Posted on 11/30/2015

5 Home Loan Options for First-Time Homebuyers

3 minute read

From student loan debt, saving for a down payment and building mortgage-ready credit, it’s clear first-time homebuyers face different hurdles when it comes to buying a home. Here are some of the best options for home financing when preparing to buy your first home.


The FHA is the largest insurer on mortgages in the world and typically one of the easiest types of loans to acquire. Though repeat homebuyers can finance with an FHA loan, it is commonly referred to as a “first-time homebuyer loan”, because of the many ways it benefits first-time buyers, including:

  • Flexible credit guidelines
  • Small down payment requirement of 3.5%, which can be gifted from a family member or a grant from a state or local government down payment assistance program
  • Across-the-board interest rate often lower than market rates
  • Lowered mortgage insurance premiums

Fannie Mae HomeReady Mortgage

The goals of this Fannie Mae Program is to provide a responsible and affordable home financing option to qualified low-income borrowers. Benefits include:

  • Low down payment of 3%, can come from gifts, grants and Community Seconds, with no minimum personal funds required.
  • Better than or qual to Fannie Mae’s standard loan pricing (risk-based pricing waiver for LTV ratios > 80% with a credit score > 680).
  • Reduced mortgage insurance and cancellable once borrower’s equity reaches 20%.

IHDA’s 1stHomeIllinois

This program is available to Illinois homebuyers in Boone, Cook, DeKalb, Fulton, Kane, Marion, McHenry, St. Clair, Will or Winnebago counties. 1stHomeIllinois is tailored for first-time homebuyers, veterans, or anyone who hasn’t owned a home in the last three years and offers:

  • $7,500 cash assistance for down payment and/or closing costs
  • 30-year, fixed-rate mortgage with a competitive interest rate
  • Choice of FHA, VA, USDA or Conventional loan type
  • Income limits up to $106,000 for a household of three or more

Funds are limited for this IHDA program.

IHDA’s @HomeIllinois

The @HomeIllinois program allows homebuyers to purchase a home for as little as $1,000 down. Though not exclusive to first-time homebuyers, @HomeIllinois allows homebuyers to choose loan options personalized to their individual financing needs. Interest rates are determined based on the options chosen by the borrower, which include:

  • $5,000 down payment or closing cost assistance
  • Lender-paid mortgage insurance
  • Choice of FHA, VA, USDA or Conventional loan type
  • Federal tax credit certificate

Credit requirements, income and purchase price limits apply.

USDA Rural Development Loan

The United States Department of Agriculture partners with approved local lenders, like Compass Mortgage, to extend 100% financing to eligible borrowers. The USDA Rural Development Guaranteed Housing Loan, also known as a USDA or Rural Development Loan, was designed to help individuals and families achieve homeownership in rural areas across the United States by providing:

  • No down payment requirements
  • Lower-than-market interest rates
  • Ability to finance upfront private mortgage insurance (PMI) into the loan
  • Low monthly PMI rate
  • Flexible credit guidelines and some non-traditional credit histories acceptable for borrowers with limited credit history

Credit score, maximum loan amounts, debt-to-income ratios, income, and location restrictions to apply.

The above list of loan types above is not extensive, but includes some of the best options for first-time homebuyers who may be struggling to save for a down payment or build their credit score.

The best way to determine your best option for home financing is to meet with a mortgage banker for a pre-approval or loan commitment.  For more information regarding the homebuying and home financing process, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.