What’s the best first-time home buyer loan?
When you’re a first-time home buyer, you’re looking for any way to get a foot in the door.
Maybe that means a mortgage option with a lower down payment or one with looser credit and income guidelines.
Programs like the FHA, VA, or Conventional 97 loan can help. But there’s no “one-size-fits-all” mortgage. So be sure to explore all your options.
Whatever your situation calls for, there’s likely a first-time home buyer loan that can help.
In this article (Skip to...)
- Comparison table
- FHA loans
- Conventional 97 loans
- HomeReady / Home Possible
- USDA loans
- VA loans
- Good Neighbor Next Door
- First-time home buyer loans FAQ
- Today’s mortgage rates
The 6 best mortgage loans for first-time home buyers
We’ll dig into the best loan programs for first-time home buyers below. But first, here’s a quick overview of six top programs and their basic requirements:
|Minimum Down Payment||Minimum Credit Score||Mortgage Insurance Required?|
|Conventional 97||3%||620||Yes if <20% down|
|HomeReady/Home Possible||3%||620||Yes if <20% down|
|VA Loan||0%||Usually 620||No|
|Good Neighbor Next Door||$100||580||Yes|
Other programs, including down payment and closing cost assistance, can help lower the upfront barrier to homeownership.
So even if you’re short on savings, talk to a loan officer about your options. There may be first-time home buyer programs offering cash assistance that could put you in a home much sooner.
1. FHA loans
FHA loans are “guaranteed” by the Federal Housing Administration. That doesn’t mean you’re guaranteed to be approved. Rather, the FHA will reimburse the mortgage lender if the borrower defaults on their mortgage loan.
Because an FHA mortgage comes with this built-in protection, it can offer a lower barrier to entry than most other mortgage products.
FHA loan benefits for first-time home buyers
- Minimum down payment requirement is 3.5% (on a $200,000 loan, that’s just $7,000)
- Low interest rates
- Lowest credit score requirements of any mortgage program
To qualify for a 3.5% down payment, you’ll need a credit score of at least 580. But if you can put 10% down, your score can be as low as 500.
FHA also provides flexible income guidelines. You don’t have to make a lot of money to qualify.
The big downside of FHA loans is that they require mortgage insurance. This comes as both an upfront fee at closing and then an annual mortgage insurance premium, which is spread out across your monthly payments.
But for many, mortgage insurance is a small price to pay to get out of renting and start building home equity.
2. The Conventional 97 loan
If you’re simply looking for a low down payment option for your home loan, the Conventional 97 can be a smart choice. With these conventional loans, you need just 3% down to qualify.
Like FHA loans, they do require annual mortgage insurance. But you can actually cancel your private mortgage insurance (PMI) after you’ve gained enough equity in the home.
On most FHA loans, by contrast, mortgage insurance is with you until you refinance into a different type of loan.
Conventional 97 loan benefits for first-time home buyers
- Buy with just 3% down
- Mortgage insurance is cancellable
- No upfront insurance fee
- Minimum 620 credit score
Conventional loans also don’t require an upfront insurance fee, which can save you money on your closing costs. (The upfront fee clocks in at $3,500 on a $200,000 FHA loan!)
Finally, conventional loans aren’t an option if you have poor credit.
You’ll need at least a 620 credit rating to qualify for a conventional loan, so if your score’s below that, an FHA mortgage may be a better choice.
3. Fannie Mae HomeReady and Freddie Mac Home Possible
Fannie Mae’s HomeReady loan and Freddie Mac’s Home Possible loan are two types of conventional mortgages that let you buy a house without too much cash upfront. Both types of mortgages require just 3% down.
HomeReady and Home Possible benefits for first-time home buyers
- Only 3% down required
- Private mortgage insurance can be canceled
- Roommate income can help you qualify
- Use gift funds for up to 100% of the down payment (Home Possible)
- Credit scores starting at 620 accepted
If you’re new to the home buying process, then you will need to take a homebuyer education course in order to qualify.
And like the Conventional 97, HomeReady and Home Possible come with cancelable private mortgage insurance.
Again, these mortgage options require at least fair credit. You’ll need a FICO score of 620 or higher to qualify for Fannie Mae’s HomeReady or Freddie Mac’s Home Possible.
4. USDA loans
If you want to buy a home in a rural area or smaller town, a USDA loan could be the best mortgage option.
USDA loans are backed (or sometimes even issued directly) by the U.S. Department of Agriculture. And like FHA loans, that government backing has big benefits for buyers.
USDA loan benefits for first-time home buyers
- Zero down payment required
- Low interest rates
- Cheapest mortgage insurance
- Designed to help lower-income home buyers
The catch? You can only buy a home in certain parts of the country. That’s because the USDA loan is meant to spur homeownership in less populated regions.
The USDA’s eligibility map tool breaks down which areas are eligible. It’s actually 97% of the U.S. landmass — but you won’t be able to buy in or around a big metro area.
5. VA loans
If you’re a military member or veteran (or your spouse is), then the VA mortgage is the single-best way to become a homeowner.
VA loan benefits for first-time home buyers
- Zero down payment required
- No ongoing mortgage insurance
- Low rates
- Lower closing costs
- Lower credit scores accepted
There aren’t really any drawbacks to using a VA loan. So if you can qualify for one, it’s definitely something you’ll want to consider.
Keep in mind, though: only certain mortgage lenders are approved to issue VA loans, so you’ll want to shop around.
6. Good Neighbor Next Door
Good Neighbor Next Door (GNND) is a federal loan program from the U.S. Department of Housing and Urban Development (HUD) that provides a 50% discount on the purchase price of real estate in “revitalization areas.”
In exchange for this substantial assistance, home buyers must commit to living in the property for 36 months.
In addition, you must purchase a home listed for sale by HUD. You can check the listings for your state using the HUD Special Programs site.
While there are no income limits to qualify, this HUD program exclusively assists teachers (pre-Kindergarten through 12th grade), firefighters, law enforcement officers, and emergency medical technicians to achieve their goals of home ownership.
Other helpful first-time home buyer programs
There are other loan programs and forms of assistance that can make the home buying process easier (and more affordable) if you’re a first-timer.
Here are just a few of your options:
- Down payment assistance programs: There are tons of programs and loan options that can help you reduce or even eliminate your down payment entirely. Some don’t even need to be repaid. See our guide for down payment assistance programs in your state
- Closing cost assistance: Similarly, there are also programs that can help you offset your closing costs as well. Again, some of these don’t require repayment
- Down payment gifts: If you have a loved one who’d be willing to help you buy that home, a down payment gift is an option. Just make sure the loan program you’re using allows it (not all of them do)
- Getting a co-borrower: Finally, getting a co-borrower can help you qualify for a home purchase. If they can contribute to your down payment and closing costs, that’s the first step. If they have good credit and a steady, moderate income that can help you qualify for your loan amount, that’s even better
Best first-time home buyer loans FAQ
The answer depends on your situation. If you have good credit, a conventional loan is often best. These are available with just 3 percent down. And if you put down 20 percent or more, you can avoid mortgage insurance. Buyers with lower credit might prefer an FHA loan. And anyone who has served or is currently serving in the U.S. military should consider a VA loan.
Generally, anyone who has not owned a home in the past three years is considered a first time home buyer. This can help you qualify for special mortgages and assistance programs even if you’ve owned a home in the past but fell on hard financial times.
The best mortgage loan program will depend on your financial situation. However, for most first-time buyers, an FHA-backed loan will be easiest to get because its requirements are more lenient, allowing lower credit scores and less strict debt-to-income ratios than conventional home loans.
Your mortgage lender can preapprove you for a home loan based on financial information you provide, including tax returns, W2s, bank statements, pay stubs, a hard pull on your credit report, and your social security details. While preapproval is a more rigorous underwriting process, you can also get prequalified for a home loan which is a general estimate of how much a mortgage lender is willing to offer.
See today’s mortgage rates
The bottom line? Homeownership isn’t as out of reach as you likely think. With the right loan program in place, qualifying for a home loan isn’t just possible — it can be affordable, too.