The Pros and Cons of First Time Home Buyers Loans

When you're dreaming of settling into a home of your own, first time home buyers loans seem like the obvious choice for getting financing with favorable conditions. While these loan programs offer an excellent opportunity for some, they're not right for everyone. Before you narrow your choices down, make sure you understand the ins and outs of these loans.

The Pros

No or low down payments
For many people, the chance to skirt the 20% down payment most mortgages require is one of the most attractive features of first time home buyers loans. Many states also offer down payment assistance in the form of gift programs that provide up to 10% of the price of the home.

Low interest mortgages
Not only do first time home buyer loans give you the chance to buy with minimum up-front cash, they frequently offer below market interest rates. In most cases, you'll pay 1% to 4% less in interest than you would with a standard mortgage loan.

Flexible underwriting standards
You don't need years of excellent credit history to apply for first time home buyers loans. Accommodating underwriting standards mean lenders are willing to consider non-traditional forms of credit history like credit card payments, auto loan payments, and rent or utility payments. They may also be willing to allow higher ratios of debt to your income.

The Cons

Selection limited to lower end homes
First time home buyer loans generally place a cap on the price of the home you can buy, meaning you'll be restricted to the cheaper properties in the area you plan to buy in. Some programs also require you to choose a home in a "target area" that may not be a particularly desirable place to live.

Penalties for selling early
With most first time home buyers loans, if you sell before a specified time (usually five years) you’ll be stuck with a bill for the full principal of the loan at the close of escrow. If you think there's any reason you might need to sell (to relocated to a new job or move closer to ailing parents), take a close look at the penalties you’ll incur if you sell early.

Limited selection of loan types
Interest rates and associated fees on these loans may be low, but you're often limited as to the time of loan you can take out. Most often, a 30-year fixed-rate mortgage is the only type you'll be offered. The good news, though, is that FHA and VA loans are almost always eligible.

If you're on a limited income, have decent money management skills, and aren't looking to move into a mansion, first time home buyers loans are a great way to get a low-interest mortgage even when you don't have much saved for the down payment. They do have their drawbacks, though, so before you limit your options, take a good look at what you can get through traditional mortgage lenders in your area, then compare it to the first time home buyer loans available.