Before applying for a home loan, it’s important to have a good credit score — something first-time homebuyers might find challenging. For younger homebuyers, a new home might be one of their first major obligations, and their credit history may not be as extensive as those of repeat homebuyers. At the same time, a shorter credit history does not always mean first-time homebuyers have a reduced number of options when it comes time to apply for a mortgage. Private and public lending markets both provide loan options for these homebuyers.
The Federal Housing Administration is a government agency that insures mortgages originated by participating private market lenders. Many banks offer an FHA loan option, and they’re often popular for first-time homebuyers because they can come with lower down payment and less stringent credit score requirements. A buyer with a credit score of 580 or higher may only be asked to make a 3.5 percent down payment on an FHA loan, substantially lower than the typical 20 percent down payment required on non-FHA loans. Buyers with scores between 500 and 579 must make a 10 percent down payment. Buyers with scores lower than 500 won’t be eligible for an FHA loan.
Low down payments can benefit first-time homebuyers because these consumers haven’t always saved up the tens of thousands of dollars sometimes needed for a traditional down payment.
Non-FHA loans may come with higher down payments, interest rates and other loan terms. If a homebuyer cannot afford the lender’s down payment requirement of 20 percent or if he or she does not have a good credit score, he or she may be asked to pay for private mortgage insurance, which provides the lender with financial protection against a default. Lender fees, interest rates and down payment requirements can vary between different lenders, making it a smart idea to shop around for a mortgage.
While it’s smart to shop for different loan quotes, each quote requires lenders to pull a consumer’s credit scores and reports. That can result in credit score damage, making it important for a consumer to finish all his or her mortgage shopping in a brief period of time — preferably two to four weeks. Many credit scoring models will condense multiple hard inquiries into one single mark if they are completed during that span of time. If they haven’t already started mortgage shopping, first-time homebuyers may want to take the time to pull their own credit scores and reports so that they have time to clear any inadequacies or errors before they apply for a loan.