The best loans for first-time homebuyers typically include FHA loans for lower credit scores (580+), Conventional 97 or HomeReady/Home Possible for 3% down, and VA or USDA loans for 0% down. These options offer low down payments and flexible requirements, with FHA loans allowing 3.5% down and USDA/VA loans providing zero-down options in specific areas or for veterans.
With their more flexible lending requirements, FHA loans may be well-suited for first-time home buyers, particularly because those with lower credit scores may be accepted. On the other hand, conventional loans may be ideal for borrowers with higher credit scores who can also make a larger down payment.
Federal Housing Administration (FHA) loans are popular among first-time homebuyers since they offer lower credit score and down payment requirements. They often have more flexible lending requirements than conventional loans. Even with a weaker credit score, you may only be required to put 3.5% down.
The “high-interest first” strategy
Paying off high-interest debt first is commonly referred to as the avalanche method. This involves making the minimum monthly payments on all of your credit cards and loans, but putting every extra penny you can toward the card or loan with the highest interest rate.
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
Here are seven steps to guide you through the process.
How much can first-time buyers borrow?
Ignoring Their Budget
One of the most common mistakes first-time home buyers make is underestimating the costs involved. It's crucial to establish a budget and stick to it. Include not just the mortgage, but also property taxes, insurance, maintenance, and unexpected expenses. A common rule of thumb is the 28% rule.
FHA (Federal Housing Administration) loans are government-backed loans that offer lower down payment requirements and more lenient credit standards. If you're a first time home buyer who doesn't have much savings and/or a lower credit score, this may be best for you.
There are some cases where you can buy a home with no money down. Two types of zero-down mortgages are government-backed loans, such as a Department of Veterans Affairs (VA) loan and a U.S. Department of Agriculture (USDA) loan.
First-time buyer rules generally define you as someone who hasn't owned a primary home in the past three years, allowing access to special loans and down payment assistance, even if you've owned before (like a mobile home or jointly with a former spouse). Key requirements include a decent credit score (e.g., 580+ for FHA), stable income/employment (2+ years), manageable debt, a small down payment (3.5%+), and often completing a homebuyer education course, with specific income/price limits depending on your location and program.
You could also become a member of a credit union and apply for a payday alternative loan. They generally have high interest rates. These are small loans that typically don't require you to have good credit or a credit history; however, you could be asked to provide additional information, such as proof of income.
How to Improve Your Credit Score
With a 700 credit score (considered "Good"), you're well-positioned to get approved for most major loans like mortgages, auto loans, and personal loans with more competitive interest rates and terms than someone with a lower score, plus you'll qualify for better rewards credit cards and may even see lower insurance premiums. You can access a wide range of financial products, but to get the best rates, scores above 740-760 are often needed.