• Joe Gilani

First-Time Homebuyers – What Type of Loans are Available?

Updated: Sep 5


Buying a home for the first time is exciting and overwhelming at the same time. Before you can make an offer, you have to know where you’ll get financing. With so many loan options available, how do you know which is right for you?


We know it can be overwhelming, so we’ve broken down the most popular first-time homebuyer loans below to give you a head start.




Conventional Loans for Borrowers with Good Credit


If you have good credit (around 680 or higher), look into securing conventional financing. This non-government backed loan has the most attractive features and terms.


Many people mistakenly think you need a 20 percent down payment for a conventional loan. Fannie Mae and Freddie Mac (who invest in these loans) only require a 3 percent down payment for first-time homebuyers, though.


Conventional loans are easy to qualify for if you have the credit score. You must meet the following:


  • Maximum 36% total debt-to-income ratio (your monthly debts must not take up more than 36% of your income before taxes)

  • Stable income and employment for the last 2 years

  • No recent public records (bankruptcy or foreclosure)

  • At least a 3 percent down payment


If you put less than 20 percent down on the home, you’ll pay Private Mortgage Insurance. This protects the lender if you default on the loan. You can cancel PMI once you owe less than 80 percent of the home’s value. This can occur with regular payments on a predetermined schedule or with extra payments and/or faster home appreciation.


Conventional lenders allow the use of gift funds as the down payment. Each lender/borrower differs, but some may be eligible to use 100 percent gift funds for the down payment.




FHA Loans for Borrowers with Less than Perfect Credit


If you don’t quite have the credit scores needed for a conventional loan, the FHA loan is a great alternative.


Borrowers only need a 580 credit score for FHA loans, which is the lowest credit score allowed in any loan program. FHA loans are also great for borrowers with more debts than the conventional loan allows, as it has higher debt-to-income ratio allowances too.


FHA loans require:


  • Maximum 43 percent debt-to-income ratio (some lenders even go up to 50 percent)

  • Stable income and employment for the last 2 years

  • No recent public records (bankruptcy or foreclosure)

  • At least a 3.5 percent down payment

  • Proof that you’ll occupy the property as your primary residence (FHA loans aren’t allowed on investment homes or second homes)


FHA loans have two mortgage insurance requirements. Borrowers pay a 1.75 percent upfront fee, and 0.85 percent annually based on your outstanding principal. For example, on a $200,000 loan, you’d pay $3,500 upfront and $1,700 per year or $142 per month. FHA mortgage insurance lasts for the life of the loan.




VA Loans


Veterans of the military, Reserves, or National Guard have access to the VA mortgage loan, which is a 100 percent loan program. Eligible veterans don’t need a down payment and can secure attractive terms, much like FHA or conventional loans provide.


VA loans have some of the most flexible underwriting guidelines including:


  • Minimum 620 credit score (this varies by lender, some require higher or lower scores)

  • Maximum 43 percent debt-to-income ratio (some lenders even go up to 50 percent)

  • Stable income and employment for the last 2 years or a job offer letter if you’re just leaving the military

  • No recent public records (bankruptcy or foreclosure)

  • Proof that you’ll occupy the property as your primary residence


VA loans don’t charge annual mortgage insurance, which is another great benefit. Veterans pay a one-time upfront funding fee each time they take out a VA loan, which right now is equal to 2.3 percent for borrowers that don’t put any money down.




Which Loan is Right for You?


Look at your qualifying factors to determine which loan is right for you. If you aren’t a veteran, the VA loan program isn’t an option. Then it’s between the FHA and conventional loan program.


If you have the credit score for a conventional loan, apply for it, and see if the terms are affordable. Conventional loans have some of the lowest interest rates and the best terms, making it a great option for first-time homebuyers.


Don’t worry if you don’t qualify for a conventional loan, though, FHA loans are a great comparable alternative, giving you the chance to be a homeowner with just 3.5 percent down and less-than-perfect credit. There is a perfect first-time homebuyer’s loan for everyone!