Are you looking to buy your first home? Stepping into homeownership is exciting, but understanding your payment options is vital for a stress-free purchase! In this blog post, we’ll cover a few things you need to know about buying a home.
The Challenge for First-Time Homebuyers
Buying a home for the first time is a big step and the process can sometimes be daunting. The extensive financing options, credit requirements and down payments can make the dream of homeownership feel hard to reach. The down payment, in particular, is a stumbling block for many.
Lenders have a variety of mortgage options, from traditional loans to low-down payment loans.
- Fixed-rate mortgage: This is a traditional mortgage with a fixed rate for the entire term, generally 30 years.
- Adjustable-rate mortgage (ARM): This loan has an initial fixed rate. After the fixed-rate period ends, the rate becomes variable and adjusts every year.
As a first-time homebuyer, you may be able to take advantage of programs that can help get you into your first home without having to make the traditional 20% down payment.
Low Down Payment Programs
Government-backed loans allow homebuyers to purchase a home with a low down payment.
FHA Loans
These loans are popular among buyers because you don’t need much cash to get started, and they’re not overly strict on credit scores. However, you must pay for mortgage insurance. FHA loans are especially helpful for people with lower incomes or those buying for the first time. They simplify the approval process compared to other loans. Here are the key details:
- With a credit score of 580 or above, you only need to put down 3.5%.
- If your credit score is between 500 and 579, a 10% down payment is required.
- Expect to pay a Mortgage Insurance Premium (MIP) every month, which could be up to 1% of your loan amount annually. Or work with a lender that offers a mortgage loan program with lender-paid MIP – potentially saving a first-time homebuyer hundreds off their monthly payment. Speak with your mortgage lender to learn more.
- You’ll need to work with an FHA-approved lender, like Amegy, to get your loan.
VA Loans
Run by the Department of Veterans Affairs (VA), this program helps U.S. military vets get home loans. While banks and mortgage companies handle the actual lending, the VA backs up part of the loan, helping you get favorable terms. With a VA loan, there is no need for a down payment or private mortgage insurance. To qualify:
- The home should be occupied by a veteran or the living spouse of a service member.
- The potential homeowner should have a good credit score, a stable income and a valid Certificate of Eligibility (COE) confirming their veteran status.
USDA Loans
Living in a rural or suburban area? The U.S. Department of Agriculture (USDA) provides its own home loan program that helps people with lower to moderate income. This program also offers up to 100% financing.
Good Neighbor Next Door
Run by the U.S. Department of Housing and Urban Development (HUD), the Good Neighbor Next Door program is for police officers, firefighters, EMTs and teachers from preschool to high school. If you work in one of these jobs, you can purchase a home in a “revitalization area” at half the price, provided you live in the home for at least three years. You can search for properties in your state on the program’s website.
State and Local Programs
Many states and cities provide helpful programs designed specifically for first-time homebuyers. These may include advantages such as reduced interest rates, tax incentives or assistance with making a down payment. For detailed information regarding the programs available in your respective area, please consult the U.S. Housing and Urban Development’s state information website for programs in your area.
How to Qualify for Low Down Payment Programs
Typically, you’ll need a credit score of at least 620 and an income that meets the program’s standards. Your debt-to-income ratio (how much debt you have compared to your income) is also something many programs look at.
Additional requirements include:
- Your new home should be in a city or county specified by the program.
- Usually, these programs are for first-time homebuyers.
- You’ll likely need to take a class that covers the basics of home buying and managing your finances.
- You will be required to live in your new home for a set number of years, which vary depending on the program you choose.
Be sure to check the specific requirements of each program, as they can vary.
Considerations Before Opting for Low Down Payment Programs
Low down payments are tempting but take a minute to consider the interest rates and mortgage insurance. Planning for the long term? Understand the total cost of your loan to avoid any surprises down the road.
Taking the Next Step
If you’re ready to make your move, consider getting pre-qualified so you’ll know how much home you can afford. Here are some benefits to getting pre-qualified:
- It verifies you’re likely to secure the loan, reducing the risk of unexpected letdowns.
- You’ll have a clearer picture of the amount available to borrow, allowing you to focus on properties within your budget.
- Sellers see you as a committed buyer when pre-qualified, enhancing your negotiating stance and possibly receiving improved service.
Keep in mind that pre-qualification isn’t preapproval. While pre-qualification gives you an idea of your home purchasing power, preapproval is a provisional nod to lend a set amount of money — not a guarantee.
Buying your first home can seem complicated. Reach out to our team of bankers to help you along the way. Our friendly bankers at Amegy Bank will be happy to assist you.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Amegy Bank.