What are the best first-time home buyer loans?
There’s a wide range of first-time home buyer loans on the market, from zero-down VA and USDA mortgages all the way up to a 20-percent-down conventional loan.
There are also specialty home loans that can help outside-the-box buyers; for instance, construction loans, rehab loans, ‘green’ mortgages, and home loans for public service workers.
At the end of the day, the real question is, which first-time home buyer loan is right for you?
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Five first-time homebuyer loans
Mortgage loans aren’t one-size-fits-all. They have different guidelines and requirements, with some loans tailored to specific borrowers. This includes loans for borrowers with low to moderate incomes, lower credit scores, and limited upfront cash.
Fortunately, the most common mortgage programs are suitable for most first-time homebuyers.
1. Conventional loan
Conventional loans are the most popular type of home loan. ‘Conventional’ simply means these loans are not backed by the federal government (unlike some programs listed below). Most are also ‘conforming loans,’ meaning they fall within conforming loan limits.
Conventional mortgages can work for a primary residence, a second home, or an investment property.
Standard conventional loans require a 5% down payment and a minimum 620 credit score. But this isn’t your only conventional option as a first-time homebuyer. Other options include the conventional 97 loan, Fannie Mae’s HomeReady, and Freddie Mac’s Home Possible, all of which require just 3% down for a one- to four-unit property.
While the conventional 97 and HomeReady programs allow a 620 credit score, Home Possible usually requires a minimum 660 credit score. But check with your lender as these minimums can vary.
2. FHA loan
FHA mortgage loans, which are backed by the Federal Housing Administration, are also popular among first-time homebuyers. These loans require just 3.5% down with a minimum 580 credit score, and 10% down with a credit score between 500 and 579.
The biggest downside of an FHA loan is that you’ll have to pay mortgage insurance premiums (MIP) regardless of your down payment amount. By comparison, conventional loans only charge private mortgage insurance (PMI) if you put less than 20% down.
The FHA itself doesn’t create these loans. You’ll need to apply with an FHA-approved mortgage lender. Most major banks and lenders offer FHA loans, so they’re not difficult to find.
Note that FHA loans are only for purchasing or refinancing a primary residence. You cannot use an FHA loan to buy an investment property unless you purchase a multi-unit home and live in one of the units yourself.
3. VA loan
If you are an active-duty service member, a veteran, or a surviving spouse, a VA loan is another option. This is an attractive program because there’s no down payment or monthly mortgage insurance.
Similar to the FHA program, VA loans are backed by the U.S. Department of Veterans Affairs and offered by most mainstream mortgage lenders.
VA loans typically have the lowest mortgage interest rates of any program. Coupled with their no-down-payment feature, this makes a VA mortgage one of the most affordable loans on the market. So it’s definitely worth applying if you have a military service history.
4. USDA loan
This loan, backed by the U.S. Department of Agriculture, is another zero-down program. To qualify, you’ll need to have a low or average income for your area and purchase a home in a qualified ‘rural’ area. Keep in mind that ‘rural’ isn’t as restrictive as it sounds; about 97% of the U.S. landmass is eligible.
Unlike VA loans, USDA loans have both an upfront and an annual mortgage insurance fee. Although, the mortgage insurance cost is lower than for an FHA loan.
USDA loans also tend to have below-market interest rates which help keep mortgage payments affordable. So if you think you might qualify, it’s worth applying.
5. Jumbo loan
A jumbo loan is a mortgage that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA).
For 2022, the conforming limit is $ in most areas. It’s higher in more expensive areas like Los Angeles, New York City, and Washington DC, where the single-family loan limit is $. If your mortgage amount is above the local loan limit, it’s considered a jumbo loan.
Jumbo loans are available to first-time home buyers. However, they typically involve a higher down payment, starting at 10-20 percent. In addition, you’ll need a higher credit score to qualify. The minimum FICO score varies from lender to lender but can range from 680 to 700 or above.
First-time home buyer loans comparison
|Loan Type||Min. Down Payment||Min. Credit Score||Max. Loan Amount*|
|VA Loan||0%||580-620 (varies)||None|
|Jumbo Loan||10-20% (varies)||680-600 (varies)||Often $2-3 million (varies)|
*Loan limits vary by county and change annually. Maximum loan amount represents the baseline single-family loan limit for 2022.
Specialty first-time homebuyer loans
Most first-time home buyers will use one of the five mainstream mortgage programs listed above. However, those with unique homebuying needs might prefer a specialized program.
Here are a few examples of specialized first-time home buyer loans.
Construction and rehab loans
If you’re building a home, a construction loan lets you finance the cost of the lot, materials, labor, and permits. One option is a construction-only loan which only covers the building process. You’ll then refinance into a permanent mortgage upon completion of the home.
Another option is a construction-to-permanent loan. This covers the construction cost and the completed home. Conventional, FHA, VA, USDA, and jumbo programs have construction loan options.
If you’re buying and renovating an existing fixer-upper home, you can also finance the purchase price and eligible renovations into a single rehab loan.
Rehabilitation loan options include:
An energy-efficient home can create a comfortable living space, increase your resell value, and even lower your utility costs. You can use an energy-efficient mortgage (EEM) to buy an ENERGY STAR-certified home or to finance energy-efficient improvements.
EEM loan options include:
- Fannie Mae’s HomeStyle Energy Mortgage
- Freddie Mac’s GreenCHOICE Mortgage
- FHA’s Energy Efficient Mortgage
- VA’s Energy Efficient Mortgage
Housing finance agency (HFA) loans
If you’re a first-time buyer with low to moderate income, HFA loans can make homeownership more accessible and affordable. With these loans, state housing agencies partner with Fannie Mae or Freddie Mac to provide affordable financing.
Those who apply and qualify for an HFA loan can receive a lower monthly payment and assistance with their down payment and closing costs. Repeat buyers can also take advantage of this program.
To qualify, your income can’t exceed your state’s HFA limit and you’ll likely need a 620 credit score or higher. In addition, you’ll be required to take a homebuyer education class.
State-run mortgage loan programs
Some states have conventional and government mortgage programs specifically for first-time home buyers. These are typically based on one of the five standard loan programs above, but include additional perks like below-market mortgage rates, down payment assistance, and/or mortgage credit certificates (MCCs).
To learn more and find first-time home buyer loans in your state, see: Complete guide to down payment assistance in all 50 states.
Good Neighbor Next Door
If you’re a teacher, a law enforcement officer, a firefighter, or an EMT, you might qualify for the U.S. Department of Housing and Urban Development’s Good Neighbor Next Door program.
Good Neighbor Next Door (GNND) can offer up to a 50% discount when buying a home in a targeted revitalization area. You must live in the home for at least three years to qualify.
Ask your mortgage lender for more information if you’re interested in GNND.
Native American Home Loan
Some loans are also tailored for Native American home buyers.
One such option is a Section 184 Native American home loan. To qualify, you must be a member of a federally recognized tribe. These loans are backed by HUD, so you’re required to use a HUD-approved lender. You can use the loan to purchase, construct, or rehab a home on and off native lands.
If you’re a Native American veteran or service member, you might be eligible to receive a loan directly from the VA. You can use funds to buy or improve a property purchased on federal trust land. These loans have no down payment, no mortgage insurance, and low interest rates.
First-time homebuyer assistance programs
Saving up for a down payment and closing costs is typically the biggest obstacle to buying a home. But many first-time home buyers don’t realize there are assistance programs available to help with these upfront costs.
Down payment grants and loans are available in every state as well as many counties and cities.
State and local down payment assistance
Some state and local agencies might help with your down payment. This assistance can take four different forms:
- A grant that never has to be repaid
- A forgivable loan that you don’t have to repay after a certain number of years
- A deferred loan that you pay when you move, sell, or refinance
- A second mortgage that you pay monthly in tandem with your main mortgage
Ask your loan officer about eligible programs or conduct your own online research. You can search, “down payment assistance in [your state or city],” or visit your state’s Department of Housing and Urban Development website.
Mortgage credit certificates
A mortgage credit certificate is a dollar-for-dollar tax credit that reduces the amount a homeowner owes on their annual federal taxes. MCCs can reduce a borrower’s tax bill by up to $2,000 each year. These are often built into first-time home buyer loan programs offered by state HFAs.
Contact your local housing finance authority to learn more.
Lender assistance programs
In addition, some lenders offer their own down payment assistance and specialized mortgage loans. These are typically private lenders (who aren’t affiliated with a bank) and portfolio lenders (who don’t sell their mortgages).
They might offer low- or no-down-payment loans without mortgage insurance. Or, they might offer a cash credit toward your closing costs.
If you find a lender offering down payment assistance, be sure to compare its mortgage rates and loan terms carefully to ensure you aren’t paying more over the life of your loan in exchange for upfront savings.
Get started on your first-time home buyer loan
If you’re ready to get serious about buying a house, talk to a mortgage advisor about your first-time home buyer loan options. There’s a wide range of programs available and it’s important to find the loan that meets your needs best. This will make it easier to qualify and should reduce your mortgage costs, too.
Ready to get started?