Best Mortgage Lenders for First-Time Buyers

Apr 2, 2022 | Mortgage Guides

The 5 Best Mortgage Lenders For First-Time Buyers

Every first-time homebuyer has unique challenges in their mortgage journey. Some need to work with smaller budgets, while others must manage a limited credit history – both make finding the best mortgage program difficult. Moreover, many home buyers wrestle with questions about credit cards, government-backed loan offers, homeowners insurance, and balancing their financial life with things like money market accounts, individual retirement accounts (IRA), and savings accounts in order to make the best decisions for their situation.

Despite this, 34% of new homes sold in 2021 went to first-time homebuyers. How did they pull this off? They choose the best lenders and mortgage programs to suit their needs and pave the way for their new life in the world of home ownership. Paying attention to the details of various loan options was crucial for their success.

To aid the home-buying journey, this guide will help you understand mortgage basics, the types of loan options, creditor options, and how to determine the best lender for both your personal and business requirements.

Mortgages Explained

Mortgages are secured loans taken out against the value of an asset – that is, the house you want to purchase as a first-time homebuyer. To pay off this loan, homeowners must make payments according to an amortization schedule determined by their creditors.

Failing to pay off a mortgage loan can result in a lender repossessing the property to offset financial losses. Once the mortgage loan is paid off, you become your house’s official owner, and the lender can no longer repossess the home.

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Mortgage Types

There are a variety of mortgage products and loan options. Some home loans may require 20% of the home’s cost upfront, while other creditors have low down payment options for clients with a stellar credit history.

Even if a first-time homebuyer does not meet the minimum credit scores for conventional loans, government-backed mortgage products make owning a home more attainable.

The section below describes the most common types of loan products and who can apply for them.

Conventional Home Loan

Conventional loans are mortgages that the federal government does not back. Instead, a first-time home buyer with a good credit score can secure a mortgage with private creditors or government-sponsored organizations like Fannie Mae or Freddie Mac.

Because the government doesn’t guarantee these loans, mortgage lenders may require borrowers to pay for private mortgage insurance (PMI) on down payments of less than 20% of the total. In addition, first-time home buyers should have clean credit histories and a stable income.

Government-Backed Home Loan

A government-secured mortgage might be an option when a borrower does not meet a conventional loan’s minimum credit score requirement. The FHA, VA, and USDA loans are all government-secured mortgage products, meaning they provide insurance if the agreement falls through. As a result, financiers are more likely to enter agreements with first-time homebuyers with a less-than-perfect credit score.

Federal Housing Administration (FHA) Loan

FHA loans are designed to help first-time homebuyers who can’t qualify for a conventional loan, whether it’s because of their credit score or debt-to-income ratio (DTI). Lenders are lenient with rates and fees on FHA loans, sometimes allowing borrowers to pay as little as 3.5% for their down payment without PMI. Also, mortgage rates on FHA loans are lower.

However, one drawback to getting an FHA loan is the mortgage insurance premium (MIP). Borrowers must pay the premium upfront and every year following the activation date. Factors like these are essential considerations when selecting a suitable mortgage company.

Department Of Veterans Affairs (VA) Loan

Qualified service members and their spouses can apply for a VA loan, which provides them with the entire loan amount with zero down payment. VA loans also have lower mortgage rates than conventional and FHA loans! Throughout the process, VA loan applicants can rest assured that they are taking advantage of one of the most lucrative offers available for their unique circumstances. This article will highlight some essential information about VA loans as part of a comprehensive guide for prospective borrowers.

The following are the requirements for this low-interest rate option:

  • Veterans receiving VA-sponsored benefits due to a service-related disability
  • Surviving spouses of veterans who died while in service
  • Veterans entitled to compensation for a service-related disability or injury

Borrowers who apply for VA loans pay a funding fee, which offsets the cost to taxpayers. Note that the prices vary based on the type of service and the mortgage amount. Certain lending partners may offer the option to pay the funding fee through an app. Additionally, some companies could provide down payment assistance programs.

Department of Agriculture (USDA) Loan

Like FHA, VA, and other government loans, USDA loans help low-income first-time homebuyers. However, unlike other government-insured options, USDA loans target buyers in rural areas that are less dense and underserved by conventional lenders. Creditors require low down payments, sometimes offering no-money-down mortgages while also offering reasonable low interest rates compared to other government-backed loan programs. Buyers can deposit their cash in the dedicated account to secure their loans.

More than 90 percent of the United States area map qualifies for a USDA or Rural Development (RD) home loan.

Conforming Home Loan

A conforming home loan is a conventional mortgage that doesn’t exceed a county-specific dollar cap – therefore, meets the requirements to be purchased by Fannie Mae or Freddie Mac. The Federal Housing Finance Agency (FHFA) determines the maximum, which changes every year. 

As of 2023, the conforming loan limit (CLL) for one-unit properties is $726,200, but areas like New York and San Francisco may have higher limits. These loans are essential because the CLL protects both the lender and borrower from taking on more risk/debt.

Non-Conforming Home Loan

As the name suggests, non-conforming loans exceed the county-specific dollar cap, making them unlikely to be purchased by government organizations for insurance. The most common non-conforming loan option is a jumbo loan.

A typical mortgage lender considers these loans risky, resulting in larger down payment requirements. Only first-time homebuyers with excellent credit or substantial savings will be considered.

Types Of Mortgage Lenders And Creditors

First-time buyers face many decisions when purchasing a home. One of the most important considerations is who will be the financier. Lenders determine everything from the rate to the payment scheme, so find one that suits your needs. Be sure to explore all available partners for better loan deals.

Below are the most common types of mortgage lenders.

Direct Lenders

Direct lenders can be online entities, credit unions, banks, and other organizations that offer mortgages. Thus, first-time buyers don’t have to deal with mortgage brokers while securing the best interest rates.

Given that a direct lender processes applications internally, the information is accessible – from closing costs and interest rates to the origination fee for their services. Albeit, loan products may be expensive or incomprehensible when dealing with direct lenders, so shop around. There are a number of ways to navigate loan products tailored for small business owners; for example, seeking advice from a financial advisor can help you find the best option.

Mortgage Brokers

A mortgage broker is an independent professional who compares mortgages on behalf of buyers. They charge about 1-2% of the total loan, payable by the buyer or lender. Brokers are third-party agents without deciding power over closing costs, interest rates, or origination fees. They typically partner with a range of lenders to offer a diverse product selection for clients.

Correspondent Lenders

Unlike brokers, correspondent mortgage lenders originate, underwrite, and fund the loans. Once the loan closes, they sell them to larger institutions through the secondary mortgage marketplace. Once the mortgage is sold, the larger lending institution becomes the loan servicer. This process allows for a seamless transition and a higher number of mortgages being serviced.

Wholesale Lenders

In contrast to most lenders, a wholesale mortgage lender works with brokers. They offer products at reduced mortgage rates and rely on independent agents to connect them with consumers. These relationships ensure that their products reach a broader audience.

Portfolio Creditors 

Community banks, credit unions, savings, and loan institutions are portfolio creditors. Similar to correspondent lenders, these lenders also originate and fund loans. However, there is one significant difference: the mortgages purchased from these creditors are funded with customers’ deposits. 

That means portfolio lenders can afford to keep the mortgages within their agency, so they also service the loan throughout its lifetime. These lenders often cater to a range of customers in a specific area, and their ability to provide personalized service can attract local clients. In some cases, they may even offer rewards and access to additional services, like phone banking, for their U.S. customers. By doing so, they can help to alleviate the burden of taxes for their clients.

Hard-Money Creditors

Hard-money creditors are private investors who provide short-term loans backed by real estate. These investors are indifferent to mortgage rates and care more about the collateral’s value.

On top of this, a hard-money lender gives borrowers less time to repay their loan, often from 1-5 years. They also charge higher interest rates and closing costs. The loan terms can be challenging, but some borrowers, particularly those in need of quick funding, find this option suitable.

How to Find the Best Mortgage Lender

Choosing the best lender isn’t about getting lucky—it’s about being prepared. Here are five actionable tips for new buyers looking for a lender.

Work On Your Credit Score

A credit score is the most significant determining factor regarding your mortgage rate. But what can you do about poor credit?

Performing a credit check beforehand with the three main reporting bureaus, Experian, TransUnion, and Equifax, is often recommended. If your credit score is not as high as expected, review the report for delinquent accounts or payment errors. Once you’ve identified the problem, start making regular payments. Once you’ve remedied a poor credit rating, many creditors will likely offer a more favorable mortgage rate.

Determine Your Budget

First, take note of your gross income, recurring expenses, and outstanding loans. Then, factor in your financial goals (savings, spending money) and monthly utilities. Once you have an itemized list of expenses, you’ll have a more precise estimate of how much you can afford to set aside for a mortgage.

Note that while creditors run strict financial checks to ensure you’re capable of paying off your mortgage, some firms may allow buyers to max out their spending capacity – leaving zero wiggle room. While this can secure a more significant first home, you risk losing your property if you encounter financial troubles. An experienced financial advisor can help you create a manageable plan and determine your borrowing capacity based on your individual circumstances.

Research Home Loan Options

To land the best mortgage lenders for first-time buyers, speak a lender’s language to get the optimum mortgage rate. That means researching, reading about the housing market, understanding state and local legislation regarding homeownership, and having a working knowledge of mortgage-related jargon, including credit score requirements and the difference between fixed-rate and adjustable-rate mortgages.

Beyond just knowing the difference between a fixed-rate and adjustable-rate mortgage, knowing what you can and cannot do will expand your mortgage options. For example, many folks buying their first home go the “traditional” route and apply for a mortgage with a large lender, like a bank. Alas, these creditors require hefty down payments and may have stricter credit score requirements. 

On the other hand, buyers who researched know that local creditors may have better terms, rates, and more lenient credit score requirements. Taking the time to smarten up pays off when determining the best mortgage lenders.

Compare Rates From Different Lenders

Once you match the criteria for minimum credit score and understand the loan types, including adjustable-rate mortgages, complete a few online applications – credit unions, banks, and online mortgage lenders. Shopping around for the best possible loan terms means you are in charge of how much money is spent. 

Gaining access to a wide range of options, from phone apps to traditional banks, allows you to compare what each lender offers, ensuring you make the best decision for your financial situation. After all, every lender has protocols that form their rates, and sometimes, it just isn’t a good fit. This is especially true in the mortgage process, where a person might seek assistance and compare opinions to find the best lender for their needs.

If you have a bigger budget but less time, contact a mortgage broker. Ascertain what you want and communicate it with the broker. They may help guide you towards specific programs suitable for your situation, such as a home equity line of credit (HELOC).

By creating an account on the lender’s site or app, buyers can access a page containing essential information about interest rates and fees in different states. This content can help them make informed decisions when choosing the best mortgage option.

Get Pre-Approved For Your Mortgage

Let’s say you’ve settled on a lender of two after your cursory examination. The next logical step would be to get pre-approved. This process opens the line of communication between you and your chosen lender. They examine your credit score, spending history, and overall loan eligibility. Get quotations for a fair and accurate comparison between creditors.

Best Mortgage Lenders For First-Time Buyers | Wesley Mortgage

Best Lenders For Home Loan First-Time Buyers

This section lists some of our top picks for the best mortgage lenders for first-time buyers.

Best For VA Loans: Veterans United

Veterans United has an array of loan products but only works with eligible veterans and military spouses. It is one of the largest VA loan lenders in the United States.

Minimum credit score: 640

Pros

  • 24/7 customer service
  • Online applications
  • Free credit-counseling
  • Fixed-rate and adjustable mortgage options

Cons

  • It does not offer HELOCs or home equity loans
  • The website can be challenging to navigate
  • It may be more expensive than other VA creditors

Best For First-Time Homebuyers who Prefer Banks: Bank Of America

Bank of America (BoA) is one of the friendliest “big bank” options for new buyers. This creditor boasts low rates alongside a user-friendly online interface. Bank of America also has numerous brick-and-mortar locations.

Min credit score: 620

Pros

  • No-PMI, low down payment mortgages
  • Alternative credit data can be considered
  • One of the best online mortgage experience

Cons

  • Long approval process
  • Origination fee necessary
  • No USDA loans

Best Credit Union For Veterans: Navy Federal Credit Union

A members-only institution aimed at supporting military service people, veterans, and their families. With its excellent online integration and top-tier customer service, It is the best choice for military families buying a new home.

Min credit score: N/A

Pros

  • Excellent customer service
  • Well-designed apps for most platforms
  • Zero down
  • Flexible approval process

Cons

  • Available to military folks
  • No home equity loans

Best For Getting An Online Mortgage: Quicken Loans By Rocket Mortgage

Different from traditional creditors, Quicken Loans has a low credit score requirement, making home buying effortless for many low-income families and individuals.

Min credit score: 580

Pros

  • Unparalleled online service
  • Customizable loan term
  • Rate lock

Cons

  • No physical branches
  • No home equity loans

Best For A Self-Employed Homebuyer: New American Funding

Most lenders evaluate potential borrowers based on their credit ratings and income statements, making it difficult for self-employed individuals to secure a mortgage. Alas, New American Funding boasts a manual approval process that allows consumers to submit other sources of financial data.

Min credit score: 620

Pros

  • It uses manual underwriting, which works for inconsistent income streams
  • One of the best online application processes

Cons

  • Higher rates than other creditors

Best Overall Mortgage Lender for First-Time Buyers: Wesley Mortgage

A lender can make or break a home-buying experience, especially when purchasing your first home. No matter the choice, it all depends on the financial institution that closes the mortgage – that is why picking the best overall is essential. Alas, the ‘best’ is relative for each applicant, and navigating each and every creditor’s terms and conditions can be exhausting. 

To save time on further research, Wesley Mortgage is one such mortgage company that first-time buyers will find very little to be disappointed with. Connect with Wesley Mortgage, a community-based mortgage community that prioritizes creating individualistic homebuying journeys for each client and reinvesting in those same areas, to discover how we can assist you in taking the first step towards homeownership.

Start Your Homebuying Journey Today with Wesley Mortgage

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