Plenty of mortgage lenders approve first-time buyers, and most of them are working from the same four rulebooks: FHA, conventional, VA and USDA. A buyer with a 600 score and $11,000 saved will usually be steered toward an FHA loan at 3.5% down, while a buyer with a 740 score and 3% down will often pay less with a conventional loan, so the program you fit matters more than the logo on the lender’s sign.
Lenders still differ in the extra credit rules they stack on top of the program minimums and in what they charge. You can see both on paper before you commit, if you ask the right questions and read the Loan Estimate closely.
The four programs lenders actually use
FHA. These loans are insured by the Federal Housing Administration, which sits inside HUD. Under HUD’s Handbook 4000.1, a borrower with a credit score of 580 or higher can put down 3.5%, and a borrower between 500 and 579 needs 10% down. The CFPB describes FHA loans as allowing down payments as low as 3.5 percent and lower credit scores than most conventional loans. Every FHA loan carries mortgage insurance, with an upfront premium at closing and a monthly one after.
Conventional. No government insurance here. Fannie Mae and Freddie Mac buy most of these loans and set the baseline rules. Freddie Mac’s Home Possible program allows a 3% down payment, with qualifying income capped at 80% of area median income, and the down payment can come from family gifts or employer assistance. Fannie Mae’s HomeReady works on a similar model. Put less than 20% down and you’ll pay private mortgage insurance, which the CFPB says is generally cheaper than FHA insurance for borrowers with good credit.
VA. For eligible veterans, service members and some surviving spouses. The Department of Veterans Affairs says nearly 90% of VA-backed loans are made with no down payment. There’s no monthly mortgage insurance; most borrowers pay a one-time funding fee instead.
USDA. For low and moderate income buyers in eligible rural and some suburban areas. The CFPB notes these loans offer zero down payments and are usually cheaper than FHA loans, though you still pay an upfront fee and an ongoing annual one. Both the address and your household income have to pass the program limits, so plenty of buyers who’d love a USDA loan simply don’t qualify on location.
Why one lender says no and another says yes
FHA’s 580 is the program’s floor. Individual lenders are free to set their own, and many add their own stricter requirements on top, which the industry calls overlays. A lender might require a 620 or 640 score for FHA, cap your debt-to-income ratio lower than the program does, or ask for a couple of months of mortgage payments sitting in the bank after closing. None of that is printed on the program’s fact sheet, and lenders don’t always volunteer it.
So a buyer with a 595 score can get a flat no from one company and an approval from another the same week, on the same FHA program. If you’re near the bottom of a program’s range, ask the loan officer directly: what’s your minimum score for FHA, and what’s your maximum debt-to-income ratio? Two direct questions on the first call will save you a wasted application.
Debt-to-income is the other common reason files get stopped. It’s your monthly debt payments, including the new house payment, divided by gross monthly income. Our post on debt-to-income ratio and why loans get declined walks through the calculation. Underwriters also want steady documented income (self-employed buyers usually need more than one year of tax returns), enough cash for the down payment and closing costs, and a house that appraises near the contract price.
FHA or 3% conventional on a $300,000 house?
For a $300,000 house, the comparison below uses a 6.5% quote on a 30-year fixed for both loans. Holding the rate equal makes the insurance difference easier to see. Real FHA and conventional rates are priced separately, so plug in your own quotes.
With FHA at 3.5% down you put in $10,500 and borrow $289,500. The upfront mortgage insurance premium is 1.75% of that, or $5,066, and most people roll it into the loan, which pushes the balance to about $294,566. Principal and interest come to roughly $1,862 a month. Then add the annual premium: under HUD’s Mortgagee Letter 2023-05, a 30-year FHA loan of $726,200 or less with more than 95% loan-to-value pays 0.55% a year. That’s about $1,592 in the first year, or $133 a month. Total before taxes and homeowners insurance: around $1,995.
With a 3% conventional loan you put in $9,000 and borrow $291,000. Principal and interest are about $1,839. Freddie Mac says borrowers can expect PMI of roughly $30 to $70 a month for every $100,000 borrowed, depending largely on credit score and down payment. On $291,000 that’s somewhere between $87 and $204 a month, so the total lands between about $1,926 and $2,043.
Strong credit pushes you toward the low end of that PMI range and makes conventional the cheaper loan. A thin or bruised file pushes PMI toward the top, and FHA can come out ahead in the early years. You won’t know which side you’re on until you have both quotes on paper for your own score.
The insurance that never leaves
The monthly comparison leaves out the biggest difference between the two loans. Conventional PMI ends. The CFPB explains that you can ask your servicer in writing to cancel it once your balance is scheduled to hit 80% of the home’s original value, and the servicer generally must end it automatically at 78% if you’re current. In the example above, at 6.5% the balance reaches $234,000 (78% of $300,000) on schedule after about 12 years, and sooner if you prepay or ask at 80%.
FHA’s annual premium doesn’t work that way. Freddie Mac’s PMI page points out that cancellation is possible for conventional loans but not FHA loans. With less than 10% down, the FHA premium stays for the life of the loan, and the usual way out is refinancing into a conventional loan later, which depends on rates and your credit at that time. With 10% or more down, it drops off after 11 years. A first-time buyer who plans to stay put for 15 years should weigh that more heavily than a $60 difference in the first monthly payment.
How to compare lenders on paper
Big banks, credit unions, nonbank mortgage companies and online lenders can all offer the same FHA or conventional program at different prices. Credit unions sometimes run first-time buyer products just for members. The only fair comparison is the Loan Estimate, the three-page form every lender has to give you after you apply. The CFPB’s Loan Estimate explainer says to compare the origination charges on page 2 and the Comparisons section on page 3, which shows the APR and the total interest percentage. A lender that advertises the lowest rate can claw it back in points listed on page 2.
Shopping won’t wreck your score if you do it in a tight window. The CFPB says multiple mortgage credit checks count as a single inquiry as long as they fall within 45 days of the first one. More on how inquiries are scored is in our post on hard vs soft credit inquiries.
Before you hand over your Social Security number, look the company and the loan officer up on NMLS Consumer Access, the free public licensing database. If you want a rough idea of rates for your score before calling anyone, the CFPB’s Explore interest rates tool shows how score, down payment, term and loan type move the number.
Down payment help
State housing finance agencies, cities, counties and nonprofits run down payment and closing cost programs, often limited by income or to first-time buyers. The CFPB notes that many of them can be used with a regular FHA or conventional loan. Only lenders approved by that agency can close those loans, though, so ask any lender you’re considering whether they participate in your state’s program before you apply. A HUD-approved housing counselor can tell you what’s available locally, usually for free.
A month before you apply
- Pull your three credit reports at AnnualCreditReport.com and dispute errors now, since fixes can take 30 days or more.
- Work out your debt-to-income ratio with a realistic house payment, taxes and insurance included.
- Call two or three lenders, including one credit union, and ask each for their minimum score and maximum DTI on FHA and on 3% conventional.
- Collect two years of W-2s or tax returns, 30 days of pay stubs and two months of bank statements, then apply with your top choices inside one 45-day window and line up the Loan Estimates side by side.
Related reading
- How Much House Can I Afford on a $75,000 Salary?
- Debt-to-Income Ratio: The Number Behind Many Loan Declines
- Your Loan Was Denied. What the Letter Tells You and What to Do Next
Program minimums, premiums and lender overlays change, and the $300,000 comparison is an illustration. Your Loan Estimates are the figures to decide on.
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