Buying your first home is a big deal. It takes time, money, and a lot of hard work. Unless you are buying your home with cash, you will likely require some form of financing and are probably looking into first time home buyer loans.  Lenders have indeed become a lot stricter in recent times and loans are tougher to get than they were just a few years ago.  However, there are programs available that can help, especially if you have good credit.

There are many benefits to first time home buyer loans but they do come with restrictions and have strings attached.  As such, they may or may not be right for you depending on your current situation.  On the plus side, these programs let you and your family own a home which otherwise may not have been possible.  It also helps the community as home owners take care of their properties,  get involved, and contribute.  The economy also benefits. First time home buyer loans can help you:

* Subsidize the interest you pay (i.e. the program pays part or all of it)
* Allow you to make a low down payment or make no down payment at all
* Offer grants
* Impose limits on fees that lenders charge you
* Defer payments
* Forgive loans completely

On the downside, most of these programs do put a limit on the value of the property you intend to buy and the home you end up with may not be the one you want.  As such, you are not going to be able to get a very expensive place.   The home also needs to be your primary residence and so the program won’t work if you are planning on buying it just to rent it out.   You will also lose some or all program benefits if you sell your home too soon.  This is to discourage house flipping.  There are also income restrictions to qualify for subsidized first time home buyer loans – if you make too much, then you won’t qualify.  Other potential disadvantages include the requirement to pay a recapture tax on benefits you received and restrictions on the types of loans you are eligible for.  Lastly, the home you intend to buy must meet certain physical requirements and safety standards as required by the program.

As a good rule of thumb, subsidized first time home buyer loans work best if you have a FICO credit score below 680.  If your score is above 720, you likely won’t benefit very much.  If a subsidized first time home buyer loan is not right for you, you may be better off with a traditional mortgage with a low down payment or an FHA (Federal Housing Authority) loan.

FHA loans are loans insured against default up by the FHA – in other words, if a borrower defaults the FHA guarantees that it will pay.  As such, lenders are more willing to make large loans.   With FHA loans, you can buy a home with small down payment and receive additional benefits such as no prepayment penalties, leniency during difficult financial times, and funding for home improvement.  On the downside, an FHA loan may not provide you with enough money if you need a large mortgage and they do charge a 2.25% upfront  mortgage insurance premium and ongoing monthly fees which can get expensive.  (The insurance premiums are used to pay off the mortgage if a borrower defaults).  Many states also have programs that offer low interest first time home buyer loans and/or cash grants to help you make down payments and cover closing costs.

As with anything else, it is imperative that you shop around and explore all your options. Compare traditional mortgages, subsidized first time home buyer loans, FHA loans, and programs offered in your state and find the program that’s fits your needs and current financial situation.

References:

http://banking.about.com/od/mortgages/a/firsttimebuyer.htm
http://banking.about.com/od/mortgages/a/FHALoans.htm