Buying your first home can be very exciting and nerve-wracking all at the same time. You’re excited to buy your first home but the process can seem new and overwhelming. And since you’re likely on some type of budget and want to save as much money as possible, you’re looking for any break you can get.
We’ve asked financial expert Grant Botma for some tips and advice that can help you save money when you’re buying your first home.
However, Botma says that, “every consumer needs to dispel the phrase ‘first-time home buyer.’ The truth is that there aren’t special programs for first-time home buyers in today’s market.”
What Credit Score Is Needed for First-Time Home Buyers?
According to Botma, you’ll need at least a credit score of 620 to buy a home. That holds true for any home buyer, whether you’re buying your first home or you’re a seasoned home-buying vet.
“Technically, you could get a home loan with a credit score below 620, but it’s not ideal,” says Botma.
A credit score of at least 620 will allow you to take out a conventional loan. Conventional loans come with the most competitive interest rates and the most repayment options, such as a 15- or 30-year mortgage period.
With a conventional loan, you likely will have options when it comes to the down payment, and you may be eligible for a low down payment. However, down payments less than 20% usually require you to buy private mortgage insurance, which can increase your loan payments.
First-Time Home Buyers with Bad Credit
If your credit score is under 620, you’ll still be able to take out a mortgage and buy a home, but it won’t be with a conventional mortgage.
The Federal Housing Administration, or FHA, offers loans for people with credit scores under 620. The main caveat is that your exact credit score will determine how much down payment you’ll need in order to qualify.
Scores of at least 580 will qualify for as low as a 3.5% down payment. You can always make a larger down payment if you can afford it, but 3.5% is the minimum down payment for people with credit scores of between 580 and 619.
If your credit score is under 580, you still may qualify for an FHA-backed loan but your down payment amount will be higher. You’ll typically need to make a down payment of at least 10% if your score is under 580.
However, each lender will have its own terms and requirements, in addition to the FHA. So while you may qualify for an FHA-backed loan with a credit score of 530, not every lender will be willing to offer you a loan because their minimum requirement might still be 580.
Grant Botma recommends patience for potential home buyers with bad credit, especially if your credit score is close to a higher tier, such as 580 or 620.
If you’re looking to increase your credit score within a short amount of time, there’s some steps you can take:
|Action items that can help your credit score:|
|1. Work on paying off existing debt. Botma suggests starting with your highest interest rate debts first and working your way down. The name of the game is cash flow. The more cash flow you have, the better off you'll be when purchasing a home.|
|2. Pay off one debt item completely. Botma advises his clients to get one line of debt paid off completely. "You'd be surprised at how much this can actually raise your credit score in a short period," says Botma. He goes on to say that it's all about your debt-to-income ratio, or DTI. The more cash flow you have, the better your credit score will be.|
|3. Talk with a trusted advisor. Sometimes you don't know what you don't know. A trusted financial adviser who can advise in credit repair should be consulted.|
Programs for First-Time Home Buyers
Botma says, “There are no first-time home buyer programs, there are only borrower programs.” Lenders are mainly concerned with your ability to repay the loan amount, which is why so much importance is placed on your credit score and potentially your down payment.
A larger down payment signals to the lender that you’re fully invested in the property and have the money to repay the loan.
Botma further says that, “first-time home buyer programs are nothing more than a sales tactic.” So if you see a program that’s called a first-time home buyer offer, it’s likely hidden with higher interest rates and suboptimal loan choices.
The FHA and the VA are your best options if you’re trying to buy a home with bad credit. The FHA will offer loans for people with credit scores between 500 and 620.
These loans will require a certain down payment amount to qualify. For people with scores of at least 580, you’ll probably be allowed to make only a 3.5% down payment. If your score is lower than 580, you’ll be required to make a 10% down payment.
The VA offers loans to anyone who is eligible, regardless of credit score or down payment. No minimum credit score, no private mortgage insurance, and no down payment. VA loans are perhaps the best deal for anyone, regardless of credit score, but of course you’ll have to qualify for one first by serving in the military.
Is the First-Time Home Buyer Tax Credit Still Available?
No, the federal first-time home buyer tax credit is not available anymore. It started in 2008 as a response to the 2008 financial crisis, but was phased out in 2010.
Officially part of the Housing and Economic Recovery Act (HERA), it allowed first-time home buyers to receive up to $7,500 in federal tax credits. This was later increased to $8,000 before the program ended in 2010.
Do I Qualify for a First-Time Home Buyer Tax Credit?
Even though the federal first-time home buyer tax credit isn’t around anymore, there are still tax credits available to homeowners that you may be eligible for. Your state or your county may have various tax credits that are designed to attract people to the city or state. And there are always things you can do you buy a house like a pro without overpaying.
And if you’re in the market for a new home and are a first time home buyer, you’ll also need homeowners insurance. Be sure to talk with a local independent insurance agent today to see what your options are on the home you’re buying.
TrustedChoice.com Article | Reviewed by Grant Botma
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