What’s the best first–time home buyer loan?

When you’re a first–time home buyer, you’re looking for any way to lower the bar and get your foot in the door.

Maybe that means a mortgage option with a lower down payment, or one with less stringent credit score or income standards.

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 unique situation calls for, there’s likely a first–time home buyer loan that can help.

Find the best first-time home buyer loan for you. Start here (Nov 22nd, 2021)

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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 6 top programs and their basic requirements:

Minimum Down Payment Minimum Credit Score Mortgage Insurance Required?
FHA Loan 3.5% 580 Yes
Conventional 97 3% 620 Yes if <20% down
HomeReady/Home Possible 3% 620 Yes if <20% down
USDA Loan 0% 640 Yes
VA Loan 0% Usually 620 No 
Good Neighbor Next Door $100 580 Yes

Find the best first-time home buyer loan for you. Start here (Nov 22nd, 2021)

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.

Find out if you qualify for an FHA loan. Start here (Nov 22nd, 2021)

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.

Find out if you qualify for a Conventional 97 loan. Start here (Nov 22nd, 2021)

3. Fannie Mae HomeReady and Freddie Mac Home Possible loans

Fannie Mae HomeReady and Freddie Mac Home Possible loans are two types of conventional mortgages that can help you get your foot in the door 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 a first–timer 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.

Find out if you qualify for 3% down with Fannie or Freddie. Start here (Nov 22nd, 2021)

4. USDA loans

If you’re willing to buy a home in a more rural part of the country, 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.

Find out if you qualify for a zero-down USDA loan. Start here (Nov 22nd, 2021)

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.

Find out if you qualify for a zero-down VA loan. Start here (Nov 22nd, 2021)

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

Who is considered a first-time home buyer?

If you’re interested in qualifying for a first–time home buyer loan program, most government and nonprofit programs will consider you a first–timer if you haven’t owned a home in the last three years. However, consult with your real estate agent if you have any concerns.

Which is the easiest first-time home buyer loan to get?

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.

How do I get loan pre-approval?

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 and plan in place, qualifying for a home loan isn’t just possible – it can be affordable, too.

Show me today’s rates (Nov 22nd, 2021)

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