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Your Guide to First Time Home Buyer Programs

first time home buyer programs

Saving up a down payment and buying your first home is a huge achievement, but it can also be daunting. The myriad activities may leave you feeling like you don’t have time to find the best loan or look into first-time homebuyer programs that could save you money.

This guide will help you understand home-buying programs for first-time buyers including:

  • Anyone who hasn’t owned a primary residence in the last three years
  • A single parent who has only owned with a former spouse (while married)
  • Displaced homemakers (legally separated or divorced) who only owned with a spouse
  • Mobile homeowners looking to buy a permanent-fixture home (also owners of other non-affixed home dwellings)
  • Anyone who owns property that doesn’t meet local building codes and cannot be brought into compliance for less than the cost of building a new structure

If you or your spouse meets any of the criteria above, you fall under the Federal Housing Administration’s definition of a first-time homebuyer. You may be able to qualify for a number of loan programs and perhaps some financial-assistance programs, too. These can help you save money and get into your new home sooner.

In this guide we cover:

Loan programs versus financial assitance for first-time homebuyers

National loan programs for first-time buyers

Financial assistance for first-time buyers

Tax credits and deductions for first-time homebuyers

State and local financial assistance

First-time buyer FAQ

Loans vs. financial assistance for first-time homebuyers

Loan programs make up the majority of initiatives supporting first-time homebuyers. The federal government does not issue loans to first-time homebuyers, but they insure certain loans, meaning the government will reimburse the bank for all or part of a loan if the buyer defaults on their loan.

In exchange for the insurance, banks accept lower down payments, or they accept less creditworthy borrowers than they otherwise would. Depending on your ability to save for a down payment, your creditworthiness, your income and other factors, a loan designed for first-time homebuyers may benefit you. But in the long run, a loan for first-time homebuyers may cost as much or more than a conventional mortgage.

By comparison, financial assistance for first-time homebuyers will cut your housing costs. Financial assistance could include:

  • Tax credits for first-time buyers
  • Down payment assistance
  • Money to put toward closing costs (and other home-buying costs)
  • The ability to purchase a home at a price below market value

Most financial-assistance programs have stringent qualification criteria, but they can help you save a ton of cash.

National first-time home buyer loans

Specialized loan programs can be helpful tools for helping you buy your first home. In general, these loans require lower down payments, and you don’t need a great credit score to get one. However, they often have higher costs compared to other types of mortgages, and you will face restrictions on the types of homes you can buy.

FHA loans

FHA loans are mortgages issued by traditional banks or credit unions and insured by the Federal Housing Administration of the United States. The underwriting criteria for FHA loans make it easy for people with small down payments or fair credit histories to buy their first home.

A first-time homebuyer can take out an FHA loan for a one- to four-unit, owner-occupied residence. The maximum loan amount varies across the nation based on the cost of real estate in each city, but in most parts of the country the maximum loan size for a single-family home is $275,665.

No matter where you live, FHA loans allow for down payments as low as 3.5 percent if you have a credit score at or above 580. If you have a credit score between 500 and 579, you need to put down at least 10 percent on your home purchase.

You can choose between a 15- or 30-year loan term (meaning you make payments for up to 30 years) and a fixed or adjustable rate. When you finance a mortgage with an FHA loan, you will pay FHA mortgage insurance to protect your lender.

Understanding FHA mortgage insurance

FHA mortgage insurance (also called a mortgage insurance premium) is a fee you pay in addition to the principal and interest on your loan. FHA mortgage insurance has two parts. First, you’ll pay a 1.75 percent upfront payment to the FHA. This means, if you take out a $200,000 loan, you’ll pay $3,500 at closing for mortgage insurance. You can finance this portion of the FHA loan (meaning you can take out a $203,500 loan in this example).

You will also pay an ongoing mortgage insurance premium. This mortgage insurance premium has the effect of raising your interest rate. For example, if your initial interest rate is 4.2%, and you pay an 0.8% (80 basis point) insurance premium, your effective interest rate is 5%. However, the insurance premium goes into an escrow account and is paid to the FHA each year. If you put down more than 10 percent, you’ll pay the insurance premium for 11 years. Otherwise you’ll pay the premium for the life of your loan.

An overview of FHA loans

Minimum Credit Score: 500

Down Payment Requirements: 3.5 percent to 10 percent (based on credit score)

FHA Mortgage Insurance: Required

Loan Terms: 15 and 30 years

Loan Limits: Generally $275,665, except in high-cost-of-living areas

Interest Rate Terms: Fixed and variable

Pros:

  • Down payment as low as 3.5 percent
  • Low credit score requirements
  • Competitive interest rates
  • Can buy up to four units

Cons:

  • Upfront mortgage insurance costs (1.75 percent of total value of house)
  • Ongoing mortgage insurance
  • Some lender restrictions
  • Some loan size limitations
  • Must buy owner-occupied home
  • Smaller loan size limits

When to consider

Consider an FHA mortgage if you have a limited credit history or you’re struggling to save a down payment. It’s also a great way to buy an owner-occupied rental property, such as a duplex.

When to avoid

The high cost of mortgage insurance makes this a poor choice if you have more than a 5 percent down payment and good credit. If you want to buy an expensive home, an FHA loan may not be the right choice because the loan has the most conservative loan limits.

Where to get an FHA loan

Most major banks and large credit unions will offer FHA loans, but to get the best interest rate on an FHA loan, we recommend starting your search online.

You can start by using the Department of Housing and Urban Development’s lender list to find FHA-approved lenders in your area. You can also use Lending Tree’s comparison tool to find real offers from lenders in your area.

Take the time to get preapproved by one or more lenders, so you can shop for your home with confidence.

VA loans

VA loans are insured by the Department of Veterans Affairs, which means they will pay back the bank if you stop paying your loan. Most military members (including active duty military) who have served for at least two years and were not dishonorably discharged are eligible for the VA loan benefit. Some service requirements are shorter than two years.

VA loans require no down payment, and veterans must have “satisfactory credit” and “satisfactory repayment ability.” They even have lenient occupancy requirements to help active-duty service members. In general, service members (or their spouse or children) must plan to occupy the home for at least 12 months before turning the home into a rental property.

You can use a VA loan to buy up to a four-unit home. There are no limits on VA loans, unless your lender sells their VA loans in the secondary market. In that case, throughout most of the country, you can finance up to $424,100 for a single-family home. You can borrow more for houses with more than one unit or in more expensive areas of the country. Check loan eligibility limits on the Federal Housing Finance Agency website.

The VA loan also caps closing costs. You will not be charged a buyer’s or seller’s agent fee, and a bank can charge no more than 1 percent of the loan value in origination fees. However, VA loans have one unique cost called an upfront funding fee. This helps cover losses when VA loan borrowers default on their mortgage.

Understanding the VA funding fee

VA loans do not charge an ongoing mortgage insurance payment, but VA loan borrowers must pay an upfront funding fee to help cover the VA mortgages that fall into default. This fee can be financed and added to your base loan. The VA reduces the fee for any service member using the VA loan for the first time.

You can reduce your funding fee by putting more money down on your home purchase.

First-Time VA Borrower Funding Fee Schedule
Veteran type Down payment Fee for first-time VA borrowers
Regular military 0%-4.99%

5%-10%

10% or more

2.15%

1.5%

1.25%

Reserves or National Guard 0%-4.99%

5%-10%

10% or more

2.4%

1.75%

1.5%

 

An overview of VA loans

Minimum Credit Score: Set by lenders who require “satisfactory credit”

Down Payment Requirements: None

VA Funding Fee: Required

Loan Terms: 5 to 30 years

Loan Limits: Generally $424,100 except in high-cost-of-living areas

Interest Rate Terms: Fixed and variable

Pros:

  • No down payment required
  • No mortgage insurance
  • No firm credit minimums
  • Can buy up to four units
  • Competitive interest rates

Cons:

  • Upfront funding fee
  • Some lender restrictions
  • Must buy home with the intent to occupy for at least 12 months

When to consider

First-time homebuyers with military experience should consider a VA loan as one of their top choices. The upfront funding fee may turn away some borrowers, but if you have less than a 20 percent down payment, the fee will generally save you money compared to private mortgage insurance.

When to avoid

If you have more than a 20 percent down payment, you may find that a conventional loan makes more sense for you. Likewise, if you have poor credit (a score below 620), you may struggle to find a VA lender.

Where to get a VA loan

Before you take out a VA loan, you must get a Certificate of Eligibility (COE) through the Veteran’s Administration eBenefits platform.

Once you get your COE you can work with a lender of your choice. You can start by comparing rates online through LendingTree. Once you find the best few offers, get preapproved, so you know exactly how much house you can afford before you start home-shopping.

Freddie Mac Home Possible Advantage mortgages

Freddie Mac Home Possible Advantage mortgages are a lot like conventional mortgages, but they have a few attractive features that make them attractive to first-time homebuyers. First, the loans only require a 3 percent down payment. The down payment doesn’t have to come from personal funds. You can use gifts, state and county financial assistance, or even a second mortgage to finance your down payment.

However, the Home Possible Advantage mortgage is more restrictive than a conventional loan. You must complete an online home-buying education course before you take out this loan, and you must have a minimum credit score of 660. You can only buy a single-family home with this mortgage, and you can only choose a fixed-rate mortgage with a maximum 30-year term.

You will pay private mortgage insurance (which protects the bank if you default) until your loan is worth less than 80 percent of your home’s value.

An overview of Freddie Mac Home Possible Advantage mortgages

Minimum Credit Score: 660

Down Payment Requirements: 3 percent

Mortgage Insurance: Required until you have 20 percent equity in your home (requires appraisal)

Loan Terms: Up to 30 years

Loan Limits: Generally, $424,100 except in high-cost-of-living areas

Interest Rate Terms: Fixed rate only

Pros:

  • Small down payment
  • Down payment doesn’t have to come from personal funds
  • Mortgage insurance can be canceled when you achieve 80 percent loan-to-value (LTV) ratio

Cons:

  • Only one unit, owner-occupied
  • Some lender restrictions
  • Only allowed to consider fixed-rate mortgages
  • High credit score requirement

When to consider

This loan is very similar to a conventional mortgage, but it requires a smaller down payment. Over the life of a loan, it’s likely to be cheaper than an FHA loan, so people with decent credit should consider it.

When to avoid

If you have more than a 5 percent down payment, or you want to buy a rental property, the Home Possible Advantage mortgage won’t be a good fit.

Where to get a Home Possible Advantage mortgage

A Home Possible Advantage loan is a conventional mortgage, but not every lender will offer them. You can use a tool like LendingTree’s conventional mortgage comparison engine to start your search, but call the bank or credit union to be sure it actually offers the Home Possible Advantage mortgage.

If the lender offers the mortgage, you will need to take a free online education class before you qualify for the loan.

Fannie Mae Standard 97% LTV mortgage

The Fannie Mae 97% LTV mortgage requires just a 3 percent down payment. Aside from the low down payment requirement, the mortgage is the same as a conventional, fixed-interest mortgage.

The funds for your down payment may be gifts, state and county financial assistance, or even a second mortgage to finance your down payment. However, this mortgage has the most stringent underwriting criteria of loans for first-time borrowers. You need a credit score above 680 and a debt-to-income ratio of 36 percent or lower to qualify for the loan. If you have a debt-to-income ratio between 37 and 45 percent, you need a credit score of at least 700 to qualify.

You will pay private mortgage insurance (which protects the bank if you default) until your loan is worth less than 80 percent of your home’s value.

An overview of the Fannie Mae Standard 97% LTV mortgage

Minimum Credit Score: 680 (or 700 if you have a debt-to-income ratio above 36 percent)

Down Payment Requirements: 3 percent

Mortgage Insurance: Required until you have 20 percent equity in your home (requires appraisal)

Loan Terms: Up to 30 years

Loan Limits: $424,100 except in the most expensive parts of the country

Interest Rate Terms: Fixed rate only

Pros:

  • Small down payment
  • Down payment doesn’t have to come from personal funds
  • Mortgage insurance can be canceled when you achieve 80 percent LTV

Cons:

  • Only one unit, owner-occupied
  • Some lender restrictions
  • High credit score requirement

When to consider

This loan is very similar to a conventional mortgage, but it requires a smaller down payment. People with good credit should consider this mortgage, especially if your down payment comes in the form of a gift, grant or other type of financial assistance.

When to avoid

If you have more than a 5 percent down payment or you want to buy a rental property, this isn’t the right mortgage for you.

Where to get a Fannie Mae Standard 97% LTV mortgage

Not every lender offers Fannie Mae’s 3 percent down payment mortgage, but many of the largest banks and credit unions will. You can find lenders in your area using an online search, or you can use a tool like LendingTree’s conventional mortgage comparison engine to start your search. Once you find a few lenders with great rates, you’ll need to talk to a loan officer to be sure they offer 3 percent down payment loans. If they offer these loans, they can walk you through the next steps.

Other Loans to Consider

Loans specifically designed for first-time buyers aren’t always the right choice for first-time buyers. If you have a down payment of at least 5 percent and a decent credit score, you may prefer a conventional mortgage. You should also consider alternative loan programs designed for specific buying situations. These are a few loan programs that first-time buyers should understand before committing to one of the loans above.

Buying a fixer-upper? Consider an FHA 203(k) loan

If you dream of buying a fixer-upper, an FHA 203(k) loan could be a great match. This loan allows you to finance both the purchase and the repairs on a home. You can put as little as 3.5 percent down when you use the FHA 203(k) loan.

Learn more about an FHA 203(k) loan.

Buying in a rural area? Consider a USDA loan

You may be surprised by how much of the country counts as rural according to the USDA. The USDA loan is a 0 percent down loan for people who have low to moderate incomes and want to buy a home in an eligible area.

Learn more about USDA loans.

Buying an older home? Consider the Energy Efficient Mortgage Program

If you’re buying an older home, you may be worried that utility costs will eat into your monthly budget, but it’s tough to consider expensive energy-saving improvements right after buying a house. That’s where the Energy Efficient Mortgage (EEM) makes sense. EEM allows buyers to finance cost-saving, energy-efficient home improvements right into their monthly mortgage.

First-time home buyer grants and financial assistance

First-time buyer loans can help you buy your first home, but they don’t always cut your costs. By contrast, financial-assistance programs can actually make your home more affordable. Financial-assistance programs can include grants (such as down payment matching grants), tax credits, assistance with closing costs, and even low- or no-interest loans.

Middle- and upper-income earners shouldn’t assume they won’t qualify for financial-assistance programs. While some programs require you to earn less than a certain amount, others allow you to qualify based on your occupation. This guide covers federal financial-assistance programs, but first-time buyers should also contact their local Housing Finance Agency to learn about local financial-assistance programs.

The HUD Dollar Homes Program

The Housing and Urban Development (HUD) Dollar Homes Program is a federal-local partnership program designed to help low- and middle-income buyers access a home for well below market costs. However, as an individual buyer you cannot directly buy a home through the dollar program. Instead, HUD sells foreclosed homes to local governments and nonprofit organizations for $1 plus closing costs. The local government or nonprofit sets buying requirements and passes the home along to you. To learn if this program is available in your area, you need to contact your local Housing Finance Agency.

If you pursue the program, it’s important to note that these homes will generally be “tear-down” homes. They’ve sat vacant and on the market for at least six months and must have a market value of less than $25,000. They are more common in areas that suffered urban blight.

The city will determine who has to pay to fix up the home, but in most cases, you should expect to shoulder most or all of the costs associated with rehabbing the home and bringing it up to standards. You may be required to live in the home for several years as part of the agreement for buying the property.

Good Neighbor Next Door

Law enforcement officers, teachers, firefighters and EMTs can participate in neighborhood revitalization and get up to 50 percent off the list price of a HUD home if they participate in the Good Neighbor Next Door program. HUD homes have been taken back from borrowers who didn’t make mortgage payments, and the program is designed to help areas that have high rates of foreclosure, low incomes or low rates of homeownership (also called revitalization areas).

If you qualify based on your occupation, you’ll get a second mortgage for 50 percent of the list price of a HUD home. This mortgage doesn’t require any payments, and it will be forgiven in full after you’ve lived in the home for at least 36 months.

For the other half of the mortgage, you can take out any type of loan, including a conventional mortgage or one of the loans listed above.

Before pursuing this program, it’s important to note that many HUD homes may require rehabilitation, and those costs aren’t covered by the Good Neighbor Next Door program.

HomePath ReadyBuyer

Fannie Mae offers a HomePath ReadyBuyer program for low- and middle-income homebuyers. If you qualify for the program, you can get up to 3 percent closing cost assistance when you buy a HomePath home. A HomePath home is a home owned by Fannie Mae due to a foreclosure.

 

Before you qualify for the ReadyBuyer program, you’ll have to take a $75 home-buying education course (which can be reimbursed at the time of home purchase). You’ll also have to take out a Fannie Mae HomeReady mortgage, which requires a 3 percent down payment. Buyers need to occupy their home within 60 days of purchase, and you can only buy a single-family home.

Tax credits and deductions for first-time homebuyers

Mortgage points deduction

Under specific circumstances, you can fully deduct any “points” you buy from your mortgage the year you buy your home. Points are a form of prepaid interest, and many people pay the points to lower their monthly interest rate. Be sure to work with your accountant to learn more at tax time.

Mortgage credit certificate

A mortgage credit certificate (MCC) helps lower- and middle-income people lower federal income tax liability by up to $2,000 per year. You can claim this tax credit every year you occupy your home as a primary residence. You can receive a credit for up to 50 percent of all interest paid in a year.

To qualify for an MCC, your lender must issue you a certificate at the time of loan origination. Not every lender is qualified to issue an MCC, so you may want to connect with your local Housing Finance Agency to see which lenders qualify. Each state can restrict MCC issuance to certain types of mortgages.

The MCC can be used in conjunction with the mortgage interest deduction, but you can’t “double dip.” So if you paid $10,000 in interest on your new home, you can claim up to $4,000 on the mortgage credit certificate (for a maximum credit of $2,000), and itemize the remaining $6,000.

This program is especially helpful if you want to take out a smaller mortgage that you wouldn’t normally itemize.

State and local financial assistance

State and local governments administer some of the most generous financial-assistance programs. Most commonly, local Housing Finance Agencies administer programs that provide down payment assistance. Oftentimes, these take the forms of matching grants for low-income homebuyers, but the benefits don’t stop with down payment assistance. Some states and counties offer energy-efficiency grants and forgivable loans.

These are generous programs (often offering more than $10,000 in assistance) that can move the needle on helping you buy your home.

The best way to learn about these programs is by contacting your state and county Housing Finance Agency. The agency may offer free seminars or online materials to help you learn about government financial-assistance programs. The Down Payment Resource website tracks financial-assistance programs from over 1,200 Housing Finance Agencies, so it’s a great place to start.

A knowledgeable real estate agent can often help you learn about the programs, too. They might also help you connect to local charitable groups that help low-income people with down payment assistance.

FAQ

How much money should I put down on a house?

The right down payment is a balancing act. If you put down too little, you may be forced to sell at a loss if the housing market in your area takes even a slight dip. On the other hand, if you put too much down, you’ll have a lot of money locked up in your house.

In general, first-time buyers should primarily consider how their down payment will affect their monthly payment. Putting down less than 20 percent means you’ll generally pay some type of mortgage insurance, which will raise your costs. If you can afford the mortgage insurance, and you can’t afford a 20 percent down payment, it usually makes sense to choose the minimum down payment.

Do I need to fix my credit before taking out a mortgage?

In general, first-time buyers need at least a 500 credit score to take out a loan, but a credit score above 680 unlocks some of the best loans for first-time homebuyers. The Urban Institute shows that the average first-time mortgage borrower has a 710 credit score.

Use this guide to learn how you can repair your credit on your own.

How much of a mortgage can I afford?

Banks use a ratio called debt-to-income to determine how much they will lend to you. In the past, banks allowed borrowers to take on up to a 36 percent debt-to-income ratio. This means that your minimum monthly payments consume up to 36 percent of your gross income. Today, many lenders allow you to have a debt-to-income ratio up to 43 percent of your income, and up to 50 percent for Fannie Mae mortgages.

However, a bank’s willingness to lend money to you shouldn’t dictate the size of your mortgage. Consider your income, your other fixed expenses (especially child care or child support expenses), and the stability of your job when you’re considering a home budget. You may decide that it’s best to buy a smaller and more affordable home.

Should I work with a real estate agent?

Traditionally, the seller pays both the buyer’s and seller’s agent’s commission, so you won’t pay more money if you choose to work with an agent. Agents can guide you through the buying process and help you find an appropriate home. However, you should not sign an agreement to work exclusively with a particular buyer’s agent until you are comfortable with them.

Should I take on a mortgage before I pay off my other debt?

Many homebuyers choose to take on a mortgage before they pay off other forms of consumer debt. Most of the time, taking on a mortgage will slow your other debt payoff because owning a home comes with many hidden costs. However, personal debt shouldn’t stop you from buying a home if it makes sense for you and your budget.

Should I get preapproved for a mortgage?

Almost all buyers take the time to become prequalified for a mortgage, but few go on to become preapproved. However, getting preapproved can save a ton of headaches down the road. During preapproval you’ll learn how much you can borrow and the expected interest rates and fees on the loans. With these numbers in hand, you can shop for your home with confidence.

 

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