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What are the best home loans for first-time home buyers?

Yahoo Personal Finance· Getty Images
Updated 4 min read

Down payment.

Credit score.

Of all the challenges first-time home buyers face in obtaining a mortgage and purchasing a home, these two may prove the most difficult.

Difficult, but not impossible, especially with a home loan that's designed to help first-timers overcome these hurdles.

Among the many mortgages available to first-time home buyers, several specific loan programs stand out because they're widely available and aim to resolve both the down payment and credit challenges that first-time home buyers face.

The down payment challenge arises because, unlike repeat home buyers, first-timers haven't built up equity in their current home that they can use for this purpose. Add closing costs to the equation, and a down payment of 20% or even 10% of the home's purchase price may be insurmountable.

The solution? A home loan that allows a down payment of only 3.5%, 3% or even 0%.

The credit score challenge arises partly because first-time home buyers haven't had the opportunity to boost their credit scores by making on-time mortgage payments every month. Regular mortgage payments are one reason homeowners tend to have higher credit scores.

The solution? A home loan that offers home buyers flexible guidelines to qualify and may not require any credit score at all.

Read more: How to get a mortgage with a 1% down payment

Most of the programs we will discuss below require some form of mortgage insurance, which protects the lender's interest in the loan if the borrower doesn't repay it. This protection encourages lenders to offer loans that may be riskier for them due to the loans' smaller down payments and flexible credit guidelines.

With all of these programs, lenders may impose their own criteria in addition to the minimum criteria set by the program office.

Learn more: Best first-time home buyer programs in Texas

FHA loans are insured by the Federal Housing Administration (FHA), a federal government agency within the U.S. Department of Housing and Urban Development.

FHA loans offer:

  • A down payment as low as 3.5%.

  • Low closing costs.

  • A credit score as low as 500 with a 10% down payment.

FHA loans require an upfront mortgage insurance premium (MIP) and an annual MIP. The upfront MIP can be financed as part of the loan amount. The annual MIP is payable in monthly installments.

Read more: Best FHA lenders

VA loans are directly funded or guaranteed by the U.S. Department of Veterans Affairs (VA). Eligible borrowers include military service members and veterans, their surviving spouses, and certain other groups of borrowers.

VA loans offer:

  • Financing up to 100% of the purchase price.

  • Lower rates than non-government-backed mortgages.

  • No mortgage insurance.

  • Fewer closing costs.

Some VA borrowers must pay a one-time upfront VA funding fee. This fee can be paid in cash at closing or financed as part of the loan amount.

Dig deeper: VA funding fee exemption — How it works and who qualifies

USDA loans are directly funded or guaranteed by the U.S. Department of Agriculture. Eligible borrowers include buyers with moderate, low, or very-low income who are purchasing a home in a rural (or some suburban) location.

USDA loans offer:

  • Financing up to 100% of the appraised value.

  • No minimum credit score.

  • No maximum purchase price.

  • No limit on gift funds toward the home purchase.

Read more: Guild Mortgage review

HomeReady and Home Possible are two programs that let you get a mortgage with as little as 3% down. HomeReady is a Fannie Mae lending program. It's intended for low-income borrowers who may have relatively low credit scores.

HomeReady loans offer:

  • A minimum down payment of 3%. Down payment may be from a gift or grant.

  • A fixed rate or a 5-year, 7-year, or 10-year adjustable rate with a 5% down payment.

  • No minimum credit score.

  • Borrowers may be required to complete homeowner education or housing counseling.

  • Mortgage insurance may be cancelable.

Home Possible is a Freddie Mac lending program. It's intended for borrowers with low or very-low income.

  • A minimum down payment of 3%.

  • Non-occupant borrowers may be allowed if the home is only one unit and at least one borrower occupies it as a primary residence.

  • No credit score is required.

  • At least one borrower may be required to participate in homeowner education.

Not sure which first-time home buyer mortgage is right for you? Ask your Realtor or mortgage lender for more information about these and other programs that may be available in your state or local area.

Read more: Everything you need know about first-time home buyer programs

The more you know about your options, the better prepared you'll be to choose a loan that could fit your needs.