First-Time Home Buyers

First-time buyers get access to loan programs and assistance that repeat buyers don’t. The catch? Most people don’t know these programs exist, or they get confused by the alphabet soup of FHA, VA, USDA, PMI, and MIP. Let’s break it down clearly.

Loan Programs for First-Time Buyers

FHA Loans

The Federal Housing Administration insures these loans, which means lenders take on less risk and can approve borrowers with lower credit scores and smaller down payments. The terms:

• Down payment: 3.5% with a 580+ credit score. 10% if your score is 500-579.
• Credit requirements: Officially 500 minimum, but good luck finding a lender who’ll go below 580. Most set their own floor at 620.
• Debt-to-income: Up to 43% standard, up to 57% with strong compensating factors (cash reserves, minimal credit growth, etc.)
• Mortgage Insurance Premium (MIP): 1.75% upfront (usually rolled into the loan) + 0.55% annual for most borrowers

Here’s the part nobody mentions in the brochure: FHA mortgage insurance never goes away. It sticks with you for the entire life of the loan unless you refinance into a conventional mortgage. On a $350,000 loan, that’s roughly $160/month that will never drop off. For borrowers with credit scores above 680, a conventional loan with PMI that disappears at 80% loan-to-value is almost always the better long-term play.

FHA makes sense when: your credit is below 680, you have a high DTI that conventional lenders won’t touch, or you’re using gift funds for the entire down payment (FHA allows this; some conventional products have restrictions).

Conventional 97 / HomeReady / Home Possible

These are the 3%-down conventional loan programs from Fannie Mae (HomeReady) and Freddie Mac (Home Possible). They’re designed for first-time and low-to-moderate income buyers.

• Down payment: 3% minimum
• Credit requirements: 620 minimum, but you’ll want 680+ for competitive PMI rates
• Income limits: HomeReady caps at 80% of area median income. Home Possible has similar restrictions. Standard Conventional 97 has no income cap.
• PMI: 0.3% to 1.5% annually depending on credit score and LTV. Drops automatically at 78% LTV or by request at 80% LTV.

The PMI dropping off is the key advantage over FHA. Once your equity hits 20%, that monthly cost disappears. With a $350K home appreciating at even 3% per year, you might hit 80% LTV in 5-7 years instead of the 9-10 the amortization schedule suggests.

VA Loans

If you’re a veteran, active-duty service member, or qualifying spouse — stop reading and go get a VA loan. It’s the best mortgage product in the United States. Period.

• Down payment: 0%
• PMI/MIP: None
• Funding fee: 2.15% for first use (can be rolled into the loan), 3.3% for subsequent use. Exempt if you receive VA disability.
• Interest rates: Typically 0.25-0.5% lower than conventional
• Credit requirements: No VA minimum, but most lenders want 620+

Zero down. No monthly mortgage insurance. Lower rates. The VA funding fee is a one-time cost that’s dramatically less than what you’d pay in PMI over the life of a conventional loan. Veterans who use conventional loans instead are leaving tens of thousands of dollars on the table.

USDA Loans

These are the sleeper pick. Zero down payment, funded by the U.S. Department of Agriculture for rural and suburban properties.

• Down payment: 0%
• Location requirement: Property must be in a USDA-eligible area. Check the eligibility map — you’d be surprised how many suburban areas qualify. It’s not just farmland.
• Income limits: Household income can’t exceed 115% of area median income
• Guarantee fee: 1% upfront + 0.35% annual (much cheaper than FHA MIP)

The catch is the location restriction. But if you’re buying in a suburban or exurban area, check the USDA map before assuming you don’t qualify. Towns 20 minutes outside major metro areas often qualify.

Down Payment Assistance Programs

Every state offers some form of down payment assistance (DPA) for first-time buyers. These programs range from outright grants (free money) to forgivable loans (forgiven after you live there 5-10 years) to second mortgages at low or zero interest.

A few examples of what’s out there:

• California CalHFA: Up to 20% of the purchase price as a silent second mortgage, no payments until you sell or refinance
• Texas TDHCA: Up to 5% of the loan amount as a 0% interest second lien, 30-year term
• Florida Hometown Heroes: Up to $35,000 in down payment and closing cost assistance for community workers — teachers, nurses, firefighters, law enforcement
• Illinois IHDA: $6,000 forgivable loan, forgiven over 10 years

These programs have income limits and often require completing a homebuyer education course (usually 4-8 hours online, $50-100). The education requirement is annoying but the programs are legitimate. Check your state housing finance agency’s website — that’s where the real programs live, not the ads you see on social media.

As for the federal $10,000 first-time homebuyer tax credit that gets proposed every election cycle: it hasn’t passed as of early 2026. Don’t plan your finances around it.

The Mistakes That Cost First-Time Buyers the Most

Buying Too Much House

Just because the bank approves you for $450,000 doesn’t mean you should spend $450,000. Lenders don’t account for your daycare costs, your student loan payments under income-driven repayment, or the fact that you like eating out. The 28/36 rule exists for a reason: total housing costs should stay under 28% of gross income, and total debt payments under 36%. Go over and you’ll feel it every month.

Skipping Pre-Approval

Looking at homes without a pre-approval letter is window shopping. You don’t know what you can actually afford, sellers won’t take your offer seriously, and you’ll waste weekends touring houses that were never in your price range. Get pre-approved before you look at a single listing.

Waiving the Inspection

In competitive markets, some agents advise buyers to waive the inspection contingency to make their offer more attractive. This is terrible advice. A $500 inspection can reveal $30,000 in foundation issues, a failing roof, or knob-and-tube wiring that needs full replacement. If you want to compete without a full contingency, consider an “inspection for informational purposes only” clause — you can still walk away, you just can’t negotiate repairs.

Not Shopping Your Mortgage

Most first-time buyers apply with one lender and accept whatever rate they’re offered. Studies show that shopping at least three lenders saves borrowers $3,000 to $6,000 over the life of the loan. The rate difference between lenders on the same day can be 0.5% or more. That’s real money.

Draining Your Savings for the Down Payment

Putting every dollar into the down payment and closing costs, then moving in with $500 in the bank, is a recipe for financial stress. Homes break. The water heater fails in month two. The HVAC dies in August. Keep at least 3 months of mortgage payments in reserve after closing. Six months is better.

Frequently Asked Questions

What counts as a “first-time homebuyer”?

For most programs, it means you haven’t owned a home in the past 3 years. So if you owned a condo in 2020 and sold it in 2022, you’d qualify again in 2025. It’s not about whether you’ve ever owned — it’s the 3-year lookback.

Can I use gift money for my down payment?

Yes, with documentation. FHA allows 100% of the down payment to come from gifts. Conventional loans allow gifts too, but if you’re putting less than 20% down, some programs require at least 5% of your own funds. You’ll need a signed gift letter stating the money is a gift, not a loan.

How much are closing costs for first-time buyers?

Typically 2-5% of the purchase price, separate from your down payment. On a $350,000 home, expect $7,000-$17,500. Many first-time buyer programs include closing cost assistance, and you can negotiate seller concessions to offset these costs — especially in buyer-friendly markets.

Should I pay points to lower my rate?

One discount point costs 1% of your loan amount and typically drops your rate by 0.25%. On a $300,000 loan, that’s $3,000 upfront to save about $50/month. The break-even is roughly 5 years. If you’re certain you’ll keep the home and mortgage that long, points can be worth it. If there’s any chance you’ll sell or refinance in 3-4 years, skip them.