First-Time Homebuyer Illinois Programs – All You Need to Know!

An overview of first-time homebuyer Illinois financing options, guidelines, and FAQs

Ready to buy your first home in Illinois? Here, we have ranked the top first-time homebuyer Illinois programs you can access right now, sorted according to their features, advantages, and most suitable use cases. Let’s dive right in!

At the end of this article, you will find a table comparing all of the loan features and explanations of many terms discussed here.

What Mortgage Programs Are Available for Illinois First-Time Buyers

1) VA Loans

An excellent zero down payment mortgage reserved exclusively for the military personnel

RATING: 4.5/5

Recommended for:

  • Low down payment buyers
  • Single-family home purchases
  • First-time buyers with bad credit or major derogatory events reported in the last 2 years

Best Avoided for:

  • Condominium purchases
  • Purchases under time constrain
  • Properties requiring repairs or posing safety risks

As a first-time home buyer in Illinois, VA (Veteran Affairs) loans offer an attractive financing option if you meet the minimum eligibility requirements.

Advantages of VA loans for Illinois first-time homebuyers:

VA loans offer features and benefits like no other, including a $0 downpayment option for qualified buyers and lower out-of-pocket costs compared to other financing programs on this list. You could also request the seller to cover your closing costs, making it a true no-closing-costs, zero-down payment mortgage. 

Additionally, Veteran Affairs loans do not carry mortgage insurance, and the interest rates are generally lower than any other available mortgage program. This results in smaller monthly payments and quicker equity accumulation in your home.

However, one of the most attractive features of VA loans is that they can be used to purchase a residence even with a credit score as low as 580 and only two years out of bankruptcy or foreclosure. This is the only program on this list that lets you do that!

Finally, let’s not forget that in Illinois, many veterans are eligible for a reduced property tax rate and, in some cases, pay no property tax. 

VA Loans – Minimum Eligibility Requirements:

  • Veteran Administration’s Certificate of Eligibility (VA COE)
  • $0 to $100 Down payment
  • 640 credit score
  • Minimum 2 years after bankruptcy; and 2 years after a foreclosure
  • Borrowers’ income determines the maximum loan amount

Disadvantages of VA loans for first-time homebuyers:

First-time buyers can benefit from many outstanding features offered by VA loans, but there are also some limitations to be aware of.

The Veterans Administration (VA) provides VA-backed loans exclusively to veterans, active-duty service members, National Guard members, and, in certain cases, the spouses of military personnel. To be eligible for a VA-backed loan, you must obtain a Certificate of Eligibility (COE) based on your service record.

Furthermore, VA loans require the endorsement of the United States Department of Veterans Affairs (VA), which is time-consuming and can significantly delay the loan underwriting process.

This, combined with VA loans’ strict appraisal inspection requirements, makes certain sellers more reluctant to accept VA-financed offers, especially in a fast-moving market.

Furthermore, as far as VA property eligibility requirements are concerned, it’s essential to note that condos and townhouses must be a part of VA-approved projects, which makes VA loans far less attractive for city buyers, such as Chicago first-time homebuyers, for example. (Check if the condominium you are interested in is on the VA-approved list here)

As a final point, it’s worth mentioning that due to the administrative burden of VA loans, not many lenders specialize in or even offer VA loans to their clients. Therefore, when you decide on VA financing, be prepared to work with a limited number of lenders. 

VA loans for first-time homebuyers summarized:

Despite their drawbacks, Veteran Affairs-sponsored mortgages earn our top recommendation for financing your first home purchase in Illinois, as long as you’re not looking to buy a condominium or a townhouse.

Pros:

  • 100% Financing
  • No Mortgage Insurance (no MI)
  • Low mortgage interest rates
  • Lower credit profile requirements
  • Limit on the closing cost paid by the buyer
  • Easy to refinance into another VA loan via streamlined IRRRL refinance

Cons:

  • Reserved only for military service members, veterans, reserve, National Guard, and surviving spouses of a veteran
  • Not allowed on non-VA-approved condominium projects
  • VA Funding Fee of up to 3.6% may be applied
  • VA Appraisal required
  • Require more documentation and dealing with the VA administration can cause delays
  • Featured by a limited number of lenders

2) Conventional 97%

A versatile, low down payment mortgage from Fannie Mae and Freddie Mac

RATING: 4/5

Recommended for:

  • Condominium projects without HUD approval
  • Purchases under time constrain
  • Properties requiring minor repairs

Best Avoided for:

  • Low credit score buyers

If you thought that conventional loans lacked the muscle to propel your homeownership dreams, you would be dead wrong. As a matter of fact, 97% Conventional financing is our second favorite program on this list due to its flexibility and speed.

Advantages of Conventional loans for Illinois first-time homebuyers:

With blazing-fast underwriting times and simplified documentation (especially useful for self-employed borrowers), conventional financing is one of the easiest and quickest ways to buy your first property in Illinois as long as you have a good credit history and at least 3% saved for the down payment.

Moreover, conventional loans are far less restrictive than VA or FHA loans regarding property appraisals, making them a preferred option for Chicago first-time buyers looking to purchase condominiums, townhouses, or properties needing cosmetic renovation.

Last but not least, Fannie Mae and Freddie Mac, which offer these programs, offer interest rate discounts to borrowers with income below 80% of the Area Median Income (AMI). (Use this tool to check the AMI limit by property address).

Conventional 97% Loans Minimum Eligibility Requirements:

  • 3% down payment
  • 620 credit score
  • Up to 50% debt-to-income
  • The borrower’s income determines the maximum loan amount
  • Eligible for financing minimum 4 years after bankruptcy and 7 years after a foreclosure

Disadvantages of Conventional loans for first-time homebuyers:

On the downside, conventional loans require a down payment of at least 3%, which may not seem like a large amount, but it is more than the $0 down requirement on some of the government-backed loans, such as VA or USDA mortgages, and may be difficult for some first-time buyers to amass.

Further, conventional loans have stricter credit requirements, which include a minimum credit score of 620 points. There is also a mandatory wait period of four years after bankruptcy discharge and seven years after foreclosure in order to be eligible.

Last but not least, conventional loans are typically associated with higher interest rates than government loans. Nevertheless, if your credit score is at least 680 points and you are willing to increase your down payment, you may be able to mitigate this problem. Alternatively, you may also apply for one of the special 97% financing programs offered by Fannie Mae and Freddie Mac. These programs are known as HomeReady and Home Possible and offer very competitive interest rates but are subject to household income limits.

It is also important to remember that conventional financing will require Private Mortgage Insurance (PMI) when the down payment is less than 20%. By putting down 20% or more or selecting the “lender-paid” MI option, you may typically eliminate the PMI requirement, which should prove particularly beneficial if you plan to occupy the property for an extended period.

Conventional loans for first-time homebuyers summarized:

In conclusion, Conventional mortgages are an excellent option for first-time homebuyers with strong credit, particularly those who are willing to make a larger down payment towards their first home purchase in Illinois.

Pros:

  • Accept Illinois First-Time Buyer downpayment assistance programs
  • Reduced documentation
  • Fast closings (often in 2-3 weeks)
  • Great for self-employed borrowers
  • Available at many mortgage lenders
  • A simplified appraisal (sometimes appraisals are waived)
  • Perfect for buying condominiums and townhouses

Cons:

  • A minimum 3% downpayment required
  • Mortgage insurance (MI) below 20% down payment
  • 4-year waiting period after bankruptcy
  • 7-year waiting period after foreclosure

Following are answers to first-time homebuyers’ frequently asked questions about conventional financing:

3) FHA Loans

Excellent choice for first-time homebuyers challenged by poor credit.

RATING: 3.5/5

Recommended for:

  • Single-family home purchases
  • Low down payment buyers
  • Buyers with a poor credit history or after a major recent adverse event such as foreclosure or bankruptcy

Best Avoided for:

  • Condominium projects that are not HUD approved
  • Property in a need of repairs or with safety concerns

Advantages of FHA loans for Illinois first-time homebuyers:

It used to be that FHA (Federal Housing Administration) financing was among the most popular mortgage programs out there.

Chicago first-time homebuyers often took advantage of FHA financing due to the relatively low 3.5% down payment requirement, competitive interest rates, and a maximum debt-to-income limit of up to 55% — higher than any other financing option available at the time.

Things changed, however, when Fannie Mae and Freddie Mac introduced their revamped first-time homebuyer programs with a reduced down payment requirement of 3% and an allowable debt-to-income limit of 50%, making FHA loans much less desirable.

Nevertheless, FHA financing remains very relevant in today’s market. It is one of the most affordable options and pretty much the only sensible choice for Illinois first-time homebuyers with bad credit.

That’s because you can qualify for an FHA loan even with a credit score of just 580 points. More importantly, however, FHA financing provides individuals with a pathway to homeownership as early as 2 years after a bankruptcy discharge and 3 years after a foreclosure. No other loan program allows you to do that except for a VA loan.

Let’s also not forget that Federal Housing Administration loans offer very competitive interest rates and still offer the maximum debt-to-income limit of 55%, making them a fantastic product for first-time buyers looking to increase their purchasing power while committing only a 3.5% down payment towards their purchase.

FHA Loans Minimum Eligibility Requirements:

  • 3.5% down payment
  • 580 credit score
  • Borrowers’ income determines the maximum loan amount
  • Eligible for financing 2 years after bankruptcy and 3 years after a foreclosure

Disadvantages of FHA loans for first-time homebuyers:

Although FHA financing has many benefits, there are also some drawbacks to be aware of.

First and foremost, these loans come with a strict mortgage insurance policy.

Unless you have a minimum down payment of 10%, you will be required to pay monthly mortgage insurance premiums (MIP) for the duration of the loan. This requirement can be shortened to 11 years with a 10% down payment or greater, but it is still higher than any other mortgage product currently available to first-time buyers.

Another major disadvantage of FHA financing is that condominiums and townhouses must be HUD-approved. Thus, first-time home buyers in the Chicago metropolitan area will have difficulty finding HUD-approved units eligible for an FHA loan. (Check if the condominium project is on a HUD-approved list here)

Lastly, FHA-financed properties are subject to a strict appraisal inspection, which may necessitate repairs that would otherwise not be required. As a result, some sellers refuse to accept FHA-financed offers to avoid making additional repairs to their properties.

FHA loans for first-time homebuyers summarized:

To conclude, FHA loans are ideal for first-time homebuyers with bad credit who intend to refinance to another program in the future, thus avoiding the expense of paying the mortgage insurance premium for a prolonged period.

Pros:

  • Competitive interest rates
  • Relaxed credit profile requirements
  • Debt-to-Income Ratio (DTI) up to 55%
  • Can finance a mixed-use property (ie. residential 2-flat with a commercial space)
  • Easy to refinance without income check or appraisal into another FHA loan with FHA Streamline refinance

Cons:

  • Carries two mortgage insurances; Upfront Mortgage Insurance of 1.75% and up to 0.7% annual mortgage insurance premiums (MIP)
  • Strict Appraisal Requirements
  • Requires HUD-approved projects for condominium and townhouse purchases

4) USDA Loans

Great for low to moderate-income families looking to buy or build a home in rural Illinois

RATING: 3.5/5

Recommended for:

  • Single-family home purchases
  • Home buyers with low downpayments
  • Buyers with low credit scores
  • First-time homebuyers who prefer to build rather than purchase

Best Avoided for:

  • Properties located in urban zones
  • Condominiums and townhouses not HUD approved
  • High-income borrowers
  • Buyers with less than perfect credit history, or after a major recent derogatory event such as foreclose or bankruptcy

Advantages of USDA loans for Illinois first-time homebuyers:

USDA Single Family Housing Guaranteed Loan Program offers several benefits to first-time home buyers in rural Illinois. If you are considering buying your first home in a small town or the countryside, the USDA loan may be an excellent option.

One of the major advantages of USDA loans is that they are considered true zero-down payment mortgages. There is no down payment or cash reserve requirement for first-time homebuyers. Additionally, closing costs can be rolled into the loan or paid by the seller, making it an outstanding mortgage option for most buyers.

Don’t like any of the properties listed for sale? No problem; USDA loans can also be used as construction loans, so you can build your first home exactly as you envisioned.

Moreover, USDA loans are relatively easy to qualify for based on your credit history. For example, you can apply for a USDA loan three years after a bankruptcy discharge, foreclosure, or short sale. It is also important to note that while most lenders require a credit score of 640 or higher to apply, the USDA does not set a minimum credit score requirement.

USDA Loans Minimum Eligibility Requirements:

  • $0 Down payment
  • 640 credit score
  • Borrowers’ income determines the maximum loan amount
  • Eligible for financing 3 years after bankruptcy and foreclosure

Disadvantages of USDA loans for first-time homebuyers:

Now, let’s look at some USDA loans’ disadvantages.

One of the downsides of USDA loans is that they are geographically restricted. USDA loans are available only if the property is located within a USDA Rural Development area. Unlike other programs, USDA loans cannot be used to finance properties located in urban centers. Consequently, first-time buyers in the Chicago Metropolitan Area, for example, would not be able to take advantage of this program. (See whether USDA loans are available in your area here.)

In addition, due to the program’s purpose of providing affordable mortgage financing to low- and very-low-income families, applicants must also meet strict income requirements in order to qualify.

As a final note, USDA loans take longer to underwrite since both the lender and USDA must approve the application. Thus, if you decide to finance your first property with a USDA loan, you will need to consider the additional time and effort involved. Keep in mind that not all sellers might be enthusiastic about the extra wait time.

Pros:

  • $0 down payment and a possibility to finance closing costs
  • Competitive interest rates
  • Lower mortgage insurance premiums compared to other mortgage types
  • Relaxed credit history requirements
  • Low credit score borrowers may still qualify thanks to flexible credit guidelines
  • USDA loans are assumable, which could make the home more attractive to potential future buyers
  • Can be used as a construction loan to build a new home

Cons:

  • Requires credit score of 640 or higher
  • Geographical restrictions apply; the property must be located in a USDA Rural Development area. Homes in urban centers do not qualify
  • Income limits apply as the program is designed to assist low- and very-low-income families
  • The mortgage process takes longer
  • Only primary residences are eligible.
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With nearly two decades in Chicago's mortgage industry, Mariusz has donned roles ranging from loan originator and underwriter to loan ops manager. His journey is defined by a steadfast commitment to providing honest advice based on extensive industry knowledge. Beyond the titles and accolades, Mariusz remains your approachable, neighborhood mortgage expert. Questions? Need advice? Mariusz is just a chat away.