Buying your first-home can be an overwhelming experience. From figuring out the best mortgage type to partnering with the right real estate agent, there’s a lot to consider. Choosing the right mortgage program and mortgage lender can save you tens of thousands of dollars over the years you’re paying off your mortgage.
It’s crucial to understand the various types of home loans available to you as a first-time homebuyer, particularly as mortgage rates continue to rise across the country, so you can make the best decision for your particular financial situation. Knowing your options and comparing different mortgage programs will help you make more informed decisions throughout the process.
We’ll walk you through the multitude of home loan types available to first-time homebuyers, so you can decide which option makes the most sense for you and your budget. Here are eight of the best loan programs to consider when buying your first home.
1. FHA loan
- Minimum credit score: 500-580
- Minimum down payment: 3.5% or 10%, depending on your credit score
- Other requirements: Mortgage insurance requirement
FHA loans are backed by the Federal Housing Administration and are considered more secure than conventional loans because they are backed by the US government. They’re one of the easiest mortgages to get approved for if you’re a first-time homebuyer with a low credit score and minimal down payment savings. FHA loans offer 3.5% down payment options for those with credit scores of 580 or above. If you have a credit score between 500 and 579, you can still get approved for an FHA loan, but will be required to make a 10% down payment.
FHA loans are fixed-rate mortgages and require a debt-to-income ratio of 43% or less, a steady employment history and a private mortgage insurance premium, or MIP. You’ll pay 1.75% of the loan amount upfront for MIP and the annual cost can vary between 0.45% to 1.05% of your home loan amount, depending on your down payment and 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 insurance can be canceled after 11 years. If your down payment was less, MIP will be canceled once your full mortgage is repaid.
To qualify, you must be a first-time homebuyer or have not been a homeowner in three years.
2. VA loan
- Minimum credit score: Varies by lender
- Minimum down payment: 0%
- Other requirements: Borrower must be an active or retired service 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 requirements. VA loans are backed by the US Department of Veterans’ Affairs and are issued by private lenders. Although VA loans offer down payment benefits, you will need to pay an origination fee between 1.4% and 2.3%, which can typically be rolled into the loan amount.
To qualify for a VA loan, you need to 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 down payment: 0%
- Other requirements: Home purchase in a qualifying rural area
USDA loans are 30-year fixed mortgages backed by the US Department of Agriculture. This home loan offers 100% loan financing, which means it does not require a down payment. A USDA loan is available for applicants purchasing a home in a designated rural area. USDA loans do not require private mortgage insurance but do have a 1% upfront funding fee due at the time of closing and a 0.35% annual fee that will be built into your monthly mortgage payments. This fee cannot be canceled once you reach 20% equity, like some mortgage insurance can.
To qualify, you’ll typically need a 640 credit score or higher, but requirements vary by lender.
4. Fannie Mae conventional loan
- Minimum credit score: 620
- Minimum down payment: 3%
- Other requirements: Private mortgage insurance for down payments less than 20%
The Fannie Mae conventional mortgage is one of the most common types of mortgages in the US, with 30-year fixed mortgages and 15-year fixed mortgages being some of the most popular. It is not backed by the government like an FHA loan, but instead is backed by banks and the lenders themselves. A conventional mortgage allows you to put as little as 3% down. You’ll also need to purchase private mortgage insurance if you put less than 20% down. You can cancel your mortgage insurance once you reach 20% equity in your home.
To qualify, you need a credit score of at least 620 for fixed-rate and 640 for adjustable-rate mortgages. Keep in mind, the conventional loan limit for a single unit in the US is $647,200.
5. Freddie Mac Home Possible loan
- Minimum credit score: 660
- Minimum down payment: 3%
- Other requirements: Income cannot be higher than 80% of area median income
This conventional loan is not backed by the federal government but offers benefits for first-time homebuyers. The Freddie Mac Home Possible loan program only requires a 3% down payment but does require a minimum credit score of 660. To qualify, your home must be located in an underserved area or your income must be no greater than 80% of the median income for that area.
PMI is required if your down payment is under 20%. This can be canceled when you reach 20% equity in your home.
6. Fannie Mae HomeReady loan
- Minimum credit score: 620
- Minimum down payment: 3%
- Other requirements: Complete homeowner education course
For lower-income borrowers, the HomeReady Mortgage program could help. This loan program is similar to the Freddie Mac Home Possible program, but it’s easier to qualify for. The HomeReady Mortgage program requires only 3% down and a minimum credit score of 620. You will also have to complete a homeownership education course. Unlike the FHA loan, this program does not place geographical restrictions on mortgage limits. You can also use grants and gifts from nonprofit organizations, churches or family members to help fund your down payment, and no minimum personal funds are required.
You’ll also need to purchase PMI if your down payment is under 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 down payment: $100
- Other requirements: Minimum of three-year occupancy in the home
This mortgage program incentivizes primary and secondary school teachers (from pre-K through 12th grade), law enforcement officers, emergency medical technicians and firefighters with a 50% discount on a property’s listed price. 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 US Department of Housing and Urban Development-approved revitalization areas for 36 consecutive months to receive the discount.
8. Energy Efficient Mortgage loan
- Minimum credit score: Varies
- Minimum down payment: Varies
- Other requirements: 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’ll order an energy assessment that will provide suggestions on how to lower your home’s energy use. An EEM mortgage can be used in conjunction with other mortgages like conventional loans, FHA and VA loans, as well as refinancing. Further, you do not need to make a larger down payment for this additional funding, nor do you need to requalify.
First published on May 22, 2022 at 4:30 a.m. PT.
