From setting a budget to picking a neighborhood, first-time home buyers have a lot of decisions to make.
Here’s another one: What type of mortgage should I get?
There’s no single “first-time home buyer loan.” Instead you’ll likely compare a few mortgage types. Each one has different requirements, including how much down payment you’ll need.
The right mortgage depends on more than just being a first-time buyer. Your credit score, income, savings, debt and down payment can all affect which options are available to you. Understanding where you stand financially can help you decide which option is the best fit for your situation.
Once you nail down the mortgage type, you can look at combining your mortgage with first-time home buyer benefits such as down payment or closing cost assistance.
Did you know...
You don’t necessarily have to be buying your first home to qualify as a first-time home buyer. In fact, you're often considered a first-time buyer if you haven’t owned your primary residence in the past three years.Here’s how to compare your financial situation with first-time home buyer financing options and find what’s best for you.
Overview: Best loans for first-time home buyers
Here are six first-time home buyer loans and programs that are worth exploring.
- FHA loans are government-insured mortgages that require as little as 3.5% down.
- VA loans are zero-down-payment loans for qualified military borrowers.
- USDA loans offer financing on rural and some suburban properties with 0% down.
- Fannie Mae and Freddie Mac back conventional loans with just 3% down. (Fannie and Freddie don’t lend money directly; you get the loan through a mortgage lender.)
- State first-time home buyer programs include loans and assistance programs (such as grants or tax credits) tailored to the borrower’s location.
- Fixer-upper mortgages, known as renovation loans, allow you to buy a home and roll remodeling costs into your mortgage with one convenient monthly payment.
Which mortgage program fits you?
FHA loans
Best for: Borrowers with lower credit scores
Loans backed by the Federal Housing Administration require just 3.5% down, making them a popular choice among first-time home buyers. (If your credit score is under 580, you need to put 10% down.) In general, FHA loans offer more flexible qualifications than conventional loans.
While you can technically qualify for an FHA loan with a credit score in the 500s, approved borrowers tend to have much higher scores. A score of at least 580 is especially important because it allows borrowers to qualify for maximum FHA financing, while scores between 500 and 579 are limited to a 90% loan-to-value ratio.
FHA loans also require FHA mortgage insurance. This protects the lender’s stake in the loan if you default. Borrowers pay an upfront premium as part of their closing costs and an ongoing premium as part of each monthly mortgage payment.
» MORE: Find the best FHA lender for you
VA loans
Best for: Service members and veterans
The Department of Veterans Affairs helps eligible service members, veterans and surviving spouses buy homes. VA loans are especially generous, often requiring no down payment or mortgage insurance. (Borrowers do have to pay a one-time funding fee.) They also allow borrowers to have higher debt-to-income ratios — and qualify for larger mortgages — than some other loan programs.
While the VA itself doesn’t set credit or income requirements, individual VA lenders will have their own criteria. Borrowers with credit scores of 620 or higher will have an easier time getting approved.
» MORE: Find the best VA lender for you
USDA loans
Best for: Borrowers buying properties in rural areas
The U.S. Department of Agriculture offers loans directly to homebuyers and backs (or “guarantees”) loans through private mortgage lenders. And, no, you don’t have to live on a farm to get a USDA loan. The program targets rural and some suburban areas and allows 100% financing, or zero down payment.
USDA loans have income limitations, which vary by region and the type of loan you apply for. While the USDA doesn’t set a minimum credit score lenders generally prefer that you have a score of at least 640.
Conventional loans (Fannie Mae and Freddie Mac)
Best for: Borrowers with higher credit scores
Fannie Mae and Freddie Mac are the engines behind the home loan machine, working with mortgage lenders to offer a range of conventional loan products, some requiring low down payments.
Fannie Mae’s HomeReady loan, for example, is designed for low-income borrowers with credit scores of 620 or higher and requires only 3% down. One advantage of this kind of loan is that borrowers could qualify to end their mortgage insurance once they’ve built up 20% equity in their home — unlike with FHA loans, where borrowers can cancel their mortgage insurance after 11 years only if they originally put 10% down.
Freddie Mac’s Home Possible loan is another product geared toward low-income borrowers with a minimum down payment of just 3%. Borrowers can apply sweat equity or funds from gifts, grants or loans toward the down payment.
Nerdy Perspective
I’ve looked into a lot of loan programs, and I’m impressed by the zero-down Alliant Advantage Mortgage from Alliant Credit Union, which also has no PMI. Rocket Mortgage offers a 1% down mortgage, which is just one reason it topped the list of our best mortgage lenders for first-time home buyers.Just read the fine print: These perks often have income or location limits, and saving money upfront doesn’t always mean paying less overall. You don’t have to research every option yourself, either. A mortgage broker can comparison shop for you and may have access to programs you can’t get directly.
State first-time home buyer programs
In addition to these national programs, many state and local governments offer assistance to home buyers. Browse NerdWallet's list of state first-time home buyer programs to learn more.
🤓Nerdy Tip
Before you can qualify for a grant, loan or other assistance, you might be required to take a first-time home buyer class. These classes teach you how to navigate the homebuying process. Many are available online to work at your own pace. Even if it’s not mandatory, you might find it useful to take one anyway.Home renovation loan options
If you’re planning to tackle some renovations, here are a few mortgage options that can help with the cost.
- An energy-efficient mortgage, or EEM, helps borrowers finance energy-efficient homes or energy-saving upgrades. The benefit is that you can enjoy lower energy bills and a more comfortable home sooner instead of picking away at energy-saving projects over time.
- FHA 203(k) loans are designed for buyers who want to tackle a fixer-upper. This special FHA-backed loan considers what the value of the property will be after improvements and allows you to borrow the funds to complete the project as part of your main mortgage.
- The CHOICERenovation loan is a conventional loan program through Freddie Mac that allows you to finance the purchase of a home and the cost of improvements, too, with low down payments.
- HomeStyle from Fannie Mae is another conventional loan option for purchase-and-remodel projects. A 3% down payment is available to first-time home buyers who qualify for the HomeReady program.
- VA renovation loans are available to qualified military borrowers, but lenders that offer them can be harder to find.
» MORE: Use our mortgage calculator to find out your monthly mortgage payment.
If you’ve narrowed down the type of loan that’s best for you, it’s time to compare options from different lenders to find the right combination of rates, terms and costs.
If you qualify for one of these programs or products, they can help you get a home without draining your savings for a down payment, can assist you in navigating additional costs like mortgage insurance and can keep your payments low.
Once you’ve settled on the financing that works for you, it's also important to have a real estate agent who understands your specific needs. Choose an agent who has experience with the loan product you've picked; they can craft your offer and show the seller you're a well-qualified buyer.
NerdWallet writer Isabella Angelos contributed to this story.
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