First-time homebuyers have access to programs that don’t require 20% down.
Rachel Mendelson/Insider
You typically need a 620 credit score and a 3% to 10% down payment to get a mortgage.
There are programs that help first-time homebuyers even if they don’t meet the usual loan standards.
You may be eligible for a government-backed mortgage or a program specific to your state.
This article is part of “The Road to Home” series focused on helping first-time homebuyers navigate the daunting and exhilarating process of purchasing a home.
Buying a home can be an intimidating process, especially when you’re doing it for the first time. The requirements for obtaining financing can feel overwhelming. Conventional mortgages typically mandate at least a 620 credit score and 36% debt-to-income (DTI) ratio. And if you put less than 20% down, you’ll have to pay for mortgage insurance.
These requirements can be tricky for first-time buyers to meet, especially if you’re young. Thankfully, there are plenty of programs and loans designed to help. They can help lower the barrier to entry into homeownership by offering loans with lower down payments, more lenient credit requirements, and assistance with closing costs.
You do have to meet some conditions to qualify for such programs. But when it comes to your finances, these loans and grants have more lenient requirements for getting a mortgage than conventional loans.
Who qualifies as a first-time homebuyer?
While program qualifications may vary, one of the most common first-time homebuyer programs comes from the Federal Housing Administration. The FHA defines first-time homebuyers as anyone who meets any of the following criteria:
You haven’t owned a home in the three years before purchasing a property. For married couples, only one spouse must meet the requirement of not owning property in the past three years.You are a single parent or displaced homemaker who has only owned a home with a former spouse.You’ve either only owned property not “permanently affixed to a permanent foundation” or not compliant with state, local, or model building codes.
Here are 6 types of loans and programs for first-time homebuyers:
1. Government-backed loans
Unlike conventional loans, government-backed mortgages are guaranteed by federal agencies. If you default on your payments, then the agency pays the lender on your behalf. This guarantee allows lenders to offer you a mortgage even if you don’t meet the usual conditions for a conventional loan.
There are three primary types of government-backed home loans:
FHA loan
With a Federal Housing Administration loan, you only have to put 3.5% down.
Lenders are looking for DTI ratios of 43% or less, and credit scores of 580 or higher. You can still apply with a credit score between 500 and 579, but you’ll need a down payment of 10%.
You will have to pay some premiums, though. At closing, you’ll pay a mortgage insurance premium (MIP) that comes to 1.75% of your loan. Then you’ll pay an annual premium of 0.45% to 1.05% of your loan, depending on your term length, loan amount, and loan-to-value ratio.
FHA loan qualifications
Minimum 580 credit score to get 3.5% down payment 500-579 credit score for a 10% down paymentDebt-to-income ratio (DTI) of less than 43%Mortgage Insurance Premium (MIP) requiredSteady income and proof of employment
“Without FHA loans there would be significantly fewer buyers able to afford a home,” says Bill Gassett, a Realtor and founder of Maximum Real Estate Exposure.
The chance to build equity rather than spending money on rent is often a selling point of these loans. Mortgage insurance, which you pay to protect your lender, may be a downside for the borrower.
Loan limits also exist and vary depending on your location and the type of property. Homes must be in good condition to use an FHA loan.
Important: Using FHA financing may affect how your purchase offer is viewed by the seller due to the less-stringent standards for FHA borrowers.
USDA loan
You may qualify for a mortgage through the United States Department of Agriculture if you a) buy a home in a rural or suburban area, and b) earn a low-to-moderate income. The income requirements vary by state.
You don’t need any down payment for a USDA-backed loan.
USDA loan qualifications
Low to moderate income (limits vary by region)Homes located in rural or suburban areas below a certain population thresholdUS citizen, non-citizen national or qualified alienHome must be primary residenceIncome eligibility: cannot earn over 115% of median household income for the areaNo credit score requirements, but must “demonstrate a willingness and ability to handle and manage debt”Can only get a 30-year fixed rate Must be able to afford the payment including taxes and homeowners insurance: no more than 29% of monthly incomeDTI: 41% for other debts
VA loan
Active and former military members could qualify for a loan from Veterans Affairs. You don’t need a down payment, and the VA doesn’t set a minimum credit score or DTI ratio. Although the loan is backed by the VA, you’ll still get the loan through a traditional lender, so the lender will set the credit score and DTI ratio guidelines.
You won’t have to pay mortgage insurance, but you’ll pay a funding fee that protects the lender should you default on your payments.
Your funding fee amount will depend on various factors, including how much you borrow, how much you have for a down payment, and whether this is your first time getting a VA loan. You may choose to pay the entire funding fee at closing, or roll the fee into your monthly mortgage payments. Veterans receiving VA compensation for a disability connected to their service have the funding fee waived.
Chris Birk, vice-president of Veterans United Home Loans, calls the VA loan “one of the most powerful loan products on the market for first-time buyers.”
VA home loan qualifications
Must be either an active-service member of the military, veteran, or spouse of veteran who diedA minimum lengh of service of 24 months in most cases (less if discharged due to disability)Minimum credit score in the low- to mid-600 level, with some exceptionsDTI: 41%Home must meet Minimum Property Requirements (MPRs) as determined by the VA
Benefits of a VA loan include no down payment requirement, no mortgage insurance, flexible credit guidelines and low fixed interest rates. It’s also a lifetime benefit you can use multiple times. Birk says VA loans have “helped generations of veterans become first-time buyers, building generational wealth in the process.”
There’s technically no borrowing limit, but the VA limits the amount it guarantees to your lender if you default on the loan.
Even though the VA doesn’t require a down payment, the individual lender may require one.
Important: VA loans don’t allow borrowers to waive a home inspection or appraisal. There are also limits to the kind of property you can buy and its condition.
2. Conventional mortgages with low down payments
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are two government-sponsored mortgage companies. Each offers conventional first-time homebuyer loans with as little as a 3% down payment to those with good credit who meet the qualifications. Borrowers will have to pay mortgage insurance on these loans until they have at least 20% equity in the home.
You’ll still need a 620 credit score, but only a 3% down payment. The maximum DTI ratio allowed will depend on the strength of the rest of your financial profile.
These are some of the loans available:
Fannie Mae HomeReady Mortgage: This loan allows for a down payment as low as 3%, has income limits of 80% of area median income, and requires a credit score of at least 620. Freddie Mac HomeOne Mortgage: These loans are also available with as little as 3% down and must be single units with fixed interest rates. Freddie Mac Home Possible Mortgage: You don’t have to be a first-time homebuyer to qualify, but must have income not exceeding 80% of area median income. Fannie Mae 3% Down Payment Mortgage for First-time Homebuyers: The home must be a one-unit property and your primary residence with a fixed rate. At least one of the buyers must not have owned a home in the past three years. “Unlike the Home Ready and Home Possible programs, there are no income limits with this loan,” says Kelly Kirchner, a senior mortgage originator at Reliable Home Lenders.
3. Fixer-upper loan programs
If you’re in the market for a home and don’t mind a property that needs some work, look into home loans that offer flexibility for fixer-uppers. Some home loans combine financing for renovations with the total property purchase price, saving the borrower both time and money.
Fixer-upper loans can provide a greater pool of properties for first-time buyers to choose from.
These are some of the options:
Fannie Mae HomeStyle loan
The HomeStyle loan is for homes that need repairs after moving in. You’ll only need a 3% down payment if a) you’re living in the house rather than letting someone else live in it or renting it out, and b) at least one of the people taking out the loan is a first-time homebuyer.
Freddie Mac CHOICERenovation loan
The CHOICERenovation loan is similar to the Fannie Mae HomeStyle loan. More specifically, it can be a good option if you’re looking to disaster-proof your home with improvements such as retaining walls or flood barriers.
The construction or renovation has to be completed before the mortgage is “delivered” to Freddie Mac. There’s also a smaller-scale version of this loan, the CHOICEReno eXPress.
CHOICERenovation loans come with maximum loan-to-value (LTV) ratios, generally up to 75% of either the appraised value of the improvements as completed, or the sum total of the purchase and the renovation costs.
FHA 203(k) loan
This loan has stricter regulations about what types of improvements can be made than the HomeStyle or CHOICERenovation loans, but you can qualify with a lower credit score. Place as little as 3.5% down if your credit score is 580 or higher, and 10% if your score is between 500 and 579.
FHA 203(k) loans are useful when you want to renovate your first home. They can provide an affordable route into a competitive market by providing financing for a fixer-upper that other buyer’s might pass by because of the extra work involved.
“With the 203(k) a borrower can purchase a home, along with having additional money for needed repairs to the property,” Gassett explains.
Energy Efficient Mortgage program
An EEM lets you roll the costs of energy-efficient repairs into your mortgage without making a bigger down payment. You can improve things like your furnace, insulation, or thermostat system with an EEM.
You’ll need a down payment of 3.5% if your credit score is at least 580, or 10% if your score is between 500 and 579.
Improvements you finance with an EEM must be deemed cost-effective. For existing homes, costs must equal out over the expected lifespan of the improvements. For new buildings, cost-effective improvements are those that comply with the updated International Energy Conservation Code (IECC).
Borrowers must have an energy assessment conducted by a professional.
4. State and local first-time homebuyer programs
States have different programs for first-time homebuyers with a range of services. It’s a good idea to research options in your state before deciding on a particular type of loan, to take advantage of the best programs for you.
Quick tip: Use Personal Finance Insider’s guide to first-time homebuyer programs to see what help is available in your state.
You may be able to secure funding assistance for your down payment, closing costs, and other costs based on your location. Some states also provide tax credits for borrowers at low-to-moderate income levels.
The program specifics vary by state and region, but here are a couple of examples of the kind of help that’s available:
The North Carolina Housing Finance Agency offers forgivable $8,000 down payment assistance to qualifying first-time homebuyers and military veterans. Staying in the home is beneficial, too: this loan is forgiven at 20% per year from years 11-15, and fully forgiven after 15 years.The Indiana Homeownership Opportunities Program (HOP) provides assistance with down payments and closing costs. You must be a first-time buyer at or below 80% of the area’s median income, put at least $1,000 towards the home purchase, complete an approved homebuyer counseling course, and not allow housing debt above 35% of gross household income.
5. Down-payment assistance
Down payments are often the biggest roadblock on the path to homeownership.
“There are many down payment assistance programs on a national, state, and local level that can assist qualified clients with either grants or second mortgages with the required down payment amounts,” says David Hosterman, a loan officer with Citywide Home Loans
You’ll want to research down-payment assistance programs in your state or city. Likely qualifications you’ll have to meet will be a minimum credit score, maximum income level, and specific DTI ratio.
For example, the Iowa Finance Authority provides either down payment and closing costs as a $2,500 grant or up to $5,000 as a loan.
6. Other government loan programs
There are other government home loan programs geared toward specific groups of people. These include:
Good Neighbor Next Door
You may qualify for the Department of Housing and Urban Development’s Good Neighbor Next Door program if you’re a teacher, firefighter, law enforcement officer, or emergency medical responder who lives in a “revitalization area.”
Go to the Good Neighbor Next Door website to search for homes in your area. Homes are listed for seven days, and you can purchase one for 50% off the listed price.
Native American Direct Loan
The NADL is for Native American military veterans, and it’s issued through the VA. You don’t need money for a down payment, and you won’t pay private mortgage insurance.
With a regular VA loan, a lender gives you a mortgage that is backed by the VA. With a NADL, the VA is actually your lender.
The bottom line
First-time homebuyers can obtain financing through conventional means, but saving enough to make a substantial down payment is often the biggest hurdle.
Loans and programs specifically for first-time homebuyers offer great benefits, but also have limitations. So consider all of your options before choosing how you’ll finance your mortgage. In some cases, the costs associated with lower down payments such as mortgage insurance and possibly ending up owing more on your mortgage than a house is worth can outweigh the benefits.