Affording your first home can be difficult, and lenders understand this. That's why they offer different types of home loans for people with different income levels, credit scores, and down payment amounts. As a first-time buyer, you may even be able to receive cash toward your down payment through a special homebuyer program. Choosing the best home loan for you will depend on your financial situation, location, future plans, and more.
Mortgage loan types
Conventional loans
Many first-time buyers qualify for conventional loans. These are funded by private lenders, such as banks or mortgage companies. They tend to offer good terms and interest rates, and some require a down payment of only 3%—though a higher down payment can qualify you for better terms, a lower rate, and reduced private mortgage insurance. If your credit is strong and you have a stable financial history, consider a conventional loan.
The 30-year fixed-rate loan is the most popular conventional loan. The interest rate never changes, and payments are more affordable because they're spread out over 30 years. Adjustable rate mortgages (ARMs) and shorter terms, such as 15-year or 20-year, are also available.
Jumbo loans
A jumbo loan is a mortgage with a loan amount that exceeds the limits set by Fannie Mae and Freddie Mac, the government-sponsored organizations that buy loans from banks. These limits vary by county, and you can see the . If the amount you want to borrow for a home is more than the amount shown on the map, you may need a jumbo loan.
Since Fannie Mae and Freddie Mac won't guarantee these loans, they're riskier for lenders, and the interest rates for the loans may be higher. These types of home loans are also tougher to qualify for, requiring a higher down payment, higher credit score, and lower debt-to-income ratio. But this varies by lender, and you should speak with your loan officer for details.
Government-backed loans
FHA, VA, and USDA loans are all examples of loans insured by the U.S. government. Because of this insurance, lenders can be less strict about who they loan money to. If you're a lower-income buyer or a new homebuyer without much credit, it's easier to qualify.
- A Federal Housing Administration (FHA) loan could be a good option if you need a lower down payment option, have a higher debt-to-income ratio, or are still trying to raise your credit score. It can also help you buy a multi-family home since the minimum down payment is only 3.5%. The downside is that you may have to pay thousands in mortgage insurance, and there are some restrictions on how the loan can be used. Learn more about FHA loans.
- Veterans Affairs (VA) loans are available to eligible veterans, spouses, and other beneficiaries. These loans offer a competitive interest rate without requiring a down payment or mortgage insurance. Plus, there's no minimum credit score. apply.
- A U.S. Department of Agriculture (USDA) loan is a good no-down-payment option if you're house-hunting in a rural area or some suburban areas. The minimum credit score to qualify is 580, but with a score of 640 or higher, you can get streamlined processing. See if your .
These types of home loans have downsides too. Because the home must meet government standards, you may not have as many homes to choose from, and sellers may be more reluctant to accept your offer. You must also live in the home after you buy it, rather than using it as an investment or rental property.
Fannie Mae and Freddie Mac loans
Fannie Mae and Freddie Mac loans can help first-time homebuyers who have less credit, lower income, or face other challenges to buying a home
- HomeReady and HomePossible Mortgages: These can be good options if you have trouble qualifying for a loan on your own, because they allow a parent or other individual who won't live in the home to be a co-borrower.
- 3% Down Payment Mortgage for First-time Homebuyers: Buyers who can't afford a large down payment but would otherwise qualify for a home loan may be eligible for a 3% down payment.
- HFA Preferred: Buyers with low to moderate incomes can qualify, and mortgage insurance fees are low. Unlike FHA, the insurance can be canceled after a certain point.
These types of home loans can be combined with down payment assistance to make home-buying even more affordable. Learn more about or .
Loans for people in certain professions
If you're a teacher, law enforcement professional, firefighter, or EMT, talk to your loan officer about lending options that may help you save even more money, such as the program. There are also special physician loans that can help medical doctors and dentists buy a home even while carrying significant medical school debt.
Get pre-approved and secure your dream home
Work with a lender to find the right loan for the home you love.
First-time homebuyer programs
In addition to loans, you may also be able to receive money toward a down payment or closing costs through a program designed especially for first-time homebuyers. There are more than 2,500 homebuyer programs in the U.S., including many offered locally to encourage homeownership in a city or county.
There are three main types of first-time homebuyer programs:
- Grants: You usually don't have to pay back a grant.
- Loans: You eventually pay back a loan. Sometimes these loans are interest-free.
- Tax credits: These reduce the amount of tax you owe as a way to make homeownership more affordable.
Each organization and program has its own rules, but many have income limits. Some base how much they'll give you on the home's sales price, while others only contribute a flat amount. Make sure to ask about any restrictions on renting the home out or selling it within a certain timeframe.
You may have to participate in a class on homeownership or responsible borrowing to take advantage of certain programs. But if you're a first-time homebuyer, these classes can be helpful.
Which loan or homebuyer program is right for you?
To choose the type of home loan or program that meets your needs, think about your situation as well as the details of the loan or program. Make sure to compare options, because some programs that save you money up front also charge a higher interest rate and fees.
The costs of the loan
Some loans seem appealing at first glance but can cost you more in the long run. For example, mortgage insurance on an FHA loan typically costs more and is more difficult to remove later than it is on a conventional loan.
Other types of home loans may have higher interest rates, added fees, or money you have to pay back. Make sure to ask your lender to explain all the costs of a loan you're interested in.
Your credit and finances
Buyers usually prefer a conventional loan if they can qualify for one. But if your credit history or income are on the low side, a mortgage with more relaxed financial requirements may be a good option. If your problem isn't your credit but the down payment, a conventional loan with down payment assistance could get you in the door.
Your timeline
Need to buy soon? An FHA or other government-backed loan can help you buy without waiting for your credit to improve. But first consider how long you plan to stay in your home. Some loans and down payment programs require that you live in the home for a certain amount of time after buying. If your plans are uncertain, you may want more flexibility.
Your location
This may come as a surprise, but your city, state, or county may be willing to pay you to buy a home there. Many local governments and organizations encourage homeownership by offering down payment assistance to new homebuyers in the area. You may even want to consider buying in a different town if there's an incentive available.
Your career
Some loans are designed just for teachers, doctors, police officers, and others in certain professions. The VA loan is for veterans and their beneficiaries. These loans may require that you buy in a certain area or that the home meet certain standards.
Takeaway: 5 Types of Home Loans for First-Time Buyers
Not all lenders offer the different types of home loans, so the best thing you can do is shop around and ask questions. Some lenders specialize in working with first-time buyers, and homebuyer programs often require that you work with a specific lender who's been trained to offer the program. Choosing a mortgage lender and a loan that are a good fit for you can make all the difference when it comes to buying your first home.
See all articles about How to Afford a Home
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