Best Mortgage Lenders for First Time Home Buyers in 2024

Offered by private lenders, most conventional mortgages “conform” to underwriting guidelines and standards set by Fannie Mae and Freddie Mac. These types of mortgages come with stricter requirements, such as a larger down payment, higher credit scores, and lower debt-to-income ratios as they are not backed by the government.

Examples of low down payment conventional first-time homebuyer loans include the Conventional 97 mortgage, Fannie Mae’s HomeReady mortgage, and Freddie Mac’s Home Possible and HomeOne Mortgages. Here is what you need to qualify for a conventional home loan:

• Credit score - Most lenders require a minimum credit score of 620, although some may require a higher score depending on the borrower's financial situation.

• Down payment - Conventional loans require a minimum down payment of 3% to 5%. However, if your down payment is less than 20%, you’ll need to pay for private mortgage insurance (PMI) until you’ve built up enough equity in the home.

• Debt-to-income ratio - Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward paying off debt. Most lenders prefer a debt-to-income ratio (DTI) of 43% or less.

• Employment history - Borrowers need to have a steady employment history and be able to show proof of income.

• Property requirements - The property should be in good condition and have a value that is at least equal to the loan amount.

FHA Loans

Insured by the Federal Housing Administration (FHA), FHA loans are popular with first-time homebuyers and borrowers with less-than-perfect credit scores. While FHA loans offer low down payment options, you’ll usually need to pay mortgage insurance premiums (MIP) until you either refinance to a different mortgage program or pay off your loan. Here are the requirements for FHA loans:

• Minimum credit score and down payment: - You typically need a credit score of at least 580 to qualify for an FHA loan with a 3.5% down payment. If your credit score is between 500 and 579, you may still be eligible for an FHA loan, but you'll need to put down at least 10%.

• Debt-to-income ratio: - The FHA typically requires a DTI of 43% or less, although some lenders may allow a higher DTI.

• Property requirements - The property you are purchasing with an FHA loan must be your primary residence and in good condition.

VA Loans

VA (Veterans Affairs) loans are government loans guaranteed by the U.S. Department of Veterans Affairs. These mortgage loans are available to eligible active-duty service members, veterans, and some surviving spouses. These zero-down payment mortgages are designed to make homeownership more accessible for those who have served or are currently serving in the military. The qualifications for VA loans include:

• Eligibility: - To qualify for a VA loan, you must be an active-duty service member, veteran, or surviving spouse. The length of your service, discharge status, and other factors will determine your eligibility.

• Certificate of Eligibility (COE): - You need to obtain a COE from the VA, which verifies your eligibility for the loan.

• Credit score: - There is no minimum credit score requirement for VA loans, but most lenders prefer a score of at least 620.

• Property requirements: - NGB Form 22 (Report of Separation and Record of Service) and NGB Form 23 (Retirement Points Accounting and proof of the character of service).

• Funding fee: - You will be required to pay a funding fee, which varies depending on your military status, loan amount, and down payment amount. This fee helps to sustain the VA loan program.

USDA Loans

Backed by the United States Department of Agriculture (USDA), USDA loans are primarily designed to help rural and suburban homebuyers with low-to-moderate incomes afford a home. They are offered by approved lenders and have several benefits, such as low interest rates which translate to affordable mortgage payments, no down payment requirement, and flexible credit requirements. Here are the requirements for a USDA loan:

• Property location: - The property must be your primary residence located in a designated rural area or suburban area, as determined by the USDA.

• Income eligibility: - Your income must not exceed the USDA's income limits for the area where you're looking to buy a home. These limits vary by location and household size, but generally, your total household income must be at or below 115% of the median income for the area.

• Credit score: - While there is no minimum credit score requirement for USDA loans, most lenders prefer a credit score of at least 640.

• Debt-to-income ratio: - Your debt-to-income ratio (DTI) should not exceed 41%. This means that your monthly debt payments, including your mortgage, should not exceed 41% of your monthly gross income.

• Citizenship and residency: - You must be a U.S. citizen or have permanent residency status.

First-time Homebuyer Grants and Assistance

Many first-time homebuyers struggle to accumulate enough funds to cover down payment and closing cost requirements. In addition to government-backed loans, private lenders and federal, state, or local housing authorities may provide alternative programs to assist in purchasing a home. These programs often target specific states or counties and assistance can come in the form of tax benefits, down payment or closing cost assistance. Here are a few examples:

• Good Neighbor Next Door: - Provided by the U.S. Department of Housing and Urban Development (HUD), the program offers a 50% discount on the purchase price of homes to law enforcement officers, firefighters, emergency medical technicians, and teachers. Qualified borrowers can purchase a home located in a designated revitalization area at half of the listed price, on the condition that they occupy the home for at least three years.

• HomePath Ready Buyer program: - This is a special program offered by Fannie Mae that provides first-time homebuyers with up to 3% in closing cost assistance when purchasing a HomePath property. To be eligible, homebuyers must complete an online homebuyer education course prior to submitting an offer on a qualifying HomePath property.

• Down payment assistance loans: - These are second mortgages that you can use to cover a portion of the down payment or closing costs. Examples are low or zero-interest loans, deferred payment loans, and forgivable loans.

• Mortgage credit certificates (MCCs): - MCCs are issued by the state or local housing agencies. They allow eligible homebuyers to claim a percentage of their annual mortgage interest as a tax credit on their federal income taxes. This tax credit reduces the federal income taxes you owe making home ownership more affordable by increasing the amount of the borrower’s take-home pay.

How to Choose a Mortgage Lender as a First-time Homebuyer

Choosing the right mortgage lender is crucial as a first-time homebuyer. It can help you secure a loan that fits your financial needs and goals, with competitive interest rates, favorable loan terms, and manageable monthly payments. Whether you decide to work with a mortgage banker, traditional bank or credit union, keep these tips in mind:

• First, make a clear list of what you're looking for in a mortgage. Consider which first-time homebuyer and assistance programs you're interested in, your preferred repayment period and whether you prefer a completely digital process or in-person services. Having these preferences in mind will help you narrow down your options.

• Next, shop around and get pre-approvals from several lenders to compare quotes and loan estimates. Try to do this within a 14 to 45-day window to avoid multiple inquiries on your credit report.

• Finally, analyze and choose the right lender based on their reputation, experience, customer service, rates, and fees. Don't hesitate to ask questions and clarify any doubts before making your decision.