The Best Mortgages for First-Time Homebuyers

Growing up in the United States means that you likely view homeownership not only as a great investment opportunity, but also as an indicator of a successful life.  Owning a home not only introduces a level of stability into your life, but it is also an outstanding investment opportunity that permits ordinary Americans to build generational wealth and memories.  It has never been a better time to be a first-time home buyer in America.  Along with brand new government assistance programs, private lenders are more receptive than ever before to working with first-time buyers who have little or nothing to put down on their new homes.


What is the best mortgage product for first-time buyers?  Which programs can help people get into their first residence with little or no down payments, flexible underwriting, and terms that won’t break the bank?  These four programs are perfect for first-time buyers:

  • HomeReady
  • FHA
  • 80/10/10 Back-to-Back loans
  • USDA (Rural Housing)


Fannie Mae’s HomeReady mortgage program is a perfect conventional mortgage offering that does not rely on any government guarantees.  Mortgages offered under the HomeReady program are directed at borrowers whose income satisfies various income and eligibility requirements.  Interested in buying a property in an area defined as lower-income by recent U.S. Census data?  If so, the HomeReady program totally waives income limits and is open to almost anyone.  For borrowers subject to income limits, borrower income cannot exceed more than the “Average Median Income” (AMI) of the area surrounding the home they would like to buy.

Eligibility can be verified by using the free, no-obligation HomeReady Income Eligibility Lookup tool.

What places HomeReady apart from other competing programs is that it is open to seasoned home buyers.  First-time home purchasers are required to finish a program sponsored homeowner education program before funding will be offered for their first-time purchase.  This educational program helps potential home owners better plan for and deal with the challenges associated with first-time home ownership.  If you’ve owned a property in the past, you are not required to attend this class.

Considering HomeReady?  Here are some great advantages:

  • Mortgage Insurance Premium (MIP) rates are discounted. Unlike FHA loans, a HomeReady loan also allows borrowers to cancel MIP once the owner has enough equity in the property.  If you plan on staying in your house long term or want to make bigger-than-planned payments, this feature can help you lock in record low rates on the house you want.
  • Rock Bottom Minimum Down Payments. 20% down payments are no longer required to get fairly priced mortgages.  HomeReady loans require home buyers to put just 3% down on their home.
  • Generous underwriting terms permit lenders to consider income from household members who will not be listed on the loan. If your significant other or adult child lives with you and does not wish to co-sign, their income can still be considered for HomeReady qualification purposes.
  • Closing costs and down payments can be borrowed or gifted from listed, approved sources without complicating the terms of the mortgage.
  • Manufactured houses qualify for funding with as little as 5% down at the time of purchase. Those looking for manufactured houses should seriously consider HomeReady due to its support of these loans.

Aside from completing an informative homebuyer education course, there are no disadvantages to the HomeReady mortgage program.  If you’re looking for the best rates available, also consider applying for Home Possible, a Freddie Mac program that sports similar requirements and terms.


For decades the FHA supported new and established home buyers with access to affordable mortgages.  What are some advantages to a FHA loan?

  • FHA accepts borrowers with FICO scores as low as 580 to participate in their 3.5% down payment loan programs. While you need to show that you can responsibly repay the loan, FHA terms are designed to get people into homes that they can afford.
  • Minimum down payment sums as little as 3.5% can be borrowed or gifted from any approved source without jeopardizing the loan or its underwriting.
  • FHA loans can be assumed by friends, family members, and future home purchasers. This is an enormous advantage, as you can lock in historically low interest rates and transfer payments to a buyer or family member when you’re ready to move.
  • FHA loans support remodeling expenses, including expenses to increase energy efficiency. The cost of these remodeling efforts can be bundled into the original loan.
  • FHA loans are friendly to those with high debt-to-income (DTI) ratios. FHA loans will be offered to people with DTI ratios as high as 50%.

While FHA loans have some massive advantages for first-time buyers and buyers looking to put little money down on their home purchase, the loans do carry some draw backs and are typically not the most cost competitive offerings on the market.  Here are some things to think about before buying a house with a FHA loan:

  • FHA loans have rigid maximums. If you are looking at expensive properties, a FHA loan may not be for you.
  • FHA mortgages require borrowers to pay annual insurance fees that equal 0.85% of the borrowed amount. This insurance fee applies to most borrowers who opt for the FHA loans and this fee can be more expensive than PMI.  Unlike PMI, mortgage insurance on a FHA loan cannot be canceled and remains active for the life of the loan.
  • Borrowers are required to pay a one-time mortgage insurance premium that may be included in the loan balance. This premium is 1.75% of the total loan amount.
  • Many condo-projects are not FHA approved.

Back-to-Back Loans

These loans are not unique mortgage programs.  Instead, back-to-back loans use a combination of loans to fund the purchase price of a home.  Home buyers using this strategy avoid PMI or MIP by tying an 80% primary mortgage with a “purchase money” secondary mortgage.  This second mortgage generally covers 10% of the home’s purchase price, although certain lenders may allow for it to cover significantly more.

The most common back-to-back mortgage requires a borrower to take out an 80% down payment mortgage, a 10% second purchase money mortgage, and put 10% down.  Don’t have 10% to put down?  Some lenders are allowing borrowers to put down as little as 5% when pursuing back-to-back loan options.

The only major downside to these loans is that the second mortgage tends to be offered at a higher interest rate than what you could find on a single mortgage offering.  This is due to the risks the borrower faces when offering a second mortgage.  If you need to use a large second mortgage to make your back-to-back deal work out, it may make sense to pursue alternative sources of funding.\


The USDA (Rural Housing) mortgage is special because it offers funding only to properties placed in specified rural areas.  Buyers of properties in some suburban areas, small towns, and commuter areas outside of large cities can have success in applying for USDA mortgages.  If you’re considering a USDA mortgage, start by checking your eligibility with the USDA’s property lookup tool.

Like FHA loans, USDA loans apply strict eligibility guidelines that consider a borrower’s income.  To participate in the USDA loan guaranty program, a borrower must show that their income does not exceed 115% of the property area’s median income.  Borrowers with income up to 80% of the area’s median income can qualify to participate in the USDA Direct program.  This program permits the USDA to lend borrowers the money and subsidized interest rates.  How low are these rates?  Current offerings are down to 1%.  If that isn’t worth considering, what is!

USDA Advantages:

  • No limits on the size of the loan.
  • $0 down payment permitted.
  • Restoration and home energy efficiency project costs can be included in the price of the loan.
  • Fees from lenders, escrow agencies, and other closing costs can be included in the loan whenever the property’s appraised value exceeds the sales price.
  • Like FHA loans, USDA loans may be assumed.
  • As of October 2016, the initial fee charged on USDA loans was dropped from 2.75% to just 1%. Mortgage insurance rates dropped from an annual fee of 0.5% to 0.35%.

Like FHA loans, the biggest disadvantage to a USDA loan is that the mortgage insurance stays for the life of the loan.  The only way to escape the mortgage insurance is to refinance the property.

Time to Decide

Whether you’re considering a back-to-back financing option, a FHA guaranteed loan, or are pursuing other funding options, start your search by speaking with a loan officer and mortgage broker.  A qualified professional can help you compare loan offerings and ensure that you get the house you want without jeopardizing the future you deserve.



About the author

Matt Heitmann

Realtor®, Real Estate Agent

Thanks so much for stopping by! Whether you are selling the home you take pride in, purchasing your first home, or relocating to Wisconsin, I'm looking forward to showing you the great homes available! I want you to feel sure that the home you purchase is that special one, and just right for you! Go Badgers!!

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