Top Financing Options When Buying a Home for the First Time

Are you planning to purchase your first home? 

In 2022, roughly 26 percent of all home buyers in the US were first-time home buyers. 

Buying a home comes with numerous challenges. But unique obstacles can make the home purchase more difficult if you're a first-time buyer. Rising home prices, limited savings, and poor credit history are common hurdles you might encounter. 

With that in mind, preparing your finances is crucial. Part of being financially ready is understanding the financing options available to you and determining which one best fits your situation. 

We'll explore the top alternatives that can best help finance the purchase of your first home. But before we proceed, let's discuss the specific criteria to be eligible as a first-time homebuyer. 

Qualifications To Be Eligible as a First-Time Homebuyer

Buying a home for the first time can be challenging, but it has its upsides. First-time home buyers may qualify for specific benefits that are not always available to repeat buyers. 

Some advantages include lower down payments, special tax breaks, and reduced loan costs. However, you must meet a set of criteria before qualifying for first-time homebuyer benefits. 

Title 24 Code of Federal Regulations § 93.2 defines a first-time home buyer as an individual who hasn't owned a primary residence in the last three years before purchasing a home. It may also include a single parent or displaced homemaker who only owned a house with their spouse. 

Additionally, the mortgage lender and loan program may set other requirements to be eligible as a first-time home buyer, such as the following: 

• A credit score of at least 620

• A minimum of three percent down payment

• Less than 43 percent debt-to-income ratio

• Stable income 

• A two-year work history

These qualifications may vary depending on your lender and the type of loan you get. Hence, connect with a lender as early as possible to understand what you'll need to qualify for and enjoy the benefits of a first-time home buyer. 

Top Financing Options Available for First-Time Homebuyers

A variety of mortgage options exist for first-time home buyers. Understanding what they are can help you keep more money in your pocket. Remember that the best loan depends on your specific financial situation. 

Some of the top financing options worth considering include: 

Conventional loans

These mortgages are not offered or insured by the government. They may come with stricter lending requirements and more significant down payments. 

First-time home buyers who qualify for a conventional loan can save more in the long run. It has lower interest rates and no upfront mortgage insurance fee. But while it can be cheaper than the loans guaranteed by the federal government, a conventional mortgage is more challenging to secure. 

You'll need a strong credit history and higher down payments to qualify for this mortgage. A first-time home buyer can get approved for a conventional loan with a down payment of as low as three percent. However, you can expect to put down up to 20 percent. 

FHA loans

Alternatively, a first-time home buyer can easily qualify for an FHA loan. These types of mortgages are backed by the Federal Housing Administration (FHA), so they have lower credit scores and down payment requirements. 

You can get FHA loans with a credit score of as low as 580 and a 3.5 percent minimum down payment. But even with a credit score of 500, you can be eligible by paying a 10 percent down payment. Moreover, this financing option has no income limits and verification required. 

That makes FHA loans an ideal option for first-time home buyers, especially those with low credit scores or limited savings to pay for a down payment. But the downside is FHA loans are significantly capped, so you may receive enough financial assistance to purchase your dream home. 

USDA loans

A USDA loan is another excellent option for buying a home for the first time. It's a type of mortgage guaranteed by the US Department of Agriculture (USDA) that allows homebuyers to secure financing without a down payment. 

Besides having zero down payment requirements, USDA loans typically have lower interest rates. A USDA loan's monthly payment is generally cheaper than an FHA loan. Unlike FHA loans, USDA loans don't have loan limits, making it an excellent financing option for your first dream home. 

However, there are geographic and income requirements that you should meet to qualify for a USDA loan. That means the property you purchase with a USDA loan must be in an eligible area, so your options might be restricted. 

Ensure Financial Readiness Before Purchasing Your First Home

There's a lot to factor in when buying your first home. But the financial aspects are one of the most crucial things you must consider. Most first-time home buyers need a lump sum to purchase a home in a single cash payment. That's why getting mortgages is essential for most home buyers. 

Suppose you're eligible for a mortgage loan. You may still need a sizable downpayment, typically a minimum of 20 percent of the home's purchase price, to get the best deal. Although some loan programs don't require a down payment, you'll need funds to cover closing costs. 

Add to that the future expenses of owning a home, such as insurance, property taxes, utilities, repair, and maintenance costs. With all that in mind, you must research and prepare financially before purchasing your first home.