June 13, 2018 / Hollie Shuttlewood.
The Best Lenders for First-Time Home Buyers
June 13, 2018 / Hollie Shuttlewood.
If you qualify as a first-time buyer and have begun shopping around for a mortgage and a new home, we have good news to tell you: some of the nation’s best lenders will be willing to offer you a home loan with a down payment of less than the usual 20%. All you need to do in return is pay private mortgage insurance (PMI), which typically costs 0.5% to 1% of the value of the loan annually.
Top 3 Lenders for First-Time Home Buyers
Years of operation: 22 | States: 50 | Annual Closed Mortgage Volume: | NA
- + Free service
- + Compare multiple lenders
- + Handy educational resources
- - Not a direct lender
- - Rates shown only by entering contact details
- - Calls from multiple lenders
LendingTree is an online marketplace that connects users to the best mortgages from a network of trusted lenders in seconds. All you need to do is enter some basic details about your purchase price and the loan amount you’re looking for, and LendingTree will show you the best rates and let you toggle between rates, terms, and closing costs. Once you’ve selected a lender or lenders, you’ll be connected with a loan agent who can tell you about their programs for first-time buyers.
Years of operation: 4 | States: 14 | Annual Closed Mortgage Volume: | ~$1 billion
- + No origination fees
- + Quick approval process
- + Good for buyers in competitive markets
- - High closing costs
- - No FHA, VA or other unconventional loans
- - Not yet licensed in every state
Better has designed its “Better Offer” package to help first-time buyers win bidding wars in competitive markets and get a discounted rate on homes in less competitive markets. After Better pre-approves you, it uses its digital appraisal process or sends an appraiser out to the home you’re interested in to determine the real value. It makes an informed offer on your behalf based on the true value of your home and waives all your financing and appraisal contingencies as well. That way you get a better deal on your home and save money on closing costs.
Years of operation: 15 | States: 50 | Annual Closed Mortgage Volume: | ~$3 billion
- + Specializes in non-conventional loans
- + Dedicated loan officer for each customer
- - No live chat option
- - Must give contact details to discover rates
CrossCountry offers first-time buyers from all 50 states a couple of options if they can’t make a 20% down payment. One option is a 3% down payment with private mortgage insurance (PMI). A second option is what is known as lender-paid mortgage insurance (LPMI): if you can’t make the full 20% down payment, CrossCountry may be able to pay your mortgage insurance in exchange for a slightly higher interest rate.
Who Qualifies as a First-Time Buyer
First things first, a “first-time buyer” doesn’t just refer to people buying their first home. Under the Department of Housing and Urban Development’s definition, lenders should treat borrowers who meet any of the following requirements as a first-time buyer:
- A person who has never owned a property.
- A person who has not owned their principal residence for at least 3 years.
- A single parent who previously co-owned a home while they were married.
- A homemaker who previously co-owned a home with a spouse but who is now separated and no longer receives financial support from that spouse.
- A person who has only owned a residence not affixed to a permanent foundation, such as a mobile home or a trailer.
The Benefits of Being a First-Time Buyer
The 2 major benefits of being a first-time buyer are the lower down payments and the fact that certain mortgage expenses are tax deductible.
Let’s not underestimate the importance of lower down payments. The minimum down payment for a conventional fixed-rate or adjustable home loan is 20%, meaning that if your home value is $300,000, you’ll need to pay $60,000 up front (in addition to closing costs). Thankfully, first-time buyers don’t need to pay such a high amount to get into the housing market. Many of the nation’s top lenders offer conventional mortgages for as little as a 3% down payment: if your home’s value is $300,000, that means your lender will only ask for $9,000 up front. And if you can’t meet the credit requirements, then a government-backed FHA loan requires a down payment of 3.5% for borrowers with a 580-619 credit score and down payment of 10% for borrowers with a 500-579 credit score. The only catch with an FHA loan is that the borrower must take out private mortgage insurance (PMI) to protect the lender.
The other major benefit is that some mortgage expenses are tax-deductible, and again this can lead to significant savings for the borrowers. Interest is deductible, so long as your mortgage is worth less than $1 million. To understand just how much you can save, let’s use the example of a borrower with $60,000 income taking out a $300,000 home loan over a 30-year term. In this example, the borrower would pay $247,220 in interest over the term of the loan; using a 25% income tax rate and all other things being equal, they would save a whopping $61,805 on their taxes over the duration of their loan. Real estate taxes are also deductible. On the other hand, the recent federal tax reforms stripped mortgage insurance of its tax-deductible status.