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Recent Grads: Loan Options For First Time Homebuyers

Buying a home is a long-term goal for many, especially recent college graduates starting to pursue a career in their dream field. What’s a better way to celebrate your adult life than buying a house? 

You may be intimidated by the process as a first-time homebuyer. Am I ready to buy a home? Will I be approved for a mortgage at such a young age? How much do I need for a downpayment?

Despite the intimidation, many financial benefits come with buying a home at a young age. Not only will you save thousands of dollars in the long run, but you will also start building equity sooner. Learn more on why waiting to build your dream home is costing you.

With proper planning and strategizing, homebuying can be a stress-free, straightforward process. To start, make sure you choose the right loan for you. Numerous loan options are specific to help first-time homebuyers with down payment requirements. We define them below:

FHA Loan

An FHA loan is a mortgage insured by the Federal Housing Administration. They insure mortgages issued by lenders: banks, credit unions, and nonbanks. The FHA’s backing offers lenders a layer of protection, meaning that your lender won’t experience a loss if you default on the mortgage. They typically come with competitive interest rates, smaller down payments, and lower closing costs than conventional loans. 

They are helpful for buyers with smaller savings or lower credit scores. If you have a credit score of 580 or higher, you could be eligible for a mortgage with a down payment as low as 3.5 percent of the purchase price. If your credit score is lower than 580, you still might qualify for an FHA mortgage, but your down payment would be at least 10 percent of the purchase price.

Buyers should note an additional expense with FHA loans in the form of a mortgage insurance premium.

VA Loan

A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs and issued by a private lender: bank, credit union, or mortgage company. It helps active-duty military members, veterans, and surviving spouses buy homes.

The VA guarantees part of the loan, making it possible for lenders to offer unique features: competitive interest rates, no down payment, or credit score requirements. One of the most significant benefits is if it becomes difficult to make payments on the mortgage, the VA can negotiate with the lender on your behalf.

USDA Loan

While not well known, the U.S. Department of Agriculture (USDA) has a homebuyer assistance program. This type of loan is a zero-down-payment mortgage for low-income borrowers who cannot afford to get a traditional mortgage.

They’re issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture. There may be no down payment required, and the loan payments are fixed.

While the program primarily focuses on homes in some rural regions, you don’t need to buy or run a farm to be eligible.

Applicants with a credit score of 640 or higher typically get streamlined processing. With a credit score below 640, you still can qualify for a USDA loan, but the lender will ask for extra documentation regarding payment history.

Buyers should note that there are additional expenses with USDA loans in the form of the Guarantee Fee and the Annual Guarantee Fee. There may also be varying location income limitations. 

Fannie Mae or Freddie Mac

Fannie Mae and Freddie Mac are government-sponsored entities that work with local lenders to offer mortgage options that benefit low- and moderate-income families.

With the backing of Fannie Mae and Freddie Mac, lenders can offer competitive interest rates and accept down payments as low as 3% of the purchase price.

Fannie Mae also provides homeownership education for first-time homebuyers through its “HomePath Ready Buyer” program.

With various home buying assistance programs and minimal down payment requirements, these loan options are perfect for recent graduates looking to purchase a home. You now can afford a new home without having to worry about draining your entire savings account. 

Our preferred lender, RMC Mortgage, offers many of these first-time buyer loan options as well. Get pre-approved here or reach out to schedule a virtual or in-person appointment.