First-time homebuyers with bad credit need to get educated on the types of mortgage loan programs that are available and which mortgage loan program is best suited to their needs. Types of mortgage loan programs include FHA, VA, USDA, Portfolio Loans, Jumbo, Conventional, or Non-QM Loans.

Getting Qualified and Pre-Approved For A Mortgage

Once you have set your mind that you want to be a homeowner, you should start the mortgage application process as soon as possible. There are times when you think that you are a sure bet in getting a mortgage loan approval. A mortgage loan originator can be any first-time home buyer with less than perfect credit, high debt to income ratios, lack of down payment and/or closing costs, collection accounts they do not know about, or most commonly, errors on the credit report. All of these items take time to take care of. The sooner you get qualified the better situation you will be in when the right home steers your way and you need to make a purchase offer.

Pre-Qualified Versus Being Pre-Approved For First-Time Homebuyers With Bad Credit

Your first step as mentioned above is to get pre-qualified and pre-approved. Once a mortgage loan originator deems a first-time home buyer qualified and pre-approved and has reviewed the mortgage loan applications, credit report, credit scores, credit history, and an automated approval per Automated Underwriting System, the buyer will have the green light to make a real estate purchase offer on a home. There is no deadline date for pre-approval. As long as the first-time homebuyer is employed and is not late on monthly payments, the pre-approval should be good indefinitely unless the borrower’s income changes.

Shopping For Homes With Pre-Approval Letter

Take time shopping for homes. Many times the right home will come up. Buyers should never make a purchase offer without having to go through the pre-qualification and pre-approval process. The mortgage loan originator will give you a figure on how much house you can afford.  Just because you are qualified for a certain amount of mortgage loan amount, you need to make sure that the monthly mortgage payments are affordable.

Can I Afford My Monthly Payment On My New Home Purchase?

There are many advantages of being a homeowner versus being a renter, especially the appreciation potential.  Real estate prices are still low after the 2008 real estate and mortgage meltdown and there are many properties where the upside appreciation potential is a true given and a no-brainer.  Many homes are listed and selling below construction and re-build costs which will eventually appreciate.  Everyone likes a nice home with as many amenities as possible. You need to realize that as a first-time home buyer and new homeowner, there will be a lot more expenses in being a homeowner than being a renter. 

How Much Does It Cost Me For My House Payments And Other Costs?

Besides your principal, interest, taxes, and insurance ( PITI ), you will have added monthly expenses in being a homeowner.  Water, scavenger, repairs, maintenance, landscaping, and other fees associated with maintaining your new home will occur, and sometimes high ticket repairs like HVAC repairs and repairing appliances can occur without notice and these repairs can be quite costly. 

How Much House Can I Afford?

It is recommended that you do not buy more houses than you can afford and just because you qualify for a large mortgage loan amount does not mean that you can afford that mortgage amount.  Mortgage lenders will not count your personal expenses such as entertainment, child care, schooling, and other expenses that you have.  When a mortgage lender gives you the maximum amount you qualify for and your monthly payment, review it carefully always keeping in mind reserves for unexpected repairs.

Down Payment And Closing Costs For First-Time Home Buyer With Bad Credit

Many potential first-time homebuyers do not realize that they can actually afford to be a homeowner and that a huge down payment is not needed. I spoke with a first-time home buyer just recently who told me she was not ready to purchase a home. This is because she only had a 10% down payment. She thought that she needed a 20% down payment. That is so not true.

Most homebuyers do not have a 20% down payment to put down on a home purchase. Borrowers can qualify for a conventional loan with a 3.0% down payment, FHA with a 3.5% down payment. USDA  and VA loans do not require any money down. As for closing costs, home buyers do not need to worry about that because they can get a seller’s concession or a lender credit to cover some, most, or all of their home purchase closing costs.

 What Are Closing Costs?

Every home purchase mortgage loan will have closing costs which are costs and fees associated with the home purchase and mortgage loan. Examples of closing costs include title charges, attorneys fees, one year’s worth of homeowners insurance premium, recording fees, and other fees and costs Normally, as a right-hand rule, 2% of the purchase price is generally the closing costs. But your mortgage loan originator will get you a more accurate figure depending on where the property is located and what the third-party charges are for that area.

Get Pre-Approved Today For First-Time Homebuyers With Bad Credit

If you are a first-time homebuyer or veteran home buyer and need pre-approval, click on GET PRE-APPROVED TODAY and complete the 4-page online mortgage application.  I will get alerted via email and will contact you so we can get you pre-approved. 

First-Time Home Buyers With Bad Credit Guidelines and Requirements

First-Time Home Buyers Mortgage Guidelines depend on the individual loan program the borrower applies. The main concern most first-time homebuyers have is the down payment and closing costs. The down payment on a home purchase is fixed. HUD requires a 3.5% down payment on FHA loans. Fannie Mae and Freddie Mac require a 3% down payment on conventional loans. A 5% down payment is mandated on seasoned home buyers on conventional loans. VA and USDA offer 100% financing. Therefore, there is no down payment requirement on USDA and VA Loans. Non-QM and alternative financing loans require a 10% to 30% down payment.

Closing Costs on Purchase and Refinance Transactions

All home purchase and refinance loan transactions have closing costs. Most of our purchase borrowers do not have to worry about closing costs. Closing costs can be covered by the seller’s concessions and/or lender credit.

We will cover the following topics in this article:

• Down payment requirement
• Closing costs on purchase and refinance loans
• Agency guidelines versus lender overlays
• Conventional loans
• Government loans
• First-time home buyer tips

First-Time Homebuyers With Bad Credit Guidelines: Lender Overlays Versus Agency Mortgage Guidelines 

There are various mortgage programs for first-time homebuyers with bad credit. First-Time Home Buyers Mortgage Guidelines depend on individual loan programs. Borrowers need to realize that not all lenders have the same guidelines on FHA, VA, USDA, and Conventional Loans. Just because a borrower does not qualify for FHA Loan at a bank does not mean they cannot qualify for an FHA loan with a different lender.

All lenders need to meet HUD Guidelines on FHA Loans. However, lenders can have higher lending guidelines than agency minimum guidelines. The additional guidelines required by lenders are called lender overlays. FHA Lend Mortgage is one of the very few five-star national lenders with no lender overlays on government and conventional loans.

First-Time Homebuyers With Bad Credit Guidelines On Down Payment Requirements

Most first-time homebuyers can easily afford their proposed monthly home mortgage payment. However, the issue most first-time homebuyers have is coming up with down payment and closing costs. First-time homebuyers On Down Payment Varies Dependent On The Loan Program. HUD offers a 3.5% down payment for borrowers with at least a 580 FICO Score.

Borrowers with under 580 credit scores down to 500 FICO can qualify for FHA Loans with a 10% down payment. Need to get approve/eligible per automated underwriting system. Borrowers who cannot get an approve/eligible but get a refer/eligible can be downgraded on FHA and VA Loans. HUD guidelines are the easiest and most lax when it comes to getting an automated underwriting system with bad credit and high DTI.

Conventional Loans

Conventional loans are the most popular loan program in the United States. Fannie Mae and Freddie Mac set the standards on conventional loans.

First-Time Homebuyers Mortgage Guidelines On Freddie Mac Home Possible

Freddie Mac’s Home Possible has a 3% down payment mortgage program. Freddie Mac Home Possible loan program was created. It was launched to help first-time home buyers. Home Possible is also for move-up home buyers, and retired home buyers. 1% down payment on single-family homes. 5% down payment on 2 to 4 unit multi-family owner-occupant homes. Sellers can contribute up to 3% in sellers’ concessions for home buyers closing costs. Freddie Mac Home Possible has a maximum income limit by borrowers. Borrowers must meet certain income limits with the Home Possible Mortgage program.

The Income and Property Eligibility Tool can be used to determine if borrowers meet maximum income eligibility requirements.

First-Time Homebuyers With Bad Credit: Freddie Mac Home One

Freddie Mac’s Home One Mortgage Program requires a 3% down payment program. Freddie Mac’s Home One Mortgage is for first-time homebuyers. It does not have income limits or geographic area restrictions.

HomeReady Conventional Loans

The HomeReady Mortgage requires a 3% down payment:

• Fannie Mae’s HomeReady program requires a 3% down payment loan program
• This is for seasoned and first-time home buyers

Here is the link to Fannie Mae HomeReady Eligibility Tool:

HomeReady’s Income Eligibility Lookup Tool

Government Loans 

Private lenders originate and fund government-backed loans at competitive rates and zero to low down payments. Government loans are partially guaranteed and insured by a government agency. There are three types of government loans: FHA, VA, USDA. Government loans are for owner-occupant primary residence loans only. Second homes and investment properties are not eligible for government loans.

FHA Loans For Bad Credit

FHA Loans is the most popular loan program in the United States.

• 3.5% down payment is required for borrowers with at least 580 credit scores
• Borrowers with under 580 FICO and down to 500 credit scores require 10% down payment on a home purchase

Sellers contribute up to a  maximum of 6% sellers’ concessions for homebuyer’s closing costs.

VA Loans

Lenders finance 100% LTV on VA loans:

• VA does not require a minimum credit score requirement
• There is no maximum debt-to-income ratio requirements

VA allows up to 4% of sellers’ concessions.

USDA Loans

Like VA Loans, USDA does not require any down payment on USDA Loans and offers 100% financing. USDA allows up to 6% sellers concessions by home sellers.

First-Time Home Buyer Tips

Reserves help homeowners in an event of an emergency. You do not want to have zero money and become a homeowner. There are things homeowners need to purchase. Landscaping tools and yard machinery such as a lawnmower are often necessary and are not cheap. New homeowners may need new furniture and blinds throughout the house. Start saving for a down payment. Applying for new credit during the mortgage process can cause loan denial. Quitting your job and/or changing jobs can cause a loan denial or delay in closing. Avoid any high ticket purchases such as buying a new car or new furniture.

To qualify for a mortgage with a lender with no lender overlays, please contact us at FHA Lend Mortgage if you have any questions at 888-900-1020. Or text us for a faster response. You can also email us at contact@fhalend.com. The team at FHA Lend Mortgage is available 7 days a week, evenings, weekends, and holidays.

Anyone with under 580 FICO credit scores requires to put a 10% down payment on a home purchase FHA loan. FHA Down Payment Requirements allow for 100% of gifted funds for the down payment. The down payment can be gifted by a family member and/or relative but there are rules and regulations on how the gift funds can be used. Gift funds can be used for the down payment and closing cost but cannot be used for reserves. Reserves are one month’s P.I.T.I. ( principal, interest, taxes, insurance). Three-month reserves are normally required on mortgage loan borrowers with credit scores under 600 FICO as well as manual mortgage underwriting files.

FHA Down Payment Requirements: Gift Funds For Down Payment

FHA allows 100% gift funds for the down payment on a home purchase. The gift fund donor needs to sign a gift letter stating that the gift funds for the down payment are not a loan and the gift funds will not get paid back from the home buyer.

The gift funds recipient needs to provide a copy of the check along with the deposit slip of the gift funds as well as an updated bank statement with the gift funds deposited. The donor of the gift funds needs to provide 30 days bank statements of their bank account. The bank statements need to show the funds have been seasoned and show that the gift funds left their bank account.

Automated Underwriting System Findings

Mortgage lenders and the Automated Underwriting System does not view gift funds favorably. There are many times where borrowers with credit scores under 620 FICO will get a referred/eligible per DU Findings and not get an approve/eligible per DU Findings due to having gift funds for their down payment. If you remove the gift funds for the down payment when the DU Findings are referred/eligible, the new findings may result in an approve/eligible just by not having gift funds and the home buyer having their own funds for the down payment.

FHA Down Payment Requirements: How To Avoid Gift Funds

A home buyer can get gift funds and use them as their own funds for the down payment on a home purchase. There are two ways of doing this. The first is by getting the gift funds deposited in the home buyer’s bank account and letting it season for sixty days. Mortgage lenders will require 60 days of bank statements. This holds true as long as the funds are already in the borrower’s bank account, it will be treated like it is the borrower’s own funds.

Tips On How To Come Up With Verified Assets

  The second way of avoiding gift funds for a down payment is by adding the borrower’s name into the donor’s bank account as a joint bank account holder. Once the borrower’s name is added to the bank account of the gift donor, get sixty days of bank printouts and have the printout signed, dated, and stamped by the bank teller. Then get a letter from the main account holder stating that the joint bank account holder has full access and rights to the joint bank account.   

Low Down Payment Home Purchase Programs And Guidelines

Down Payment is the biggest hurdle for first-time home buyers. Many home buyers often contact us to go over Down Payment Home Purchase Options. Many homebuyers can afford to make monthly mortgage payments and become homeowners. The single biggest hurdle they have is coming up with the down payment. All real estate transactions have closing costs. However, most closing costs can be covered with sellers’ concessions and/or lender credit. In this blog, we will go over Down Payment Home Purchase Options for home buyers.

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Costs And Fees Involved With Home Purchase Transactions

With the exception of VA and USDA Loans, all loan programs have down payment requirements. All purchase and refinance transactions have closing costs. Most homebuyers do not need to worry about closing costs. Closing costs can be covered with sellers’ concessions. If they are short with sellers’ concessions, lenders can offer lender credit in lieu of a higher mortgage rate. However, during a booming hot housing market where sellers get multiple purchase offers, it may be difficult to get a seller concession.

FHA Down Payment Requirements Versus Mortgage Loan Program 

There are many down-payment mortgage options. VA and USDA Loans are government loan programs that do not require any down payments. Lenders can offer 100% financing on VA and USDA loans to qualified borrowers. HUD, the parent of FHA, requires a 3.5% down payment. Freddie Mac Home Possible mortgage program allows a 3% down payment. Fannie Mae Home Ready Mortgage Program requires a down payment of 3%. FHA Lend Mortgage offers national DPA programs. Our Down Payment Assistance Programs offer grants to first-time homebuyers needing down payment assistance.

How Property Tax Proration Credit Can Help With Down Payment

In certain states like Illinois, property taxes are paid in arrears. What this means is that home seller owe home buyers the previous year’s property taxes at closing. This is called property tax proration. Homebuyers in Illinois or other states where property taxes are paid in arrears get to use the tax prorations as part of their down payment and/or closing costs.

For example, if a home buyer is buying a home for $100,000, the home buyer needs to show a 3.5% down payment or $3,500. However, if they get a property tax proration credit of $3,000, then the buyer only needs to come up with $500 in closing. The property tax proration credit will be applied to the down payment. Buyers still need to show that they have $3,500 to the lender but do not need to use their own funds if they are getting property tax proration.

Can Sellers Concessions And Lender Credit Be Used For Down Payment

Sellers are allowed to give sellers concessions to home buyers. Sellers’ concessions can only be used for closing costs. It cannot be used for a down payment. The only credit that can be used for a down payment is property tax prorations. Lender credit can only be used for closing costs and NOT Down Payments on home purchases. Every mortgage program has its maximum sellers’ concession credits sellers can offer buyers.

Maximum Sellers Concessions Allowed

Here are the maximum seller concessions per loan program. FHA maximum sellers concessions are 6%. VA is 4% sellers concessions. USDA loans allow up to 6% seller concession. Conventional loans allow up to seller concession Up to 3% with 90% LTV or higher on owner-occupant and second homes. Up to 6% sellers concession on Loan To Values of 75% to 90% LTV on owner occupant and second homes.

Up to 9% sellers concessions with a loan to value than 75% on owner-occupant and second homes. Maximum 2% sellers concessions on investment home loans. Jumbo lenders allow sellers concessions but depend on the lender. NON-QM lenders allow sellers concessions of up to 6% but depend on the particular non-QM lender.

Qualifying For Mortgage With Little Down Payment

There are times when borrowers will get overages in sellers concessions:

• Any sellers concession overages need to go back to the home sellers
• Buyers cannot have sellers concession overages
• Borrowers cannot get a kickback from sellers on sellers concession overages
• It needs to go back to home sellers
• Most experienced loan officers will not waste sellers concessions
• Loan officers will find creative ways of using up all sellers concessions

The easiest way of using up sellers concession overages is to use it in buying down mortgage rates. Upfront FHA mortgage insurance premiums and VA Funding Fees can be paid with seller’s concessions and not rolled into the mortgage loans.

Sources For Down Payment

VA and USDA do not require down payments. Homebuyers can purchase homes with zero money out of pocket with VA and USDA Loans. Both agencies allow 100% financing. Closing costs are not needed because they can be covered with seller concessions and/or lender credit. Other sources to help with a down payment with other mortgage programs may be gifted funds. Lenders allow gift funds by relatives for homebuyers to use as a down payment.

Many home buyers have 401k retirement accounts. Homebuyers are allowed to use 401k for home purchases. Borrowers can borrower up to 60% of their 401k value. The repayment of their 401k does not impact borrowers’ debt-to-income ratios. The reason it does not count against borrowers’ debt to income ratio is when you are borrowing against 401k retirement accounts, you are borrowing your own funds. Therefore, you are not incurring any additional debt but borrowing against yourself.

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