Should a first-time homebuyer choose FHA or conventional?

It depends on your credit score and savings. FHA is better if your credit score is below 680 or you have limited down payment savings. Conventional is typically better with a score above 700 and 5%+ down.

How much money do I need to buy my first home?

You need at least 3-3.5% for a down payment plus 2-5% of the home price for closing costs. For a $300,000 home, that means roughly $15,000-25,000 total.

What credit score do first-time homebuyers need?

FHA loans require 580 for 3.5% down. Conventional loans need 620+. A score of 740+ gets you the best rates on either loan type.

Can I buy a house with no down payment?

While FHA and conventional loans require down payments, VA loans offer 0% down for eligible veterans, and USDA loans offer 0% down in qualifying rural areas.

What are closing costs for first-time buyers?

Closing costs typically run 2-5% of the loan amount, or $6,000-$15,000 on a $300,000 home. Some can be negotiated or covered by seller concessions.

How much house can I afford?

A common rule is that your housing payment should not exceed 28% of gross monthly income. For a $5,000 monthly income, that means a maximum housing payment of $1,400.

First-Time Homebuyer's Complete Guide to Choosing a Mortgage

Quick Answer

First-time homebuyers should start by understanding the two most common mortgage types: FHA loans (3.5% down, 580+ credit score) and conventional loans (3-5% down, 620+ credit score). Your credit score, savings, and income will determine which option saves you the most money. The right choice could save you tens of thousands of dollars over the life of your loan.

Key Takeaways

FHA loans offer the easiest qualification with 3.5% down and a 580 minimum credit score
Conventional loans typically cost less over time for borrowers with credit scores above 700
You need to budget for both down payment (3.5-20%) and closing costs (2-5%)
Get pre-approved before house hunting to know exactly what you can afford
First-time buyer programs can help with down payments and closing costs
Your debt-to-income ratio should stay below 43% for most loan programs

Step 1: Assess Your Financial Health

Before you start looking at homes, take an honest look at your finances:

Check Your Credit Score

Your credit score is the single most important factor in determining which loan type you qualify for and what interest rate you will receive. Get free copies of your credit report from all three bureaus at AnnualCreditReport.com.

Below 580: You may struggle to qualify for any mortgage. Focus on building credit first.
580-619: FHA loans are your best (possibly only) option. Expect higher rates.
620-679: You can choose FHA or conventional. Compare costs carefully.
680-739: Conventional loans become more attractive with better PMI rates.
740+: You qualify for the best rates on conventional loans.

Calculate Your DTI Ratio

Your debt-to-income ratio tells lenders how much of your income goes toward debt payments. Add up all monthly debt payments (student loans, car payments, credit card minimums, etc.) and divide by your gross monthly income.

For example, if you earn $6,000/month and have $1,500 in debt payments, your DTI is 25%. Most loan programs allow a maximum housing payment that keeps your total DTI at or below 43%.

Save for Down Payment and Closing Costs

You will need savings for two things:

Down payment: 3.5% (FHA) to 20% (conventional without PMI) Closing costs: 2-5% of the home price

For a $350,000 home with 5% down:

Down payment: $17,500
Closing costs: $7,000-$17,500
Total needed: $24,500-$35,000

Step 2: Choose Your Loan Type

FHA Loan Pros and Cons for First-Time Buyers

Pros:

Only 3.5% down required
Credit scores accepted from 580
More forgiving of past credit issues
Allows higher DTI ratios
Down payment can be a gift

Cons:

Mandatory mortgage insurance for the life of the loan (with <10% down)
Upfront MIP of 1.75%
Only for primary residences
Stricter property requirements

Conventional Loan Pros and Cons for First-Time Buyers

Pros:

No upfront mortgage insurance fee
PMI cancels at 78% LTV
Can be used for any property type
Higher loan limits
Lower total cost over loan life (with good credit)

Cons:

Higher credit score required (620+)
Stricter DTI requirements
Larger down payment typically needed
PMI is expensive with lower credit scores

Step 3: Get Pre-Approved

Getting pre-approved gives you a clear picture of how much home you can afford and shows sellers you are a serious buyer. You will need:

Two years of W-2s or tax returns
Recent pay stubs (30 days)
Bank statements (2-3 months)
Photo ID
Authorization for credit check

Get pre-approved with at least two or three lenders to compare offers. Even a small difference in interest rate can save you thousands over the life of the loan.

Step 4: Find Your Home and Make an Offer

Work with a real estate agent who understands first-time buyer programs. When you find the right home:

Make an offer within your pre-approved budget
Include contingencies for inspection, appraisal, and financing
Negotiate closing cost credits from the seller when possible
Be prepared to act quickly in competitive markets

Step 5: Close on Your Home

The closing process typically takes 30-45 days from accepted offer. During this time:

Complete the mortgage application with your chosen lender
Lock your interest rate
Get a home inspection and appraisal
Secure homeowners insurance
Review the closing disclosure carefully
Bring your down payment and closing costs to closing

First-Time Buyer Programs to Explore

Several programs can help reduce your upfront costs:

Fannie Mae HomeReady: 3% down with income limits
Freddie Mac Home Possible: 3% down for low to moderate income
State and local programs: Many offer down payment assistance, grants, or tax credits
Good Neighbor Next Door: 50% off home price for teachers, firefighters, EMTs, and police

Check with your state housing finance authority for local programs.

Making Your Decision

Still not sure which loan is right for you? Use our FHA vs Conventional Loan Comparison Calculator to see exact numbers for your situation. Then read our detailed guides on FHA loan basics and conventional loan requirements to make the most informed decision possible.