First-time homebuyer loans: Best options and how to qualify

Buying your first home is an exciting step, but a financially challenging one, too. According to a survey by Opendoor, 53% of first-time buyers said financial factors were most likely to delay their home purchase. First-time homebuyers may struggle to save enough for a down payment since they don’t have the benefit of built-up equity from a previous home to contribute to a new one. First-time buyers may also find the process of purchasing a home — the inspection, appraisal, loan pre-approval, paperwork, and more — daunting to keep straight.

If you’re planning to purchase your first home, it’s worthwhile to explore the best first-time homebuyer loans, down payment assistance, and how to qualify. 

What are first-time homebuyer loans and how do they work? 

Several types of mortgages benefit first-time homebuyers through low down payment requirements or a lower credit threshold. Some states or cities offer their own mortgage programs that may require you to be a first-time homebuyer (such as Utah’s FirstHome or Kentucky’s Mortgage Revenue Bond program), but most types of mortgages don’t have this requirement. 

Contrary to what the name suggests, you may qualify for first-time homebuyer programs even if you have owned a home before. Many programs define a first-time homebuyer as someone who hasn’t owned a home in the three years prior to purchasing. 

Finding a home loan that is best suited to your financial situation can be difficult when you’ve never gone through the process before. Before you apply for a loan, consider talking to a few banks or mortgage brokers to see what options are available in your area and compare rates.

What types of first-time homebuyer loans are available?

Each person’s needs are different when it comes to owning a home, so there are a number of mortgage products available for a range of homebuyers. Whether you’re looking to buy your first home or your fifth, these are the most common types of mortgages you’ll see:

FHA

These mortgages are backed by the Federal Housing Administration (FHA) and are commonly used by people buying their first home — more than 82% of FHA loans last year went to first-time buyers. FHA loans are popular due to their low down payment requirements, low interest rates, and lenient credit score requirements. If your credit score is between 500 and 579, you can qualify with a 10% down payment, and if your score is 580 or higher, your down payment can be as low as 3.5%.

VA

Backed by the Department of Veterans Affairs, VA loans are only available to eligible veterans, service members, and surviving spouses. These mortgages don’t require a down payment, but they do have an upfront funding fee, which is between 1.25% and 2.15% of the loan amount on VA loans for first-time homebuyers.

USDA

Like VA loans, these mortgages do not require a down payment. However, you can only use them on properties that are in designated rural areas. You can check the USDA eligibility map to see if your home qualifies. Income limits for borrowers also apply.

Conventional

These loans are mortgages that government agencies don’t insure. They typically have more stringent qualification requirements than government-backed loans. Conventional loans conform to the underwriting requirements set forth by Fannie Mae and Freddie Mac — government-sponsored entities that buy residential mortgages and sell them on the secondary market. 

FHA 203(k) renovation loans

This is a subtype of the FHA mortgage designed for homes that are in need of repairs. It covers the cost of buying the property and extra for making repairs. The credit requirements for an FHA 203(k) loan are the same as for a standard FHA loan, but there are specifications for the contractors and repairs that your fixer-upper needs.

Region-specific

State and local governments may create special mortgage programs for first-time homebuyers. The qualifications and terms will vary, so search the U.S. Department of Housing and Urban Development (HUD) local homebuying programs page for more information on resources available in your state. 

How to qualify 

Each lender and type of loan will have different requirements. Here are some of the basic categories your financial institution will review: 

• Credit score: This score factors in how much debt you have, what types, whether you’ve been paying on time, and other elements of your financial history. Lenders use this as a rating on how well you’ve handled credit. You can check your score on AnnualCreditReport.com or see if your bank or credit card issuer provides FICO credit scores for free. 
• Down payment: Most lenders require you to contribute your own funds to buy a house to ensure you have skin in the game. In many cases, your lender will require mortgage insurance if you put down less than 20%, a benchmark that the average first-time homebuyer didn’t reach last year. According to a National Association of REALTORS® report, first-time homebuyers put down an average of 8% of the home’s price as a down payment. 
• Debt-to-income ratio: This is a calculation of your total monthly debt payments (including your future mortgage payment) divided by your gross monthly income. Lenders use this calculation to ensure you have enough room in your budget to keep up with mortgage payments. 
• Other eligibility requirements: Different loan programs might have requirements for the condition of the property, its location, or the borrower’s income level. For example, FHA loans typically can only be used on homes that meet HUD safety and security standards. If you’re looking for a specific type of mortgage, talk with potential lenders about what that loan requires.

What are the benefits of first-time homebuyer loans? 

If you’re newly venturing into the housing market, you might feel a little overwhelmed by high interest rates and home prices — HUD estimated home prices were up 6.7% compared to the same time last year. However, the right mortgage program can lower some of your costs and help you overcome some of the hurdles that typically hinder first-time homebuyers. Many loans that benefit first-time homebuyers include these features: 

• Lower down payment requirement
• Lower interest rates
• Homebuyer education
• Flexible credit score requirements

How to apply 

Getting a mortgage involves some prep work, but the process is simpler if you follow these steps: 

1. Research lenders and real estate agents: Getting a team of professionals to help you will make the homebuying process easier. Ask for recommendations from friends and family on lenders, mortgage brokers, and real estate agents to find people who are trustworthy and experienced with first-time homebuyers.
2. Get pre-approved with at least three lenders: It can be surprising how much fees and interest rates vary between lenders, even if you’re looking at similar mortgage products. Go through the pre-approval process with at least three lenders, and compare their rates, fees, and terms. 
3. Make an offer: With a pre-approval letter in hand, you’re ready to make an offer on your dream home. Pre-approval from a bank will let sellers know your offer is serious and you have financing lined up. 
4. Submit an official loan application: Once your offer is accepted, you can submit final documentation to the lender to complete your loan application. This includes proof of income (such as tax returns or pay stubs), bank statements, and other financial documents.
5. Home inspection and appraisal: The next step is for the home to be inspected for underlying problems or damage. This often isn’t required by the lender, but it’s a good idea for you to know the home’s condition and identify any deal breakers. An appraisal, on the other hand, is necessary as the lender will assess the home’s value before it approves the mortgage. In the case of FHA loans, an appraisal will also help determine that the house is safe and secure. 
6. Underwriting and approval: The documents you submit are processed and reviewed in a process called underwriting. This can take a few days to a few weeks, depending on your mortgage type, the complexity of your financial situation, and the lender’s workload. Once your loan is approved, the lender will provide a closing disclosure document no less than three days before closing. This contains your loan terms, interest rate, and other loan details.
7. Complete homebuyer education course: Some mortgage programs require you to take an online homebuyer education course, which must be completed before closing. Even if you don’t have to, completing a free education course will help you feel confident in your homebuying decision and prepare for homeownership.
8. Close the loan: On closing day, you’ll pay closing costs and sign official documents to finalize your loan and title transfer. Be sure to ask about any part of the documents you don’t understand before you sign. Once you close, you’ll receive the keys to your new home. 

First-time homebuyer programs 

There are numerous down payment assistance programs to help first-time homebuyers overcome hurdles like down payments and closing costs. These are offered by various organizations from community groups to state and local governments. Here are some common types: 

• First-time homebuyer grants: These don’t need to be repaid. They are often issued by a state or local government to encourage people to buy homes in the area. Search for the city or state where you plan to buy a home, and see if there are any homebuyer grants available on their websites.
• Down payment assistance second mortgages: These “soft” second mortgages let you borrow the money to cover closing costs or a down payment. Some require monthly repayment like your primary mortgage does. Others only require repayment once the home is refinanced or sold. You can also find soft second mortgages that are forgiven after certain criteria are met, such as you living in the home for a certain number of years. 
• Homeownership individual development accounts (IDAs). These aren’t as common as other forms of down payment assistance, but some organizations help first-time homebuyers set up a dedicated IDA to save money for a down payment. They may also match saved funds to help give homebuyers a boost. 

First-time homebuyer loans FAQ 

What loan do most first-time homebuyers use? 

First-time homebuyers use all kinds of mortgage loans, but they might benefit most from programs with lower down payment requirements. FHA, VA, or USDA loans can be particularly helpful to those who are looking for low or no down payment. 

What credit score does a first-time homebuyer need? 

This depends on which type of mortgage you apply for. Most conventional mortgages require a credit score of at least 620, though you can qualify for an FHA loan with a score as low as 500. Higher credit scores will generally help you get a lower interest rate, so check your score and see if there are ways you can improve it, if needed.

How much is the down payment for a $500,000 house? 

If you opt for a conventional loan, you’ll need at least 3% for a down payment, which would be $15,000 for a $500,000 house. If you want to put down 20% to avoid private mortgage insurance, your down payment would be $100,000. An FHA loan would require 3.5%, which would be $17,500. Other programs, such as USDA or VA loans, may not require any down payment. 

Which loan is best for first-time homebuyers? 

The right mortgage for you depends on what’s available in your area, what types of financing a seller will accept, and what mortgage you qualify for based on your financial situation. If you’re a veteran, you might find the rates and requirements for a VA loan work better for you than conventional loans. If you’re still building your credit history and have a lower score, an FHA loan might be the best option to help you buy a home and start building equity.