The Pros and Cons of First Time Homebuyer Programs

Auggie Capistrano Last Updated Dec 03, 2016 (0) comment

Are you considering purchasing your first home? If so, especially if you just kicked off your research, you are probably confused with the number of loan options available (conventional loans, VA loans, FHA loans). With all of these options and considerations, it may be harder for you to decide on a loan that is best suited to your needs. Like many, you may also have no idea on how to go about weighing the pros and cons of each.

If that’s your story today, welcome to the club! This blog is about understanding what a first-time homebuyer loan actually is, to see beyond the attractive deals and validate their efficacy helping you determine which one would best suit your situation needs.

The Loan Characteristics

What defines a first-time homebuyer loan are features such as reduced interest rates, minimum down payment requirements, limited transaction fees and in extreme cases, even the possibility to defer your first payments. In some cases, these are insured by the Federal Housing Administration for people, including displaced homemakers and single parents, who haven’t been homeowners in three years or who owned a property with a former spouse.

If you have a credit score of at least 580 – most FHA-approved lenders insist on a score of 620-640 as the minimum – your application might be considered for a loan with a down payment as low as 3.5%. Considering that low credit score, this is a win! Other factors that influence your eligibility include complete documentation of your assets and earnings and your ability to match the respective lender’s debt-to-income ratio.

The Pros

Let’s break it all down and make it more understandable, shall we? When you read that the first time-homebuyer loan is about fewer restrictions, here’s what you should be thinking about:

  • You have been lousy at saving money all your life and now, as a consequence, you don’t have a sufficient amount to make the large down payment for your dream-house. If this is the case, this loan IS for you and moving forward you’ll learn how to be better with your money (right?).
  • You won’t be able to pay off the interest and fees given that you are financially not well-off at the moment. Chances are you will be better off in the future, after you take out the loan. So why wait any further before trying to buy the house, right?
  • All the other forms of conventional loan financing have rejected your request because of your poor, low credit score. That, plus your negligible or bad credit history, for instance, stresses to lenders that your business is not worth their risk. Because of that, a first time homebuyer loan seems to be too good an opportunity to pass after all… Really, you have few other choices in these cases.

The Cons

So, we’ve made it all appealing, haven’t we? You are ready to take the plunge as have many others before – without reading about the dangers looming ahead. Yes, there are downsides to it, including the following:

  • The one biggest pitfall of all is that you’d have to pay more for the mortgage insurance of these FHA loans than you’d be asked for otherwise. And until and unless you put down a larger down payment, this insurance payment will continue until the loan reaches maturity. There has to be a give and take. A riskier loan will require a greater sum of insurance.
  • Second, there are limits to the amount of the loan based on certain criteria. For example, the property has to be one you would use as your primary residence, not renting it to someone else.
  • Third, it won’t be possible for you to change the terms or to postpone refinance with this loan.

Do you still think a first time home buyer program is for you? If so, get started and for no obligation, get your quote today.

Auggie Capistrano

Chief Staff Writer at FHA Loan Search
Auggie Capistrano is an award-winning reporter and editor with more than 15 years of experience in journalism and personal finance. Auggie's background includes covering mortgage news and providing home buying tips for the Texas, California, New York, and Florida markets. He has a B.B.A. in Real Estate Finance and a Master's Degree in Journalism.
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