Today, we’ll go over what unique loan programs are available for first-time homebuyers. Many lenders lie to you about various loan programs that are not first-time programs in the true sense. They’re only saying anything to get you through the door.
First Time Home Buyers
Unfortunately, first-time homebuyers are the most vulnerable to advertising gimmicks and lies, which lenders and loan brokers use all over different advertising mediums, such as the internet, radio, youtube, and others.
There are a lot of loan brokers who claim to offer special programs for first-time homebuyers. However, the truth is that there are very few loan programs that are only for first-time buyers. They are available most of the time but do not even fit most first-time buyers. Home affordability has become so hard in certain parts of this country, especially with inflation getting crazy. All those first-time programs people are talking about are available to people, even buying their second home or upgrading from their first to their second home. Essentially, some programs help you if you are low on the down payment or closing costs. They might offer incentivized rates, but they’re available to everybody.
Now, let’s examine some of the popular myths in the industries used to attract first-time homebuyers.
FHA loans are available to everybody in the country who qualifies. There are qualification parameters for conventional and government-backed loans like the FHA loans. These parameters are your credit score and your debt to income ratio because we have to prove that you can repay the loan. As long as you qualify, you can get an FHA loan on your second home if you’re upgrading, and you can do it for your third or fourth or fifth home if you’re moving around and need to buy a new house.
Now, FHA, in general, requires you to live in the house, so you can’t use it for a rental property. However, the FHA loan is in no way, shape or form a first-time home loan only. It is available to everybody in the country, typical of most government programs. If you have a government program, it cannot discriminate against first-time homebuyers and non-home first-time homebuyers. If there is an excellent reason for a first-time homebuyer, they can sometimes make exceptions, but generally speaking, government programs are available to everybody who qualifies.
Occupation Specific Loans
A very common first-time homebuyer program you’ll see is the first-time homebuying program specifically for specific professions — for instance, first responders or teachers. Generally speaking, it’s a lie. Now there are occasions where they do have special programs. I’ll go into more details about these later on. However, be aware that occupation-specific loans are few and far between. Generally speaking, teachers or first responders such as doctors and firefighters, who are going to buy homes, will not take advantage of these programs for various reasons. Again, we’ll get more into this when it comes up later.
These advertisements are trying to target people who have good credit score history and decent incomes. It’s a little sneaky, but lenders like to focus on people who will generally qualify for that loan. Hence, if you’re advertising a special program for teachers, what you’re doing as a loan broker or as a lender guarantees that the people who answer that advertisement are teachers. Teachers tend to have excellent saving habits, great credit scores and very stable w-2 jobs, making them ideal candidates for a home loan. So when you’re advertising for those people, you are getting them to call, and then you take advantage of having a perfect borrower, but there’s no special program for them. So a lender may say they have a unique program in an FHA, but that program is available to everybody.
What are the options?
Now, are there any classic first-time homebuyer programs at all? Yes, there are two that I’m aware of. One is offered regularly, and the other is very hard to come by. First, let’s go over the more regular kind of run-of-the-mill first-time homebuyer situation or program that is available almost regularly. This is the 3% conventional loan. An FHA loan has a minimum down payment of 3.5%, while a conventional loan has a minimum payment typically of 5% down on a purchase.
However, if you are a first-time homebuyer, you can get a conventional loan with as little as 3% down. There are a couple of caveats to this. You want to make sure that your credit score is decent. If your credit score is 720 or above and you want to have as little down payment as possible, perhaps because you just haven’t saved as much, this is an excellent fit. As a first-time homebuyer, my recommendation is that you want to come in with 20% down; it’s going to give you more ability to refinance if rates drop. You’re going to have a smaller payment, and you’re going to avoid mortgage insurance or private mortgage insurance (PMI), as it’s often called.
If you’re unsure what any of those terms are, such as mortgage insurance or PMI, I have another article where I have gone over FHA and conventional loans. The article covers these areas ad terminologies in detail. You can catch up on it here.
However, in a nutshell, mortgage insurance is an additional fee that you pay per month if you come in with anything less than 20% down when you purchase a home. It can range from as little as $40 to $700 a month, so it could be a real ding on your pocketbook. You want to avoid it at all costs, if possible. Not everybody can afford to save 20%, and that’s fine. I deal with borrowers who come in with 3½% on an FHA or 3% on an unconventional. We’re more than happy to work with them, but you want to know what’s best for you, and it usually makes the most sense to come in with more down payment.
The other program that is sometimes available for first-time homebuyers, which is harder to come by, is specific to professions. Usually, it allows you to waive that mortgage insurance that I mentioned earlier. There are specific first-time buyer programs for particular occupations like doctors and teachers that will waive or heavily reduce mortgage insurance payments. Now, you have to search far and wide for these because they come and go, and they’re not very easy to qualify for. They’re not easy to find; most banks don’t offer them. The one for doctors is usually a speciality bank that tries to focus specifically on doctors.
Hence, If you are a doctor or a teacher, I would recommend at least asking your lender if there are any interest programs specific to you, which are not available to other professions. You can check it out to find out the details. If they say it’s just a 3% conventional loan or an FHA, that’s not honest because that’s available to everybody; see if there’s one that would waive the mortgage insurance.
I don’t work with these programs personally because they’re so few and fleeting. By the time I want to advertise for it, they’re typically gone or by the time someone writes in to take advantage of it; they’re gone. I can sometimes tell you who does if you want to reach out. However, the program is only a benefit if you don’t have that 20% down. Hence, if you’re a doctor and you’ve just started out and still pay your medical bills, it’s okay to want to come in with less down. You have a very stable career ahead of you, so you know you will make that mortgage payment. You can make a smaller down payment, and if you can get rid of the mortgage insurance, it would be fantastic. This goes for a teacher also, especially if you’re tenured.
However, generally speaking, if you can save for that 20%, it’ll give you a much smaller payment with no headaches about finding out which banks have a no-mortgage insurance type of program. When you aren’t forced into working with the only available bank with that mortgage insurance program, you can shop against different lenders and try to get the most competitive rate.
These are the essential things you need to know about first-time home buying programs, especially the typical lies and illusions that the smoke mirrors of advertising have in the lending world around these programs. If you are new to loans in general, I would advise you to check out my explanations on reading a loan estimate and comparing it to others. If you’re considering the difference between an FHA or conventional loan, I have an article on that also, which will help you understand the differences between the two. It will help you decide which one is more appropriate for you.