Loans for Homes

Home Loan Options for First-Time Homebuyers

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If you’re in the market for a home, there are plenty of loans available, especially if you’re a first-time homebuyer. Before you get preapproved and prequalified, it’s a good idea to explore all your options so you can choose the best loan for your budget and needs. Below, we’ll dive into the different types of home loans.

Key Takeaways

  • There are many types of home loans designed to meet the needs and preferences of different homebuyers.
  • Compared to conventional mortgages and jumbo loans, government-backed loans such as FHA loans, USDA loans, and VA loans are easier to qualify for.
  • Your home cost, finances, and future plans will help determine the best loan.

Types of Home Loans

There are several types of loans you can choose from for your first-time home purchase including:

Conventional Home Loan

A conventional home loan is a good option if you have good credit and a substantial down payment. Conventional loans are offered by private lenders such as banks and credit unions. Many conventional loans are also “conforming loans” and must observe the loan limits set by the Federal Housing Finance Agency (FHFA) as well as other requirements set by Fannie Mae and Freddie Mac, the government-sponsored entities that purchase most mortgages originated in the United States. A non-conforming conventional loan does not have to adhere to these limits and requirements.

In most parts of the U.S., the 2022 conforming loan limit for one-unit properties is $647,200. The FHFA changes the limit each year to adjust for inflation.

You may be able to put as little as 3% down on a conventional home loan. A down payment of 20% or more will allow you to avoid paying private mortgage insurance (PMI). This insurance protects the lender in case the borrower defaults. If your down payment is less than 20% of the sales price, you’ll have to pay a PMI premium each month until you reach an 80% loan-to-value (LTV) ratio.

FHA Loan

Insured by the Federal Housing Administration (FHA), an FHA loan is worth considering if you don’t have a large down payment or the best credit. You can take out an FHA loan with a minimum FICO score of 580 as long as you put 3.5% down. If you have a down payment of at least 10%, a score of 500 is acceptable.

Although they don’t require a large down payment, FHA loans come with two mortgage insurance premiums. You’ll pay one upfront, which is equal to 1.75% of the loan’s value, and the other on an annual basis. The annual premium varies depending on the length of the loan, the loan amount, and your down payment.

There is a limit to FHA loans that varies by county. In most areas of the U.S., the 2022 limit is $420,680.

VA Loan

If you’re part of the military community, a VA loan is a great way to purchase your first home. VA loans are created for active-duty and veteran military members and their families. The greatest benefit of a VA loan is that you don’t have to put any money down or pay mortgage insurance. You will, however, have to pay a funding fee, which is between 1.4% and 2.3% of the loan amount for first-time homebuyers.

VA loans offer the following benefits:

  • Better terms and interest rates than those offered by private lenders
  • Allow you to borrow up to the conforming loan limit without a down payment (and more, if providing a down payment)
  • Don’t carry a premium or require private mortgage insurance
  • No penalty fee for paying off the loan early

USDA Loan

A loan either directly from or insured by the U.S. Department of Agriculture (USDA) might be a good fit if you’re a low- to moderate-income borrower and interested in buying a home in a rural area. To pursue a USDA loan, your home must be in a USDA-eligible area. You’ll also need to meet certain income limits, which vary by county. While some USDA loans don’t require a down payment, you can expect an upfront fee and an annual fee.

Jumbo Loan

If you hope to buy an expensive home and have a high credit score and large down payment, a jumbo loan is likely your best bet. Jumbo loans are loans that fall outside of the FHFA limits ($647,200 in most areas of the U.S.). Because they carry a greater risk to lenders, the cost of borrowing is often higher for jumbo loans. However, in some areas of the country where housing prices are high, such as New York City and San Francisco, they may be your only option.

Fixed-Rate vs. Adjustable-Rate Loans

Fixed-rate mortgages keep the same interest rate over the life of your home loan, so your mortgage payment will always stay the same. Adjustable-rate loans have fluctuating rates that can go up or down depending on the market. Many of them have a fixed rate for a few years, then change over to an adjustable rate for the remainder of the term.

An adjustable-rate loan may be a smart option if you want smaller payments early on, or you will only live in your home for a short period of time. A fixed-rate mortgage should be on your radar if you’ll likely stay in your home for a while or have a tight monthly budget and don’t know if you’ll be able to afford higher payments in the future.

With conventional loans, jumbo loans, VA, and FHA loans, you can choose from a  fixed rate or adjustable rate. USDA loans are only available at a fixed rate.

How To Choose the Best Loan for Your Home

There are a number of factors to consider when trying to determine the ideal loan for your situation, including:

  • Potential home cost: The cost of your home will play a vital role in your mortgage payments. Ask yourself what type of place you hope to buy. Is it a fixer-upper in a low-cost-of-living area, a forever home in an expensive city, or something in between? Remember: Unless you’re using a VA loan, if you put less than 20% down, you’ll have to pay a monthly insurance premium.
  • Your finances: Your credit as well as the amount of money you have saved up for a down payment can affect your loan options. If you have good credit and a large down payment, for example, you might choose a conventional or jumbo loan. You may opt for a government-backed loan such as one from the FHA, VA, or USDA if you’re strapped for cash and have fair or poor credit.
  • Your future plans: Circumstances like your career or life events such as getting married or having a baby will influence how long you stay in your home. Decide whether you wish to live in your new home for a few years or a few decades.

You can compare your options and investigate how different scenarios will affect your monthly housing payment with our mortgage loan calculator.

Frequently Asked Questions (FAQs)

How do you find a home that qualifies for a USDA loan?

The USDA website has an eligibility tool you can use to find a home eligible for a USDA loan. All you have to do is type in the address of a home that interests you. Once you do, the resource will tell you whether or not the home qualifies.

Where can you get a loan for a mobile home?

Your mobile home and financial situation will determine the ideal financing option for you. You may consider an FHA loan, a VA loan, a USDA loan, Fannie Mae’s MH Advantage program, Freddie Mac’s CHOICEHome program, a chattel loan, or a personal loan.

How do construction loans work for new homes?

With a construction loan, the builder will receive the funds in “draws,” which correspond to different phases in the construction process. The first draw, for example, may occur during the framing stage. The next draw may be when the drywall or HVAC systems are installed. A construction-to-permanent loan is a single loan that funds construction, then converts into a mortgage. In an end loan, the borrower would still have to take out a separate mortgage to pay off the house.

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Article Sources

  1. Consumer Finance Protection Bureau. “Conventional Loans.”

  2. Federal Housing Finance Agency. “FHFA Announces 2022 Conforming Loan Limits.”

  3. Department of Housing and Urban Development. “Section A. Borrower Eligibility Requirements.”

  4. Department of Housing and Urban Development. “Appendix 1.0 Mortgage Insurance Premiums.”

  5. Department of Housing and Urban Development. “FHA Mortgage Limits List - FHA Forward.”

  6. Department of Veteran Affairs. “VA Funding Fee and Closing Costs.”

  7. Department of Agriculture. “Single Family Housing Direct Home Loans.”