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Types of home loans for first-time buyers 

 April 24, 2021

By Scott Teesdale  

minutes read time

For first-time home buyers, there are five different types of home loans that are most popular. These five loans give first-time buyers some options to choose from:

  • FHA loan
  • USDA loan
  • VA loan
  • Conventional loan (Fannie & Freddie Mac loans)
  • Home renovation loan

These five types of home loans can save first-time buyers money, prevent common mortgage mistakes, and provide options.

What is the best loan for first-time homebuyers?

A Federal Housing Administration (FHA) loan is commonly considered the best loan for first-time homebuyers because of its low upfront costs and lower credit score needed to qualify. An FHA loan is provided by an FHA-approved lender and is considered federal assistance. Buyers need a credit score of at least 580 to qualify for an FHA loan. 

Most first-time home buyers use this loan to aim for a down payment of 3.5% on their homes, which is great for first-time homebuyers who might be struggling with saving up enough money for a bigger down payment.

Since FHA insurance protects mortgage lenders, it allows them to offer below-average interest rates and lower down payments. This is attractive to first-time homebuyers with low income. 

What is the most affordable loan for rural homebuyers?

If you’re looking to buy a home but you don’t have that much money saved up, a Rural Development Guaranteed Housing (USDA) loan can save you money, but it comes with some restrictions. 

For starters, a USDA loan guarantees that home buyers can buy a home with nothing down on the property. It’s covered by the loan. The loan also covers the closing costs of purchasing a home and is flexible for buyers with lower credit scores such as a 580. On top of that, USDA loans have lower interest rates than most other loans. This makes a USDA loan a great option for homebuyers who don’t have a lot of money but still want to buy a home. 

However, there are some restrictions first-time homebuyers need to be aware of. The first is that buyers are restricted to purchasing homes in rural areas. The USDA definition of a rural area is “any area other than a city or town that has a population of greater than 50,000 inhabitants; and the urbanized area contiguous and adjacent to such a city or town.”

Additionally, only single-family homes can be purchased and the income requirement of four people or less living in that home needs to be less than $76,000 a year. If you can meet all of these requirements then you can purchase a home with very little money to your name.

What is the best first-time home loan option for military veterans?

If you’re a military veteran and you’re searching for a home then a VA loan will be your best option. It’s from the U.S. Department of Veterans Affairs and it helps veterans purchase homes by not requiring them to pay any down payment or mortgage insurance. 

According to the U.S. Department of Veterans Affairs, to be eligible for a VA loan you must meet one or more of the following requirements: 

  • Served 90 consecutive days of active service during wartime;
  • Served 181 days of active service during peacetime;
  • Served 6 years of service in the National Guard or Reserves;
  • Spouse of a service member who has died in the line of duty or as a result of a service-related disability.

What is the easiest loan for first-time buyers to get approved for?

Government-backed conventional loans, otherwise known as Fannie Mae or Freddie Mac loans, are the easiest loans to get approved for because the government guarantees the loan through a program created by Congress to help home buyers obtain a home mortgage.

These types of loan programs were created to buy out loans from banks and hence approve more people. They have competitive interest rates and low down payment options for buyers.

Most bank lenders prefer to make a deal with conventional loans because they know these two programs are ready to pay off the bank at all times. This is why buyers are more likely to be approved for these types of loans, even if they don’t meet all of the qualifications.

There are other types of conventional loans that are not backed by the government. These are called “non-conforming” loans, or jumbo loans, because they do not conform to the government standards (they are too big).

What is the best loan for a fixer-upper home?

A home renovation loan is the best loan first-time buyers can get if they plan on buying a fixer-upper and putting a lot of work into the property. Home renovation loans help buyers budget for home improvement by giving them access to funds they need to fix up their homes. These loans typically come in the form of mortgages with built-in funding for repairs. 

Many first-time homeowners contemplate if they should buy a fixer upper because these homes are usually much cheaper than market value. If you’re confident that putting the extra work into a home will raise its value in the long term and reduce your cost of living then a home renovation loan is a great idea.

There are different types of home renovation loans that buyers can qualify for, including: 

  • FHA 203(k)
  • USDA Rural Development Home Repair Loans
  • Fannie Mae HomeStyle

Each of these types of home renovation loans comes with its own qualifications for buyers. One standard across the board for home renovation loans that buyers need to be aware of is providing documentation. Home buyers need to document that they spent the extra money to fix up their homes and not on something unrelated. 

Choosing the right type of home loan that’s best for your situation is important because it affects how you might be making payments for the next few decades. It doesn’t matter if you have a lot of money saved up to spend on a home or no money at all, it’s still possible for you to purchase a home with a loan that meets your needs.

Always do your research and make sure you understand the qualifications needed to be accepted for a loan before you apply and what information you might need to report after you’ve bought your home.

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I use data and technology to help Millennials navigate the ins-and-outs of buying or selling a home in today's market. From appraisals to mortgages to zoning, I cover it all with the goal to teach others. Connect with me on social via the icons above.

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