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Homeownership is the dream of many Americans. However, it can sometimes seem out of reach, with mortgage approval hinging on satisfying strict requirements for credit history, down payment and other factors. Add in rising home prices and other economic factors, and the obstacles to homeownership can seem great for those who are looking to take a step up from renting. Fortunately, there are many home loan programs, operated by both banks and the government, that focus on aiding first-time homebuyers secure mortgages.

These home loans differ in some important respects from other mortgages, as they are designed specifically to assist first-time home buyers, and generally have relaxed criteria. For instance, applicants may be able to gain approval even if they have fair or bad credit. Lower down payment requirements are also a prominent feature of such mortgages. Other specifics of the loan, like the interest rate, structure, and repayment will may also be modified.

Prospective first-time homebuyers can turn to conventional loans, government-supported mortgages and even grant programs. Talking to a financial expert can help you identify the best options for a first-time homebuyer mortgage.

Who is a first-time homebuyer?

Let’s establish who a first-time homebuyer exactly is, as the definition may be a bit more broad than you think. Certainly, those who have never owned a home before are included in this definition. These may be growing families who are making the transition from renting to owning, or young professionals who have lived in apartments all their lives. But the term “first-time homebuyer” also extends to people who have owned a home before — just not in the last three years before seeking a mortgage. While state and lender-specific criteria may vary, in general, individuals who have not been homeowners for at least three years may qualify as first-time homebuyers.

What is a first-time homebuyer mortgage?

As opposed to grant and financial assistance programs — which are also maintained to help facilitate homeownership — a first-time homebuyer mortgage is a home loan that caters specifically to borrowers who benefit from relaxed qualification standards. Some of the ways in which these mortgages differ include:

  • Credit score: Many conventional loans have requirements for “excellent” credit scores, or may hike interest rates to compensate for the risk. Some mortgage borrowers may not have have qualified in the past because of their credit score; but it is possible to get a first-time homebuyers mortgage with poor and fair credit.
  • Down payment: The industry standard for down payment averages 20%. That can be a prohibitive upfront cost for many prospective homebuyers, who despite provable income, employment and cash flow can’t afford such a large lump sum payment. Reduced down payment requirements are a hallmark of first-time homebuyer programs, and may mandate that as little as 3% is put toward the home.
  • Interest rates: Borrower with middling credit or lack of previous homeownership may be charged higher interest rates. A program designed for this borrower demographic might grant them a rate discount in turn for completing financial literacy courses or some other class. There are grant programs, however, that can help subsidize interest costs
  • Fees: Closing costs can be a nasty surprise at the end of the process, especially for those who have not sought a mortgage before. Fees and expenses can add to the final bill. Many first-time homebuyer mortgage offerings come with reduced or waived fees.

Who offers first-time homebuyer mortgages?

There are a wealth of options for prospective first-time homebuyers, including conventional loans and government-supported mortgages. Borrowers can find conventional loans at a bank or other financial institution, like an online lender or credit union. These first-time homebuyer mortgages usually have a credit score requirement of at least 680, and you may be able to negotiate for favorable repayment terms or structures. For instance, a variable-rate mortgage that is interest-only grants you near-term cost savings in the rate and monthly payment. Such a loan transitions to a fixed-rate after the introductory period, allowing you to budget for paying down the premium.

On the other hand, government-sponsored mortgages may have even more attractive terms. Because the government secures the loan, the lending organization is more free to lower credit score or down payment requirements. First-time homebuyerss can get a mortgage through the:

  • Federal Housing Authority (FHA): This popular option offers 3.5% down payment and 580 credit score requirements, or 10% down with a credit score as low as 500. Assistance with closing costs is also possible.
  • Department of Veterans Affairs (VA): VA mortgages are available to active duty members of the armed forces, veterans, and certain qualifying surviving spouses. The primary benefit of such loans is no down payment.
  • Department of Agriculture (USDA): Used to incentivize homeownership in rural areas, USDA loans come with far relaxed credit and down payment standards. Many suburban areas also qualify.

One thing to be mindful of when seeking a first-time homebuyers mortgage is monthly mortgage insurance. Mortgage insurance is usually incorporated into the monthly payments, and is a risk measure that insures the lender against defaults. For borrowers, however, it can become a major cost that offers no benefit, but it is required for most government-backed loans. Homeowners with an FHA mortgage, for instance, generally cannot get rid of mortgage insurance unless they refinance into a conventional mortgage. That is one edge conventional mortgages have: if mortgage insurance is required, it will be terminated once the loan reaches a loan-to-value ratio of 78%.

Want to lean more about first-time homebuyer mortgages and how the various options fit your needs? Contact The Federal Savings Bank today.

This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.