Buying your first home is exciting but also overwhelming—especially when it comes to choosing the right mortgage. This guide explores the 6 best loan options for first-time homebuyers in 2025, including FHA, Conventional 97, VA, USDA, HomeReady/Home Possible, and assistance programs. Learn about income requirements, down payments, pros/cons, and real-life buyer stories to help you make a confident decision.
For most Americans, buying a home isn’t just about shelter—it’s about building a future. The type of loan you choose impacts not only your monthly payments but also your long-term financial health.
Whether you’re a 28-year-old purchasing a starter condo or a veteran buying a family home with no down payment, the right mortgage opens the door to sustainable homeownership.
In this article, we’ll explore the best loans for first-time buyers, backed by examples, statistics, and expert-backed insights.
Before diving into loans, it’s essential to understand the current homebuying climate.
- Affordability is the #1 barrier. Even though inflation-adjusted prices dipped slightly, higher interest rates have kept monthly payments high (NerdWallet).
- Who is buying? The median first-time buyer is now 35 years old, up from 29 in 1981.
- Down payments: First-time buyers put down an average of 6% (~$8,220), while repeat buyers average 17% (Resimpli).
- Income: Typical first-time buyers have a household income of ~$95,900.
- Generational shift: Millennials and Gen Z made up 58% of agency-backed purchase loans in Q1 2025 (BankSouth Mortgage).
The Federal Housing Administration (FHA) loan remains one of the most popular for first-time buyers.
Key Highlights:
- Minimum down payment: 3.5% (if credit ≥580)
- Credit score: Can go as low as 500 with 10% down
- Government-backed insurance protects lenders
Pros: Easier approval, lower credit barriers, smaller down payments.
Cons: You must pay Mortgage Insurance Premium (MIP) both upfront and monthly.
Real Example: Emma, a 28-year-old from Ohio, had a 560 credit score and $10,000 saved. With FHA, she bought a starter home and refinanced three years later to remove the MIP.
The Conventional 97 loan is perfect for buyers with good credit but not much savings.
Key Highlights:
- Down payment: as little as 3%
- Credit requirement: ≥620
- Private Mortgage Insurance (PMI) required but removable at 20% equity
Pros: PMI eventually goes away, flexible terms.
Cons: Higher credit needed compared to FHA.
Real Example: Alex and Jordan, newlyweds with 700+ credit, used Conventional 97 to buy a $280,000 condo with just $8,400 down. Their PMI dropped after three years once they reached 20% equity.
For eligible military members and veterans, VA loans are the gold standard.
Key Highlights:
- 0% down payment required
- No mortgage insurance
- Competitive interest rates
Pros: Incredible savings, flexible qualification, no PMI.
Cons: Only for qualified veterans, active-duty service members, or certain spouses.
Real Example: Luis, a retired Navy veteran, bought his first home without putting a dollar down. His lower monthly payments gave him space to invest in home improvements.
Backed by the U.S. Department of Agriculture, USDA loans are designed for rural homebuyers.
Key Highlights:
- 0% down payment required
- Must buy in eligible rural/suburban areas
- Income limits apply
Pros: No down payment, affordable mortgage insurance.
Cons: Restricted to certain locations and income levels.
Real Example: Chloe, who relocated from New York City to a small town in Pennsylvania, used a USDA loan. She saved her down payment funds for new furniture and renovations.
These are Fannie Mae and Freddie Mac programs designed for moderate-income buyers.
Key Highlights:
- As low as 3% down
- Flexible income guidelines, especially for multi-generational households
- Reduced PMI rates
Pros: Lower costs, inclusive rules.
Cons: Restricted to program eligibility and income caps.
Real Example: Mira and her parents combined their incomes to buy a home under HomeReady. The 3% down and reduced PMI made ownership achievable without financial strain.
State and local governments, nonprofits, and even employers often provide down payment or closing cost assistance.
Key Highlights:
- Can be grants, forgivable loans, or deferred loans
- Some programs require you to live in the home for a certain number of years
Pros: Reduces upfront burden, can mean the difference between renting and owning.
Cons: Eligibility rules vary.
Real Example: Chris, from Ohio, used a $5,000 state DPA program. It covered closing costs and let him submit a stronger offer in a competitive market.
| Loan Type | Down Payment | Credit Score | Pros | Cons |
|---|---|---|---|---|
| FHA | 3.5–10% | ≥500–580 | Flexible, easy approval | MIP required |
| Conventional 97 | 3% | ≥620 | No permanent PMI | Higher credit needed |
| VA | 0% | Flexible | No MIP, low rate | Restricted eligibility |
| USDA | 0% | Moderate | No down, rural-focused | Location/income limits |
| HomeReady/Possible | 3% | Moderate | Inclusive, lower PMI | Income restrictions apply |
| Assistance Programs | Varies | Varies | Grants lower upfront cost | Limited availability |
The required income varies by home price, mortgage rate, and debt-to-income (DTI) ratio. Lenders follow the 28/36 rule:
- No more than 28% of your gross income on housing.
- No more than 36% on all debt combined.
Example: On a $300,000 house at 6.5% with 5% down, your monthly mortgage is about $2,200. To qualify, you’d need a gross monthly income of ~$7,850 (≈$94,000 annually).
Takeaway: Income requirements differ by state, loan program, and interest rate. Use a pre-approval or affordability calculator for personalized numbers.
Many first-time buyers believe they need 20% down, but that’s a myth.
- FHA Loan: 3.5% minimum
- Conventional Loan: 3% minimum (Conventional 97)
- VA/USDA: 0% down
- Traditional Rule of Thumb: 20% to avoid PMI
Average in 2025: First-time buyers put down 6% (~$8,220).
Key Takeaway: Don’t wait years to save 20%. Programs like FHA, VA, USDA, and DPAs make homeownership possible with much less upfront.
Yes, it’s absolutely possible to buy a house in the U.S. with no money down, but it depends on your eligibility and the loan program you choose. The two main zero-down mortgage options are the VA Loan (for military members, veterans, and eligible spouses) and the USDA Loan (for rural and some suburban buyers).
- VA Loan: Offers 0% down, no private mortgage insurance (PMI), and lower interest rates. The savings can be enormous over the life of the loan. For example, on a $250,000 home, avoiding a 5% down payment means you keep $12,500 in your pocket.
- USDA Loan: Available for properties in USDA-approved areas, these loans also require no down payment. They do have income limits, but they allow moderate-income families to purchase in rural or suburban neighborhoods.
Key takeaway: If you don’t have savings for a down payment but meet the qualifications, VA or USDA can help you start building equity without years of waiting.
The FHA loan is widely considered the easiest option for first-time buyers, especially if your credit isn’t perfect or you don’t have a large down payment saved.
- Credit flexibility: FHA requires a minimum score of 580 for just 3.5% down, or 500 with 10% down.
- Debt-to-income ratio (DTI): FHA allows higher DTIs than most conventional loans, making it easier if you have student loans or other debts.
- Gifted funds allowed: FHA permits gifts from family to cover down payments.
Real-life example: Emma, a 28-year-old in Ohio with a 560 credit score, qualified for an FHA loan with 10% down, while she would have been denied a conventional loan.
Key takeaway: If you have low-to-moderate credit or income, FHA is usually the easiest path to homeownership.
This depends on your budget, loan type, and financial goals. While many people think they need 20% down, that’s a myth.
- FHA Loan: 3.5% minimum.
- Conventional Loan: 3% minimum (through Conventional 97).
- VA and USDA Loans: 0% down for qualified borrowers.
- Traditional 20% Rule: Recommended if you want to avoid PMI (Private Mortgage Insurance).
Average in 2025: First-time homebuyers put down about 6% (~$8,220).
Example: On a $300,000 home:
- 3% down = $9,000
- 20% down = $60,000
Key takeaway: Don’t delay homeownership just to save 20%. Many successful buyers start with smaller down payments and refinance later once equity builds.
Private Mortgage Insurance (PMI) is a fee lenders require when you put down less than 20% on a conventional loan. It protects the lender—not you—in case of default.
- FHA Loans: Require Mortgage Insurance Premium (MIP), which stays for the life of the loan unless you refinance.
- Conventional Loans: PMI can be canceled once you reach 20% equity (through payments or home value increases).
Example: Alex and Jordan, who bought with a 3% down payment, paid PMI for three years. When their home value rose by 20%, they requested PMI removal, saving $180 monthly.
Key takeaway: PMI isn’t permanent with conventional loans—plan to refinance or track your home’s equity to cancel it.
Yes, some programs have income caps to target moderate-income buyers:
- USDA Loans: Income limits vary by county and household size, usually around 115% of the area’s median income.
- HomeReady/Home Possible: Cap household income at 80% of the Area Median Income (AMI).
- FHA and VA Loans: Generally do not have income limits, making them more accessible.
Example: A family earning $90,000 in a county where the USDA limit is $85,000 would not qualify, but they could still apply for FHA or conventional loans.
Key takeaway: Always check local income thresholds before applying—you may qualify for programs you didn’t know about.
Using a mortgage broker often gives you access to more options and potentially better rates, especially if your financial profile isn’t standard.
- Broker Pros:
- Access to multiple lenders
- Personalized advice based on your credit, income, and goals
- May secure better rates or approval for non-traditional borrowers
- Bank Pros:
- Direct relationship with the lender
- Potential discounts if you have accounts with them
Key takeaway: If you want flexibility and multiple options, use a broker. If you want a single, straightforward process, go directly to your bank.
Down Payment Assistance Programs (DPAs) are available at the state, county, and city level. These can be grants, forgivable loans, or deferred loans.
- Grants: Free money you don’t repay (common for first-time buyers).
- Forgivable Loans: No repayment if you live in the home for a set number of years.
- Deferred Loans: Repayment is delayed until you sell or refinance.
Example: Chris from Ohio received a $5,000 grant for closing costs, which lowered his out-of-pocket expenses dramatically.
Key takeaway: Always research your local housing authority—there could be thousands in free assistance waiting for you.
The most common guideline is the 28/36 Rule:
- Spend no more than 28% of gross monthly income on housing (mortgage, taxes, insurance).
- Spend no more than 36% on total debt (housing + credit cards, car loans, etc.).
Example: If you earn $6,000/month, you should spend no more than $1,680 on housing and $2,160 total on debt.
Key takeaway: Use this formula, but also consider personal factors like childcare, commuting costs, or retirement savings.
Upfront costs include:
- Down payment: Average is 6% (~$8,220).
- Closing costs: Usually 3–6% of the loan amount.
- Other expenses: Appraisals, inspections, moving, and emergency funds.
Example: On a $300,000 home, expect to pay:
- $9,000 down payment (3%)
- $9,000 in closing costs (3%)
- Total upfront: ~$18,000
Key takeaway: Don’t just save for the down payment—budget for closing costs and move-in expenses too.
Yes, AI tools like ChatGPT, mortgage calculators, and affordability bots can provide instant guidance. They can estimate payments, suggest loan types, and answer common questions.
However, AI tools should not replace licensed mortgage professionals. An AI can’t analyze your credit history or negotiate with lenders.
Example: A MarketWatch study found that 39% of buyers used AI to explore mortgage options, but final decisions always came from human loan officers.
Choosing your first mortgage isn’t just about math—it’s about starting a new chapter. With the right loan, your dream of homeownership becomes affordable, realistic, and sustainable.
Remember: the best loan is the one that fits your life—not just your lender’s guidelines.