First-time homebuyers in Louisiana have a lot of options when looking for mortgage financing. You don’t even need a large down payment or perfect credit. We have a variety of loans available for borrowers just like you.
Are you ready to get started? Let’s look at how the first-time homebuyer loan works, what you need to know, and how to get started!
🏡 What is a First-Time Homebuyer?
First, let’s state the obvious – first-time homebuyers in Louisiana are anyone that hasn’t owned a home before. It’s that simple. If you’ve rented, lived with your parents, or bunked with a friend, but never had your name on a title – you are a first-time homebuyer.
But, there’s an exception. Most loan programs also consider people who haven’t owned a home in the last three years a first-time homebuyer. That means even if you owned a home before, if it’s been at least three years since you owned one, you get the same first-time homebuyer benefits.
💰Loan Program Options for First-Time Homebuyers in Louisiana
First-time homebuyers in Louisiana have a lot of options for financing. Any loan available today is suitable for a first-time homebuyer. They all have flexible guidelines and low down payment requirements.
Understanding each loan program helps you determine which would be right for you, as they each have their differences or nuances.
We’ve covered the most popular first-time homebuyer loans in Louisiana below.
Many people assume FHA loans are for first-time homebuyers in Louisiana. In reality, they are for anyone that meets the qualifications and is a great alternative to conventional loans if you don’t qualify.
FHA loans are backed by the FHA (not underwritten or funded by them). You still secure the loan from an FHA lender, but they must follow the FHA guidelines. The good news is that the guidelines are flexible, making it easy for anyone to qualify, even with less-than-perfect credit or a high debt-to-income ratio.
We’ll get into the exact requirements for each below, but for now, know that FHA loans are a great option if you’ve had some credit issues before. As long as you’ve fixed the issue and can prove you can afford the loan, you’re a good candidate.
Some sellers still believe the stigma that the FHA is harder on appraisals than conventional loans, but that’s not true. FHA lenders require that a home is safe, sound, and sanitary, just like any lender requires. As long as the home is move-in ready, worth as much as you bid (or more), and doesn’t have any issues that would put anyone at risk, it will likely pass the FHA appraisal. The FHA does have a Minimum Property Requirement list, but the list is identical to what conventional lenders want too.
FHA loans require mortgage insurance for the life of the loan. The premiums help the FHA guarantee the loans for lenders. If you default on your loan, for example, the FHA pays the lender a portion of the funds they lost.
The FHA charges two mortgage insurance fees – an upfront fee of 1.75 percent and an annual mortgage insurance fee of 0.85 percent. Lenders charge the annual mortgage insurance fee monthly, so it’s broken down for you.
For example, if you borrow $100,000, you’d pay $850 a year or $71 a month. As you pay the principal down, the amount decreases.
USDA loans are another government-backed loan. This loan is for a specific set of borrowers. Unlike FHA loans, you must first prove your eligibility for the loan program, and then prove that you qualify.
The USDA uses your household income to determine eligibility. This means anyone who lives with you that makes an income. It could be adult children, grandparents, or even friends that live with you – all income counts.
The USDA program is for households that make less than 115 percent of the average income for the area. You can determine your eligibility here, but the average income limit for 1-4 family member households is $90,300 in most Louisiana counties.
Along with income eligibility, you must buy a home in a ‘rural’ area according to the USDA guidelines. A majority of homes in Louisiana are eligible for USDA financing. As long as the property isn’t in a metropolitan area, it may qualify.
Borrowers must also prove that they can’t get any other financing before securing a USDA loan. It’s a ‘last resort’ type loan. If you can’t get approved for an FHA loan because your income is too low or you don’t have the down payment, for example, the USDA loan may be a suitable option.
Like FHA loans, USDA loans have a mortgage insurance fee for the life of the loan. The fees are much lower on USDA loans, though. Currently, they charge 1.0 percent of the loan amount upfront and 0.35 percent of the outstanding principal balance annually.
On a $100,000 loan that means $1,000 upfront and $350 a year or $29 a month. The insurance lasts for the loan’s term or until you refinance.
VA loans are for veterans or active members of the military. Like USDA loans, you must be eligible for the loan before determining if you qualify.
Eligibility is reserved for veterans or current military members that served 90 days during wartime or 181 days during peacetime. If you satisfy the service requirements and have an honorable discharge or positive recommendation from your supervisor, you are eligible.
You must provide your Certificate of Eligibility from the VA, which either you or the lender can get. The certificate shows your entitlement, letting lenders know how much you can borrow without a down payment. All veterans start with full entitlement, but once you buy a home and use some of it, you can’t reuse it until you sell the home, pay off the loan, and request entitlement reinstatement.
If you’re eligible, VA loans are among the most flexible loan programs available today. You’ll love the flexible underwriting guidelines (more on that below), and the absence of annual mortgage insurance. You only pay an upfront funding fee of 2.3 percent of the loan amount. On a $100,000 loan, that’s $2,300.
Conventional loans are the ‘traditional mortgages’ most people think of when they hear the word mortgage. Unlike the popular opinion, though, you don’t need a 20 percent down payment. Conventional loans require just 3 percent down for first-time homebuyers in Louisiana.
Borrowers do need good credit and low debt-to-income ratios for conventional loans, though. They are the only non-government backed loan option available to you. Because there isn’t a guarantee, lenders have stricter requirements and require the purchase of Private Mortgage Insurance if you put less than 20 percent down on the home.
Anyone can qualify for a conventional loan, they don’t have eligibility requirements like the government-backed options. As long as you meet the requirements, you can secure conventional financing.
✅ Minimum Credit Score Requirements for First-Time Homebuyers in Louisiana
One of the first factors lenders look at when you apply for any loan in Louisiana, whether conventional or government-backed, is your credit score.
It may look like just a three-digit number, but it tells lenders at first glance if you are financially responsible. Each loan program has minimum credit score requirements that you must meet, but you should also pay close attention to your credit history.
The credit score is the first thing they see. It’s what lenders use to decide if they will move forward with your application. For example, if you have a 500 credit score and applied for a conventional loan, they wouldn’t move forward. But, if you had a 599 score and applied for an FHA loan, they’d process your application.
Once you move past the credit score barrier, lenders dig further into your credit history. They want to see how well you pay your bills, if you overextend your credit, and if you have any public records, such as collections, bankruptcies, or foreclosures. They’ll look at each tradeline, and may ask further questions about your history to determine your financial responsibility.
Knowing your credit score will help you determine which loan program works for you:
- FHA loans – Borrowers need a 580 credit score to make a 3.5 percent down payment. If you have a credit score between 500 – 579, you may qualify but with a 10 percent down payment.
- USDA loans – Borrowers need at least a 640 credit score. If you have a lower credit score, you may still qualify, but underwriters may ask for more documentation and/or take more time underwriting your loan.
- VA loans – The VA doesn’t have a minimum credit score requirement, but most lenders want at least a 620 score on average. Some lenders in Louisiana accept lower credit scores if you have other qualifying factors.
- Conventional loans – These loans have the highest credit score requirements. Most borrowers need at least a 660 to qualify. It depends on the lender and your other qualifying factors, though. For example, if you have a large down payment, you may get approved with a lower credit score because the down payment offsets the risk.
Keep in mind, even if you have the credit score, you need to prove you have what it takes to qualify. If you have recent public records (collections, bankruptcy, etc.) on your credit report, it raises red flags. Lenders may ask more questions and/or ask for more proof of your ability to afford the loan or proof that you’ve straightened out your financial life.
🔹Ways to Check your Credit Score and Credit History
If you don’t know your credit score or aren’t sure what your credit history looks like, there are several free ways to get the information:
- Get your credit score – Check with your credit card companies or bank. Most companies offer free access to your credit report with any financial product. You must opt-in to the program, so make sure you sign up. Most companies give access to your Experian score. You may also sign up through Experian directly, as it’s also free. This credit score won’t be exactly the same score lenders see, but it’s a close estimate of it.
- Get your credit history – Like we said above, your credit history plays an important role too. Even if you have a good credit score now, but had some recent negative history, lenders may want an explanation to make sure the issue is taken care of and won’t be repeated. You can get free access to your credit history (weekly until April 2021) here. Look over your credit history carefully, looking for late payments, overextended credit, collections, and even errors. Make note of any issues and use the tips below to help improve your credit score.
🔹How to Improve your Credit Score
Before you apply for a mortgage, learn how to improve your credit score. Because it’s the first impression lenders have of you, it should be as good as possible. You can’t change your credit overnight, so start this process as early as possible – 6 to 12 months is ideal. But at the very least, give your credit 30 – 60 days to improve once you make changes.
Fortunately, credit scores change all the time. As soon as lenders have something to report on your account, they do. If it’s good, your credit score may increase and if it’s bad, it may decrease, it’s that simple.
If you want your score to increase, try some or all of the following:
- Bring all late payments current – Your payment history is the largest part of your credit score. It makes up 35 percent of your score. One late payment (more than 30 days late) can drop your credit score. If you have more than one late payment or a 30-day late payment turns into a 60 or 90-day late payment, your payment drops more. Do what you can to get current on all payments for the best and most drastic results.
- Decrease your debt – Your utilization rate (comparison of your outstanding debt to your total credit line) is the next largest portion of your credit score. It makes up 30 percent of your credit score. Ideally, you should have no more than 30 percent of your total credit line outstanding at one time.
- Don’t close unused credit cards – It seems logical to cancel credit cards you don’t use, but don’t do it. Closing old accounts lowers your average credit age. The less credit history you have, the lower your credit score drops. Open credit cards also help lower your utilization rate or the amount of credit outstanding versus your total credit line which also helps your credit score.
- Check out Experian Boost if you need help improving your credit score. Experian Boost gives you credit for paying your utility bills and cell phone payments on time. You have to sign up for the service, but it’s free and reports your utility payments for six months to help boost your credit.
- Only apply for credit when you need it. Avoid applying for multiple credit cards or other loans at one time. Inquiries hit your credit score for a few points every time you apply, even if you don’t get approved. Hard inquiries also stay on your credit report for 2 years.
- Correct/dispute any errors. If your credit report has errors, contact the appropriate credit reporting agency. For example, if TransUnion reported a late payment on your car payment when you have proof that you made it on time, you’d file the dispute online with TransUnion. They have 30 days to respond to the dispute.
Improving your credit score takes time. Give it at least a few months, but it may even take longer. The earlier you check your credit the better your chances of having a high enough credit score for loan approval become.
💵 Down Payment Requirements
Next to your credit score, the down payment is the next most important factor. Your credit score shows how well you handle your bills, but your down payment gives you ‘skin in the game’ or investment in the property.
The more money you put into the home, the less risk the lender takes. First-time homebuyers in Louisiana with more than the minimum amount required invested are less likely to default. For example, if you put $3,000 down a home versus $20,000, you are much more likely to make your payments when you invest $20,000 versus $3,000.
Each loan program has its own down payment requirements, and none of them go above 5 percent, so it’s easy to get your first home even if you don’t have the larger down payment.
The minimum down payment requirements are as follows:
- FHA loans – If you have a credit score of at least 580, you can put just 3.5 percent down on a home. If you have a credit score between 500 – 579, you need a 10 percent down payment.
- USDA loans – The USDA program is for low to moderate-income families and provides 100 percent financing. Borrowers don’t need a down payment if they don’t have it, but if you do, it’s a good idea to put money down as it lowers your payment and increases your chances of approval.
- VA loans – The VA program is for veterans or current military members and also provides 100 percent financing. You don’t need a down payment, but if you put at least 5 percent down, you reduce the amount of the funding fee that the VA charges on every loan. Not only can the down payment save you on your mortgage payment, but it lowers the funds you need at the closing too.
- Conventional loans – Popular myths have people believing you need 20 percent down on a conventional loan, but that’s not the case. First-time homebuyers can put just 3 percent down on a conventional loan in LA. If you buy a subsequent house down the road, you’ll need at least 5 percent down. Any borrower putting less than 20 percent down pays PMI until you owe less than 80 percent of the home’s value.
🔹Ways to Save for a Down Payment
It sounds like a lot when you think of the down payment in percentages. 20 percent makes most people think they’ll never own a home, but even 3 percent sounds like a lot, but there are ways to save for a down payment that when you start them early, make it easy to have the funds to invest in a home when you’re ready.
First, determine how much you need to save each month. If you can afford the monthly amount, set up automatic transfers from your checking to your savings account. When you take the thinking out of it and ‘pay yourself first’ you won’t ignore the need to save for a down payment. Before you know it, the funds add up and are there when you’re ready.
If you can’t save enough to buy a home on your desired timeline, try the following ways to cut back and save the money for your down payment:
- Cut out memberships and subscriptions. We are all guilty of signing up for ‘free’ subscriptions only to get charged down the road because we never canceled it. Go through your bank statements and credit card statements and look for memberships or subscriptions you pay for. Cancel them (unless you need them) and instead send the money to your savings account each month.
- Cut down on dining out or entertainment outside of the house. It’s time to get frugal and creative. Try new recipes at home, or make copycat restaurant recipes to give your family the same exciting meals at a fraction of the cost. For entertainment, host movie nights at home, go hiking, have themed dinner nights, or just relax around a campfire. Any money you save on dining out and entertainment can be saved for your down payment.
- Learn to shop sales. Whether you’re grocery shopping or clothes shopping, the temptation to impulse buy and overspend is high! Only shop with a list and use coupons whenever possible. If you can make lists (especially grocery lists) ahead of time, you can shop the sales and stop paying full price. Any money you come in under budget on your groceries can help fund your down payment needs.
- Cut the cord on cable. If you’re still paying for cable, cut it. You can get streaming services for a fraction of the price, putting the money away for your down payment.
- Start a side hustle. If you’ve cut everywhere you can, consider increasing your income. Today it’s easier than ever to start a side hustle. Whether you’re crafty, a good writer, good with graphic design, or love cutting lawns, there’s something for everyone. Take any money you make on your side hustle and put it right in your down payment savings account.
- Consolidate debt with a balance transfer card. If you can get a 0% APR credit card, consolidate as much of your debt onto it that you can. This lowers the total interest you’ll pay on the loan and frees up your debt-to-income ratio, not to mention puts more money in your savings account.
- Pause your retirement contributions. It seems counterintuitive, but saving for a down payment contributes to your retirement too. Your home is your largest investment, so diversifying the contributions, for the time being, can help you achieve your homeownership goals. You can pick up where you left off after you buy the home.
✅ Other Options if you Don’t have a Down Payment
If you don’t the necessary down payment to buy a home in Louisiana and can’t save as much as you need, consider these options:
- Gift funds – Most loan programs allow you to accept gift funds. For example, FHA loans don’t require you to invest any of your own funds if you have enough gift funds for the down payment (3.5 percent) and have a credit score over 580. Conventional loans allow gift funds in most circumstances too, but it varies by borrower and lender.
- Piggyback loans – If you’re taking out a conventional loan and don’t have the 20 percent down payment, but don’t want to pay PMI, a piggyback loan helps. A piggyback loan is a 10 percent second loan in addition to the first loan for 80 percent. The remaining 10 percent down payment is your responsibility (or gift funds). This way you avoid PMI and get the low interest rates second mortgages have.
- Down payment assistance programs – Louisiana has many down payment assistance programs that help first-time homebuyers purchase a home. If you need help securing a down payment, let me help you find the program that suits your needs the most.
➗Debt Ratio Requirements for First-Time Homebuyers in Louisiana
Lenders look not only at your income but your debts too. Lenders evaluate how much of your income is already ‘taken’ by your current debts. This is called your debt-to-income ratio and is an important factor when qualifying for a loan.
You must meet each loan’s DTI guidelines to qualify as a first-time homebuyer in Louisiana.
- FHA loans – Maximum 43 percent DTI, but some lenders go up to 50 percent
- USDA loans – Maximum 41 percent DTI, if you have a higher DTI, lenders may allow it but they may ask for more documentation/proof you can afford the loan
- VA loans – Maximum 43 percent DTI
- Conventional loans – Maximum 36 percent DTI, but some lenders go higher if you have other qualifying factors, such as a high credit score or large down payment
🔹Ways to Lower your Total Debt Ratio
If you calculate your DTI and find that you’re way above the maximum allowed, here are some ways to lower it:
- Make extra payments to debts with a high debt to balance ratio. Ideally, you shouldn’t have more than 30 percent of one credit line outstanding. Pay off the debts with the highest balances to lower your minimum payment and your DTI.
- Pay your installment debt off faster. You don’t have to wait until the official maturity date to pay off your installment debt. If you can afford extra payments, make them and wipe that debt off your credit report altogether.
- Consolidate your debt. If you can secure a 0 percent APR balance transfer card, consolidate some of your debt without going over the 30 percent threshold. This should lower your monthly payments, freeing up your DTI.
- Increase your income. Just like saving for a down payment, a side hustle can help decrease your DTI. While a lender can’t use ‘new’ income to qualify you for the loan, if you use the funds to pay off your debts, you’ll decrease your DTI with the same funds.
🏡 Step-by-Step Program for First-Time Homebuyers in Louisiana
Now that you know how to qualify for your first mortgage, it’s time to put it into practice! Here is a simple step-by-step guide to help first-time homebuyers in Louisiana.
▪️Evaluate your financial situation
Your financial situation determines if you can move forward with the mortgage process. Ask yourself the following questions to determine if you’re ready, and if not, think about what you can do to get ready.
▪️Is your credit good enough?
You need at least a 580 credit score for an FHA loan, and a higher score for all other programs. If you don’t have at least a 580, figure out how you can improve your credit score and do it. Remember, your credit score needs at least a few months to make any changes.
▪️Do you have enough money saved?
You need at least 3 percent down for a conventional loan and 3.5 percent for an FHA loan. Unless you are eligible for a USDA or VA loan, you’ll need some money down. If you don’t have it, can you get gift funds or are you eligible for a down payment assistance program? Sort these issues out early so you can move through the loan approval process seamlessly. There are many programs available for first-time homebuyers in Louisiana.
▪️Does your income cover your current expenses?
Look closely at your income versus your debts. Do you spend less than 43 percent of your income before taxes each month? This includes the new mortgage payment. If you spend more, you need to find ways to cut down and/or increase your income.
▪️Get your paperwork in order
If you’ve prepared your finances enough, it’s time to prove everything you stated. Having all your paperwork together helps move your loan through the process faster.
▪️Gather your income documentation
Lenders need proof of the last 30 days of income/employment via your paystubs. They also need your last two years’ W-2s and possibly tax returns if you’re self-employed or make more than 25 percent of your income as commission.
▪️Get your assets in order
Lenders need proof of your assets to prove you can afford the down payment and closing costs. Sometimes you also have to prove you have assets on hand (reserves) to pay your mortgage payment when you can’t.
▪️Have your employment information
Lenders also need to verify that your employment will continue for the foreseeable future. They do this by contacting your employer either via phone or asking for a written Verification of Employment.
Once you have all documentation ready, it’s time to get pre-approved. This step is important. It helps you learn how much you qualify for and what conditions lenders will put on the approval. Most sellers today require a pre-approval letter, especially in the face of COVID-19. They only want to deal with qualified buyers.
If you’re pre-approved, you’ll receive a letter stating the amount you can borrow, the rate, the closing costs, and the loan program. This helps you narrow down your home search and allows you to stay within your budget.
▪️Work with your real estate agent
Once you have your pre-approval letter, your real estate agent can help you find the perfect home. The letter gets your foot in the door and it helps should you get involved in a bidding war. Sellers want pre-approved buyers as there’s a lower chance of you backing out of the contract if you have the financing ready.
▪️Make an offer, sign a contract
Once you find your ‘dream’ home in Louisiana, you’ll sign a contract. This ‘starts the clock’ and gets underwriting moving. Once the underwriters receive your executed contract, they’ll order an appraisal and the property’s title work. You usually have 30 – 45 days to close the loan.
Once you are under contract, the underwriting process continues. Lenders go over any outstanding documents they require as well as any documentation related to the property itself. They may ask for more documentation throughout the process. The faster you respond to their request, the faster your loan gets to closing.
▪️Close on the loan
After you satisfy all conditions, the lender can clear your loan to close. Once you are ‘clear to close’ you head to the closing table, exchange funds, and receive the keys to your new home.
🔑 Tips for First-Time Homebuyers in Louisiana
- Know how much you can afford before you shop for a home. Do your homework, get your pre-approval, and stick within your budget.
- Have enough money set aside so that you have money left after the closing. Owning a home is a lot of responsibility. You want to make sure you have enough money for any emergencies that arise.
- Research the neighborhood as much as you evaluate the home. When you buy a home you buy into the neighborhood. Make sure it fits your needs and is somewhere you’ll be comfortable for the next few years.
- Work on your credit score early. It takes time to improve your credit. If you want the best terms, look at your credit at least 12 months before you decide to buy a home.
- Explore all of your loan options, as there are many. I can help you understand each loan program and how it affects your eligibility, payment, and long-term goals.
- Stick to your budget. Even if you have room in your approval for a higher payment than you budgeted, stick to your budget. It’s the number you’re comfortable with and what you should stick to so you can avoid getting overwhelmed in the future.
- Make sure you have enough homeowner’s insurance. Lenders require you to have homeowner’s insurance, but make sure you have enough coverage should your home meet with total destruction. Make sure you have a deductible you can afford and premiums that are affordable too.
✅ Are you Ready for your First Mortgage?
If you’re a first-time homebuyer, I’m here to help you! I have worked with hundreds of first-time homebuyers in Louisiana, helping them to secure the best financing for their home. Let me help you understand your different options, how they affect your bottom line, and what you can afford.
I know how overwhelming and exciting buying your first home is and I’m here for you every step of the way. Let’s start by chatting about your situation and we’ll go from there. I look forward to helping you become a homeowner soon!