Buying your first home usually comes down to two questions: which loan fits my situation, and how much cash I actually need upfront. Here’s how to answer both, plus what the process looks like from pre-approval to closing.
Which Loan Type Fits a First-Time Buyer?
| Loan Type | Minimum Down Payment | Minimum Credit Score | Mortgage Insurance |
|---|---|---|---|
| FHA | 3.5% | 580 | Required, usually for the life of the loan |
| Conventional (HomeReady / Home Possible) | 3% | 620-660 | Required, but removable once you reach 20% equity |
| VA | 0% | No official minimum, most lenders want 580-620 | None |
| USDA | 0% | 640 for streamlined processing | Guarantee fee instead of traditional mortgage insurance |
FHA: Best if your credit score is under 620 or you’re carrying more debt than conventional guidelines allow. See our FHA loan rates.
Conventional 3% Down: Best if your credit score is 620 or higher and you want mortgage insurance you can eventually drop.
VA: Best if you’re an eligible veteran or service member. No down payment and no mortgage insurance, period. See our VA loan rates.
USDA: Best if you’re buying in an eligible rural or suburban area and meet the income limits for your county.
MFP Tip: Credit score alone doesn’t decide this. Run the numbers on both FHA and conventional 3% down before choosing, since the mortgage insurance cost difference can outweigh a slightly higher conventional rate.
How Much House Can I Afford?
Most lenders use two ratios to figure out your maximum loan: your monthly housing payment shouldn’t exceed 28% to 31% of your gross monthly income, and your total monthly debt, housing included, shouldn’t exceed 43% to 45%.
Example: If you make $6,000 a month gross income:
- Maximum housing payment at 31%: $1,860
- Minus estimated taxes, insurance, and mortgage insurance: About $500
- Available for principal and interest: $1,360
- Approximate loan amount at 7% rate: About $200,000
- Purchase price with 3.5% down: About $207,000
You can also run your own numbers with our home affordability calculator.
Closing Costs Breakdown
Closing costs typically run 2% to 5% of your loan amount, on top of your down payment. Here’s what’s usually included:
- Loan origination fee: 0.5% to 1% of the loan amount
- Appraisal fee: $400 to $700
- Title insurance and search: $500 to $1,500
- Credit report fee: $30 to $50
- Recording fees: $50 to $250, varies by county
- Prepaid items: Homeowners insurance and property tax reserves, often 2 to 6 months upfront
- Home inspection: $300 to $600, paid before closing
MFP Tip: Ask your lender for a Loan Estimate early in the process. It breaks out every closing cost line item, and some down payment assistance programs will cover part of this too.
Steps to Buying Your First Home
1. Check Your Credit and Budget: Pull your credit report and figure out your realistic monthly budget before you start shopping for a loan.
2. Get Pre-Approved: A pre-approval tells you your actual price range and shows sellers you’re a serious buyer.
3. Research Down Payment Assistance: Check what’s available in your state and city before you start house hunting, since some programs affect which lender you can use.
4. Find a Real Estate Agent: A buyer’s agent typically doesn’t cost you anything directly, the seller usually covers commission.
5. Shop for a Home and Make an Offer: Stay within your pre-approval range, and leave room for closing costs and moving expenses.
6. Get a Home Inspection: This happens after your offer is accepted, and gives you a chance to negotiate repairs or walk away.
7. Final Underwriting and Closing: Your lender verifies your documents one more time, then you sign and get your keys.
See our full mortgage documents checklist so you know exactly what to gather at each step.
How Down Payment Assistance Works
Down payment assistance programs are run by state, county, and city housing agencies, not by your mortgage lender. They generally come in one of these forms:
- Grants: Money you don’t repay
- Forgivable second mortgages: A second loan that’s forgiven if you stay in the home a set number of years, often 5 to 15
- Deferred second mortgages: A second loan with no monthly payment, repaid only when you sell, refinance, or pay off your first mortgage
- Repayable second mortgages: A second loan you repay monthly alongside your first mortgage
Most programs require you to complete a homebuyer education course, usually 1 to 3 hours, and to use an approved lender. Many can be combined with FHA or VA loans.
MFP Tip: We’ve mapped over 550 down payment assistance programs across every state. See our full down payment assistance guide to find programs in your state, county, and city.
Pros and Cons of Low Down Payment Programs
Benefits
Buy Sooner: You don’t need to save 20% down, which can take years longer in most markets.
Keep Cash Reserves: Putting down less means keeping more savings available for moving costs, repairs, or emergencies.
Combine With Assistance: Low down payment programs are usually the ones eligible for down payment assistance funds.
Flexible Qualification: FHA and conventional low down payment programs both accept gift funds and non-traditional credit histories.
Cons
Mortgage Insurance Cost: A smaller down payment usually means a monthly mortgage insurance charge on top of principal and interest.
Less Equity Upfront: You start with a smaller ownership stake, which matters more if home values dip.
Higher Total Loan Amount: Financing more of the purchase price means more interest paid over the life of the loan.
Common First-Time Buyer Mistakes
House Hunting Before Pre-Approval: Falling for a home outside your actual budget wastes time and sets unrealistic expectations.
Forgetting Closing Costs: Budgeting only for the down payment and getting surprised by another 2% to 5% due at closing.
Maxing Out the Pre-Approval Amount: Just because a lender approves you for a certain amount doesn’t mean that payment fits comfortably in your budget.
Making Big Purchases Before Closing: A new car loan or credit card balance between pre-approval and closing can change your debt-to-income ratio enough to delay or derail your loan.
Skipping the Home Inspection: Waiving inspection to make an offer more competitive can mean inheriting costly repairs you didn’t see coming.
First-Time Buyer Documents You’ll Need
The document list is largely the same as any mortgage, with one addition: proof of your first-time buyer status if you’re applying for a program that requires it, along with a completion certificate from your homebuyer education course. See our full mortgage documents checklist for everything else you’ll need.
FAQs: First-Time Homebuyers
What’s the difference between FHA and conventional first-time buyer programs?
FHA accepts lower credit scores and higher debt-to-income ratios, but the mortgage insurance usually stays for the life of the loan. Conventional programs like HomeReady and Home Possible require a slightly higher credit score, but the mortgage insurance can be removed once you reach 20% equity.
Do I have to be a first-time buyer to qualify for down payment assistance?
Not always. Most programs are aimed at first-time buyers, but some allow repeat buyers too. HUD generally defines a first-time buyer as someone who hasn’t owned a home in the past 3 years.
Can I combine a low down payment loan with down payment assistance?
Yes, this is one of the most common combinations. An FHA loan at 3.5% down paired with a down payment assistance grant or second mortgage can significantly lower what you need in cash at closing.
Can down payment assistance also cover closing costs?
It depends on the specific program. Some allow the funds to be used for closing costs in addition to the down payment, others restrict the money to the down payment only. Check your program’s terms directly.
How much do I actually need saved to buy my first home?
Example: On a $300,000 home with an FHA loan and down payment assistance covering the down payment:
- Down payment (3.5%): $10,500, potentially covered by assistance
- Closing costs (2-5%): $6,000 to $15,000, may be partially covered depending on the program
- Cash reserves some lenders require: 1 to 2 months of mortgage payments
MFP Tip: Talk to your lender about down payment assistance before you start shopping for a home, not after. Some programs affect which lenders you can use, so it’s easier to plan around that upfront.