Pros and Cons of First-Time Home Buyer Loan Programs

First-time home buyer loan programs may be available at the federal or state level. They are designed to help credit worthy individuals deal with the unique issues surrounding buying a first place; namely, they help make the start up costs less expensive. While this is a significant advantage, it comes at the expense of other issues that may make the programs a bad idea for some people. 

Pros of First-Time Home Buyer Loan Programs

  • Low down payment - The main goal of these programs is to reduce the start up cost required to buy a home. They do this by accepting low down payment terms. The FHA first time buyer program, for example, requires only 3.5 percent down. Closing costs and fees may also be reduced. Overall, the amount you will be required to obtain and save before buying your first home will be lowered, making it possible for you to buy the home sooner. 
  • Fixed rates - Most first time loans are designed to help home buyers avoid traps and problems associated with many conventional first time buying experiences. Adjustable rate loans are common among first time home buyers who do not use a designated program. With a federal or state program, a buyer is typically guaranteed a fixed rate for the life of the loan.
  • Affordability - The goal of the first time program is to make home ownership affordable through the low down payment and fixed rate. It is also to assure the borrower qualifies for the loan, since most programs will not accept borrowers if they have reason to believe default is possible. 

Cons of First-Time Home Buyer Loan Programs

  • Low limits - With any first time home buyer loan program, the program coordinator is taking on a large risk. The low down payments and fixed interest rates make your loan affordable, but this affordability only exists when the loan is also low limit. You may find you can only secure 60 to 75 percent of the amount you would be offered on a conventional loan.
  • High insurance requirements - First time home buyer loan programs proudly boast the fact you will not be required to purchase private mortgage insurance. While this is true, you will still need to replace this insurance with insurance provided by the loan program. You will need to keep this insurance until at least 20 percent of your mortgage is paid off, on average. The additional fee can actually be greater than the fee you would pay for private insurance in the same amount. 
  • Lack of flexibility - First time home buyer loan programs are only available to a limited group of people who fit a specific profile. They are not very flexible for borrowers with less than perfect credit. Further, the loan terms may be strict going forward. You may be unable to refinance, take on home equity loans, or otherwise change the terms of your debt or your collateral. While there may be options to refinance through the program provider, your options to remove the loan from the provider will be limited.
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