A $350,000 house at 6.5% costs roughly $2,212 a month in principal and interest. That number barely moves whether you take an FHA loan or a conventional one. What does move is everything wrapped around it: whether mortgage insurance drops off after four years or sticks around for thirty, whether your down payment is $12,250 or nothing at all, and whether the $15,000 your parents want to contribute is even allowed. Choosing among the best mortgage types for first-time home buyers is really a question about those details, not the rate printed on the flyer.
Seven loan programs cover the vast majority of first purchases. Each was built for a different financial profile, and the gap between them can run past $200 a month on the same house.
Get Three Numbers Before You Compare Anything
Loan shopping goes sideways when buyers start with rates instead of their own file. Pull these first:
- Credit score. Conventional loans typically want 620 or higher. FHA accepts 580 with 3.5% down, or 500 to 579 with 10% down. The best pricing starts around 740.
- Debt-to-income ratio. Most lenders cap total monthly debt payments at 43% to 50% of gross income, and the new mortgage counts toward it.
- Cash to close. Down payment plus closing costs, usually 2% to 5% of the purchase price, plus prepaid taxes and insurance.
A pre-approval letter converts those three numbers into a price range and tells sellers you are serious. Sorting out the steps for first-time home buyer mortgage approval before you tour houses keeps you from falling for something outside your budget.
Conventional Loans: The Default That Rewards Good Credit
Conventional loans are not backed by the government. Fannie Mae and Freddie Mac buy them from lenders, which is why the rules feel uniform across banks. For first-time buyers, the 3% down versions (HomeReady, Home Possible, and Fannie’s standard 97% loan-to-value option) are the ones to ask about. Income limits apply, generally 80% of your area’s median income.
Mortgage insurance is required whenever you put less than 20% down, but the part that matters most is this: conventional private mortgage insurance is cancellable. You can request removal once your balance hits 80% of the original value, and it must end at 78%. On a $340,000 loan, that insurance might cost $150 a month for four or five years and then disappear. Because you will live in the home, pricing follows owner-occupied mortgage guidelines, which are noticeably cheaper than loans on investment property.
FHA Loans: Easier to Qualify, More Expensive to Keep
FHA loans let you in with 3.5% down and a 580 score, which is why they are popular with buyers who have thin credit files or recent dings. The trade-off lives in the insurance. You pay 1.75% of the loan amount upfront, plus 0.55% annually split across twelve monthly payments.
On a $340,000 FHA loan, that annual premium runs about $156 a month, and it never goes away if you put less than 10% down. Put 10% down and it drops off after eleven years. Conventional insurance on the same loan could be gone in year five. FHA also caps loan sizes, with a ceiling around $1,209,750 in expensive markets and a floor near $524,225 in low-cost ones. Many FHA buyers refinance into a conventional loan once they build 20% equity, which resets the insurance math in their favor.
VA and USDA: Zero Percent Down If You Qualify
VA loans go to service members, veterans, and some surviving spouses. No down payment, no monthly mortgage insurance, and a funding fee of 2.15% for first-time use with nothing down, which can be rolled into the loan. Veterans with a service-connected disability are exempt from that fee. Sellers can cover all of your closing costs, and the VA restricts what buyers are allowed to be charged.
USDA loans target rural and small-town properties, with household income limits that vary by county. Also zero down, with a 1% upfront guarantee fee and 0.35% annually. Plenty of areas you would not call rural qualify, so check the USDA eligibility map before ruling it out. Properties with real acreage or agricultural income fall outside these programs entirely and need a different product altogether.
Down Payment Assistance Most Buyers Never Ask About
State housing finance agencies, counties, and nonprofits run programs that hand out or lend down payment money, often as a second mortgage forgiven after five to ten years of living in the home. A typical offer looks like 3% of the purchase price as a forgivable second lien on an FHA or conventional loan. Some are straight grants. The catch is usually an income limit and a homebuyer education course that takes a few hours online.
Use these programs strategically. Keep a few thousand dollars in reserve for a furnace, a roof, or a gap in work. A slightly larger loan you can comfortably pay beats a stretched budget with nothing left over.
Fixed or Adjustable, and How Long You Will Actually Stay
Almost every first-time buyer should start with a 30-year fixed. The payment never changes, and that matters when a job change, a baby, or a car repair lands in the same month. If you are confident you will move or refinance within seven years, a 5/6 ARM can shave half a point off the rate. A 15-year fixed gives you a lower rate and a faster payoff, but the payment runs roughly 30% higher, which squeezes out savings.
House Hacking With an FHA or VA Loan
Both FHA and VA loans allow up to four units as long as you live in one of them. On a duplex, your 3.5% FHA down payment might be $14,700 on a $420,000 property, and the tenant’s $1,500 rent knocks a serious dent in the mortgage. Lenders can count a portion of projected rent, usually around 75%, once an appraiser confirms the market rate. This is the fastest way for a first-time buyer to get into an expensive market, though you become a landlord on day one, with everything that entails. The mechanics of financing a duplex with rental income are worth reading before you make offers.
Ask Whether the Seller’s Loan Is Assumable
FHA, VA, and USDA loans can often be taken over by a new buyer. If a seller locked in 3.1% back in 2021, that is a rate you cannot get today, and assuming it can save hundreds a month for decades. The catch is equity: you have to pay the seller the difference between the loan balance and the sale price, usually in cash, since no new mortgage is involved. It is a niche play, but in a market where rates hover near 6.5%, it deserves a question. The process behind taking over a seller’s low-rate mortgage is more straightforward than most buyers expect.
Shop Lenders, Not Just Loan Types
Two lenders can quote you rates half a point apart on the same day for the same borrower. Get at least three quotes, and do it within a two-week window so the credit pulls count as a single inquiry. Brokers, credit unions, and community banks often beat the big names, though not always. Big banks win on convenience and sometimes on jumbo loans, and it pays to understand where a household name helps and where it costs you, as in this breakdown of Wells Fargo mortgage pricing and trade-offs.
Six Questions to Ask Every Lender
- What is the full monthly payment, including taxes, insurance, HOA dues, and mortgage insurance?
- How much cash do I need on closing day, itemized?
- Does this loan carry a prepayment penalty?
- If mortgage insurance applies, when does it come off, and what has to happen for that to occur?
- Is the loan assumable by a future buyer?
- What does an extra $100 a month do to my payoff date?
Answers to those six questions expose more than any rate quote. Two lenders offering 6.4% can cost you thousands of dollars apart once insurance, fees, and cancellation rules land on the table. Write the answers down side by side, and the decision stops being about marketing and becomes arithmetic.