If you’ve never owned a home — or you have, but not recently — you might qualify for a first-time homebuyer loan or assistance. First-time buyer loans typically have more affordable rates and more flexible requirements, such as a lower minimum down payment or credit score. Many help buyers afford the costs of closing and the down payment through grants and low-interest loans.
The median age of first-time homebuyers is 38 years old, according to the National Association of Realtors.
First-time homebuyer programs by state
Each U.S. state operates a housing finance authority (HFA) to encourage homeownership, among other responsibilities. Browse HFAs and other first-time buyer resources by state:
Low-down-payment conventional loans
Conventional loans are the most popular type of mortgage, requiring only 3 percent down. This makes them an attractive option for first-time homebuyers who might have limited savings. Low-down-payment conventional options include:
- Conventional 97 mortgage: This conventional loan, backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, requires just 3 percent down and a minimum credit score of 620. It also requires private mortgage insurance (PMI), a type of policy that protects your mortgage lender should you stop paying back your loan. You’ll pay these insurance premiums until you have 20 percent equity in your home.
- HomeReady mortgage: Like the Conventional 97 program, Fannie Mae’s HomeReady mortgage program requires just 3 percent down. You will have to pay for PMI, but it might be less expensive.
- Home Possible mortgage: Freddie Mac’s Home Possible mortgage program is the counterpart to the HomeReady mortgage, with a 3 percent minimum down payment.
- HomeOne mortgage: This Freddie Mac-backed mortgage also allows for just 3 percent down with PMI. It’s available only to first-time homebuyers.
Through state housing finance agencies (HFAs), Fannie and Freddie also back another set of 3 percent down payment programs, called HFA Preferred and HFA Advantage, respectively.
You won’t get your low-down-payment conventional loan directly from Fannie Mae or Freddie Mac, however. Instead, you’ll work with a mortgage lender of your choosing, which might be a bank, online lender or credit union.
Federal first-time homebuyer programs
Aside from conventional loans, many mortgage lenders also offer loans backed by the U.S. government, which may have generous financial terms. These include:
Government-backed mortgage loans
The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Department of Agriculture (USDA) back mortgage programs that are often an option for first-time homebuyers. Here’s an overview:
- FHA loan: Insured by the Federal Housing Administration, FHA loans allow you to buy a home with a minimum credit score of 580 and as little as 3.5 percent down, or a credit score as low as 500 with at least 10 percent down. If you put down less than 20 percent, you’ll pay FHA mortgage insurance premiums (MIP), similar to the insurance you’d pay for a low-down-payment conventional loan. There’s a difference, though: You can’t typically stop paying FHA MIP unless you refinance out of an FHA loan entirely.
- VA loan: The VA guarantees home loans for eligible members of the U.S. military, veterans and surviving spouses. These loans typically don’t require a down payment, though there is a funding fee.
- USDA loan: USDA loans don’t require a down payment, but you’ll need to purchase in a designated rural area and meet income limits based on your location.
Good Neighbor Next Door
The Good Neighbor Next Door program, overseen by the U.S. Department of Housing and Urban Development (HUD), is geared toward law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers. If you work in one of these professions, you could buy a home in a “revitalization area” for 50 percent off, provided you live in the home for at least three years. You can search for properties available in your state on the program’s website.
HomePath ReadyBuyer Program
Fannie Mae’s HomePath ReadyBuyer program is geared toward first-time buyers interested in a foreclosed home. After taking a required online homebuyer education course, first-time buyers can receive up to 3 percent in closing cost assistance. There are downsides, however: Not only are you limited in your choice of properties, but the options — like many foreclosed homes — might need lots of repairs.
Energy-efficient mortgage (EEM)
Making green upgrades can be costly, but you can get an energy-efficient mortgage (EEM) — either a conventional loan or one backed by the FHA or VA — to help finance them. This type of mortgage allows you to tack the cost of improvements — like new insulation, a more efficient HVAC system or double-pane windows — onto your primary loan, without requiring a larger down payment.
However, EEMs do have certain requirements, including an energy assessment, and because you’re borrowing more, they come with larger monthly payments. Those payments might be worth it, though, as you could save on your utility bills.
Native American Direct Loan (NADL) and Section 184 program
The Native American Direct Loan (NADL), guaranteed by the VA, and Section 184 loan, guaranteed by HUD, provide financing to eligible Native American homebuyers. A Section 184 loan requires just 2.25 percent down. The NADL program has no down payment requirement, but it’s only for Native American veterans and their spouses.
Down payment assistance (DPA) options
Saving for a down payment is a big hurdle for most first-time homebuyers. That’s where down payment assistance comes in. Options include:
Down payment assistance loans
Many states’ first-time homebuyer programs offer a lower-cost first mortgage to help you buy the home, then a second mortgage to help you cover your down payment and closing costs. These second mortgages are commonly structured as either:
- Low-interest loans: A loan with a below-market mortgage rate that you’ll repay over the course of a few years
- Deferred-payment loans: A no-interest loan you’ll repay when you sell the home, refinance or pay off your first mortgage
- Forgivable loans: A second mortgage you won’t have to pay back so long as you keep the home as your primary residence for a certain amount of time and stay up-to-date with your mortgage payments
Down payment grants
A down payment or first-time homebuyer grant is essentially free money to help you cover your down payment or closing costs. The grants are usually awarded to low- or moderate-income borrowers, typically defined as those earning no more than 80 or 100 percent of the median income in their area. These programs might have other requirements, too, like a minimum credit score and maximum home purchase price.
Down payment savings match
These programs match participants’ down payment savings up to a certain amount. The money can only be used for your down payment and closing costs.
An Individual Development Account (IDA) is one type of matched savings program. If you qualify, you’ll work with an assigned counselor to deposit funds into an IDA over a set period of time. If you follow the savings plan, you’ll receive the match when you close on the home.
First-generation homebuyer help
Some states have earmarked funds specifically to assist first-generation first-time homebuyers, those who meet the definition of a first-time homebuyer and whose parents never owned a home. Rhode Island’s housing finance agency, for example, is piloting a program that provides a $25,000 forgivable assistance loan to eligible borrowers. Michigan has a similar program which also offers up to $25,000.
Other options for first-time homebuyers
Nonprofit programs
Nonprofit program options tend to be reserved for first-time homebuyers with incomes that are significantly lower than the median income in their area, or buyers who fit certain demographic or other criteria.
- Neighborhood Assistance Corporation of America: The Neighborhood Assistance Corporation of America (NACA) is a nonprofit that provides low-rate mortgages to low- and moderate-income borrowers without requiring a down payment, closing costs or any mortgage insurance. The nonprofit doesn’t use credit scores to qualify you, either: Instead, it looks at other factors, such as rent payment history.
- Habitat for Humanity: If your annual income is 60 percent or less of the median income in your area, you might qualify for Habitat for Humanity’s homeownership program. Along with not exceeding the income threshold, you’ll need to contribute sweat equity — in other words, help build the home or a home for another applicant — to qualify.
Employer-sponsored programs
Employer-assisted housing (EAH) programs help employees with housing needs, usually in neighborhoods near the workplace. This assistance can come in many forms, such as a forgivable loan coupled with required homeownership education.
EAH programs are often limited to certain occupations, and there could be other restrictions, such as being a first-time homebuyer or having worked for the employer for a certain amount of time.
First-time homebuyer programs for students
If you recently graduated from college, you might be eligible for help buying your first home. For example, the state of Ohio offers a Grants for Grads program with up to 5 percent down payment assistance for anyone who finished an academic program in the last 48 months. These programs typically come with a requirement to stay put for a given time — in Ohio, it’s five years — or you’ll need to repay the funds.
Mortgage tax deductions
As a first-time homebuyer, you might be eligible for a federal tax break through a mortgage credit certificate (MCC), usually up to $2,000 per year. There is a fee to buy the MCC, but if you plan to stay in your home long-term, the math might work in your favor.
In addition, homeowners who itemize their taxes can deduct interest paid on mortgages on their annual federal income tax return. You can only deduct the interest on up to $750,000 of mortgage debt if married filing jointly, or up to $375,000 if single.
How to apply for a first-time homebuyer loan or program
Your mortgage lender can help you determine whether you qualify for a first-time homebuyer program and apply for one if you do. You can also check out your state’s housing finance agency (HFA) website to learn about eligibility criteria and search for participating lenders.
Before you apply, start preparing financially. Look into building your credit to buy a home and saving for the upfront costs of homebuying, such as the down payment and closing costs.
FAQ
-
A first-time homebuyer refers to a homebuyer who hasn’t owned a home previously. However, many programs define “first-time homebuyer” as a buyer who hasn’t owned a home within the past three years. Depending on the program, the qualifications might also include not exceeding a certain income or buying a home above a specific price point, as well as having a certain minimum credit score or down payment contribution.
-
The best type of mortgage for a first-time homebuyer, or any borrower, is one that’s affordable. This could be any type of mortgage that has a reasonable interest rate, lower down payment requirement or low or no mortgage insurance.
That said, many first-time buyers go with a 30-year, fixed-rate mortgage because the monthly payments are lower than those for a mortgage with a shorter term. Two popular 30-year fixed-rate choices: conventional loans and FHA loans.
-
First-time homebuyer education programs are designed to help you understand the various aspects of owning a home. To qualify for many first-time buyer loan programs, you’ll need to take a course. If you’re obtaining a conventional loan, you might be able to take the Fannie Mae HomeView online class to satisfy this requirement. Check with your loan officer to learn your options.
Read the full article here
