Goodspeed: Options for first-time home buyers


QUESTION: There seem to be quite a few low down payment options out there for first-time homebuyers. How do you know which one is the best for you?

ANSWER: You need to compare not just the amount of down payment each requires, but other features of the loan programs. Aside from the common denominator of a low down payment, the different loan programs all come with different pluses, minuses and restrictions. Picking the right one will depend on your circumstances.

The Veterans Administration (VA) and Department of Agriculture (USDA rural home loan program) offer the lowest down payment loan programs (zero down). But both of these have tight restrictions that rule out most people – i.e. veteran status (VA loan) and geographic limitations (USDA).

Next lowest are Fannie Mae and Freddie Mac, the two big quasi-governmental agencies that buy most home mortgages. Both Fannie and Freddie have home loan programs requiring just three percent down, but they also come with a variety of eligibility criteria, including in some cases, income cutoffs.

Fannie and Freddie also require credit scores above 720, a deal-busting hurdle for many first-time homebuyers. For these buyers, the Federal Housing Administration (FHA) might be a better option. FHA offers home loans with as little as 3.5 percent down, and also accepts lower credit scores than Fannie and Freddie, even under 600.

Besides credit scores, another major differentiating factor of the low down payment programs offered by Fannie and Freddie, and the one offered by FHA, is debt-to-income. Debt-to-income is the ratio between a borrower’s gross monthly income and his/her total monthly recurring debt. Fannie and Freddie will generally not go higher than 45 percent debt-to-income. FHA, meanwhile, is more flexible on debt-to-income, and may accept ratios high than 50 percent.

On the minus side, FHA requires borrowers pay private mortgage insurance (PMI) for the life of the loan. (All borrowers who put down less than 20 percent are required to take out PMI.) But on conventional mortgages offered by Fannie and Freddie, borrowers can cancel PMI once their equity in the home reaches 22 percent.

FHA borrowers do not have that option. They must pay PMI for the life of the loan. On the other hand, since they are first-time homebuyers, they are likely to move up in the housing market after a few, or maybe several, years.

Linda Goodspeed is a longtime real estate writer and author of In and Out of Darkness. Email her at: