What are the best home loans for first-time home buyers?

Down payment.

Credit score.

Of all the challenges face in obtaining a mortgage and purchasing a home, these two may prove the most difficult.

Difficult, but not impossible, especially with a home loan that’s designed to help first-timers overcome these hurdles.

Among the many mortgages available to first-time home buyers, several specific loan programs stand out because they’re widely available and aim to resolve both the down payment and credit challenges that first-time home buyers face.

Down payment and credit score challenges

The down payment challenge arises because, unlike repeat home buyers, first-timers haven’t built up equity in their current home that they can use for this purpose. Add closing costs to the equation, and a down payment of 20% or even 10% of the home’s purchase price may be insurmountable.

The solution? A home loan that allows a down payment of only 3.5%, 3% or even 0%.

The challenge arises partly because first-time home buyers haven’t had the opportunity to boost their credit scores by making on-time mortgage payments every month. Regular mortgage payments are one reason homeowners tend to have higher credit scores.

The solution? A home loan that offers home buyers flexible guidelines to qualify and may not require any credit score at all.

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Lender requirements

Most of the programs we will discuss below require some form of mortgage insurance, which protects the lender’s interest in the loan if the borrower doesn’t repay it. This protection encourages lenders to offer loans that may be riskier for them due to the loans’ smaller down payments and flexible credit guidelines.

With all of these programs, lenders may impose their own criteria in addition to the minimum criteria set by the program office.

FHA loans

FHA loans are insured by the Federal Housing Administration (FHA), a federal government agency within the U.S. Department of Housing and Urban Development.

FHA loans offer:

FHA loans require an upfront mortgage insurance premium (MIP) and an annual MIP. The upfront MIP can be financed as part of the loan amount. The annual MIP is payable in monthly installments.

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VA loans

VA loans are directly funded or guaranteed by the U.S. Department of Veterans Affairs (VA). Eligible borrowers include military service members and veterans, their surviving spouses, and certain other groups of borrowers.

VA loans offer:

Some VA borrowers must pay a one-time upfront VA funding fee. This fee can be paid in cash at closing or financed as part of the loan amount.

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USDA loans

USDA loans are directly funded or guaranteed by the U.S. Department of Agriculture. Eligible borrowers include buyers with moderate, low, or very-low income who are purchasing a home in a rural (or some suburban) location.

USDA loans offer:

• Financing up to 100% of the appraised value.

• No minimum credit score.

• No maximum purchase price.

• No limit on gift funds toward the home purchase.

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HomeReady loans

HomeReady is a Fannie Mae lending program. It’s intended for low-income borrowers who may have relatively low credit scores.

HomeReady loans offer:

• A minimum down payment of 3%. Down payment may be from a gift or grant.

• A fixed rate or a 5-year, 7-year or 10-year adjustable rate with a 5% down payment.

• No minimum credit score.

• Borrowers may be required to complete homeowner education or housing counseling.

• Mortgage insurance may be cancelable.

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Home Possible

Home Possible is a Freddie Mac lending program. It’s intended for borrowers with low or very-low income.

• A minimum down payment of 3%.

• Non-occupant borrowers may be allowed if the home is only one unit and at least one borrower occupies it as a primary residence.

• No credit score is required.

• At least one borrower may be required to participate in homeowner education.

Not sure which first-time home buyer mortgage loan is right for you? Ask your Realtor or mortgage lender for more information about these and other programs that may be available in your state or local area.

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The more you know about your options, the better prepared you’ll be to choose a loan that could fit your needs.