Best first-time homebuyer loans and programs

For first-time homebuyers, purchasing that home can be an exciting and sometimes overwhelming experience.

They are on the cusp of homeownership but might not know where to start or what the best options for them might be.

There are many types of home loans for first-time homebuyers as well as programs that can make funding a purchase more affordable. Knowing the qualifications and why borrowers choose them can help you find the exact option best for you and your situation.

When you think you have found the best loan for you, start an application to talk to a professional Loan Officer and see what you could qualify for.

If you are looking to buy a home but don’t know if you can make the down payment that comes with purchasing a home, you are not alone. Buying a home, even with a mortgage, could come with some significant upfront payments, between a down payment and closing costs.

However, there are many options for potential homebuyers who might not be able to afford a large down payment. Let’s take a look at a few popular mortgage options that offer lower down payment options.

First-time homebuyers with a good credit score who are looking for smaller down payment option should look into a Conventional 97 loan.

Conventional 97 loans are backed by Fannie Mae, so lenders do not take on all the risk of borrowers defaulting. These are conventional loans where buyers have a down payment option of 3% with borrowing 97% of the home’s price.

To qualify for these loans, lenders usually ask that borrowers have at least a 620 credit score, debt-to-income (DTI) ratio of 50% or less and take a homeowner’s education course. Fannie Mae requires and offers a homeowner's education course that prepares buyers for the responsibility that comes with owning a home.

A borrower’s Conventional 97 loan does come with private mortgage insurance (PMI). PMI payments are made monthly until a borrower’s home equity reaches at least 20%.

Conventional 97 loans can only be used by first-time homebuyers on single-family homes but can be used by buyers at any income level.

Freddia Mac has a similar option for first-time homebuyers with their HomeOne loan.

Low- to moderate-income borrowers with good credit scores looking to buy a home with a lower down payment can consider Fannie Mae’s HomeReady* loan.

Similar to the Conventional 97 loan, HomeReady offers down payment options as low as 3% and comes with PMI if you choose a down payment option under 20%. PMI with HomeReady has the option to be removed after 20% home equity is achieved, if borrowers meet lender’s requirements.

To qualify for a HomeReady loan, Fannie Mae’s major requirement is that borrowers will have to make 80% or less of the area’s median income. The minimum credit requirement lenders look at for a HomeReady loan is usually 620 while Fannie Mae lets borrowers with a DTI ratio of up to 50% qualify.

One way that HomeReady loans help make homebuying more accessible is through a co-borrower. If you don’t meet the income requirements by yourself, HomeReady allows you to include a co-borrower who does not live on the property but whose income helps you qualify.

While HomeReady loans are not limited to first-time buyers, the property you purchase through these loans will have to be a primary residency.

Home Possible** loans are the Freddie Mac equivalent of Fannie Mae’s HomeReady loans, with the same qualifications and benefits.

Home Possible loans offer down payment options as low as 3% to borrowers, with a DTI ratio maximum of 50%. PMI is required on Home Possible loans with down payments under 20%.

Those looking to get a Home Possible loan will have earn no more than 80% of the area’s median income. Freddie Mac allows co-borrowers for those having trouble meeting the income requirements for a Home Possible loan.

Government-backed loans

Government-backed loans*** are guaranteed by government agencies. Because lenders are not taking on all the risk of borrower’s defaulting, government-backed loans tend to have more lenient requirements than conventional mortgages.

The three major government-back loans are: FHA, VA and USDA loans.

Backed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD), FHA loans are accessible for borrowers who have a lower credit score or shorter credit history, or who are looking for smaller down payment options.

To qualify for FHA loans, borrowers will need to have a credit score of at least 500 and a DTI ratio of 57% or lower. Borrowers who meet the FHA’s qualifications could have down payment options as low as 3.5%.

FHA loans come with mortgage insurance premiums (MIP) that could last for the life of your loan if you decide on a smaller down payment option. Down payment options of 10% or more will have MIP removed after your first 11 years of your mortgage. If you are looking to remove your MIP, talk to your lender about refinancing your mortgage.

If you are a former or active-duty military service member looking to buy a home with little to no down payment options, the VA loan is there to help. The U.S. Department of Veterans Affairs helps military service members afford homes through their lenient qualifications and zero-down payment options with their VA loans.

Along with their zero down-payment options, the VA does not set a minimum credit score borrowers need to meet. However, borrowers will need to meet the eligibility requirements set by the VA.

Like VA loans, USDA loans offer zero-down payment options for those looking to live in rural or suburban areas. Backed by the U.S. Department of Agriculture (USDA), these loans are available to help low- to moderate-income potential buyers move to rural areas.

Borrowers looking to buy a home with a USDA loan will have to have a debt-to-income ratio of 41% or less and an income of no more than 115% of the area’s median income. However, there is no set minimum credit score for a USDA loan and borrowers could have a higher debt-to-income ratio if additional factors are met.

USDA loans can only be used on primary residencies in approved non-metropolitan areas.

Every state has its own programs to assist first-time homebuyers in purchasing property. These programs come in the form of down payment assistance, grants and other financing options.

Across all 50 states, there are more than 2,500 programs offered to help first-time homebuyers. Depending on your state and program you qualify for, you could receive up to $40,000 through these programs.

One of the biggest challenges first-time homebuyers seem to face is saving for a down payment. While there are loan options to help reduce the size of a down payment, not everyone might qualify for them. If you are looking for other ways that could help you afford a down payment, there are many down payment assistance programs to consider.

There are different kinds of down payment assistance programs. Some of them you will have to pay back, others you won’t, and there are options that are forgivable if you meet certain terms, such as living in the property for a set amount of time. Each one can come with various requirements a borrower has to meet in order to qualify.

If you are a first-time homebuyer looking to apply for any loan, you can start by completing an online mortgage application.

Online applications will show you the loan you qualify for, as well as what the terms of your loan will be. During your online application, you will be connected to a professional Loan Officer who can guide you through the process and answer any questions you may have during or after.

Start your application today and take advantage of first-time homebuyer loans and programs!

^{Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.}

^{*The HomeReady Mortgage is available to borrowers with 80% or less of area median income for purchase or limited cash-out refinance transactions on one to four unit properties. Additional property restrictions and minimum borrower contribution requirements apply and vary based on number of units of subject property. Occupant borrowers may own one other financed residential property in addition to subject property at the time of closing. Minimum FICO score requirements apply. Up to six months of reserves may be required based on the factors of borrowers' eligibility including but not limited to credit score, debt to income, and loan type. If all co-borrowers are first time homebuyers or when using non-traditional credit to qualify then at least one borrower will be subject to additional requirements regarding homeownership education or counseling from an approved source. Applicants subject to credit and underwriting approval. Not all borrowers will be approved. Restrictions apply. Contact your loan officer for more information and to determine your eligibility.}

^{**Eligible borrowers must make less than 80% of Area Median Income. Available for first lien conventional mortgages for purchase and no cash-out refinances of owner occupied primary residences including condos, co-ops, and manufactured homes with additional requirements. Minimum down payment and FICO score requirements apply. Homeownership education may be required depending on transaction details. Applicants subject to credit and underwriting approval. Additional restrictions apply.}

^{***Rate is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.}