What’s the Best Type of Home Loan for a First-Time Buyer?

The 2024 First-Time Home Buyer Handbook

The 30-year fixed-rate conventional loan is currently the most popular mortgage option among first-time home buyers in the U.S. But it might not be the best option for you. Read on to learn how to choose the right type of mortgage loan

First-time home buyers typically have a lot of questions about their financing options. We know this from receiving hundreds of such questions every year.

But when it comes to frequency, one question always rises to the top:

What’s the Best Loan Type for a First-Time Buyer?

Statistically speaking, the 30-year fixed-rate conventional loan is currently the most popular type of mortgage used by first-time home buyers in the U.S.

But that doesn’t mean it’s the best mortgage option for all first-time buyers. It just means it was the most commonly used financing option among that specific group during a particular period.

A graphic showing the most popular loan options among first-time buyers

(In previous years, the 30-year FHA loan ranked #1 among first-time buyers.)

The truth is, there’s not just one type of mortgage loan that’s “best” for all first-time home buyers. Any website that claims otherwise is misleading its readers.

Individual borrowers have different financial circumstances, priorities and goals. That’s why there are so many mortgage options available these days.

Consider the following examples:

  • Some first-time buyers have plenty of money for a down payment and can therefore avoid paying mortgage insurance. Other borrowers lack such funds and need to use a low-down-payment option with mortgage insurance attached.
  • Some first-time home buyers currently serve in the military and might qualify for a VA loan with no down payment. Non-military borrowers, on the other hand, lack this option and generally have to choose between FHA or conventional mortgages.
  • Some first-time buyers only plan to live in their “starter homes” for a few years, and might benefit from using an ARM loan with a low initial interest rate. Others plan to put down roots and stay in their first house for many years, making a fixed-rate mortgage the better choice.
  • Some borrowers have had credit-related issues in the past, which could make it harder to qualify for a conventional loan. Others might have excellent credit that can open up a broader range of mortgage options and terms.

Bottom line: When buying your first home, you need to research and understand all of the different mortgage options available to you, in order to find the best match.

Part 1: Conventional vs. Government-Backed Loans

When buying your first home, you’ll have an option to choose between a conventional mortgage loan and a government-backed mortgage program.

The word “conventional” means ordinary or normal. And this applies to home loans as well.

A conventional loan is a “regular” or normal mortgage loan that is not insured or guaranteed by the government. This label distinguishes conventional loans from the government-backed mortgage programs described below.

Conventional loans are the most popular option for first-time and repeat home buyers alike. FHA loans come in second.

On the other hand, we have government-backed mortgage programs. With these programs, mortgage lenders receive a government guarantee or insurance policy that provides additional protection from borrower default.

The 2024 First-Time Home Buyer Handbook

Here are the three main government-backed loan programs:

  • FHA loans: Backed by the Federal Housing Administration, these are popular with first-time home buyers due to their low 3.5% down payment requirement and more lenient credit score standards compared to traditional loans.
  • VA loans: Offered by the Department of Veterans Affairs, these are specifically for veterans and active-duty military personnel, often with no down payment required. To qualify, you need to meet minimum service time qualifications.
  • USDA loans: Guaranteed by the Department of Agriculture, these loans are targeted towards low- to moderate-income families purchasing homes in eligible rural or suburban areas. They boast zero down payment options, but come with income restrictions and location requirements.

FHA loans are the most popular type of government-backed mortgage, followed by the VA and USDA loan programs. FHA loans usually account for around 18% to 20% of total mortgage volume in the U.S. (with conventional loans making up the majority).

FHA loans are not limited to first-time buyers. But they’re very popular with this group. According to a 2023 report from the Department of Housing and Urban Development (HUD), 82% of FHA loans generated that year went to first-time buyers in particular.

Part 2: Adjustable vs. Fixed-Rate Home Loans

First-time home buyers can also choose between an adjustable-rate mortgage (ARM) loan and a fixed-rate mortgage loan.

Here are the key differences between them:

A fixed-rate mortgage (FRM) loan has an interest rate that remains constant for the entire term of the loan, typically 15 or 30 years. Fixed-rate mortgages are popular among those who prefer steady payments. You might pay a higher interest rate for a fixed mortgage, compared to the lower initial rate on an ARM loan. But you’ll also enjoy more predictable monthly payments over the long term.

An adjustable-rate mortgage (ARM) loan has an interest rate that can change periodically, usually after an initial fixed-rate period. The initial rate for an ARM is often lower than that of fixed mortgage. This makes it attractive to first-time home buyers seeking lower initial payments. But after the initial period, the interest rate can adjust annually based on market conditions, causing changes in monthly payment amount.

Most home buyers use fixed-rate loans because they offer more stability and predictability over the long-term. But some first-time buyers could benefit from using an ARM loan to secure a lower rate during the first few years of homeownership.

The following table will help you decide which option might be right for you.

FeatureFixed-Rate MortgageAdjustable-Rate Mortgage
Interest RateStays the same throughout the loan termStarts lower, then adjusts periodically based on market rates
Monthly PaymentConsistent throughout the loan termCan fluctuate after the introductory period
PredictabilityHighly predictable paymentsPayments can become more expensive if interest rates rise
RiskLower risk of payment increasesHigher risk of payment increases
BenefitsPeace of mind with stable payments, easier to budgetLower initial payments can free up cash flow
DrawbacksLess flexibility if interest rates fall, may have a higher initial interest ratePotential for significant payment increases, more complex loan structure

Part 3: Jumbo vs. Conforming Loans

First-time home buyers should also understand the differences between conforming and “jumbo” loans.

A conforming home loan is one that meets (or “conforms” to) certain guidelines set forth by Freddie Mac and Fannie Mae. Freddie and Fannie are the two government-sponsored enterprises (GSEs) that purchase mortgages, bundle them, and sell them to investors.

  • When a loan meets the maximum size limits and other criteria used by the GSEs, it is referred to as a conforming loan.
  • If it exceeds the maximum conforming size limits used by Fannie and Freddie, it is considered to be a “jumbo” loan.

Conforming size limits vary by county because they are based on median home prices. In 2024, the conforming loan limit for most U.S. counties is $766,550. In high-cost real estate markets like San Francisco and NYC, the limit is set at $1,148,825.

Use this map to find the limits for your county

Most first-time home buyers in the U.S. use conforming loans when buying a house. But in more expensive real estate markets, like the San Francisco and Washington, D.C. metro areas, a first-time buyer might be more likely to use a jumbo loan to cover their purchase.

Because of the larger size and higher risk level, jumbo loans usually require larger down payments and higher credit scores. So not just anyone can qualify for them. You have to be a solid borrower, with above-average income and very good credit.

Down Payment and Closing Cost Considerations

When choosing a type of mortgage loan, it also helps to establish your upfront budget. And by “upfront,” we’re talking about the amount of money you need to cover your down payment and closing costs, both of which are due when you close on the loan.

Down Payments

The down payment is the initial payment made by a buyer toward the purchase of a home, typically expressed as a percentage of the total purchase price. It represents the buyer’s investment in the property and is paid upfront at the time of closing.

Infographic with three mortgage considerations for first-time buyers

The minimum down payment required for a mortgage loan can vary based on the type and size of the loan, among other factors.

  • As mentioned above, FHA loans require borrowers to put down at least 3.5% of the purchase price or appraised home value.
  • Conventional loans allow for a down payment as low as 3% in some cases, though some borrowers might have to put down 5% or more depending on their credit profile and loan size.
  • First-time home buyers purchasing a more expensive home with a “jumbo loan” might need to make a down payment as high as 20%.
  • And then we have the VA loan program, which allows eligible military members and veterans to finance 100% of the purchase with no down payment at all.

The down payment requirements for FHA loans are standard across all lenders. That’s because HUD mandates a minimum down payment of 3.5% for all home buyers who use this program.

But when it comes to conventional mortgage loans (that are not backed by the government), minimum down payment requirements can vary from one lender to the next.

Closing Costs

The term “closing costs” refers to the fees and expenses associated with finalizing a real estate transaction. For home buyers, these costs can include loan origination fees, appraisal fees, title insurance, attorney fees, government recording fees and taxes.

For a first-time home buyer, average closing costs can average anywhere from 2% to 5% of the purchase price. The median home value in the U.S. is currently around $350,000, which means that typical closing costs could range from $7,000 to $17,500.

As you can see, closing costs and down payments combined can add up to a substantial amount of money, all of which has to be paid upfront. This is why a lot of first-time home buyers choose mortgage loan options that allow for a low down payment, including:

  • An FHA loan with a 3.5% down payment (plus mortgage insurance)
  • A conventional loan with a 3% down payment (plus mortgage insurance)

The key to all of these choices is awareness. As a first-time buyer, you have to understand the mortgage financing options that are available to you, including their pros and cons.

7 Things to Take Away From This Guide

You are your best advocate during the mortgage loan process, and only you know what’s best for you.

A mortgage broker or loan officer can recommend a certain loan product based on your credit and financial profile. But it’s your job, as a home buyer, to determine your financing goals and learn about the loan options that might be you achieve them.

So, let’s review the most important points covered in this guide:

  1. There is no single mortgage loan that’s best for all first-time buyers.
  2. Many first-time buyers choose the 30-year fixed-rate conventional loan.
  3. The 30-year fixed-rate FHA loan runs a close second, in popularity.
  4. Military members often use VA loans to avoid making a down payment.
  5. Borrowers with shaky credit often rely on the FHA loan program.
  6. Every financing option has pros and cons associated with it.
  7. Ultimately, your choice will depend on your personal priorities and needs.
Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author