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Conventional Shmonventional: Is A Creative Loan Option Best For First-Time Buyers?

Written by Jaymi Naciri Posted On Wednesday, 17 January 2018 21:22

If you're in the market to buy a home and, especially, if it's your first home, you've probably heard A TON about conventional and FHA loans. But just like you're not like anyone else, your financial situation may not be either. The truth is that while you may think you need to go with one of these expected loans, it could be that there are far better options out there to meet your needs. This is especially true if you're having a hard time coming up with a down payment, have a lower credit score, are still paying off student loans, or are continually getting priced out of your desired neighborhoods. These options are all worth mentioning to your lender as you discuss your home purchase.

Employer loan assistance

This brand-new program could spell the difference between perma-renting and being able to buy your own place, and all it takes is a forward-thinking employer. "A new program allows employers to help workers' down payment on a home, similar to how companies contribute to a 401(k)," said REALTOR Mag. "HomeFundMe, a Fannie Mae and Freddie Mac-approved down payment crowdfunding platform, allows borrowers to crowdfund their down payment from several sources, including their employer. CMG Financial, a mortgage banking firm, created the HomeFundMe program."

FHA 203(k) loan

We have written about this loan a few times before but it bears repeating that THERE IS A LOAN OUT THERE THAT ALLOWS YOU TO BUY A HOME AND FIX IT UP! This is great for those who want to take on a reno project with their first home or are willing to do so because they can't find a move-in ready home in their budget and/or area. The minimum credit score is 580 to qualify for a down payment as low as 3.5%, but can go as low as 500 for a down payment of 10%.

The standard 203(k) covers most types of improvements or repairs, and the amount of money borrowed for the loan can exceed its current value; you can borrow up to 110% of what an appraiser estimates will be the "after" value of the home.

Fannie Mae HomeStyle Renovation mortgage

The Fannie Mae HomeStyle Renovation mortgage is similar to the 203(k) and requires only a 5% down payment. It has one big advantage over the 203(k): It is also open to investors—perfect if you're already a homeowners and are looking to do a flip with little money out of pocket. "With a down payment of less than 25%, you'll need a credit score of at least 680," said Interest.com. "If your debt-to-income ratio is higher than 36% but less than or equal to 45%, your credit score needs to be 700 or higher."

The funds can be used for repairs, renovations or energy improvements. "The only restriction is that the changes must be permanently affixed to the property and add value."

Energy-efficient mortgage (EEM)

This is another loan geared toward making home improvements, but, in this case, they are focused on energy efficiency. These loans are guaranteed by the FHA, or the VA for military buyers.

"One of the best tools for making your dream home more affordable while saving on the cost of power, heating and cooling is the energy-efficient, or ‘green,' mortgage," said Bankrate. "Most energy-efficient mortgage, or EEM, programs let you qualify for bigger loans than you would otherwise by folding in the additional cost of making improvements for energy efficiency or of purchasing an already energy-efficient home. Another version of the green mortgage provides discounts on loan fees or interest rates for homes that are certified as energy-efficient."

USDA loan

Zero down payment loans are "issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture," said Nerdwallet. Eligible homes are generally in rural areas, but may also cover suburban locales. You can use their map to look up individual addresses.

The USDA also "guarantees a mortgage issued by a participating local lender - similar to an FHA loan and VA-backed loans - allowing you to get low mortgage interest rates, even without a down payment" and offers home improvement loans and grants, as well.

Good Neighbor Next Door

If you're a police officer, firefighter, EMT, or teacher (K–12), you may be able to take advantage of the Good Neighbor Next Door program. Sponsored by HUD, this program slashes the price of eligible homes in "revitalization areas" by 50%. "Buying a home through HUD's Good Neighbor Next Door initiative is designed to encourage renewal of revitalization areas by providing an opportunity for law enforcement officers, firefighters, emergency medical technicians and teachers to purchase homes in these communities," said HUD. You can search eligible homes by state on the HUD website.

Eagle Home Mortgage

Another recent entry intended to help millennials become homebuyers, this mortgage option from Eagle Home Mortgage, a subsidiary of Lennar, helps homebuyers pay off their student loan debt.

"Eagle Home Mortgage's Student Loan Debt Mortgage Program offers borrowers as much as $13,000 that can be used to pay off student loan debt," said Housingwire. "But the program isn't without its conditions. Borrowers who used Eagle Home Mortgage's Student Loan Debt Mortgage Program can direct up to 3% of the purchase price to pay their student loans, but only if they buy a new home from Lennar. Lennar contributes the 3%, which, according to the company, does not increase the price of the home or add to the mortgage balance. The program's maximum loan amount is $424,100, but Lennar said that in addition to the 3% contribution to student loan balances, buyers may also be eligible for other incentives -- such as credits toward closing costs."

National Homebuyers Fund

The National Homebuyers Fund is not a loan - it's a grant for up to 5% of your loan amount that provides down payment assistance with no need to ever pay it back. "You read that right—you don't have to pay back anything," said Realtor.com. "The NHF offers two down payment assistance programs with different sets of requirements, but both are meant for low- to moderate-income earners. The NHF Sapphire program is available in multiple states and has generous FICO score requirements (which is a good thing if you have a subpar credit score)."

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