be located within the USDA’s rural boundaries. While rural sounds like out in the middle of nowhere, the USDA has loose boundaries when it comes to determining which areas are rural and which aren’t. The last requirement is that you must not be able to secure financing from any other program, such as the FHA or VA loan.
The USDA charges upfront mortgage insurance as well as annual mortgage insurance, just like FHA loans. The USDA charges 1% of the loan amount upfront and 0.35% of the loan amount on an annual basis. The USDA divides the annual insurance up over a series of 12 months just like the FHA does.
VA Loans – The Veteran’s Loan
If you served in the military, you may want to explore your eligibility for a VA loan. If you had an honorable discharge and served at least 181 days during peacetime or 90 days during wartime, you may be eligible.
If this is the case, you don’t need a down payment, and you get flexible VA underwriting guidelines:
- Minimum 620 credit score
- Maximum 43% total debt ratio
- Stable employment/income for 2 years
- Meet the disposable income requirements for your family size and location
The VA provides 100% financing as long as you can prove that you have enough money left each month to cover the daily cost of living without having to sacrifice. The VA doesn’t put a lot of emphasis on your debt ratio or even your credit score. They focus on the disposable income as they feel it’s a better determination of your ability to afford the loan.
VA loans have an upfront fee of 2.15% of the loan amount for standard veterans and 2.4% for those that served in the National Guard or Reserves for at least six years. The VA doesn’t charge annual mortgage insurance, though.
First-time homebuyers have several government loan programs at their disposal. This makes it easy to afford your first home even if you don’t have a large down payment or perfect credit. Of course, the better your qualifying factors, the lower the interest rate and fees lenders may charge.