7 best mortgage lenders for first-time buyers in July 2021
What types of loans are available for first-time buyers?
Many first-time homebuyers don’t have a great credit history, and many others don’t have large down payments available, but some do. Some have served in the military and can access VA loans, while others may be able to explore USDA funding if their homes are in certain rural areas.
With that in mind, here’s a quick rundown of the four main types of mortgages that first-time homebuyers can use to give you a better idea of what might be the right choice for you.
- Conventional mortgages: The majority of purchase mortgages in the United States are called conventional loans. This is a general term that refers to loans that are not guaranteed by a government agency. The absence of collateral means that conventional mortgages generally have more stringent qualification requirements than the other types of loans listed here. But they could still be great options for first-time buyers with good credit scores. There are several conventional mortgage programs for first-time buyers that allow upfront payments as low as 3% of the purchase price. Find out more in our guide to buying your first home.
- FHA loans: FHA mortgages are guaranteed or insured by the Federal Housing Administration (FHA). Because of this guarantee, credit requirements are generally more flexible than other types of mortgages, and down payments can be as low as 3.5%, even with a relatively low credit score. While there are a few drawbacks to FHA loans, especially when it comes to cost, they can be a great way for buyers who don’t have outstanding qualifications to become homeowners.
- VA loans: A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs, and these are available to certain military personnel, past and present. VA loans have no down payment requirements, low interest rates, and flexible credit qualifications, so they are definitely worth considering if you qualify.
- USDA loans: A USDA loan is a mortgage guaranteed by the United States Department of Agriculture. To qualify, a house must be located in a qualifying rural area and the borrower’s income must be below certain limits. If both the borrower and the property qualify, USDA loans do not require a down payment.
It’s also important to mention that in addition to these types of loans, many lenders have their own proprietary mortgage products, and some are specifically designed for first-time home buyers. So it might also be a good idea to research the options offered by some of the best mortgage lenders as well as your local and regional financial institutions.
How do I qualify as a first-time home buyer?
There are no specific requirements that apply only to first-time buyers (unless a particular loan product has a separate credit or down payment requirement for first-time buyers). For the most part, first-time home buyers are subject to the same general requirements as all mortgage applicants.
That said, first-time homeowners are less likely to know what to expect than seasoned homeowners. So here are the general categories of information your mortgage lender will consider when applying for a mortgage for your first home.
- Credit: Before checking any of your other qualifications, lenders will usually do a credit check. Virtually all mortgage lenders use the FICO credit scoring model, and most will take your scores from the three major credit bureaus and use the middle number for qualification purposes. FHA loans require a minimum FICO® score of 580 for a down payment of 3.5%, while conventional loans have a minimum of 620.
- Advance payment: Unless you are using a VA or USDA loan to finance your home, you will need a down payment. FHA and conventional loans have low down payment requirements, and funds can usually come from a donation. But you will need to document how much money you have for your down payment and where it comes from, as well as how you plan to pay closing costs.
- Debt-to-income ratio: Simply put, lenders want to make sure that you’ll be able to pay your mortgage payments, so they’ll look at your debt as a percentage of your income, a measure known as the debt-to-income ratio, or DTI ratio. DTI calculation methods and lending standards may vary, but as a general rule, your total monthly debt (including your new mortgage payment) should not exceed 45% of your before-tax income.
- Employment: Lenders want to know that not only can you pay your mortgage payments for the moment, but that you can also continue to pay your mortgage year after year. Most mortgage lenders want to see at least two years of stable employment in the same field (but not necessarily with the same employer). There are exceptions, however, for example if you graduated from university less than two years ago.
- Assets / reserves: Depending on the mortgage you choose, as well as your other qualifications, your lender is likely to require a certain amount of money in reserves. This can be as little as two months of mortgage payments. The point is, you usually can’t end up with a zero balance in your bank account after you close your house.
Before applying for a mortgage, it makes sense to make sure that each of them is as good as possible. For example, taking the time to increase your credit score and save a larger down payment could help you get a better interest rate, which will save you money in the long run.
Choosing the Best Lender for First-Time Home Buyers
Understanding how home loans work is the first step in choosing the best mortgage lender for your first home purchase. Next, you’ll need to narrow down a short list of a few (say, three or four) lenders with products and resources that meet your needs. Our best list of first-time mortgage lenders on this page is a good place to start, but it might also be a good idea to check with your local and regional banks or credit unions so you can compare mortgage rates.
Once you have a shortlist, apply for a mortgage with all of them to compare the loan terms and the specific fees that are offered to you. This will not hurt your credit score, as all mortgage credit inquiries that take place during a typical purchase period are counted as one inquiry. You’ll see a range of interest rates, fees, and APRs from different lenders, and you’d be surprised how much that can save or cost you over the life of a 30-year mortgage.