First Time Homebuyers Guide To Financing

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A home purchase is one of the biggest investments most people make in their lives. That’s what makes finding a competitive loan package tailored to your needs and budget so important. If you’re a first-time home buyer, you may be feeling overwhelmed by all the information you’re getting from different lenders.

To help you navigate what can be a confusing process, we’ve provided an overview of the most common loans on the market, what you have to do to get them, and some useful tips.

What is a conventional loan?


A conventional loan is simply a mortgage not backed by a government agency. It originates and is serviced by private lenders, like banks, credit unions, and various financial institutions. The two main types of conventional loans/financing are conforming and non-conforming.

Conforming loans meet the requirements for income and down payment established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac). Because they meet the requirements, they can later be sold to these agencies which frees up the lender’s money so they can make more loans.

Non-conforming loans do not meet the requirements of these federal agencies. Jumbo loans are an example. Non-conforming loans have higher interest rates and closing costs, more insurance requirements, and extra fees.

What are the qualifications for a conforming conventional loan?


  • Credit score must be 620 or higher (660 is required for some lenders, and 740 or higher will get you the best interest rates as long as your credit history and credit score are strong)

  • Debt-to-income less than 50%

  • Down payment of at least three percent or 20% if you want to avoid private mortgage insurance (PMI)

  • For 2022, the loan limit was raised to $647,200 in low-cost areas and $822,375 in high-cost areas.

What is an FHA loan?


A Federal Housing Administration (FHA) loan is insured by the federal government and is issued through agency-approved banks and lenders. FHA loans typically have lower minimum down payments than conventional loans and accept lower credit scores.

FHA loans are designed to help low to moderate-income families purchase homes. They are especially popular with first-time home buyers.

What are the requirements for an FHA loan?


  • Credit score of 580 or better for a 3.5% down payment

  • Credit score of 500 to 579 for a 10% down payment

  • Debt-to-income ratio of no more than 50%

  • Must have a minimum of two established credit accounts, like a car loan and a credit card

  • Must not have unresolved federal liens or judgments, like tax debt

  • Must not have past FHA-insured mortgage debt


The FHA has property loan limits that vary by county. In general, in low-cost areas, the maximum loan amount for 2022 is $420,680. In high-cost areas, the 2022 maximum loan amount increases to $970,800.

What is a VA loan?


VA loans are mortgages offered through the Department of Veterans Affairs (VA) (previously known as the Veterans Administration). They are issued by private lenders and are available to current and retired service members (including reserve and national guard) and their spouses with minimum or no down payments, no private mortgage insurance (PMI), and competitive interest rates.

What are the requirements for a VA loan?


  • Little or no down payment requirement

  • No private mortgage insurance (PMI)

  • Low-interest rates

  • Refinance option through the Interest Rate Reduction Refinance Loan


There are specific requirements for the amount of time served necessary to qualify for a VA loan. Check out the VA’s eligibility for VA home loan programs web page for complete information.

What is a USDA loan?


A USDA loan is a no-down payment loan issued to qualified buyers purchasing property in rural communities. The loans are issued through the USDA as part of a special program that supports the development efforts of rural communities.

These loans are guaranteed by the USDA and issued by approved private lenders in much the same way FHA and VA loans are. If you take advantage of the little or no down payment option, you will have to pay a private mortgage premium. The loans are intended for low to moderate-income families. Loan amounts vary according to region.

What are the requirements for a USDA loan?


  • Must be a U.S. citizen or have permanent residency

  • Credit score of at least 640 for the majority of lenders

  • No down payment for qualified buyers

  • No bankruptcies or foreclosures

  • Stable work history and steady income (self-employment allowed)

  • Income requirements vary by area ($91,900 for a one to four-person household is typical)

  • Only single-family homes qualify

  • Owner must occupy the property as the primary residence

  • Only 30-year mortgages are offered

  • Direct loans are issued for houses 2,000 square feet or less

  • Loans can vary from $500,000 in high-cost areas to $100,000 in low-cost areas


To find out if a property you are interested in is within a USDA-eligible area, check out the USDA property eligibility webpage.

What’s the difference between pre-qualification and pre-approval?


Mortgage pre-qualification is a quick estimate of the mortgage amount you can probably get. All you need to do is provide your name, assets, debts, and income. You can do it in person, over the phone, or online.

Mortgage pre-approval is a thorough analysis of your assets, debts, income, and rental history. The lender verifies all the information and gives you a pre-approval letter. This will give you a leg up on other buyers who haven’t gotten loan pre-approval. The letter tells the seller you are a serious buyer and will probably be able to go through with an eventual sale.

If you’re ready to buy and not just curious about how much house you might be able to buy, you can skip the pre-qualification process.

Tips for first-time home buyers


1. Get your financial house in order. This means paying down your debt, ensuring your credit report is accurate and saving for a down payment. It also means not incurring significant additional debt and making all your payments on time.

2. Figure out your budget. Your monthly mortgage will be determined by how much money you put down and the type of loan you get. Don’t forget to factor in insurance, taxes, and interest. You also have to be able to put aside money for inevitable maintenance issues.

Have a game plan in place for job loss, babies, divorce, and serious illness. These life issues will all affect your ability to make monthly mortgage payments. Do not stretch your budget to the outer limits and buy more house than you can really afford.

3. Explore your loan options and compare offers. You don’t have to take the first offer you get from a lender any more than you would accept the first diagnosis of a serious illness.

4. Don’t skip the pre-approval process. It’s important to know how much house you can afford before you go house hunting. Being pre-approved for a loan shows sellers you’re a serious buyer and will expedite the final approval process. Be sure to get a pre-approval letter from the lender you intend to use. Some sellers require it before they will accept an offer.

Note: After you have been pre-approved for a loan, it’s very important not to make any significant purchases that will affect your credit score or your debt-to-income ratio.

5. Research first-time home buyer assistance in your area. There are many different down payment assistance programs available to first-time homebuyers. Some of them are deferred and forgivable after a specified period. Others are grants that don’t require repayment. Many of the programs are available to home buyers who haven’t purchased within the last three years.

6. Don’t forget about the closing costs. The down payment is not the only money you need to buy a house. Closing costs can include:

  • Attorney fees

  • Appraisals

  • Pest inspections

  • Title insurance

  • Property taxes

  • Discount points

  • Escrow fees


Closing costs tend to be two percent to five percent of the total loan amount.

7. Learn everything you can. Consider investing in homeowner education. It can help you avoid costly mistakes. These classes include:

  • Evaluating your homeowner readiness

  • Financial budgeting and management

  • Home affordability calculations

  • Mortgage lender and loan comparisons


There are first homebuyer’s classes all over the country. Check out HUD’s Housing Counseling Smart Move brochure for more information.