Purchase your first home may seem like an overwhelming process – but it doesn’t have to be. Our guide to loan programs for first-time home buyers will help you understand the many steps in the home buying process. There’s a lot to consider – from figuring out the best type of mortgage to partnering with the right real estate agent, there are many steps in the home buying process, and each one is important to your financial health.
For example, as mortgage rates continue to rise across the country, finding the right mortgage lender will save you tens of thousands of dollars in fees and interest over the life of your mortgage.
Understanding all the home loan options available to you and comparing different mortgage programs will help you make wise decisions along the way. Here are eight of the best mortgage options to consider as you embark on the process of buying your first home.
1. FHA Loan
- Minimum credit score: 500-580
- Minimum deposit: 3.5% or 10%, depending on your credit score
- Other requirements: Mortgage insurance obligation
FHA loans are backed by the Federal Housing Administration and are considered safer than conventional loans because they are backed by the US government. It’s one of the easiest mortgages to get approved if you’re a first-time homebuyer with a low credit score and minimal down payment. FHA Loans offer 3.5% down payment options for those with a credit score of 580 or higher. If you have a credit score between 500 and 579, you can still get approved for an FHA loan, but you will need to pay a 10% down payment.
FHA loans are fixed-rate mortgages and require a debt-to-income ratio of 43% or less, a stable work history, and a private mortgage insurance premium, or MIP. You will pay 1.75% of the original loan amount for the MIP and the annual cost can vary between 0.45% and 1.05% of the amount of your mortgage, depending on your down payment and the amount of financing. You cannot cancel FHA mortgage insurance for FHA loans initiated after 2013, unless you put at least 10% down. In this case, your mortgage loan insurance can be terminated after 11 years. If your down payment was lower, the MIP will be canceled once your mortgage has been fully paid off.
To qualify, you must be a first-time homebuyer or not have owned for three years.
2. AV Ready
- Minimum credit score: Varies by lender
- Minimum deposit: 0%
- Other requirements: Borrower must be an active or retired member or spouse
To be eligible for a VA Loan you must be an active or retired member of the US military or the spouse of one. If you qualify, you can take advantage of a mortgage with no down payment or private mortgage insurance requirement. VA loans are guaranteed by the US Department of Veterans Affairs and are issued by private lenders. Although VA loans offer down payment benefits, you will have to pay an origination fee between 1.4% and 2.3%which can usually be incorporated into the loan amount.
To qualify for a VA loan, you must provide a certificate of eligibility and have verifiable income. There is no minimum credit score as the minimum required score varies by lender, but many lenders like to see a credit score of at least 640 or higher.
3. USDA Loans
- Minimum credit score: 640
- Minimum deposit: 0%
- Other requirements: Buying a home in a qualifying rural area
USDA Loans are 30-year fixed mortgages backed by the United States Department of Agriculture. This home loan offers 100% financing, i.e. it does not require a down payment. A USDA Loan is available to applicants purchasing a home in a designated rural area. USDA loans do not require private mortgage insurance, but have an upfront 1% finance charge due at closing and an annual fee of 0.35% that will be rolled into your monthly mortgage payments. This fee cannot be waived once you reach 20% equity, as some mortgage insurance can.
To qualify, you’ll generally need a credit score of 640 or higher, but requirements vary by lender.
4. Fannie Mae Conventional Loan
- Minimum credit score: 620
- Minimum deposit: 3%
- Other requirements: Private mortgage insurance for down payments below 20%
The Fannie Mae Conventional Mortgage is one of the most common types of mortgages in the United States, with 30-year fixed mortgages and 15-year fixed mortgages being among the most popular. It is not backed by the government like an FHA loan, but rather by the banks and lenders themselves. A conventional mortgage allows you to put as little as 3% down. You will also need to purchase private mortgage insurance if you put less than 20% down. You can cancel your mortgage loan insurance once you reach 20% of the equity in your home.
To qualify, you need a credit score of at least 620 for fixed rate mortgages and 640 for adjustable rates. Keep in mind that the conventional loan limit for a single unit in the United States is $647,200.
5. Freddie Mac Home Possible Loan
- Minimum credit score: 660
- Minimum deposit: 3%
- Other requirements: Income cannot be more than 80% of the region’s median income
This conventional loan is not guaranteed by the federal government, but offers advantages to first-time home buyers. The Freddie Mac Home Possible loan program only requires a 3% down payment but requires a minimum credit score of 660. To qualify, your home must be located in an underserved area or your income must be no more than 80% of median income for this domain.
PMI is required if your down payment is less than 20%. This can be reversed when you reach 20% equity in your home.
6. Fannie Mae HomeReady
- Minimum credit score: 620
- Minimum deposit: 3%
- Other requirements: Complete owner training course
For low-income borrowers, the HomeReady Mortgage Program might help. This loan program is similar to the Freddie Mac Home Possible program, but easier to qualify for. The HomeReady Mortgage program only requires a 3% down payment and a minimum credit score of 620. You will also need to complete a homeownership education course. Unlike the FHA loan, this program does not impose geographic restrictions on mortgage limits. You can also use grants and donations from nonprofits, churches, or family members to help fund your down payment, and no minimum personal funds are required.
You will also need to purchase a PMI if your down payment is less than 20%, but you can cancel your mortgage insurance once you reach 20% equity in your home.
7. Good Neighbor Next Door Loan
- Minimum credit score: 500
- Minimum deposit: $100
- Other requirements: Minimum three-year occupancy in the house
This mortgage program encourages elementary and secondary school teachers (K-12), law enforcement officers, emergency medical technicians and firefighters to a 50% discount on the listed price of a property. This program offers down payments as low as $100 and requires a credit score as low as 500-580. You must agree to live in revitalization areas approved by the U.S. Department of Housing and Urban Development for 36 consecutive months to receive the discount.
8. Energy efficient mortgage
- Minimum credit score: Varied
- Minimum deposit: Varied
- Other terms: Varies
For FHA borrowers, this mortgage allows you to qualify for a larger loan amount so you can finance energy-efficient improvements to your home. To qualify, you will order an energy assessment that will provide suggestions on how to reduce your home’s energy consumption. An EEM mortgage can be used in conjunction with other mortgages like conventional loans, FHA and VA loans, as well as refinance. Moreover, you don’t need to pay a larger down payment for that extra funding, and you don’t need to requalify either.