Mortgage loan programs can be confusing if you’re a first time buyer. Which program is right for you? The loan type can affect down payment, closing costs, and monthly payments, so it’s an important decision. Here’s a first time buyer’s guide to mortgage programs to help you better understand options.
FHA Loans
FHA loans are very popular with first-time buyers. Down payment requirements are low (just 3.5%) and can even be a gift from a family member. Credit score requirements are more lenient with a minimum score of 580. Lower scores of 500-579 are allowed if buyers have at least a 10% down payment. The downside to this program is the up-front and ongoing mortgage insurance premium (MIP). For buyers with 3.5% down, this premium remains for the life of the loan.
- Minimum Down Payment: 3.5%
- Minimum Credit Score: 580 (or 500 with 10% down)
- Up-front MIP: 1.75% (as of 2020)
- Monthly MIP: Varies by Loan Amount
VA Loans
VA loan programs are available to veterans and finance up to 100% of the purchase price. Closing costs are capped at 1% and there’s no mortgage insurance. However, there is an up-front funding fee of 0.5% to 3.3%. This fee is waived for veterans with qualifying disabilities and purple heart recipients. Loan amounts are based on VA entitlements and increased down payments are required when loan amounts exceed calculated limits.
- Minimum Down Payment: 0%
- Minimum Credit Score: 620
- Up-front Funding Fee: 0.5% to 3.3%
- PMI: none
Conventional Loans
Conventional loans are sold into the secondary mortgage market and make up a significant portion of mortgage loans. For single family homes, the minimum down payment is 5%. A credit score of 620 or higher is required. Private Mortgage Insurance (PMI) is required for loans for a loan-to-value (LTV) greater than 80%. Borrowers can request PMI removal once the balance is paid down to 80%; it is automatically removed at 78%. 1st and 2nd mortgages can be combined to avoid PMI.
- Minimum Down Payment: 5%
- Minimum Credit Score: 620
- PMI: Applies to loans greater than 80% LTV
Summary of First Time Buyer’s Guide to Mortgage Programs
So, which loan program is best for you? If you’re a veteran, always check eligibility for that program first. If you’re not a veteran, your credit score and down payment are the most important factors. For scores between 500 and 620, FHA may be the only option. For scores above 620, down payment is the next consideration. For the lowest down payment possible or the ability to use gifted funds, go with FHA. If you have at least 5%, then conventional will be more cost effective in terms of closing costs.
Consult with a loan officer for additional information on these and other loan programs. Loan programs are available for unusual circumstances such as a rehab property. State or local programs also exist with special financing terms and/or down payment assistance. Whether you’re ready to start searching for a home now or are just thinking about the process, a local loan officer can guide you through every step.
