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7 Best Home Loans for First-Time Buyers

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First-time home buyers are essential to the U.S. housing market and the overall strength of the national economy. 

First-time buyers bring demand into the market. Without them, housing markets suffer, which is why the government treats first-time buyers differently.

The government gives first-time buyers advantages that other buyers don’t receive:

  • Automatic mortgage rate discounts
  • Low-down payment mortgage options
  • Reduced mortgage insurance premiums

First-time buyers also receive notable tax credits and cash grants from the government to help keep homes affordable.

This article highlights today’s best home loans for first-time home buyers, how to choose your best option, and how to get approved.

1. Conventional 97 Mortgage

Best fit for: Home buyers with above-average income and credit scores

Where you can apply: Retail banks, mortgage companies, and local credit unions

The Conventional 97 mortgage is a low-down payment conventional loan backed by Fannie Mae. It allows first-time home buyers to make a three percent down payment on a single-family home that will be a principal residence.

The Conventional 97 requires home buyers to meet conventional mortgage eligibility standards for maximum loan size, minimum credit score, and debt-to-income ratio. Buyers must also attend a HUD-approved homeownership education course before closing.

The Conventional 97 mortgage is sometimes called the 97% LTV Standard.

Get pre-approved for a Conventional 97 mortgage.

2. HomeReady Loan

Best fit for: Home buyers with low- to moderate household income who prefer 30-year fixed-rate mortgages.

Where you can apply: Retail banks, mortgage companies, and local credit unions

HomeReady is an affordable, 3% down payment mortgage program backed by Fannie Mae. It’s available to first-time home buyers with low- and moderate household income and credit scores of 620 or higher. Fannie Mae also allows boarder income to help qualify.

Home buyers using HomeReady get mortgage rates discounted by as much as 1.75 percentage points and discounted private mortgage insurance (PMI) premiums. 

The program is only available as a 30-year fixed-rate mortgage.

HomeReady is for primary residences with a 30-year fixed-rate mortgage, and buyers must attend a HUD-approved homeownership education class before closing.

Get pre-approved for a HomeReady mortgage.

3. Home Possible Loan

Best fit for: Home buyers with low- to moderate household income and an above-average credit rating

Where you can apply: Retail banks, mortgage companies, and local credit unions

Home Possible is an affordable mortgage loan backed by Freddie Mac. It resembles Fannie Mae’s HomeReady mortgage. 

Freddie Mac’s Home Possible allows low- to moderate-income first-time home buyers with a minimum 660 credit score to make a 3 percent down payment on a home.

Buyers must attend a HUD-approved homeownership class before closing.

Home buyers can use any fixed-rate mortgage term from 10 to 30 years with Home Possible. Freddie Mac discounts Home Possible mortgage rates by up to 1.75 percentage points and discounts private mortgage insurance (PMI) premiums, too.

HomePossible is for primary residences only.

Get pre-approved for a Home Possible mortgage.

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4. FHA Mortgage 

Best fit for: Home buyers with lower credit scores and moderate-to-high income and buyers of multi-unit properties.

Where you can apply: Most retail banks and mortgage companies, and some local credit unions

FHA mortgages are low-down payment mortgages insured by the Federal Housing Administration (FHA). They’re a catch-all program for first-time buyers ineligible for other low- and no-down payment options.

FHA mortgages allow:

  • Minimum down payment of 3.5%
  • Credit scores of 500 or higher
  • Boarder and non-traditional income sources

Unlike other low-down payment loans, it doesn’t restrict buyers by income, profession, or location.

FHA mortgage rates are most competitive for 2-4 unit homes. Most home buyers are required to pay mortgage insurance premiums for the life of their FHA-endorsed loan. 

FHA mortgages are for primary residences only. The program offers a complete suite of fixed- and adjustable-rate mortgages (ARM).

Roughly 10 percent of first-time home buyers use FHA mortgages.

Get pre-approved for an FHA loan.

5. USDA Mortgage

Best fit for: Home buyers in suburban and rural parts of the country

Where you can apply: Most retail banks, some mortgage companies, and local credit unions

USDA mortgages are no-down-payment mortgage loans guaranteed by the U.S. Department of Agriculture. 

USDA mortgages are available in low-density areas, defined as communities with no more than 500 people per square mile. 97% of the United States land mass, which includes one-third of the U.S. population, is within USDA mortgage-eligible boundaries.

USDA mortgages allow:

  • 100% financing / no down payment required
  • Credit scores of 580 or higher
  • Reduced mortgage insurance premiums

The USDA stands behind its loans for mortgage lenders so mortgage lenders tend to make USDA mortgages at lower interest rates compared to conventional, FHA, and VA mortgage loans.

Home buyers can use USDA mortgages to purchase a single-family, primary residence with a 30-year fixed-rate mortgage only. Income restrictions apply. 

Get pre-approved for a USDA mortgage.

6. VA Loan

Best fit for: Home buyers with current or prior military experience

Where you can apply: Most retail banks, mortgage companies, and local credit unions

VA mortgages are no down payment mortgage loans with no mortgage insurance required. They’re available to active duty military, veterans, members of the National Guard and Reserves, and surviving spouses.

VA mortgage rates are often lower than conventional and FHA mortgage rates because the Department of Veterans Affairs guarantees VA mortgages against loss.

VA mortgage eligibility requires:

VA mortgages also require that a buyer lives in their home as a primary residence and that the home is safe, structurally sound, and sanitary.  

VA mortgages are available with fixed- and adjustable-rate options.

Get pre-approved for a VA loan.

7. Fannie Mae HomePath Ready Buyer Mortgage

Best fit for: Home buyers with low- or moderate-income who want to purchase discounted homes as-is.

Where you can apply: Some retail banks, mortgage companies, and local credit unions

The Fannie Mae HomePath Ready Buyer mortgage is the financing program for Fannie Mae’s flagship distressed home sale program. Through HomePath, home buyers can purchase homes in foreclosure at significant discounts to fair market value.

Fannie Mae rehabilitates many of its HomePath homes into excellent condition before listing them for sale. Prices are negotiable, and no minimum down payment is required.

However, homes are sold to buyers as-is, meaning some homes may contain minor or significant defects. In exchange for this risk, Fannie Mae gives low- and moderate-income home buyers a 3% contribution toward closing costs and interest rate buydowns, plus another $500 cash.

Fannie Mae HomePath buyers can finance their homes with any mortgage program. Fixed- and adjustable-rate mortgages are allowed.

Get pre-approved for a HomePath mortgage.

How to Choose a Mortgage Lender

Traditional BankCorrespondent LenderMortgage Broker
Great for standard loansGreat for standard loansGreat for unique loans
Approve and fund mortgagesApprove and fund mortgagesDon’t approve or fund mortgages
Standard rates and no feesLower rates and no feesStandard rates and broker fees
Slowest processQuick processSlower process

A mortgage lender is a company that makes mortgage loans. There are more than 4,300 licensed mortgage lenders nationwide. 

So, how do you choose the best mortgage lender? Follow your needs.

There are three types of mortgage lenders:

  1. Traditional banks
  2. Correspondent and non-bank mortgage lenders
  3. Mortgage brokers

Each type of lender has a customer type for which it’s best.

Traditional Banks

Traditional banks include retail banks, credit unions, and community banks. They’re best for home buyers who prefer a 30-year fixed-rate mortgage and want to buy a home on a longer purchase timeline.

Examples of traditional banks include Bank of America, JP Morgan, and Wells Fargo.

Traditional banks centralize sales and operations, which can slow communication channels and the speed of mortgage approval.

Traditional banks carry a limited set of mortgage products, and interest rates and fees are often higher than industry averages. Consumers may choose their local bank because it feels familiar to them.

Correspondent and Non-Bank Lenders

Correspondent and non-bank mortgage lenders are best for home buyers who want a fixed- or adjustable-rate mortgage and prefer speedy communication. 

Examples of correspondent and non-bank lenders include Homebuyer.com, Rocket Mortgage, and loanDepot.

Correspondent and non-bank lenders use dedicated sales teams, giving home buyers better attention and faster communication. Correspondent and non-bank lenders tend to offer more mortgage products than traditional banks and offer a broader range of mortgage interest rates.

Correspondent lenders account for the majority of mortgage loans made.

Mortgage Brokers

Mortgage brokers are best for home buyers with unique mortgage needs, including specialty products and alternative financing. Brokers can also facilitate fixed- and adjustable-rate loans.

There are no national mortgage brokerage companies. Brokerages are local.

Mortgage brokers don’t lend their own money. Instead, brokers keep relationships with traditional banks and non-bank lenders and forward customer mortgage applications to the lenders with the best rates. In exchange, brokers earn a fee. 

Sometimes, the mortgage broker fee is paid by the non-bank lender. Sometimes, the home buyer pays the fee. Ask your mortgage broker how they get paid to understand your pricing better.

Interest rates with mortgage brokers are on-level with rates from correspondent and non-bank lenders.

Learn more about the differences between mortgage brokers, lenders, and traditional banks.

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Government Programs, Grants, and Tax Credits for First-Time Home Buyers

First-time home buyers can access tax breaks, cash grants, and incentives unavailable to the general population. Some programs apply automatically, and others require a separate application.

Here are 9 programs for first-time home buyers and how to use them.

1. FHFA First-time home buyer mortgage rate discount program

The FHFA first-time home buyer mortgage rate discount program started in late 2022. The program assigns an automatic interest rate discount to buyers who use conventional mortgages and whose income falls at or below typical income for the area in which they’re buying. 

Mortgage rate discounts range up to 1.75 percentage points.

2. The $25,000 Downpayment Toward Equity Program

The Downpayment Toward Equity Act is a congressional bill granting up to $25,000 cash to first-time, first-generation home buyers for a down payment, mortgage fees, and home closing costs. 

Mortgage lenders coordinate cash grants between state and title agencies automatically. A separate program application isn’t required.

Check your eligibility.

3. $15,000 First-Time Home Buyer Tax Credit

The first-time home buyer tax credit is a congressional bill that would give up to $15,000 in federal tax credits to eligible first-time buyers. The program is modeled after the 2009 home buyer tax credit of the same name. The current bill version still needs to be voted into law. Still, it is expected to pass retroactively for all home buyers from December 31, 2020.  

Get pre-approved to check your eligibility.

4. National Homebuyers Fund

The National Homebuyers Fund is a non-profit, public-benefit entity that sponsors eligible home buyers with up to 5 percent of their home’s purchase price.

In exchange, home buyers make a five-year pledge to own and occupy the home and make on-time payments. Call (916) 444-2615 for a complete list of participating NHF lenders.

5. State and Local Government Grants

In some areas, first-time home buyers can apply for cash grants and tax incentives from city and municipal governments and local neighborhood associations. Home buyer assistance can range from $500 to $50,000 cash. It may be applied toward mortgage rate buydowns, closing cost assistance, and down payment on a home. 

To search for housing grants in your area, visit your local government website and search for “housing assistance.”

6. Forgivable Mortgages

Forgivable mortgages are mortgage loans marked as satisfied after a buyer meets certain, predetermined conditions – usually making on-time mortgage payments for a specific number of years. 

Forgivable mortgages are substitutes for making a down payment and may range up to 5% of the home’s purchase price. Some mortgage lenders and city and local governments offer forgivable mortgages. 

7. Discounted Homes from HUD

First-time home buyers can use the government’s HUD Homes website to purchase repossessed homes at a discounted price. The most well-known home discount program is Good Neighbor Next Door which sells homes at 50 percent off to buyers with four professional titles: teacher, firefighter, emergency medical technician, and law enforcement official. 

Home buyers must be full-time in their profession and live in the area in which they work.

8. Down Payment Assistance Mortgages

Down payment assistance mortgages replace a first-time buyer’s typical cash down payment. Two types of down payment assistance are down payment loans and deferred mortgages. Down payment loans are ultra-low interest rate loans for up to 10 percent of a home’s purchase price. 

Deferred mortgages are mortgages for which no payment is due until the homeowner sells or refinances the home. At this time, the mortgage is due in full. Local government agencies administer down payment assistance mortgages.

9. Closing Cost Assistance Programs for Home Buyers

First-time home buyers may be eligible for closing cost assistance to pay their closing costs in full, including mortgage costs, title fees, and state and local government taxes. The National Council of State Housing Agencies website maintains an up-to-date list of closing cost assistance programs. 

Buyers must meet minimum credit score and income thresholds, and subject homes must meet minimum safety and inspection standards.

FAQ about First-Time Home Buyer Loans

Who is considered a “first-time home buyer”?

A first-time home buyer is any person who has not owned a home in the last three years. A person may buy their second home and still qualify as a first-time home buyer.

Learn more about first-time home buyers.

What is the easiest house loan to get?

Depending on where you live, what you earn, what you spend, and the strength of your credit rating, any mortgage may be easy or hard to get. FHA mortgage eligibility is the least strict compared to other loan types. Sometimes, FHA mortgages have the lowest interest rate, too.

How do I get pre-approved for a loan?

Home buyers can pre-approve their mortgage loan at a bank branch in person or online with a licensed mortgage company. Buyers can complete an automated mortgage pre-approval in a few minutes. Pre-approvals verify basic income, employment, and credit information. 

When should I get pre-approved for a loan?

The best time to get pre-approved is before you look for a home. Mortgage pre-approvals establish your maximum price range for a home and identify areas for improvement so you can buy the home of your dreams when you’re ready.

Learn more about getting pre-approved before looking for a home.

What credit score do I need to buy a house?

FHA, VA, and USDA mortgage loans make provisions for buyers with low or no credit scores, so there are no credit score requirements to purchase a home. However, most mortgage lenders enforce minimum credit scores by loan type: 500 for an FHA mortgage, 580 for a VA or USDA loan, and 620 for a conventional mortgage backed by Fannie Mae or Freddie Mac. 

Can I buy a house with no down payment?

Yes, first-time home buyers can purchase a home with no down payment. The VA and USDA mortgages allow for 100% financing, and through forgivable mortgages and down payment assistance, an FHA-endorsed mortgage can also be zero-percent down.

Learn more about buying a home with no money down.

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