This is a very exciting time in your life. You are finally in a position to move out of your parent's home or your apartment, and buy your first home. And you can't wait. You have dreams of a big house with a white picket fence, and maybe a little vegetable garden in the back.
But buying a home can be a very emotional and exciting experience, and it is easy to let your eagerness guide your decision making. There are a lot of mistakes that first-time home buyers make, and so it is important to be thoughtful through the process to make sure that this exciting time doesn't become one full of regrets or future financial strife.
Before looking at houses, a good approach is to meet with a mortgage lender to best understand what you can afford. And keep in mind that what you can afford might not be the same as the amount you qualify for in a loan.
In fact, many people are surprised that they qualify for far more than anticipated. But only you can decide whether or not you are comfortable taking on that mortgage payment. A good rule of thumb is that most people can comfortably afford to contribute 28 – 30% of their monthly income towards a mortgage.
You also want to consider what you can afford for a down-payment.
Your mortgage lender will likely give you a minimum required amount to make, but if you can afford to put down more than the minimum, you should take the time to weigh out if that is a real possibility.
Ideally, you should put down the biggest down-payment possible, making sure you still have money for new home owner expenses such as for outdoor spaces, any home repairs if purchasing a pre-existing home, furniture, and anticipated utility costs.
By adding more to your down-payment, you will be able to either lower your monthly payment, or reduce the interest paid over the lifetime of your loan; possibly both.
Top 10 first-time home buyer programs and grants
There are a variety of first-time home buyer programs that you will want to research before signing on with any lender. Below is a comprehensive list of the best programs available to you.
- HUD First-Time Home Buyer Programs
- FHA Home Loan Program – the most common program for first-time buyers
- USDA Loans
- VA loans
- 203k Rehab Loans – for pre-existing fixer-uppers
- Fannie Mae and Freddie Mac government-sponsored programs
- Good Neighbor Next Door Program – for teachers, police officers, and firefighters
- HUD Dollar Home Program
- Homepath Mortgage – for those that plan to occupy the home as their primary mortgage (second homes do not qualify)
- Native American Direct Loan
Each program comes with different requirements, so it is important to research this thoroughly. You can also consider having a conversation with a trusted mortgage lender who will likely have access to various grant programs and can advise you on whether or not you are a candidate for qualification.
First-time home buyer loans
As a first-time home buyer, it is important to understand what you need to do to qualify for a loan. Here are the key items you need to consider.
- Your FICO score
- Documentation needed for application
- Clear understanding of your down-payment option
The higher your credit score, the more likely you will be approved. The FICO score is a proprietary score developed by Fair Isaac Corporation and uses a range of 300 – 850. The lower the score means the higher the credit risk, and the higher the score, the more likely that a lender will offer lucrative or appealing offers of credit. The FICO score is believed to be the most widely used of all credit scoring systems in the United States with over 90% of lenders leveraging FICO tools. You can learn more about the FICO scoring system on myfico.com.
Be prepared; the mortgage application process can be lengthy and tedious. It's important to understand that lenders need to be confident in your ability to pay back the mortgage over time, and therefore they will ask for a lot of information from you. You will need to be prepared with tax returns (last two years), W2s and paystubs, bank statements (usually two to three months' worth, and more if you show an overdraw or negative balance), and proof of ability to make the down payment.
As indicated previously, it is wise to make the largest down-payment that you can to help keep your minimum payment low and to lessen the amount of interest you will pay over time. But you also want to ensure that you don't put your entire savings towards the down-payment, as you will likely need funds for typical new home-owner expenses such as for outdoor spaces, any home repairs if purchasing a pre-existing home, furniture, and anticipated utility costs. If someone is giving you money for your down-payment, you will likely need to provide a gifting letter from the person giving you the funds, that clearly indicates that the funds are a gift and do not need to be repaid.
You will also want to do your homework on the best home lender for you.
Best Mortgage Lenders for First Time Home Buyers
| Lender | Best For | Minimum Credit Score Required | Minimum Down Payment Required |
|---|---|---|---|
| Navy Federal | people with no credit history | N/A | 0% |
| CitiBank Mortgage | first-time home buyers overall | N/A | 3% |
| Quicken Loans | first-time home buyers overall | 620 | 3% |
| SunTrust | low down payments | 620 | 3% |
| New American Funding | people with low credit score | 620 | 3% |
| Chase | face to face service | 620 | 3% |
| Vylla | low credit score | 620 | 3% |
| Bank of America | face to face service | 620 | 3% |
| Flagstar | low down payments | 620 | 3% |
| SoFi | low down payment jumbo loans | N/A | 10% |
First-time home buyer credit
If you purchased your primary residence between 2008 – 2010, you were able to take advantage of a first-time homebuyer credit. And, certain federal employees and members of the military were also eligible.
The credit was designed to reduce your tax bill or increase your tax refund depending on the amount of tax that you owed. You can learn more about the first-time homebuyer credit on the IRS.gov website. This credit emerged during the financial crisis of 2008 to help make homes more affordable. Unfortunately, the credit no longer exists as it ended in 2010. But that doesn't mean that you can't get help for your mortgage through other programs.
Take time to chat with your mortgage lender, accountant, or financial advisor, who can brainstorm with you on options to help make your home mortgage as easy to assume as possible. Home ownership comes with many perks and advantages and is quite likely the biggest purchase you will ever make. Therefore, it is important not to go into such a purchase lightly. Taking the time to do your homework and research your options so that you can get the mortgage that is right for you will be the first step in ensuring you can enjoy your new home for years and years to come.
Best Online Mortgage Lenders
Shopping for a mortgage is one of the most important strategic steps you can take in trying to secure the best possible interest rate for your loan, as well as avoiding as many unwanted fees as possible. If you have already started this process, you may have already talked with your local bank or credit union about options. You may have even talked to an in-house lender where your real estate agent is based out of. However, have you considered an online lender?
Why should I consider an online lender for my mortgage?
An online lender is going to offer some great advantages that a traditional brick and mortar bank would not be able to. The following is a list of just some of the benefits you could have by using an online lender:
- Access to better interest rates
- Online convenience
- Options for fewer fees
Since the overhead of an online lender is lower, they have the flexibility to offer better interest rates than their physical counterparts. A better interest rate is one of the most important things you can have when considering a mortgage.
If you have ever gone through the process of applying for a mortgage, you know it can be tedious. Your loan officer will ask you to fax documents, see documents, repeatedly see the same documents, and have you drive back and forth to the physical location as their needs come up. An online lender does not have that problem. You will be able to email or e-fax almost all of the information they will require to service you. In fact, some lenders will be able to pull information automatically if it is public record.
This goes along with better rates. They can offer products with fewer fees squeezed in because their overall cost of business is lower.
If you see these benefits and they seem enticing, then online lending might be for you!
What online mortgage lenders are the best?
Of course, just like with local lenders, there is a seemingly endless sea of choices from which to choose. The following list is some of the best that we were able to find!
- Reali Loans
- Better.com
- NBKC Bank
- SoFi
- SunTrust
This lender really takes advantage of the online space to bring you maximum convenience. They allow you to access the process of your loan and related information 24/7. No need to wait for their offices to open! They also do not try to sneak in fees into the process, you can expect there to be no origination fees or broker fees, helping keeps costs to a minimum. However, they do not service all loan types, as is the case with many online vendors. Specifically, if you are looking to do a USDA Rural Development loan, you will need to use another lender. If this lender is available for service in your state, they are definitely worth your consideration.
If you want a speedy, easy mortgage process, then Better.com is a fantastic choice. You have the option to keep the entire process between you and the internet, you do not have to speak to a loan officer unless you want assistance. Any help you receive is genuine help, none of their loan officers are commissioned off of the loans they service. If you need fast access to a mortgage pre-approval letter, they offer access to one in as little as 24 hours after having been approved. However, if you are looking to do certain government-backed loans, this lender is not an option for you. They will service neither VA loan nor USDA Rural Development loans. If those limitations are not a problem for you, this lender is another fantastic choice.
For the conveniences of an online experience with a touch of personal care and attention, NBKC Bank is a great compromise between the two. Their customer service does a great job of letting you forget that they are mostly a remote service! Unlike many other vendors, this lender services many kinds of government loans. In fact, they consider themselves VA loan experts, if that is a product you are eligible for. Unfortunately, you can expect some fees (like origination fees) that other online borrowers can avoid, but if a personal touch is a primary goal for you, it is worth the cost.
This online lender makes the list for being a great option for those that need alternative means for assessing creditworthiness. This can be ideal for those with poor credit but great finances, or those that are actually great candidates but just look bad on paper, like small-business owners. Again, as with many online lenders, this one excels in making your online experience a fantastic one, and they can do so without charging application or origination fees. Unfortunately, SoFi does not service any kind of government loan, including FHA loans, which may be a deal-breaker for many, including first-time home buyers. However, if it is not a deal-breaker and you need non-traditional means of credit to be looked at, this lender is a great online choice.
The final lender makes it on our list by not only being a strong, all-around online lender but by also offering a unique program. Their array of online tools is impressive, allowing much fo the mortgage process to be self-led with little problems. Unlike many of the other lenders on our list, they handle a huge variety of loans, including most government-backed loans. If you happen to be a doctor, they offer a unique program just for you! They consider that, even though you may have high-debt and little cash, your potential for earning extremely large sums of money in the future is very high, and can lend to you based on that assumption. They have very few drawbacks for most qualified lenders, though if you are needing alternative means of credit assessment, you will need a different lender. An overall fantastic online lender!
Though these are some of the best online mortgage lenders you will find, they are by no means the only ones available. You may stumble across one that meets your needs in a way that none of these lenders can. Consider this list a starting point as you begin to shop for the perfect online mortgage lender.
Bets Mortgage Lenders for Low Credit Borrowers
Wanting to own a home while having bad credit is a bad combination to have. Poor credit can prevent you from being approved for a home loan, or if you are, then you may end up getting gouged by high rates or fees. However, there are not only types of loans that are geared towards low-credit borrowers, but there are also lenders that specialize in those kinds of loans.
What are good mortgage options for low-credit borrowers?
You have a couple of options for loan type if you are a low credit borrower. You can either consider certain products or leverage cash to your advantage.
- Federal Housing Authority Loan: This type of loan is geared towards low to moderate-income borrowers who have lower credit and not a lot of cash on hand. Though credit requirements depend on the lender, you can frequently qualify for a mortgage with a credit score as low as 600 and only have to pay a 3.5% down payment.
Even if your credit is worse than that, you can use a large down payment to be able to qualify for a mortgage. In the case of the FHA loan, a 10% down payment can qualify you for a mortgage with as low as a 500 credit score.
- USDA Rural Development Loan: This is a type of loan that was established to encourage borrowers to buy homes in rural areas. They are specifically for low-income individuals, meaning if you make too much money, you are unable to participate.
This loan program does not require a down payment and has low-interest rates. Your given lender should be able to tell you whether or not the property you are looking at qualifies for this loan program.
Those are some general loan options to look for and ask about when shopping for a mortgage while having low credit. Each lender will have their own specific rates and fees that they can offer.
Which lenders are ideal for low credit borrowers?
The following borrowers are ideal for low credit borrowers. They may service low-credit or look at other indicators of creditworthiness:
- Carrington Mortgage Service:
- Rocket Mortgage:
- Vylla:
- J.G. Wentworth:
- New American Funding:
- Mr. Cooper:
This mortgage lender makes the list because of their willingness to venture to the credit floor offered by the FHA loan program: a credit score of 500.
Being willing to service borrowers with the absolute minimum credit score allowed by the FHA program makes this lender ideal for all different kinds of low credit borrowers. Again, you can expect higher interest rates from this lender since they service such low scores, but if that fits your needs they may be your last option for a mortgage.
This lender not only services low credit borrowers but does so by taking full advantage of the conveniences of technology.
They do not have a brick and mortar front. Instead, they are completely online, allowing them to offer competitive rates to even low credit customers. They can service an FHA loan to a potential borrower with a credit score as low as 580.
They also make the process of receiving the mortgage quick and easy, with great online customer service, the option for dedicated loan officers, and the ability to automatically pull a lot of information for you in public records.
Another lender willing to service the floor of credit requirements of an FHA loan: 500. Vylla, like Rocket Mortgage, is a completely online service, which is also why they can service such low scores and still offer competitive rates.
They offer a lot of online conveniences to make the process of the mortgage as easy as possible, and they will even allow you to lock in your rate for free (a service other lenders will charge for.) Unfortunately, if you live in Massachusettes or North Dakota, you will not be able to take advantage of their services.
As a low-credit customer, it may sometimes feel like your options are extremely limited and that lenders are just throwing you the scraps of options. Where J.G Wentworth excels is their ability to offer even low-income borrowers a lot of options in their mortgages.
They offer several mortgage terms, including 10, 15, 20, 25, and 30 fixed rate options, as well as a myriad of other products as well. Their credit minimum is 580, which is in line with Rocket Mortgage, and they also look to automate the mortgage process as much as they possibly can. This lender is mostly an online presence, as they have physical locations in only 14 states.
If your credit score is weak but your financial history is otherwise strong, then New American Funding might be the lending solution you have been looking for.
They have a listed credit minimum as 580, but they are willing to consider other forms of creditworthiness not analyzed by other lenders, like rent history. This can help you can a great rate even if your credit score is not.
Unfortunately, they do not offer services in all states, so before you become too vested, you will want to make sure they can legally service a mortgage to you in the state where you reside.
This is another option if you have a low credit score but have other non-traditional factors that support creditworthiness. They are mostly online, though you will have to either call or email a loan officer if you want to get pre-approved or even see rate options. However, unlike some of the other lenders on this list, they offer services in all 50 states. If you are interested in an FHA loan and have poor credit, this is another great choice.
The lenders on this list are just some of the options for you to consider if you are a low-credit borrower looking for a mortgage. It is by no means exhaustive.
There may be regional lenders that would better fit your needs, and if you are in the military or a veteran, you also have special loan options made specifically for you. As with all major decisions, take your time shopping, and find the lender that fits your needs the best.
