4 Popular Mortgage Programs for First-Time Home Buyers

by | BiggerPockets.com

First-time home buyers have a few really good programs to choose from. These mortgage programs only require little money down, and some allow a lower credit score. It’s common to see first-time home buyers have little money for a down payment or a lower credit score that prevent them from buying a home. These shouldn’t stop first-time buyers from looking into what programs are available to them.

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FHA Loan Program

The FHA Loan program (Federal Housing Administration) is one of the most popular programs among first time home buyers.  Here are some of the best things about this program:

  • The minimum down payment is 3.5% of the purchase price.
  • The down payment can be gifted from an approved source. It doesn’t have to be your own funds.
  • The minimum credit score, with most lenders, is 580.
  • Interest rates are lower than conventional mortgage loans in some situations.

Most first-time buyers take advantage of this program because of the small down payment and lower credit scores allowed.

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VA Loan Program

The VA Loan program is specifically for military veterans and people currently active in the military. I thinks it’s the best mortgage program available, as it should be for those who choose to serve our country.

Related: 5 Harsh Realities About Real Estate Investing Every Newbie Should Know

Here are some of the best things about this program:

  • There is no down payment required for this program. Yes, 100% financing is allowed!
  • Both veterans and people active in the military qualify.
  • You can use your VA certificate of eligibility more than once.
  • The interest rates are lower than conventional mortgage loans in some situations.
  • There is no minimum credit score requirement; instead, VA requires a lender to review the entire loan.
  • No PMI (private mortgage insurance) payment is required by the lender.

Anyone that has served in the military should seriously look into the VA mortgage program.  It allows no down payment and no PMI payment, which is the only mortgage program that allows both.

The USDA Rural Development Loan

The Rural Housing program is for home buyers looking in a rural area. This is one of the most popular first-time home buyer programs for anyone looking outside of a city area.

Here are some of the best things about this program:

  • There is no down payment required for this program. Besides the VA program, it’s the only other no down payment program.
  • The minimum credit score, with most lenders, is 640.
  • The interest rates are similar to the FHA and VA programs — lower than conventional mortgage loans in some situations.
  • This program doesn’t have a PMI payment, but they have there own monthly fee. It’s much less than the traditional PMI payment.

If you are looking in a rural area to buy a home, it’s best to look into this program. Since it’s one of the only two no down payment programs, it’s become very popular with first-time home buyers.

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Related: An FHA-Financed Duplex is an Ideal First Investment Property: Here’s Why

Conventional 97

The Conventional 97 program is another low down payment program that many first-time buyers use.

Here are some of the best things about this program:

  • The minimum down payment is only 3% of the purchase price.
  • It’s a conventional program, so the interest rates are going to be favorable like other conventional mortgages.
  • The minimum credit score, with most lenders, is 620.
  • It’s a Fannie Mae product, so it can be used with any Fannie Mae wholesale lender.

If you are looking for a good interest rate and a very low down payment program, this Fannie Mae program is going to be a good option.

Which of these loans do you prefer and why?

Let me know your question and comments below!

About Author

Joshua Bucio is a Sr. Mortgage Advisor with 9 years in the mortgage business. He shares mortgage advice, so home buyers and homeowners can learn valuable advice when looking for a mortgage.

12 Comments

  1. Jabdiel Flores

    As a first time home buyer looking for an FHA loan for a small multi family property, to live in one unit and rent the others, are you able to place the property under an LLC or are you required to legally bind it to your name to qualify?

  2. Tyler Huntington

    Jabdiel, FHA only does loans with a personal guarantee. So you would need to qualify.

    Great article. In addition to these programs there are other regional based programs. In California, if you earn less than 115% average median income in your county, you qualify for a 3% grant (free $) which means you only need to come up with .5%! There is also NACA loans with 0% down! Look up grants offered by your local municipality. Some banks also offer niche programs if you purchase in a low to moderate income area which includes paying for closing cost. Several great programs available for first time home buyers. Do the leg work and you’ll find them.

  3. Tommy Dofflemyer

    I’m thinking of using the Fha loan for my first house. which would also be my first Investment property. Is that a good idea as long as don’t flip or sell before 90 days? If I qualify for closing help I know of I also have to pay that back if I dont stay in the home the required time, maybe 5 yrs or Whatever the terms might be.

  4. Tanner Gish

    Great Article Joshua. So many tools to make starting tangible.

    One other loan that I would add: Freddie Mac’s Home Possible Program: 3-5% down, and unlike Fannie’s Conventional 97, can be used on 2-4 unit properties as well. This program is such a best kept secret, I don’t know why more people don’t talk about it.

    http://www.freddiemac.com/homepossible/requirements.html

    The caveats: Freddie has a Census map, gridding out every neighborhood by income. A property you find will either:
    1) be in a track where YOUR personal income cannot exceed the area medium income
    2) there is not income maximum, if you are buying in an “underserved” area (again, the property address will determine this
    3) You are in a “high cost” area (for example, Beverly Hills, CA: most of this area, doesn’t have the income cap as in option one. In fact, that is the case for many tracts in Southern California where I live, making many properties accessible.

    And, like FHA 2-4 units, a formula is used to count a % (I believe it’s 85%) of average market rent for the other units (per bedroom count) of income from the other unit(s) towards your DTI.

    And again, can do 2-4 units. One caveat: like FHA, it DOES have mortgage insurance. But, it’s (last I checked) a less expensive MI (and in some cases, may be lender paid- expect a slight uptick in your interest rate if that’s the case though).

    I referred clients to these in my market all the time when I was in retail banking. If anyone has questions, just BP message me.

    -Tanner

  5. Dan G.

    I’m looking to buy a house. I am a first time home buyer. Do you guys have any suggestions to get my credit score up? I’m 20 years old and have always bought everything in cash. My mentality was if I cant afford it then I will not buy it so I never got any loans or credit cards. Now that I found BP and am researching RE I’m learning that using OPM and leveraging is great strategy to grow. I’m a total newbie. Any suggestions? I appreciate it.

    My long term goal is to be a buy and hold investor.

    • Jonathan Broderick

      Man, I wish I was ready to buy a house at 20 years old! That’s awesome, Dan!

      To answer your question about building credit, a good way to go is to find a good credit card with a low interest rate(just google this and be smart when shopping for a card). And use this card to make purchases that you know you have cash for, and then pay that amount off as soon as you can. For example, I use one of my credit cards(for the record, I don’t recommend having multiple) to do my grocery shopping each week, because I know this is something I’ve already budgeted for out of my income. If I were you, I’d start with small purchases. Be very careful about cc debt! Make sure you have the cash for whatever you’re putting on the card. I’m paying a huge price for that now as a 31-year-old who can’t afford to own a home yet because I got myself into trouble with cc debt. PLEASE don’t make that same mistake! If you don’t have the cash for that purchase, don’t buy it (i.e. treat the card as if it is cash).

      When using cc’s, make sure your payments are never late and that you always pay more than the minimum. It doesn’t have to be a lot more, just more. Using a cc wisely, never paying late, and always paying more than the minimum required payment will get you on your way to raising your credit score.

      If you can keep up the drive to get into REI at your young age, you’re going to be off to a VERY good start with your life, financially. I encourage all those younger than me to at least look into it. One thing that can help you is to fill out your profile. If you’re like me, you won’t have a lot to add as I am also very new to REI, but it’s a good place to start to get yourself some credibility in this field.

      Last bit of advice I would give you as a newbie to REI is to research, research, research. Learn what all the different niches and strategies are, learn how to analyze properties, read and contribute to forum posts and blog posts here on BP, attend BP webinars, read REI books, etc. etc. etc. I’ve been with BP for about 8 months now and I’m still in research mode, mostly because I’m not in good financial position yet to start investing (I certainly don’t recommend being in the research phase for too long).

      Anyway, I know that was lengthy, but I hope it was helpful. Feel free to private message me if you’d like if you have any more questions. Best of luck to you, Dan!

      • Dan G.

        Jonathan,

        Thank you so much for all the valuable advice. I appreciate it greatly. Since the question I posted i have started going to my local REI, found a successful local investor that I can help and in return be an apprentice, and am working on building my wholesaling business.

        This week I will go and get a cc. The advice you said about using a cc is great. The more I learn and interact with other investors the more excited and passionate about REI I get. Thank you for all your help.

  6. Great Read, Joshua. Loved the simple and easy yet informative tone. However i would like to make an addition to the FHA section.

    Although the ideal credit score is 580, borrowers with a lower credit score can still qualify for the loan. The minimum CS limit is 500 and anyone with a score of 500-579 is eligible for the loan. However, the down payment jumps up to 10%.

    That’s the only piece that I thought was missing. Great job nevertheless!

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