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Which Loan Is Best for First-Time Home Buyers?

By: Janet Smith, Vice President, Mortgage Operations

Posted on 6/11/2021 10:14:31 AM

First-time home buying couple holds up the keys to their new home

Buying a home is a big deal, and the process can be immensely challenging the first time around. Because you don't have the advantage of equity from a previous home sale, the amount of money available for your down payment is likely to be smaller.

It can be overwhelming filtering through all the financing options available, which is why you've come to the right place. Taking time to learn the fundamentals of property financing can save you a great deal of time and money.

To help demystify the process, here's a rundown of the best loan programs for first-time buyers.

Couple with a baby walks through a new house with a real estate agent

Types of First-Time Homebuyer Loan Programs

Buying a home is an expensive affair. Luckily, there are some loan programs specially created to encourage new entrants into the real estate market. Here are a few of the most common types of mortgages available to first-time buyers.

1. FHA Loan

An FHA loan is one insured by the Federal Housing Administration. The FHA was specifically created to make homeownership easier and more affordable and to reduce the rate of foreclosures.

Applicants are required to have a credit score of 580 or higher, and your down payment can be as low as 3.5 percent. FHA loans are much easier to qualify for when compared to conventional loan programs as they have lower upfront costs and less stringent credit requirements.

However, you must pay a mortgage insurance premium alongside your monthly mortgage payments with an FHA loan if you put down less than 20 percent. Unlike typical homeowners’ insurance, mortgage insurance doesn't protect you. It's meant to protect the lender in case you default on payments.

2. VA Loans

If you've served in the military and are looking to buy a home, then a VA loan might be the right option for you. VA loans are backed by the U.S. Department of Veterans Affairs, enabling active-duty military personnel, U.S. veterans, and qualified surviving spouses to access mortgages with competitive interest rates.

In most cases, VA loans are much easier to qualify for as they don't require a down payment. Although VA loans don't require mortgage insurance, you must pay a loan funding fee meant to cover foreclosure costs in case you default on the mortgage. But this funding fee can be rolled into your mortgage payments instead of paying for it out of pocket.

3. USDA Loan

The U.S. Department of Agriculture backs this loan. USDA loans are zero-down-payment mortgages for people looking to buy homes in USDA-approved rural areas. USDA loan packages can combine a loan and a grant, providing up to $27,500 for home improvement projects

However, USDA loans have income limits depending on location and are aimed towards buyers who aren't wealthy and can't necessarily qualify for more traditional mortgage options.

4. Conventional Loans

Conventional loans are mortgage premiums not insured by the federal government, making them some of the most complex loans to qualify for. In order to qualify for a conventional loan, you'll need to make a bigger down payment and have a high credit score as well as low debt-to-income ratios.

Unlike FHA and VA-backed loans, conventional loans are usually less costly since they don't require a mortgage premium or funding fees.

Conventional loans fall into two categories: conforming and non-conforming. Simply put, conforming loans comply with loan limits set forth by government-sponsored enterprises, Fannie Mae and Freddie Mac, while non-conforming loans do not.

  • Fannie Mae creates liquidity for lenders helping low-income earners to buy and refinance their homes. It's best for first-time buyers who need help with closing costs.
  • Freddie Mac is best for buyers with good credit and requires a 3 percent down payment.

5. State First Time Home Buyer Programs

Many state housing authorities offer loan programs that provide down payment and closing cost assistance. These programs come with favorable rates, and some states even provide tax credits you can use when filing your federal tax returns.

This type of aid is offered through grant programs, many of which don't have to be repaid.

6. Home Renovation Loan Programs

These are home purchase mortgages that come with additional funds for renovating, remodelling, and repairing a home. Typically, the renovation costs must exceed $5,000, and you'll be required to make a 3.5% down payment.

When looking for a mortgage, you're best served finding a lender that can give you the best mortgage rates possible. The most favorable loan program for you will likely depend on your credit score.

Here's a tip: As a first-time homebuyer, you should consider resources available in your state as they might provide some additional assistance.