Types of First Time Home Buyer Loans

Are you confused about the different types of first time home buyer loans available today? It turns out that deciding it’s time to buy your first home is a lot more fun than working through the paperwork to actually buy that first house. The type of loan you select will influence your budget and available cash flow for many years to come and is critical to your future financial integrity.

While we offer a first-time homebuyer workshop, we’ll provide crucial information here to help you decide if you’re ready to buy a house and which type of loan is right for you. 

Picking the Best Types of First-Time Home Buyer Loans

There are a variety of factors that should influence the type of home loan you select, including:

  • Credit: Some types of first time home buyer loans are more accepting of buyers with less than perfect credit. Others have high expectations.
  • Down Payment: Unless you qualify for a VA loan, you will most likely need a down payment that equals at least 3% of the home’s value.
  • Location: Some types of first time home buyer loans are limited to rural properties.
  • Local Programs: Many states now have programs that help first-time buyers meet the requirements to buy a home. Some programs will set limits on the homes available for purchase.
  • Group Discounts: The Good Neighbor Next Door program offers discounts on homes for teachers and first responders. You may find other programs available for select groups. The number of houses included in the program may vary by location.
  • Expectations: You may get a better home loan offer if you’re willing to buy a foreclosed property. If you only want a new home in a prestigious neighborhood, you may have more limited home loan options.
  • Home Size: The size of the home you want to purchase may dictate the type of loan you’re qualified to receive.

Buying your first home is exciting, but we know it can also feel overwhelming. Keep reading to learn about the types of first time home buyer loans available today. We’ll provide a detailed introduction that should make selecting a home loan to feel less intimidating.

Conventional Mortgages

Conventional mortgages are backed by private financial institutions with no guarantees from the federal government. You may find them offered by banks, credit unions, and even institutions operating entirely online. While they may not have the same restrictions and requirements as government-insured mortgages, they also miss out on some of the perks offered by federal loan programs.

For example, you may need a much higher credit score and a down payment to qualify for a conventional mortgage. Lenders can set their own terms, including the requirement that you pay private mortgage insurance or provide additional financial documentation before approval.

You can secure conventional mortgages for 15 or 20 years, but most are written for 30 years. Most conventional mortgages have fixed rates, but adjustable rates are sometimes offered. We’ll talk more about interest rates in a moment.

Right now, let’s explore the two subcategories of conventional mortgages for a deeper understanding of how they work.

Conforming vs. Non-Conforming Conventional Loans

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are among the biggest investors in American real estate. They are government-supported entities that buy conventional mortgages from banks, credit unions, and other lenders. The catch is that they determine which loans qualify for their purchase. The primary qualification is that the dollar amount of the mortgage fall below a predetermined value, which is based on the home’s location.

Each year, Fannie Mae and Freddie Mac will set baseline conforming loan limits for different geographical areas. Loans that fall below that limit are considered conforming loans because they’re eligible for purchase. Loans that go beyond that limit are considered non-conforming because they’re worth too much for purchase.

To qualify for a conforming loan, you will need to meet additional criteria. For instance, you will need a credit score of at least 620, a low debt-to-income ratio, and a down payment of at least 3%.

Why would you want to meet those requirements to qualify for a conforming conventional mortgage loan? It comes down to savings. Conforming loans are typically offered with lower interest rates and may require a much lower down payment than a non-conforming loan.

Conventional Mortgage Pros

  • Potentially higher maximum loan limits than government-insured mortgages
  • Flexible terms – fixed rates, adjustable rates, hybrid for creative lending
  • Negotiable loan fees
  • Lower closing costs

Conventional Mortgage Cons

  • A higher credit score is often required for approval
  • Greater risk for the lender means stricter qualifications for the buyer
  • Interest rates may be higher than those offered by government-guaranteed loans

Should I Get a Conventional Mortgage?

There are three reasons you may consider a conventional mortgage loan:

  • You make too much money or are otherwise unqualified for government-insured mortgages.
  • You have a high credit score, low debt-to-income ratio, and enough of a down payment to secure a conventional loan offer that is more affordable than government-backed loans. Bonus points if you have an established relationship with a bank or credit union.
  • You want to buy a home that costs more than the maximum limits allowed for government-insured mortgages.

If you have a low credit score and struggle to get approved for a conventional loan, then a government-insured mortgage may work in your favor. Or you can start with us and our credit builder loan. 

two people doing paperwork for a new house

Jumbo Mortgages

Jumbo mortgages are non-conforming conventional loans that do not qualify for Fannie Mae or Freddie Mac purchase because of their high dollar amount. These loans are also too expensive to qualify for a government guarantee. This is one of the least likely types of first-time home buyer loans because the financial institution or lender absorbs all of the risks. If the buyer defaults on the loan, there is no help from the federal government to recover the loss.

Jumbo Mortgage Pros

  • Fixed and adjustable rates are often offered in addition to hybrid or creative plans
  • More negotiation is permitted without federal government requirements or restrictions
  • Less limitation on how much you can spend on your home as long as you have supporting income
  • Not limited to primary residences, so may work for vacation homes or secondary homes

Jumbo Mortgage Cons

  • A minimum required credit score is typically 700 or higher
  • Harsher limits on debt-to-income ratio often apply
  • Lenders often want to see sizable cash reserves for approval
  • More paperwork and documentation are often required
  • Some lenders require two home appraisals
  • Higher down payments and closing costs

Should I Get a Jumbo Mortgage?

You should only consider a jumbo mortgage if you can check off all of the following criteria:

  • You want to purchase a home that costs more than the baseline conforming loan limit for your geographical area.
  • You have the financial stability to support your decision to spend more money on a home.
  • You have enough cash on hand to cover at least one year of mortgage payments.
  • You can provide at least two or three years of tax returns, bank statements, and other supporting documentation.

Many first-time homebuyers cannot prove that they have the financial stability to support a high-dollar mortgage loan. Those that do qualify may still go with lower-priced homes that qualify for conforming loans because they don’t want to pay higher closing costs and interest rates.

You should first determine if you’re qualified for a jumbo loan. You can then weigh the pros and cons to determine if this is the best mortgage type for you at this time.

Government-Insured Mortgages

Government-insured or government-backed mortgage loans are guaranteed by the federal government, so they come with far less risk for the lending institution. A bank, credit union, or other lending institution issues and funds the loan, but protections are in place to ensure the institution can recover at least some of the losses in the event a buyer defaults on the loan.

The federal government offers multiple insured mortgage programs, all controlled by different governmental departments. The goal of each program is to help a specified demographic secure mortgage loan even if they struggle to get approved for conventional loans. Some of those demographics include people with lower credit scores, lower income levels, and veteran status.

While the qualifications for approval into each loan program are intended to protect consumers who may otherwise get overlooked by banks, they may also exclude some consumers who don’t fit the strict requirements. Let’s take a look at the three types of government-insured mortgages to see how that works.

Types of Mortgages Government-Insured Mortgages

There are three types of government-insured mortgages. They each have their own requirements, which are determined by one of three government agencies: Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or Department of Veterans Affairs (VA).

Let’s look at the requirements for each of these loans.

  • FHA Loans – Backed by the Federal Housing Administration, these loans are targeted to consumers at low to mid-income levels. The benefits include lower credit scores and down payments than most conventional loans. Mortgage insurance is always required for these loans, potentially increasing the cost of your monthly payments.
  • USDA Loans – Backed by the United States Department of Agriculture, these loans are targeted to consumers at low-income levels who want to purchase single-family homes in rural areas. The program includes subsidies that can drop interest rates to as low as 1%. Approval requirements are strict, including no collections conversions on your credit report within 24 months of application. Larger homes are less likely to qualify for this program.
  • VA Loans – Backed by the Department of Veterans Affairs, these loans are targeted to military veterans, active service members, and surviving spouses. The terms are among the best with no required mortgage insurance or down payment. Veterans with a qualifying disability may qualify to purchase an adapted home or to modify their home to accommodate for the disability.

Government-Insured Mortgage Pros

  • Lower down payment requirements
  • Lower credit score requirements
  • Lower closing costs
  • Reduced risk for lenders means easier approval for buyers
  • Faster, streamlined approval for buyers who meet a minimum credit score requirement

Government-Insured Mortgage Cons

  • Restrictions on properties qualified for purchase
  • Limited to FHA-approved lenders
  • Limits on funding source for the down payment
  • Mortgage insurance is required for FHA loans
  • Limited to primary residences
  • Income may disqualify some first-time homebuyers
  • May limit the size of the home you can buy

Should I Get a Government-Insured Mortgage?

FHA loans are among the most popular types of first time home buyer loans because they allow consumers with less income to qualify easily. If you have a credit score of at least 640, you could receive streamlined approval that moves you through the underwriting process quickly with far less documentation to prove your financial suitability.

If you struggle to get approved for a conventional loan, you may have better luck with a government-insured mortgage loan. Just keep in mind that you may need to purchase a smaller home or change the location of the purchased home in order to meet government requirements.

Instead of a new loan should you refinance your mortgage?

Types of Mortgage Loan Rates

Now that you’re familiar with the different types of first time home buyer loans, it’s time to talk a bit more about interest rates. Whenever you finance a home, you will pay interest to the financial institution funding the loan. Think of it as the institution’s incentive to hand over their cash on your behalf.

Interest rates are partially influenced by your credit score and debt-to-income ratio. The better your financial standing, the lower rates you may qualify to receive. That’s because poor financial histories are red flags that tell a financial institution that you’re more likely to default on your loan.

The federal government may also influence your interest rate by setting limitations on what lenders can charge under government-insured mortgage programs. Let’s look at some of the rate options you will run into when securing a first-time home loan.

Fixed-Rate Mortgages

Fixed-rate mortgages have a set interest rate that doesn’t change at any point of the loan. That means you have one monthly payment that doesn’t change unless you alter the terms of the agreement in some official manner. This is the interest rate structure used by most types of first time home buyer loans.

It’s common to see fixed-rate mortgages extend for 30 years, but 10- and 15-year fixed-rate mortgages are possible as well. Once you agree to the terms, you know what you must pay for your mortgage every month until the loan is paid in full. That makes this the most convenient way to secure a home loan.

The clear advantage here is the stability a fixed interest rate offers. No matter what happens economically, you don’t have to worry about fluctuations in your rate and thus your monthly payment. As long as you don’t borrow more than you can afford to repay and your financial status doesn’t change much, you have the security of knowing that you can afford to keep your home.

Should I Get a Fixed-Rate Mortgage?

If you don’t want to risk your mortgage rate skyrocketing in the future, you should get a fixed-rate mortgage. Most first-time homebuyers need the security that comes with a guaranteed monthly home payment.

Adjustable-Rate Mortgages

Adjustable-rate mortgages, also known as ARMs, have fluctuating interest rates. It starts off with a low-interest rate that many first-time homebuyers find attractive. Who doesn’t want to pay below-market interest rates on a home loan?

The catch is that the rate is adjusted at a set frequency and will go up with time. That means you have a higher mortgage payment to make each time the adjustment occurs. If you hold the loan for the full duration, you will end up paying prices that are much higher than the going rate for comparable fixed-rate loans.

There is an obvious disadvantage to securing an adjustable-rate mortgage: Your rate and payment amount will change with time. It’s a bit more difficult to budget for this type of loan, and you may eventually reach an interest rate that is beyond your budget. That puts your home in danger of foreclosure.

Is there a benefit to an adjustable-rate mortgage? Yes, if you can afford to pay your home off quickly. Making higher payments than is required by the agreement may allow you to pay the loan off while the interest rates are low. If those starting rates are lower than any fixed-rate loan you may have received, you could save money on the loan.

Should I Get an Adjustable-Rate Mortgage?

You should only consider an ARM if you have the financial means to pay the loan off quickly. Each time the adjustment period ends, you will face higher payments that can easily go beyond your budget.

Focus Federal First-Time Home Buyer Loans

The professionals at Focus Federal understand that buying your first home is confusing and often overwhelming. We try to simplify the process by offering education right here on our website, including a payment calculator to give you a quick idea of what a mortgage loan may cost you.

We also offer an informative class for first-time home buyers, and we’re always willing to look at your financial situation and provide guidance. Our goal is to help you buy a home that fits your lifestyle and family size as well as your budget.

If you’re ready to enjoy a better home buying experience, we welcome you to join us at Focus. We look forward to discussing your first mortgage loan in OKC.