Tony Anderson/Getty Images: Illustration by Issiah Davis/Bankrate
New to the home-purchase scene? First-time homebuyer programs can help make your ownership dream a reality.
These programs help you get into a home with a low down payment (much lower than the usual 20 percent, that is) or get a better interest rate on your loan (which could save you thousands over the long run).
Yes, interest rates have risen in the last few years, and housing prices stay stubbornly high. But that doesn’t mean homes are entirely unaffordable. Read on to see the sort of help that’s available, wherever you want to live.
In a recent survey by Today’s Homeowner of 3,000 first-time homebuyers, 65% found the purchasing process more difficult than expected — with finding a home within their budget the most commonly cited hurdle.
Types of first-time homebuyer programs
1. Low-down payment conventional loans
Conventional loans (those not guaranteed by the government) are among the most popular types of mortgages: They don’t have specialized eligibility requirements and are offered by a variety of reputable lenders, both traditional and online. And certain ones also set exceedingly low down payment minimums: just 3 percent of the home purchase price.
Fannie Mae and Freddie Mac set borrowing guidelines for conventional loan programs. These programs include:
- Conventional 97 mortgage – Fannie Mae and Freddie Mac both back the Conventional 97 program, which only requires 3 percent down, but a minimum credit score of 620. Like most conventional low-down payment mortgage programs, the borrower is also required to pay for private mortgage insurance (PMI), an additional cost with their monthly mortgage payment.
- HomeReady mortgage – Fannie Mae’s HomeReady mortgage program also requires just 3 percent down (with PMI, although it might be less expensive), and offers more flexible underwriting.
- Home Possible mortgage – Freddie Mac’s Home Possible mortgage program is similar to the HomeReady mortgage, with a 3 percent minimum down payment.
- HomeOne mortgage – This Freddie Mac mortgage also allows for just 3 percent down with PMI, but is available only to first-time homebuyers and comes with some special criteria.
You don’t directly deal with Fannie Mae or Freddie Mac to get these loans. Rather, they’re available through many types of lenders, including banks, online mortgage lenders and credit unions.
2. Government-sponsored first-time homebuyer programs
The federal government operates many first-time homebuyer loan programs. However, these often have special requirements regarding the location or type of property, or criteria for the borrower (like military service).
Government loans are mortgages backed by a government agency, either the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture. They aren’t created or funded by these organizations, however; they’re offered through approved mortgage lenders throughout the U.S. Some lenders even specialize in certain types.
Government-backed mortgage loans
- FHA loan – Insured by the Federal Housing Administration, FHA loans allow borrowers 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. However, keep in mind that if you put down less than 20 percent, you’ll have to pay FHA mortgage insurance of 1.75 percent upfront plus annual premiums.
- VA loan – Qualified U.S. military members (active duty, veterans and eligible family members) can apply for loans backed by the U.S. Department of Veterans Affairs (VA). VA loans come with lower interest rates compared to other loan types, and don’t require a down payment, though there is a funding fee to pay upfront or roll into the balance.
- USDA loan – The U.S. Department of Agriculture (USDA) guarantees loans for some rural homes for up to 100-percent financing, meaning no down payment. To qualify, you have to buy a home in a USDA-eligible area.
Good Neighbor Next Door
The Good Neighbor Next Door program, sponsored by the U.S. Department of Housing and Urban Development (HUD), provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers. Through the program, borrowers can receive 50 percent off a home in a “revitalization area,” provided they 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
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, eligible borrowers can receive up to 3 percent in closing cost assistance toward the purchase of a property that’s been foreclosed upon and is now owned by Fannie Mae, called a HomePath home. Of course, this limits your choice of properties, which (like many foreclosed homes) might need much repair, so this program isn’t for everyone.
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 energy-efficient upgrades (think new insulation, a more efficient HVAC system or double-pane windows) onto your primary loan, without requiring a larger down payment.
However, EEMs come with larger mortgage payments (since you’re borrowing more), and there are certain requirements to abide by, including getting an energy assessment.
Native American Direct Loan (NADL)
The Native American Direct Loan (NADL) provides financing to eligible Native American veterans and their spouses to buy, improve or build a home on federal trust land. This loan differs from traditional VA loans in that the VA is the mortgage lender. There is no down payment required with this type of loan, as well as no mortgage insurance, but there is a funding fee.
3. Down payment assistance options
First-time homebuyers can more easily afford a home with the help of down payment assistance (DPA), which is a sum of money given as either a grant, second mortgage (with varying repayment terms) or matched savings.
Down payment assistance loans
Besides grants, there are a variety of down payment assistance loans — a second mortgage you take out with the first mortgage you’re using to buy the home:
- Low-interest loans – These are low-interest second mortgages for a small sum that help borrowers with the down payment and closing costs. These have to be repaid, usually over the course of a few years.
- Deferred-payment loans – These types of loans don’t charge interest, but need to be repaid in full when you sell the home or refinance the first mortgage.
- Forgivable loans – You won’t have to pay back this second mortgage so long as you stay in the home for a certain amount of time (the exact period depends on the program) and stay up-to-date with your mortgage payments.
Down payment savings match
Down payment savings match programs help grow the amount a borrower puts down for a home by matching the borrower’s savings. These programs are structured over a specific amount of time and provide matched funds up to a certain amount, which can only be used for the down payment and closing costs.
For example, some state-level housing finance agencies offer Individual Development Accounts (IDAs), which might contribute three dollars for every one dollar the borrower saves. Those who qualify work with an assigned counselor to deposit funds into an IDA over a specified period of time. If the borrower follows the plan and saves the required amount, they’ll receive the match at closing.
Down payment grants
Down payment or first-time homebuyer grants are essentially free money: an outright gift to help you cover your down payment or closing costs. Grants are usually awarded to low- or moderate-income borrowers, typically defined as people earning no more than 80 percent of the median income in their area (AMI); they may have other requirements, like a minimum credit score and maximum home purchase price.
To learn more, visit our guide to first-time homebuyers grants.
4. First-time homebuyer programs by state
Many states and municipalities offer first-time homebuyer grants (which don’t have to be repaid) and low-interest mortgage programs. Some are even enticements to attract residents, being geared to people relocating from out-of-state.
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 a first-time homebuyer or specific tenure requirement, or income limits.
6. Nonprofit programs
Nonprofit programs can offer exceptional value to first-time homebuyers seeking an affordable mortgage. One example is Neighborhood Assistance Corporation of America, a nonprofit that provides low-rate mortgages to low- and moderate-income borrowers without requiring a down payment or closing costs. The nonprofit does this by using “character-based” standards to qualify borrowers, versus the risk assessment most mortgage lenders perform, according to the organization.
There are nonprofit programs available at the local level, as well. For instance, New York City offers a down payment assistance program offering up to $100,000 to eligible borrowers in any of the boroughs.
First-time homebuyer FAQs
It’s not literal: Often, a buyer who hasn’t owned a home within the last three years can qualify as a first-timer. This includes people who own a rental or investment property, whether or not it’s considered your primary residence. Other than that, someone who’s never owned a residence before, obviously.
A first-timer, obviously (see definition above). In addition, these opportunities might only be open to those who meet certain income criteria: Generally, you have to be making a certain percentage less than the median income for your geographic area. There may also be a limit on the amount you can spend on the house — its purchase price, that is. Some government-backed programs, such as an FHA or USDA loan, require that the property meets certain standards before qualifying, as well.
To start with, look for first-time homebuyer programs in your area. Local banks, credit unions and mortgage companies often have a wealth of information, including contact info. Housing-oriented nonprofits might also be a good source to check. Or, search online for the site of your local or state housing finance authority (HFA).
Each program will have different application requirements and processes: Some might have you apply directly to the state or municipality, others might have you go through a lender. Often, you have to get an HFA mortgage — that is, one offered by the state via its approved lenders — to qualify for the down payment or closing cost assistance.
First-time homebuyer programs can help you better afford a home — or help you afford a better home. Compared to regular conventional mortgages, they offer more flexible credit and down payment requirements or a competitively-priced mortgage and down payment assistance (or a combination). Many programs also require you to take a homebuyer education class, which — while it sounds like a drag — actually can explain confusing terms and procedures, and prepare you for the financial responsibilities of homeownership.
Additional reporting by T. J. Porter