First-time home buyer guide 2022: Programs, grants, and FAQ

Buying your first home starts here

Buying a house is a lot to wrap your head around, especially as a first–time home buyer.

But if you know what to expect, it doesn’t have to be stressful or confusing.

This first–time home buyer guide will help you figure out how much house you can afford and how to finance it, which are the first two steps to buying a home.

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>Related: How to buy a house with $0 down: First–time home buyer

First–time home buyer guide: Where to start

No one expects you to be an expert on the home buying process, especially when you’re a first–time home buyer.

But there are huge benefits to learning just a little.

The more you know, the better off and less stressed you’ll be. You may even get a better deal on your new home loan.

If you’re just getting started, there are a few key tips to keep in mind before diving in:

  • Contact at least three mortgage lenders to ensure you’re getting the lowest rate. Many first–time home buyers make the mistake of going with the first lender they talk to, and they miss out on thousands of dollars of savings
  • Learn about different types of home loans. While there are dozens of loan types, more than 90% of buyers will end up using one of four major loan programs: Conventional, FHA, VA, or USDA. Find out which loan best fits your needs. There are options for low down payment, low credit score, self–employed, large loan size, and more
  • Understand your price range and monthly payment. Calculate your mortgage payment, including principal, interest, taxes, and insurance. Understand your mortgage rate as well as your budget. This will allow you to shop for a home and a mortgage with confidence
  • Get a mortgage preapproval before you house hunt. Preapproval from a lender verifies your home buying budget, and many sellers won’t accept an offer without a preapproval letter in–hand

If you keep these four things in mind, you can maximize your home buying budget and get the best mortgage deal for your new home.

What is a mortgage?

According to the National Association of Realtors, only about 13% of buyers purchase homes with all cash. Everyone else has to borrow at least some of the money to buy their new home. This is done with a type of loan called a mortgage.

So, what makes a mortgage different from other types of loans?

  • Low interest rates: Around 3–4% annually at the time of writing this article
  • Extended repayment periods: Most people pay off their mortgage over 30 years
  • Rates and payments are generally fixed: Most people get a fixed–rate mortgage that “fixes” their home loan’s interest rate, so their monthly payment will stay the same over the whole loan term. However, adjustable–rate loans are available, too
  • The loan is “secured”: Mortgages are secured by the value in your home; if you fail to make payments, the mortgage company can take back (foreclose) your house to recoup its losses

In rare cases, you can use a mortgage loan to cover the whole purchase price of the home. But most people put some of their own money toward the purchase.

The amount paid out of pocket is known as the “down payment.” The mortgage covers the remainder of the sale price after your down payment.

For example, if you bring $25,000 of your own money to a $250,000 home purchase, you have made a 10% down payment. The remaining amount – $225,000 – is covered by your mortgage loan.

First–time home buyer loan programs

Home buyers today can choose from dozens of loan types. But more than 90% of buyers (including first–time home buyers) will end up using one of four popular loan programs.

These are:

  1. The conventional loan
  2. The Federal Housing Administration (FHA) home loan
  3. The Department of Veterans Affairs (VA) home loan
  4. The U.S. Department of Agriculture (USDA) home loan

These programs are popular because of their accessibility, low rates, friendly terms, and relative affordability.

Each one has unique benefits, depending on what you’re looking for as a first–time home buyer (lower down payment, lower credit threshold, lower–income options, etc.)

Your loan officer will help you choose the right type of mortgage for your situation. But you should know your options beforehand to make sure you’re asking all the right questions.

Here’s a brief overview of each one:

1. Conventional loans: 3% down payment

Conventional or conforming mortgage loans are what most home buyers think of when they think of home loans. The term “conforming” means these loans meet guidelines established by Fannie Mae and Freddie Mac.

Conforming mortgages are often the best choice for home buyers with good credit scores and a down payment of at least 10%.

However, three conforming mortgage options exist for buyers making a down payment of just 3%. They are:

HomeReady and HomePossible mortgages offer low down payments (starting at 3%) and flexible eligibility guidelines – especially for lower–income home buyers. They may even offer up to a $500 rebate to borrowers.

Conventional 97 mortgages offer no such discount but can be the most economical way to purchase a home with little money down (just 3%) – especially for buyers with extra–good credit.

2. FHA loans: 3.5% down payment

FHA loans are popular with borrowers who have smaller down payments and/or credit issues, which require extra underwriting flexibility.

The biggest appeal of the FHA loan is that buyers with below–average credit can get mortgage approved.

FHA loans allow buyers with credit scores as low as 580 with 3.5% down, and 500 with 10% down. However, low credit scores must not be the result of recent bad credit history.

FHA mortgage rates are often lower than conforming mortgage rates.

But because all FHA loans require mortgage insurance premiums (MIP), the overall cost of an FHA loan is sometimes higher.

FHA mortgage insurance costs

  • Upfront Mortgage Insurance Premium (UFMIP): 1.75% of the loan amount for recent FHA loans and refinances
  • Annual Mortgage Insurance Premium (MIP): 0.85% of the loan amount most FHA loans and refinances

Note: FHA mortgage insurance usually lasts the life of the loan. But it can eventually be cancelled with a refinance once you’ve built equity in the home. So FHA mortgage insurance is not always “forever.”

In addition, the home you buy using an FHA loan must be your primary residence. You cannot purchase a vacation home or investment property with this loan type.

The same goes for other government–backed loan programs, including VA and USDA mortgages.

3. VA loans: 0% down payment

The VA loan is a valuable program with benefits offered by no other loan. But you need to be associated with the military to be eligible.

Available to veterans and active members of the U.S. military, VA loans offer 100% financing, simplified loan approval standards, and access to the lowest mortgage rates available.

For the last two years, VA mortgage rates have consistently beat rates for all other common loan types. VA mortgage rates can often be as much as 40 basis points (0.40%) lower than rates for a comparable conventional loan.

In terms of mortgage affordability, the VA loan is hard to beat if you’re eligible.

4. USDA loans: 0% down payment

Available in rural areas and low–density suburbs, the USDA loan is another no–money–down mortgage you can use to finance a home.

The USDA loan offers lower mortgage rates, zero down payment, and cheaper mortgage insurance to borrowers with low to moderate income.

The only catch? The home has to be in a designated rural area according to USDA standards. That usually means it has to be located in a city with a population of less than 20,000.

Compare first–time home buyer programs

Minimum Down Payment Minimum Credit Score Best For…
Conforming Loan 3% 620 Good credit and/or large down payment
FHA Loan 3.5% 580 Lower credit and small down payment
VA Loan 0% 580-620 Veterans and service members
USDA Loan 0% 640 Home buying in a rural area or small town
Non-Conforming/Jumbo Loan 5-20% 680 Buying high-priced real estate

How much down payment do I need for a house?

Many first–time home buyers believe they have to put 20% down on a home. But that’s far from true.

In fact, the average down payment for first–time home buyers is around 6%. On a $250,000 home purchase, that would be just $15,000.

And there are loan programs that let you buy with even less than 12% down. For example:

  • FHA loans: 3.5% down
  • VA loans: 0% down
  • USDA loans: 0% down
  • Conventional 97 loans: 3% down

The main takeaway here is that down payments are flexible.

Yours should depend on your monthly income, what you currently have saved, how expensive the home is, and what your overall home buying goals are.

Briefly, the pros and cons of bigger versus smaller down payments are:

  • Bigger down payment: Lower interest rate and lower monthly payment
  • Smaller down payment: Buy a home and start building equity sooner, keep more of your savings intact for emergency expenses

Take a look at your personal finances and home buying goals to figure out the right down payment for you.

Why do people say you need 20% down?

Average down payments are well under 20%. You might wonder, then, why so many people think 20% down is the minimum.

It’s because 20% down gets you out of paying for mortgage insurance.

Mortgage insurance is an extra charge on your monthly housing payment, and it often costs a few hundred dollars per month.

Understandably, most buyers would rather avoid paying for mortgage insurance if possible. That’s why some people aim for 20% down.

But there are benefits to paying mortgage insurance if it puts you in a home sooner. It’s just one more cost versus benefit to consider as you put together your home buying budget.

Down payment assistance options

Most mortgage programs require a down payment, however small or large.

Theoretically, this is money you put toward the home price out of your own pocket. But you can find ways to make a required down payment without emptying your savings.

One way is to find down payment and closing cost assistance programs in your area. Down payment assistance programs – usually run by local governments – offer grants and low–interest loans to help buyers cover their down payment and upfront home buying fees.

You can also use gift funds for a down payment on a mortgage. To use a cash gift for a down payment, however, you’ll have to prove the money came from an “acceptable source.” That means providing a paper trail showing the gift funds leaving the giver’s account, and being deposited into your account or into escrow.

You’ll also need a “gift letter” from the giver, indicating his or her relationship to you, the amount of the cash gift, and a statement that the giver does not require repayment. There is no limit to the amount of money that can be gifted to a home buyer.

Minimum credit score to buy a house

Some first–time home buyers think you need great credit to buy a house. But in reality, those with decent and even fair credit often have mortgage options.

Credit score requirements for most loan programs start at just 620. And with the FHA loan program, it’s possible to get a home loan with a FICO score of 580.

  • Conventional loan: 620+
  • FHA loan: 580+
  • VA loan: 620+
  • USDA loan: 640+

Keep in mind, it’s not just your credit score that matters.

Lenders also look at your credit report. They want to see you’ve made all your loan payments on time, and haven’t had recent credit issues like a bankruptcy or foreclosure.

What’s considered a good credit score for a mortgage?

Those with credit scores in the “excellent” range will usually have access to the most favorable loan programs and lowest rates.

For reference, credit scores are generally classified this way:

  • Excellent: 720 or more
  • Good: 680 to 719
  • Fair: 620 to 679
  • Poor: 619 or less

It becomes more difficult to find mortgage financing in the below–620 range.

Technically FHA loans are available with a credit score as low as 500 – but only if you can make at least a 10% down payment. And it can be hard to find lenders that are actually so lenient.

Similarly, VA loans have no credit score minimum by default. But most lenders impose their own minimum credit score of at least 620 for VA loans.

Start checking your credit history well before you plan to buy a house – at least a year in advance if possible.

This will give you time to flag errors on your report, solve them, and even work on raising your score if that’s necessary to get a loan.

Also try to pay down credit card balances if you’re able, which will help increase your score.

First–time home buyer grants

First–time home buyer grants are often available at the state or local level. These are typically known as down payment assistance (DPA) programs, which can help cover all or part of your down payment and closing costs.

These are real savings for first–time home buyers. One study estimated that buyers using down payment assistance saved almost $6,000 at closing, on average, and another $11,000 over the life of their loans.

Down payment assistance usually takes one of two forms:

  • A first-time home buyer grant: Money given to you that you don’t have to pay back
  • A low-interest loan: Money borrowed to cover your down payment or closing cost that you’ll have to pay back with minimal interest

First–time home buyer grants vary in size and availability depending on where you live. There are also different requirements to qualify for assistance depending on which program you use.

The U.S Department of Housing and Urban Development (HUD) offers a directory of first time home buyer loan programs by state. For more information, see our complete guide to first–time home buyer grants and loans in your state.

Interest rates for first–time buyers

First–time home buyers don’t get lower interest rates just because they’re new to the market. As a first–time buyer, your interest rate is determined by the same factors as everyone else’s:

  • Your credit score
  • Your loan type
  • Your down payment amount
  • The overall interest rate market

Your goal as a mortgage borrower should be to find the lowest interest rate possible. This will keep your monthly mortgage payments affordable, and reduce the amount of interest you pay your lender over the life of the loan.

One way to lower your interest rate is by improving your personal finances before you buy.

Saving a bigger down payment or increasing your credit score – even by a few points – can make a big difference when it comes to your mortgage rate.

The other important thing is to shop with multiple lenders before you choose a loan.

All lenders calculate their rates differently. Some may have lower rates for FHA loans, for example, or for borrowers with less–than–perfect credit.

By shopping with more than one mortgage lender, you can find the one that’s most friendly toward your situation and can offer the best deal on your home loan.

How much house can I afford?

Once you’ve decided which mortgage loan type works best for you, you’ll want to begin thinking about your monthly budget and how much home you can afford.

Start by determining your budget for a monthly mortgage payment. For this example, let’s say you’re aiming for a mortgage payment of $1,500 per month.

We’ll now work backward to determine your maximum home purchase price.

Calculate your monthly mortgage payment (PITI)

Your mortgage payment is made up of four parts, collectively known as PITI – Principal, Interest, Taxes, and Insurance.

  • Principal and Interest: Principal and Interest make up your basic mortgage payment, including your payments toward the loan balance and interest paid to your lender
  • Taxes: As a homeowner, you’re responsible for paying annual property taxes to the local taxing authority. Property taxes typically range from 1% to 2% of your home’s value annually
  • Insurance: Then, there’s homeowners insurance. Mortgage lenders require that you carry insurance for your home, which typically costs 0.25% to 0.50% of your home’s value annually

Some neighborhoods have homeowners’ associations that charge monthly dues; for this example we’ll assume you won’t include HOA dues in your monthly housing budget.

So, assuming a home purchase price of $250,000 and a 10% down payment, plan on setting aside $400 for taxes and insurance each month.

This leaves about $1,100 to spend on principal and interest.

Find your mortgage rate and price range

Determining whether a home is “in budget” depends on your mortgage rates, too.

Be aware that mortgage rates move up and down all day, every day. Over the course of weeks and months, rates can change by 50 basis points (0.50%) or more.

When you’re home shopping, especially over an extended time period, it’s important to observe mortgage rates and how they are trending.

Consider the above example, when you have budgeted $1,100 to spend on principal and interest each month.

  • With mortgage rates at 3.75%, the payment is $1,043. The home is in–budget
  • With mortgage rates at 4.25%, the payment is $1,107. The home is out–of–budget

This example shows why you should never base your home search on a price range.

The same home is affordable when rates are low, and unaffordable when rates increase.

Adjust your target price range based on current mortgage rates. It’s the only true way to keep on budget.

Mortgage calculator for first–time home buyers

Choosing a mortgage lender

One of the biggest mistakes first–time home buyers make is not shopping around for a mortgage.

They might simply get pre–qualified with the bank they already use for checking and savings. Or they might get a quote and go with the first lender they speak to, assuming rates and prices are the same everywhere.

In fact, that’s not true. Lenders have a lot of flexibility with the rates they offer.

For a single borrower, mortgage rates could potentially vary as much as 0.5% from one company to another.

Half a percent might sound small. But over the first three years of a $250,000 loan, that difference would save you almost $4,000.

Additionally, some lenders may offer lower closing costs, but higher rates. Don’t be afraid of negotiating costs like underwriting fees or loan origination fees. Negotiating could save you a couple hundred dollars, and you’ll never know unless you ask.

So, make sure you get estimates from a few different lenders to find the best rate and fees before you commit to a home loan.

Alternatively, some home shoppers like to work with a mortgage broker who can offer a variety of loan products at once.

First–time home buyer FAQ

What programs are available for first-time home buyers?

First–time home buyers can use any of the mortgage programs available, provided they’re financially eligible. First–time buyers might also have access to special loans, grants, and home buyer courses that offer savings on down payments and closing costs. Whether you can access these programs depends on where you live. And there may be special requirements to qualify.

What credit score do you need to buy a house for the first time?

Most loan programs require a credit score of 620 or higher to buy a house for the first time. That includes conventional loans, most VA loans, and USDA loans (which require 640+). Home buyers with lower credit may be able to get an FHA loan with a score as low as 580 and a 3.5% down payment. As a general piece of advice, a higher credit score gets you a lower mortgage rate and bigger home buying budget.

Who qualifies as a first-time buyer?

If you’re buying your first–ever home, you’re a first–time home buyer by default. A repeat buyer can also qualify as a first–time home buyer, as long as they have not owned a home in the past three years. The three–year mark can help previous home buyers who have come on hard times get back into a home. Qualifying as a first–time home buyer gets you access to special, low–down–payment home loans as well as assistance to help with the down payment and closing costs.

What is the maximum income to qualify for first-time home buyers?

Many popular first–time home buyer programs have no income limit. For example, buyers can qualify for an FHA loan with 3.5% down, or a VA loan with zero down, at any income level. But some first–time home buyer programs do impose maximum income caps. To qualify for a zero–down USDA loan, for example, your income can’t exceed 15% above the local median. Similarly, many down payment assistance grants set caps based on the local median income.

How do I get a first-time home buyer grant?

To get a first–time home buyer grant, you’ll have to look for programs where you live. These grants are typically offered by state and local governments and nonprofits, so they vary by area. To qualify, you generally need to be a first–time home buyer with low–to–moderate income. And you need to make sure the mortgage program you’re applying for allows you to use the funds toward your down payment and/or closing costs.

How do I know if I’m ready to buy a house?

If you want to know whether you’re ready to buy a house, ask yourself four questions: 1) Do I have a steady job and reliable income? 2) Do I have enough money saved for the down payment AND closing costs? 3) Is my credit history reasonably strong? 4) Do I plan to stay in the home for at least five years? If you answered yes to these questions, you’re probably ready to get pre–approved for a loan and start searching for your dream home.

What are the benefits of being a first-time home buyer?

First–time home buyers sometimes have access to special loan programs and home buying grants that other buyers don’t. However, these types of programs are often geared toward first–time home buyers who need a little extra help; for instance, lower–income home buyers or those with poor credit. If you have great credit and make a lot of money, the benefits of being a first–time home buyer might not apply to you – but then again, you might not need them.

How can I buy a house with no money down?  

There are two big loan programs that let you buy a house with no money down: the VA loan and the USDA loan. To qualify for a zero–down VA mortgage, you need to be a veteran or service member. For a USDA loan, you need to buy a house in a qualified rural area, and meet local income caps. If you don’t qualify for these programs, it may be possible to buy a house with no money down by using gift funds or applying for down payment assistance.

Are there any fees when a home buyer works with a real estate agent?

No, real estate agents are free for home buyers; the seller typically pays their commission. Furthermore, because of conflicts of interest, there are almost no situations in which it makes sense for a home buyer to employ the same real estate agent as the home seller.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is an insurance policy that makes homeownership possible for home buyers who don’t want to make a 20 percent down payment. You, the borrower, pay PMI premiums to protect your mortgage lender from default and foreclosure. Should you fail to repay your mortgage, the lender can cash in the homeowner’s PMI policy to recover its lost money. Conforming mortgage lenders require PMI when the home buyer makes a down payment of less than 20 percent.

What are points? How do I know if I should buy them or not?

A ‘point’ or ‘discount point’ is an extra fee you pay upfront to lower your mortgage interest rate. One point typically costs 1% of the loan amount, which is equal to $1,000 for every $100,000 borrowed. Buying one point should lower your interest rate by about 0.25%.

Do I need a home inspection?

If you use a conventional loan backed by Fannie Mae or Freddie Mac, a home inspection may be optional. Home inspections are required on government–backed loans like FHA and VA. Whether or not it’s required, though, a home inspection is highly recommended by experts. The inspector could find structural or systemic problems you’d want to know about before buying the home. And even if everything checks out, the inspector’s report would let you know how many repairs to expect in the first few years of homeownership.

Check your home buying eligibility today

The easiest way to find out whether you can buy a home right now is to check if you’re eligible for financing.

You can get started below. Getting verified by a lender is free, and it only takes a few minutes to begin.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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