The Best Mortgages for First-Time Homebuyers

Buying your first home is both exciting and stressful. Looking at homes and dreaming of how your family and your belongings will look and feel inside is exhilarating. Finding a lender and securing a mortgage, on the other hand, is not quite as fun. If you’ve never been through the process before, it can be difficult to know how it all works or even where to start. 

The good news is that there are plenty of trustworthy mortgage lenders out there who will gladly walk you through your options, either online or in person. Of course, it’s always a good idea to do some research before you apply for a loan. Not all lenders offer all loan types. Plus, knowing what type of loans are available to you based on your credit score, down payment amount, and preferred monthly payment will help you find the right first home.

Conventional Home Loan

Just because you’re buying your first home doesn’t mean you have to use a loan specifically for first-time homebuyers. Many first-time buyers qualify for this type of loan, and there are some serious perks to choosing this traditional option, including:

  • down payments as low as three percent, 
  • no private mortgage insurance (PMI) with a 20 percent down payment,
  • lower-cost PMI with less than 20 percent down,
  • ability to cancel PMI after loan is paid down,
  • down payment amount may come from a gift,
  • no upfront “funding fee,” and
  • lower interest rates than government-backed loans. 

FHA Loans

Federal Housing Authority (FHA) loans are designed specifically for first-time homebuyers. These government-backed loans offer lower interest rates for buyers with lower credit scores. FHA mortgages can also be transferred to a subsequent owner, which can be advantageous if you are trying to sell your home after interest rates rise. 

Another type of FHA loan, the 203k rehabilitation loan, can help first-time homeowners who are interested in purchasing a fixer upper by rolling repair costs into the mortgage. A “streamline” or “limited” version of the loan is available for cosmetic repairs and upgrades up to approximately $31,000. For more expensive, structural repairs, buyers can pursue a standard 203k. This loan requires homebuyers to work with an FHA consultant to oversee the renovation process. 

USDA Loans

Rural housing loans from the United States Department of Agriculture (USDA) are available to all homebuyers who meet the low-to-average income requirements and want to purchase a home in a rural area. As defined by the Housing Act of 1949, 97 percent of the geographical United States is considered rural and is therefore eligible for this type of loan.

Rural development loans, also known as Section 502 loans, require no down payment, but you will pay an upfront mortgage insurance fee. They also feature interest rates below market value and reduced mortgage insurance premiums, and you can finance closing costs into the loan. 

VA Loans

For veterans and active service members of the United States military, the Department of Veterans Affairs (VA) offers a low-interest loan with no down payment and no mortgage insurance. VA loans have flexible qualification requirements and reduced closing costs. Like an FHA loan, a VA loan is assumable by the next owner, as long as that person qualifies. To qualify, you must complete a minimum term of service as a(n):

  • active-duty serviceperson,
  • member of the National Guard,
  • reservist, 
  • surviving spouse of a veteran,
  • US military cadet, 
  • Coast Guard Academy cadet,
  • Air Force cadet,
  • US Naval Academy midshipman, or 
  • officer at the National Oceanic & Atmospheric Administration.

No matter which type of mortgage you choose, remember to shop around for the best rates. Not all lenders are created equal, and some will offer you lower rates than others. The right loan — and lender — will help ensure the process of buying your first home is a positive one.