If you’ve never owned a home before or it’s been a while since you have, you might qualify for a first-time homebuyer loan or assistance. First-time buyer loans typically have more flexible requirements, such as a lower down payment and credit score. Many help buyers with closing costs and the down payment through grants and low-interest loans. Here is our comprehensive guide to both first-time homebuyer loans and programs.
What is a First-Time Homebuyer Program?
First-time homebuyer programs help make homeownership more affordable for people who haven’t ever owned a home or haven’t owned a home in some time. These programs come in a variety of flavors, but usually include a mortgage with a better interest rate, lower down payment requirement, and other benefits like down payment and closing cost assistance.
Types of First-Time Homebuyer Programs
- Low-down payment conventional loans: Conventional loan programs that require just 3 percent down.
- Down payment assistance (DPA) programs: Loans, grants, and matching programs to help you with your down payment.
- Federal first-time homebuyer programs: Loans and programs backed or offered by the federal government.
- State, non-profit, and employer-sponsored programs: Homebuying assistance at the local level.
Along with these, first-time homebuyers who are students or in a certain profession might qualify for a special type of loan as well. Below, we’ll break down what each of these programs entails.
Low-Down Payment Conventional Loans
Conventional loans are the most popular type of mortgage and only require 3 percent down. This makes them an attractive option for first-time homebuyers who might not have considerable savings to draw from. These low-down payment loans include:
- Conventional 97 mortgage: Backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, this conventional loan requires just 3 percent down and a minimum credit score of 620. It also requires you to pay for private mortgage insurance (PMI), which protects your mortgage lender if you stop paying back your loan.
- HomeReady mortgage: Similar to the Conventional 97 program, Fannie Mae’s HomeReady mortgage program also requires just 3 percent down (with potentially less expensive PMI).
- Home Possible mortgage: Freddie Mac’s Home Possible mortgage program has a 3 percent minimum down payment requirement.
- HomeOne mortgage: This Freddie Mac-backed mortgage allows for just 3 percent down with PMI but is available only to first-time homebuyers.
You won’t get your low-down payment conventional loan directly from Fannie Mae or Freddie Mac. Instead, you’ll work with a mortgage lender of your choosing, which could be a bank, online lender, or credit union.
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.
Down Payment Assistance (DPA) Options
There are many types of down payment assistance, including:
Down Payment Assistance Loans
Many 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 low-interest second mortgage you’ll repay over the course of a few years.
- Deferred-payment loans: A no-interest second mortgage 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 as long as you stay in the home for a certain amount of time and stay up-to-date with your mortgage payments.
Down Payment Savings Match
Down payment savings match programs provide matched funds up to a certain amount. The money can only be used for your down payment and closing costs.
One type of matched savings program is an Individual Development Account (IDA). 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.
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 percent of the median income in their area. They might have other requirements, too, like a minimum credit score and maximum home purchase price.
Federal First-Time Homebuyer Programs
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. These loans aren’t created or funded by these agencies but are offered through approved mortgage lenders throughout the U.S. Some lenders even specialize in certain types. 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. 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.
- VA loan: The VA guarantees home loans for eligible U.S. military members, and these loans 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 area-specific income limits to qualify.
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 Ready Buyer 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, you can receive up to 3 percent in closing cost assistance toward the purchase of a property that’s been foreclosed and is now owned by Fannie Mae. This program isn’t for everyone, as you have limited choices of properties, and the options might need significant repairs.
Energy-Efficient Mortgage (EEM)
To finance energy-efficient upgrades, you can get an energy-efficient mortgage (EEM), either a conventional loan or one backed by the FHA or VA. This type of mortgage allows you to tack the cost of energy-efficient upgrades onto your primary loan without requiring a larger down payment.
EEMs come with larger mortgage payments since you’re borrowing more, and there are certain requirements, including an energy assessment. However, the larger payments might be worth it, as you could save on your utility bills in the long run.
Native American Direct Loan (NADL) and Section 184 Program
The Native American Direct Loan (NADL), guaranteed by the VA, and the 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 is only for Native American veterans and their spouses.
First-Time Homebuyer Programs by State
Each U.S. state operates a housing finance authority (HFA) that serves to encourage homeownership. Here are the HFAs and other first-time buyer resources by region:
- Midwest
- Northeast
- South
- West
Nonprofit Programs
Nonprofit programs can offer exceptional value to first-time homebuyers seeking an affordable mortgage. These options tend to be reserved for homebuyers with significantly smaller incomes than the median income in their area and distinguish them as low- or moderate-income buyers or buyers who fit certain criteria.
Neighborhood Assistance Corporation of America (NACA)
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 mortgage insurance. NACA doesn’t use credit scores to qualify applicants but looks at factors such as rent payment history instead.
Habitat for Humanity
Habitat for Humanity offers a homeownership program for those with annual incomes at 60 percent or less of the median income in their area. Along with meeting the income threshold, applicants need to contribute sweat equity by helping build a home for themselves or another applicant.
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, specific tenure requirement, or income limits.
First-Time Homebuyer Programs for Students
Recent college graduates might be eligible for help buying their first home. For example, the state of Ohio offers a Grants for Grads program that provides up to 5 percent down payment assistance for anyone who finished an academic program in the last 48 months. These programs typically require recipients to stay in the home for a given time or repay the funds.
Next Steps: How to Apply for a First-Time Homebuyer Program
To determine whether you qualify for a first-time homebuyer program and apply for one, consult with your mortgage lender. Additionally, you can check your state’s housing finance agency (HFA) website to learn about eligibility criteria and the next steps for applying.
FAQs
Here are some frequently asked questions about first-time homebuyers:
- What is a first-time homebuyer?
- Who qualifies for first-time homebuyer programs?
- Which loan is best for first-time homebuyers?
- What are first-time homebuyer education programs?
Conclusion
Becoming a first-time homebuyer can be an exciting but overwhelming experience. Fortunately, there are numerous loans and programs available to help make your homeownership dreams a reality. Whether you’re looking for low-down payment options, down payment assistance, or government-backed programs, researching and exploring these opportunities can lead you closer to owning your own home. Remember to consult with your mortgage lender and explore resources specific to your state to find the best first-time homebuyer program for you. News Explorer Today will keep you updated on the latest news and trends in the real estate market.