Types of Home Loans for First-Time Homebuyers

Find the right option for your financial situation

A couple unpacking boxes in living room of new house
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A number of financial hurdles potentially stand between first-time homebuyers and the keys to their first home. However, you don't have to wait until you have a hefty down payment or a perfect credit score to purchase a home. Understanding the first-time homebuyer loan options available can help you make more informed decisions during the homebuying process.

Key Takeaways

  • Many loan options for first-time homebuyers are government-backed or federally guaranteed.
  • Low- or no-down-payment options exist if you have little or no savings.
  • Mortgage insurance is generally required and can't be canceled for some loan types, even after you reach 20% equity.
  • Some loan options have no credit score requirements and may take advantage of your other financial strengths to qualify you.
  • Homebuyer education may be required for certain loan options.

Home Loan Requirements

Down Payment Minimum Credit Score Income Mortgage Insurance
FHA 3.5% 500 None Upfront fee and annual premiums; noncancellable
USDA None None Varies by location Upfront fee and annual premiums
VA None None None Upfront funding fee only
Good Neighbor Next Door (HUD) $100 500 None Upfront fee and annual premiums
HomeOne Mortgage 3% 620 None 35% of the financed amount; cancellable after you reach 20% equity
Home Possible Mortgage
(Fannie Mae & Freddie Mac)
3% 620 80% of the area's median income Up to 25% of the financed amount; cancellable after you reach 20% equity
HomeReady Mortgage (Fannie Mae & Freddie Mac) 3% 620 Two years of consistent income Up to 25% of the financed amount; cancellable after you reach 20% equity

FHA Loans

With an FHA loan, first-time homebuyers can make a down payment as low as 3.5% using personal savings or contributions from a family member, employer, or a charitable organization as a gift. While there are no income requirements, lenders do seek out a credit score of at least 500. Maximum loan amounts will vary depending on the home's location.

Loans are offered by private lenders but insured by the Federal Housing Administration, which requires mortgage insurance on all FHA loans. You'll pay mortgage insurance upfront and as part of your monthly payment. You can roll the upfront mortgage insurance cost into your mortgage, but it will increase your monthly payment.

A conventional mortgage may be a less-expensive option if you have good credit and you're paying more than 10% down.

USDA Loans

The U.S. Department of Agriculture offers loans similar to an FHA loan, but USDA loans are designed for homebuyers with little income or savings who are purchasing a home in a rural area. There's no minimum down payment, but homebuyers will have to pay an upfront and monthly mortgage insurance premium.

The USDA doesn't have a minimum credit score, but you'll need to have a score of at least 640 for lenders to approve you through the automated loan underwriting system. To be approved through automated underwriting, you also can't have any outstanding federal debts or serious delinquencies. Lenders may still be able to approve your application, but they'll have to manually underwrite the loan.

VA Loans

Eligible service members, veterans, and their families may qualify for a loan through the U.S. Department of Veteran Affairs. There's no mortgage insurance because the VA guarantee replaces the need for insurance, and there's no down payment requirement. However, there is an upfront funding fee calculated based on type of service, down payment, disability status, whether you're buying or refinancing, and whether this is your first VA loan.

The VA doesn't set a minimum credit score or maximum debt-to-income ratio. However, if your debt-to-income ratio is high, lenders will look at other information on your application, such as high savings or long-term employment, to show that you're a strong candidate for a loan.

Good Neighbor Next Door

The Good Neighbor Next Door loan program is offered by the Department of Housing and Urban Development. It helps law enforcement officers, pre-K through 12 teachers, firefighters, and emergency medical technicians purchase homes in designated revitalization areas. Homebuyers get 50% off the list price of eligible homes if they agree to live in the home as their primary residence for the next three years.

Homebuyers can make a minimum down payment of $100 and can include closing costs and prepaid expenses in the mortgage. There are no income limits, and you can qualify with a minimum credit score of 500, but you'll need a score above 580 to qualify for maximum financing.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are federally backed mortgage companies that guarantee mortgages, which makes it easier for first-time homebuyers to purchase a home.

HomeOne Mortgage

Freddie Mac’s HomeOne Mortgage allows first-time homebuyers to purchase a home with as little as 3% down. There are no income or geographic restrictions, but first-time homebuyers will need to take a homebuyer education course and have a minimum credit score of 620. Mortgage insurance is required on 35% of the financed amount, which is cancellable after you reach 20% equity. The loan can be used to purchase a single-unit property, condo, or planned unit development. It can’t be used to purchase a manufactured home.

HomeReady Mortgage

This loan option is offered by Fannie Mae and Freddie Mac for low-income borrowers. It allows homebuyers to fund their minimum down payment of 3% with outside sources. You can qualify with a credit score as low as 620, but with a score above 680, you may qualify for better pricing. Although there are no specific income requirements, you'll need to demonstrate two years of consistent earnings, and mortgage insurance is required on up to 25% of the financed amount (this, too, is cancellable after you reach 20% equity). A homebuying education course is required for first-time homebuyers. However, if you’re purchasing the home with a spouse or partner who is also a first-time homebuyer, only one of you needs to attend homebuyer education.

Home Possible

Home Possible loans are also provided by Fannie Mae and Freddie Mac. It helps first-time homebuyers with very low to low income get a low-cost mortgage. There is no personal funds requirement for the down payment, which means homebuyers can make the minimum 3% down payment with contributions from family, secondary financing, employer assistance programs, and sweat equity.

Sweat equity is work put into a home that increases its value, such as DIY renovations.

There's no limit on home location, but to qualify, your income can’t exceed 80% of the area’s median income. Mortgage insurance is required on up to 25% of the financed amount, which can be canceled after you reach 20% equity. To help make home ownership a possibility, Home Possible allows you to include a co-borrower who isn’t going to live in the home with you.

Renovation Loans

If you've found your dream home but need to do some repairs before you can move in, a renovation loan makes it possible to finance both the home purchase and certain renovations. FHA, USDA, VA, Fannie Mae, and Freddie Mac all guarantee renovation loans with similar income, credit score, and minimum down payment requirements as regular purchase loans.

FHA 203k Loan

FHA insures rehabilitation loans for homes at least one year old for a minimum of $5,000. You can borrow up to 110% of the property’s estimated value, or the price plus renovation costs if that amount is lower.

USDA Purchase and Repair Loan

Low-income homebuyers who are purchasing their first home in a rural area can take advantage of USDA's Purchase and Repair loan. Financing is available for $35,000 or up to 100% of the value of the home after renovations.

VA Alteration and Repair Loan

Through a VA Alteration and Repair loan, eligible military service members, veterans, and surviving spouses can borrow up to 100% of the expected value of the home after renovations. There’s no minimum credit score requirement from the VA, but lenders may have their own requirements.

Fannie Mae

For renovations, Fannie Mae offers the HomeStyle Loan, which allows you to borrow $50,000 or 75% of the home's value after renovations, whichever is lower. If approved, you’ll have 12 months to complete renovations.

Freddie Mac

Freddie Mac has two renovation loan options, allowing first-time homebuyers to purchase and renovate a home with as little as 3%. With a CHOICERenovation loan, homebuyers can borrow up to 75% of the home's future value for renovations that generally must be completed within a year. With a CHOICEReno eXPress Loan, you can borrow up to 15% of the home's future value and opt to use financing to purchase materials for doing the work yourself.

Finding a Loan for Your First Home

Before you speak with a lender, check your credit report and score to see where you stand. Remember, many first-time homebuyer programs have low or no minimum credit score requirements, so homeownership is still possible if you have a low credit score.

If you’re considering a government-backed loan, look for lenders that offer those loans. Check with banks, credit unions, and mortgage companies, or look for a mortgage broker who can match you with the best lenders based on your finances and budget.

Rate shopping generally won’t hurt your credit score as long as you keep applications within a 45-day window.

Compare loan terms on the offers you receive. Consider the interest rate, APR, and fees, and ask questions about anything that’s not clear to you.

Frequently Asked Questions (FAQs)

Are there grants for first-time homebuyers?

Many states, counties, and cities offer first-time homebuyer grants, which are often funded by the federal government, to help cover your down payment and closing costs. If you qualify for a grant, you'll generally have to complete first-time homebuyer education to receive funding.

How do I get down payment assistance as a first-time homebuyer?

Your state housing authority is a great resource for finding down payment assistance programs. Your real estate agency or your loan officer or mortgage broker should also be able to provide information. Before accepting a down payment assistance offer, understand whether the assistance is a grant or loan.

How big of a loan can I get as a first-time homebuyer?

Many lenders want your mortgage payment to be less than 28% of your monthly income. The amount you can borrow to purchase your first home depends on your financial factors such as your income and credit score, as well as the loan program. For example, the amount you can borrow with an FHA loan depends on the location and type of home.

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Article Sources

  1. Consumer Financial Protection Bureau. “FHA Loans.”

  2. U.S. Housing and Urban Development. “Handbook 4000.1, FHA Single Family Housing Policy Handbook,” Page 193.

  3. United States Department of Agriculture. “Section 502 Direct Loan Program’s Credit Requirements,” Page 13.

  4. Consumer Financial Protection Bureau. “VA Home Loans.”

  5. U.S. Department of Housing and Urban Development. “About Good Neighbor Next Door.”

  6. FDIC. “Good Neighbor Next Door,” Page 1.

  7. FDIC. “Good Neighbor Next Door,” Page 2.

  8. Freddie Mac. “HomeOne Mortgage,” Page 1, 2.

  9. Fannie Mae. “HomeReady Mortgage.”

  10. Freddie Mac. “Home Possible.”

  11. U.S. Department of Housing and Urban Development. “203(K) Rehab Mortgage Insurance.”

  12. U.S. Department of Agriculture. “Purchase With Rehabilitation and Repair Loans,” Pages 12, 30.

  13. U.S. Department of Veterans Affairs. “VA Home Loan Guaranty Buyer’s Guide,” Page 17.

  14. Fannie Mae. “HomeStyle Renovation Mortgage,” Page 1.

  15. Freddie Mac. “CHOICERenovation FAQ.”

  16. Freddie Mac. “CHOICEReno eXPress Mortgage.”

  17. Consumer Financial Protection Bureau. “What Exactly Happens When a Mortgage Lender Checks My Credit?

  18. US Bank. “​​How Much House Can I Afford?