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If you’re a first-time homebuyer, understanding the intricacies of applying for a mortgage is crucial. Lenders scrutinize your creditworthiness, evaluating factors such as income, assets, debts, and credit history. The choice between a fixed or floating rate, the mortgage term, and the down payment size further shape your mortgage journey. This article breaks down the process and considerations for first-time homebuyers.

1. First-Time Homebuyer Requirements:

To secure mortgage approval, meeting specific requirements is essential. The definition of a first-time homebuyer, as per the U.S. Department of Housing and Urban Development, includes those who haven’t owned a principal residence for three years, single parents who owned with a former spouse while married, displaced homemakers, individuals who owned non-permanently affixed residences, or those with properties not compliant with building codes.

For approval, proof of income for at least two years, a minimum 3.5% down payment, and a credit score of at least 620 are generally required. However, special programs exist, allowing home purchase with low income, $0 down, and credit scores as low as 500.

2. Types of Loans:

Conventional Loans: These mortgages, not federally insured or guaranteed, usually require a larger down payment, higher credit score, lower debt-to-income ratios, and may include private mortgage insurance (PMI). Conforming loans adhere to Fannie Mae and Freddie Mac guidelines, with a 2023 limit of $726,200, while nonconforming loans have lender-specific guidelines.

Federal Housing Administration (FHA) Loans: Backed by HUD, FHA loans offer lower down payment requirements (as low as 3.5%) and less strict credit criteria. However, they entail mortgage insurance premiums.

U.S. Department of Veterans Affairs (VA) Loans: VA guarantees these loans, allowing veterans favorable terms, often without a down payment.

3. Equity and Income Requirements:

Lenders determine mortgage pricing based on creditworthiness, considering FICO scores, loan-to-value (LTV) ratio, and debt-service coverage ratio (DSCR). Higher LTV ratios may result in higher interest rates. PMI is required for LTVs above 80%, but it can be avoided by borrowing less than 80% or using home equity financing.

4. Fixed-Rate vs. Floating-Rate Mortgages:

Choosing between fixed and floating-rate mortgages is pivotal. Fixed-rate mortgages provide stable monthly costs, while floating-rate mortgages offer lower initial rates, suitable for those expecting income growth. Adjustable-rate mortgages (ARMs) reset after fixed periods, and interest-only loans can benefit first-time borrowers by reducing initial monthly costs.

5. Specialty Programs for First-Time Homebuyers:

Specialty programs, such as Fannie Mae’s Ready Buyer, IRA withdrawals (up to $10,000 penalty-free), and down payment assistance programs, exist to aid first-time homebuyers.

6. Credit Score, Interest Rates, and Tax Credits:

Most conventional mortgages require a credit score of 620 or higher. Interest rates depend on various factors, including credit scores, down payment percentage, loan type, and market conditions. While the federal first-time homebuyer tax credit ended in 2010, some states still offer tax credits, and municipalities may reduce property taxes for first-time buyers.

Conclusion:

Navigating the first-time homebuyer mortgage landscape can be challenging. Understanding your financial capacity, negotiating power, and risk tolerance is crucial. Seek guidance from mortgage professionals to align your priorities with the best financing options for your situation.

Best Mortgage Lenders:

U.S. News Ratings are provided to assist in your decision-making process.

  1. Farmers Bank of Kansas City

    • U.S. News Rating: 4.7
    • Best for: Online Loan Application
    • Minimum Down Payment: 3%
    • Minimum Credit Score: 620

  2. New American Funding

    • U.S. News Rating: 4.7
    • Best for: Low APR
    • Minimum Down Payment: 3%
    • Minimum Credit Score: 580

  3. Rocket Mortgage

    • U.S. News Rating: 4.6
    • Best for: Customer Service
    • Minimum Down Payment: 1% (Not disclosed)
    • Minimum Credit Score: Not disclosed

  4. NBKC Bank

    • U.S. News Rating: 4.7
    • Best for: Online Application & VA Loans
    • Minimum Down Payment: 3%
    • Minimum Credit Score: 620

  5. First Horizon Bank

    • U.S. News Rating: 3.8
    • Best for: Non-Digital Loan Experience
    • Minimum Down Payment: 0% (Not disclosed)
    • Minimum Credit Score: Not disclosed

  6. Veterans United Home Loans

    • U.S. News Rating: 4.4
    • Best for: VA Loans
    • Minimum Down Payment: 0% for VA loan
    • Minimum Credit Score: 620

  7. PenFed Credit Union

    • U.S. News Rating: 4.6
    • Best for: Credit Union for Mortgages
    • Minimum Down Payment: 0% for VA loan
    • Minimum Credit Score: 620

  8. PNC Bank

    • U.S. News Rating: 4.7
    • Best for: Low Down Payment
    • Minimum Down Payment: 3%
    • Minimum Credit Score: 620

  9. Chase

    • U.S. News Rating: 4.2
    • Best for: Loan Options
    • Minimum Down Payment: 3% (Not disclosed)
    • Minimum Credit Score: Not disclosed

  10. U.S. Bank Mortgage

    • U.S. News Rating: 4.6
    • Best for: Short-Term Loans
    • Minimum Down Payment: 0% for VA loan (Not disclosed)
    • Minimum Credit Score: Not disclosed

Current Mortgage Rates:

  • 30-year fixed: 7.61% with 0.69 points (previous week: 7.86% with 0.73 points)
  • 15-year fixed: 6.98% with 0.88 points (previous week: 7.14% with 1.22 points)
  • 5/1 ARM: 6.76% with 0.8 points (previous week: 6.77% with 1.46 points)
  • 30-year jumbo loans: 7.58% with 0.65 points (previous week: 7.8% with 0.67 points)
  • 30-year FHA loans: 7.36% with 0.91 points (previous week: 7.57% with 1.03 points)

How to Apply for a Mortgage:

  1. Check and Improve Your Credit:

    • Review and enhance your credit score, a crucial factor in determining your mortgage interest rate.

  2. Explore Lenders:

    • Consider lenders based on your specific needs, such as low down payment, VA loans, or online application processes.

  3. Get Preapproved:

    • Start the mortgage preapproval process by applying with a few lenders for comparison shopping.

  4. Compare Offers:

    • Evaluate offers from different lenders, taking into account interest rates, fees, and other terms.

  5. Choose a Mortgage Lender:

    • Select the lender that aligns with your preferences and offers a competitive mortgage package.

Understanding Mortgages:

  • What Is a Mortgage?

    • A loan from a bank or lender used to buy or refinance a home, secured by the property.

  • Mortgage Alternatives:

    • Consider options like buying in cash, borrowing from family, seller financing, or renting to own.

  • Mortgage Interest Rates:

    • Annual cost of the loan amount expressed as a percentage, impacting your yearly interest payments.

  • Pros and Cons of Mortgages:

    • Advantages include building equity, tax breaks, and control over property. Cons involve costs and certain requirements.

  • Down Payment Requirements:

    • Explore mortgage options based on down payment capabilities, including no-down-payment and low-down-payment choices.

  • Mortgage Loan Process:

    • Steps involved in getting a mortgage, from applying to closing the loan, ensuring a smooth homebuying experience.

Mortgage Alternatives to Consider:

  • Buy a House in Cash: Ideal if financing is not required.
  • Loan from Family: Clear terms and documentation are essential.
  • Seller Financing: Flexible terms but fewer buyer protections.
  • Rent to Own: Monthly rent contributes to home purchase but has risks.

Methodology for Selecting the Best Mortgage Lenders:

  • Criteria:

    • Affordability, borrower eligibility, and customer service.
    • Factors include interest rates, loan availability, minimum down payment, minimum FICO score, and online features.

  • Nationwide Qualification:

    • Lenders must offer qualifying loans nationwide and have a positive industry reputation.

Additional Insights from CNBC Select:

  • Best for Lower Credit Scores: Rocket Mortgage

    • Accepts applicants with a credit score as low as 580, providing flexibility.
    • Offers conventional loans, FHA loans, VA loans, and jumbo loans.

  • Best for Flexible Down Payment Options: Chase Bank

    • DreaMaker loan allows a down payment as low as 3%, catering to various financial situations.
    • Provides discounts for existing customers and extensive resources for first-time homebuyers.

  • Best for No Lender Fees: Ally Home

    • No lender fees, providing a cost-effective mortgage option.
    • HomeReady loan allows a down payment as low as 3%.

Best Lenders for Low- and No-Down-Payment Mortgages

  1. NBKC

    • NerdWallet Rating: 5.0
    • Min. Credit Score: 620
    • Min. Down Payment: 3.5%

  2. Guaranteed Rate

    • NerdWallet Rating: 5.0
    • Min. Credit Score: 620
    • Min. Down Payment: 3%

  3. Flagstar

    • NerdWallet Rating: 5.0
    • Min. Credit Score: 620
    • Min. Down Payment: 3%

  4. Pennymac

    • NerdWallet Rating: 5.0
    • Min. Credit Score: 580
    • Min. Down Payment: 3.5%

  5. PNC

    • NerdWallet Rating: 5.0
    • Min. Credit Score: 620
    • Min. Down Payment: 3%

  6. Veterans United

    • NerdWallet Rating: 4.5
    • Min. Credit Score: 620
    • Min. Down Payment: 0%

  7. Northpointe

    • NerdWallet Rating: 4.0
    • Min. Credit Score: 620
    • Min. Down Payment: 0%

  8. Network Capital

    • NerdWallet Rating: 4.5
    • Min. Credit Score: 580
    • Min. Down Payment: 0%

  9. New American Funding

    • NerdWallet Rating: 4.0
    • Min. Credit Score: 580
    • Min. Down Payment: 3%

  10. Truist

    • NerdWallet Rating: 4.5
    • Min. Credit Score: 620
    • Min. Down Payment: 3%

  11. US Bank

    • NerdWallet Rating: 4.5
    • Min. Credit Score: N/A
    • Min. Down Payment: 3.5%

  12. Wintrust Mortgage

    • NerdWallet Rating: 4.5
    • Min. Credit Score: N/A
    • Min. Down Payment: 0%

  13. Rocket Mortgage, LLC

    • NerdWallet Rating: 4.0
    • Min. Credit Score: 620
    • Min. Down Payment: 3%

  14. Wells Fargo

    • NerdWallet Rating: 4.0
    • Min. Credit Score: 620
    • Min. Down Payment: N/A