TAILORED TO THE FIRST-TIME BUYER
(Sep. 28, 2020) — As millennials enter the housing market, the question that many millennials have is that of affordability. It is the most important question they have as they deal with a housing market that seems to be ever-increasing.
On average, millennials are not doing as well financially as their grandparents or parents did at the same age. With the most significant expenses being student debt and the inflated cost of living, most millennials see buying a home as a pipe dream no longer feasible. However, government-guaranteed home loans can help in reducing and, at times, removing the initial costs of purchasing a property.
These government loans are administered by the Federal Housing Administration, the U.S. Department of Agriculture, and the U.S. Department of Veteran Affairs. Additionally, the fact that they are insured by the United States government gives an extra level of protection to lenders if a borrower ends up defaulting on their loan. This protection against loss enables qualified lenders to be more lenient in their requirements for people to be eligible for a home loan, at times even going as far as helping people meet their eligibility requirements.
FHA Home Loans
Government loans administered by the FHA are perfect for first-time borrowers who do not have the highest credit score or best history due to its low eligibility requirements.
Although FHA loans usually require a down payment of at least 3.5% of the property’s purchase price, there are ways to go around it. One way is to borrow the money from a friend or a family member. However, if that’s not possible, there are other options. One of these is using an FHA down payment assistance grant to cover the down payment.
Usually, FHA home loans require that the applicant have a credit score of at least 580. However, some lenders are willing to accept lower credit scores, some even as low as 500, although the lower the credit score, the higher the down payment might be. Other benefits from FHA home loans include lower closing costs, lower monthly payments, and the option of taking out the loan as either a 15- or a 30-year fixed-rate mortgage.
Additionally, the loan is assumable, which means that a new buyer can assume the loan if the original buyer decides to sell the property.
USDA Home Loans
Home loans administered by the U.S. Department of Agriculture are meant for lower-income families trying to buy a home in a rural community. These loans have a zero down-payment requirement and offer other incentives, including competitive interest rates and low monthly payments.
As previously stated, these home loans are meant for lower-income families. They are therefore restricted to modest single-family homes within rural development areas. Eligible properties cannot have an in-ground swimming pool; also, the property cannot be used for a business of any type. USDA home loans are for homes that are meant to be occupied by the borrower.
To be eligible for a USDA home loan, the applicant must be a U.S. citizen, have a stable income, and a minimum credit score of at least 640. The applicants must also show that they have made at least 12 months’ worth of payments on time and have an income either at or below the low-income limit for the specific county.
VA Home Loans
Loans administered by the VA are for veterans, active-duty service members, and eligible spouses. These loans are excellent for many reasons, including benefits like $0 down-payment requirement, lower interest rates, no-prepayment penalties, and no premiums on mortgage insurance.
In addition to these benefits, as of January 1st, 2020, VA home loans have removed their loan limits for first-time home buyers, meaning that borrowers can now purchase homes anywhere in the country as long as they meet the income requirements. Some VA lenders have set up their own limits based on how much they are comfortable lending out for no money down.
However, to be eligible for the VA home loan, the applicant must meet all eligibility requirements, including property, income, credit, and military service requirements. The latter requires that the applicant serve at least 90 consecutive days during wartime or 181 days during peacetime. However, if the applicant is a member of the National Guard or Reserves, they must have 6 years of service before qualifying. Eligible spouses must have lost their partners while on duty or due to a service-related disability.
As affordability-minded millennials enter the housing market, having knowledge about government guaranteed home loans might make all the difference between their becoming homeowners or not. By reducing the initial costs of becoming a homeowner, government loans have opened the door for a new generation of home buyers to find their dream home at an affordable price.
Phil Georgiades is the CLS for FedHome Loan Centers, a brokerage specializing in first-time buyer home loans. He has been a practicing real estate professional for 22 years. To learn more about programs available to you or to apply for a home loan, click here.