Best First-Time Homebuyer Loans

Many first-time homebuyers struggle to come up with the cash for a down payment and closing costs. Knowing the best mortgage lenders for first-time buyers can help you become a homeowner, even if you don’t have perfect credit or a traditional 20% down payment.

If you’re in the market for your first home, here’s what you need to know to help you find the best first-time homebuyer loan.

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The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.

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There are different definitions of what it means to be a first-time homebuyer, says Tammy Andrews, vice president and branch manager for Motto Mortgage United in Fulton, Maryland. “From a lender’s perspective, it can be not ever owning a home, period,” she says. “But for different grant programs, it might mean not having owned a home in the last three years.”

A 3.5% down payment is required. It’s good for borrowers with lower credit scores and usually has looser debt-to-income ratio requirements than conventional loans. It carries an upfront mortgage insurance premium and monthly mortgage insurance payments.

No down payment is required. If you are a veteran or serving in the military, you may be eligible for these loans, which also don’t require private mortgage insurance but do have upfront costs.

No down payment required. To qualify, the property must be in an eligible rural location, and you’ll need to pay an annual guarantee fee each year.

Fannie Mae and Freddie Mac conventional loans

Required down payments can be as low as 3%. These have higher credit requirements but potentially lower interest rates. You will have to pay private mortgage insurance until you reach 20% equity.

There are a couple of ways to begin your research. Anna DeSimone, author of “Housing Finance 2020,” recommends starting with your state’s housing financing agency, which offers affordable mortgages based on housing characteristics and prices for its areas. There you will get an unbiased, independent opinion and be referred to approved lenders.

“They are subsidized by their state, and they work with FHA, VA, and Freddie and Fannie loans,” she says.

According to DeSimone, in addition to affordable mortgage programs, state agencies can give first-time homebuyers advice. Some states also help with home energy improvements and payment protection in case a borrower loses his or her job.

Andrews suggests another route to try is to work with a local lender or mortgage broker who knows about grant programs for particular areas. “It’s absolutely a great idea to shop around and ask a lot of questions,” she says, adding that a mortgage broker can do that shopping for you.

Consider this when choosing your mortgage lender:

Whether you’re a first-time or repeat homebuyer, getting approved for a loan will depend on your ability to repay. “You have to build a picture to the mortgage lender that you have the strengths and responsibility to successfully finance the home mortgage,” says DeSimone. That will include a number of factors including your income, your assets, your existing debt and your credit score.

If you’re debt free, have a steady income and have an excellent credit score, that’s a big plus. Lenders can also look at compensating factors, such as large cash reserves, additional recurring income or a long history of on-time rent payment, in order to extend your borrowing power, says DeSimone. A key number that lenders consider is debt-to-income ratio, or how much of a borrower’s income is going toward paying off existing debts and housing costs.

You should aim to have a DTI ratio of less than 43% – that’s the highest ratio a borrower can have and still get a qualified mortgage. Don’t worry if you’re above that threshold as a first-time homebuyer, though. “Some programs are allowed to loosen ratios up to 50% for people who have compensating factors,” says DeSimone.

Start thinking like a lender to ensure you get approved for the amount you need. Build a picture that shows you can responsibly finance the loan, and gather documents to prove it. From there, reach out to a mortgage professional and do a buyer consultation, says Andrews.

“The old-school way of thinking is to go to a real estate agent first, but the key component is the money piece,” she says. Speaking with a mortgage professional is grounding and can help you get a ballpark budget and understand the credit score you need.

Whether or not you’re a first-time homebuyer, interest rates are higher for people who have lower credit scores. “The riskier it is to take on this debt, the more they are going to charge,” says DeSimone.

That said, it’s important to look at the entire loan package when choosing the best option. Many first-time homebuyers believe the loan with the lowest interest rate is the only way to go, but there are other factors to consider.

“If you’re getting a mortgage and have plenty of money to pay closing costs, and the house is in perfect condition, you can afford to shop around to try to get the best rate,” says DeSimone. But if you’re strapped for cash or buying a house that needs a little work, it might be worth paying a higher rate if it means you can keep more cash on hand.

“If it makes a difference between being a homeowner now or waiting, it might make more sense to spend a little bit more now,” says DeSimone.

Crunch the numbers to figure out what a higher rate will really cost. For example, if one loan option comes out to $18 more per month because of a higher interest rate, how does that compare with putting off homeownership and paying rent for another year – just to save for a bigger down payment loan and qualify for a lower rate? If housing prices rise, you could end up paying just as much anyway.

If you’re paying less than 20% for a down payment, you’ll likely need mortgage insurance.

For FHA loans, the upfront cost is 1.75% of the loan, which will be added to the total borrowed. If you make a down payment of less than 10%, you’ll pay monthly premiums for the life of the loan. However, if your down payment is 10% or more, monthly premiums end after 11 years.

VA loans don’t require borrowers to carry insurance, but they do have an upfront cost of 1.4% to 2.3% for first-time homebuyers, depending on the size of the down payment. USDA loans have upfront and annual fees, but they are considerably cheaper than FHA loans.

With a conventional loan, you may have to pay mortgage insurance as well. According to a 2021 Urban Institute report, private mortgage insurance rates typically range from 0.58% to 1.86%. The PMI is removed once your mortgage balance hits 78% of the original purchase price. You also can request your lender remove the PMI once you reach the 20% mark.

Some lenders offer special grant programs to help first-time homebuyers defray closing costs.

And don’t forget to ask about state programs for down payment and closing cost assistance. Georgia offers up to $10,000 in down payment assistance to public protectors, educators, health care providers or active-duty service members. Ohio provides a down payment assistance program specifically for recent graduates. Program availability may depend on income level, credit score or county of residence.