First-time homebuyer programs, grants and loans
Starting out on the initial journey of homeownership is both an exciting and challenging life event, one that handsomely rewards those who are organized, detailed and persistent. First-time homebuyer programs, grants and loans work to make it even easier for you to find your dream home.
As a first-time homebuyer, you’ll need to put serious time into sifting through online listings, exploring neighborhoods and visiting properties until you find a home with the right appeal; you'll also need to think about financing. Arguably, the most crucial part of your entire experience will be obtaining an affordable first-time homebuyer loan.
If you’ve been preparing for this moment, then you’ve likely already done a deep dive into your own personal finances and calculated what you can afford. If you haven’t, then you’ll want to immediately evaluate your income, savings, assets, and credit score to determine not only your current purchasing power, but also see what kind of first-time homebuyer loans and programs you qualify for. You may be surprised at your eligibility.
Fortunately, because homeownership has long been considered a key driver of personal and generational wealth in the U.S., first-time homebuyers have numerous places to go for financial assistance. This article will explore some of the many federal, state, local and even not-for-profit enterprises that offer a wide variety of programs, grants and loans to first-time homebuyers.
First-time homebuyer financial analysis
Let’s imagine for a moment that the house-hunting process is coming along nicely. You’ve discovered several homes that check all the boxes and you’ve even made contact with a real estate agent whom you like and trust. So far so good as a first-time homebuyer.
Given your current salary, savings and credit score, you may automatically think you’re locked into a certain price range when it comes to your new home—or worse—fear that you may face rejection from lenders due to suboptimal financial history. However, the truth is that while the aforementioned financial criteria play a pivotal role in determining your home-buying budget, creditworthiness and ability to secure a loan, there are programs that exist to provide many first-time homebuyers with affordable loans and even grants. You just have to know where to look.
First-time homebuyers definition
Before we discuss specific programs, let’s take a second to define what exactly is a “first-time homebuyer” according to the Department of Housing and Urban Development (HUD). While the full definition is quite lengthy, the following criteria encompasses the majority of first-time homebuyers from a federal standpoint:
- An individual who has not held ownership in a principal residence during the three-year period ending on the date of the purchase.
- For couples, if one spouse is/was a homeowner but the other has not owned a home, both spouses are considered first-time homebuyers.
While this definition was established to provide specific guidance to lenders who offer FHA (Federal Housing Authority) loans, it’s also used by other agencies as the de facto definition when determining who is and who isn’t a first-time homebuyer. Note: To qualify for first-time government loans, borrowers should be prepared to furnish proof of eligibility.
Popular federal first-time homebuyer programs and loans
As you move closer to your home purchase and even consider a reputable lender that can assist you with your mortgage needs, you’ll want to inquire into any first-time homebuyer assistance that will enhance loan eligibility and reduce rates and fees. The following popular federally backed loan programs are where to start:
Federal Housing Authority (FHA) loans
- Many first-time owners find FHA loans an attractive option since they are 100% backed by the federal government and come with few restrictions.
- FHA loans typically offer applicants reduced down payments while accepting lower credit scores.
- Eligible first-time applicants can expect down payment options to start at 3.5% down with a minimum credit score of 580.
- Similar to FHA loans but intended exclusively for people wanting to purchase homes in designated rural and suburban areas.
- USDA loans are government-backed loans that offer borrowers the ability to finance up to 100% of their mortgage, which means zero down payment.
- Your household income can not be higher than 115% of the median income of the area.
- If you’re a member of the military or a spouse of a service member, you’re entitled to reduced rates, no required down payments and no minimum credit score.
- Native American Direct Loans (NADL) are a type of VA loan for Native Americans and their spouses. If eligible, you can expect a discount on closing costs, a low-interest 30-year fixed mortgage, no PMI (private mortgage insurance) and in most cases no down payment is required.
Fannie Mae and Freddie Mac
- Conventional loans with down payment options starting at 3% for for homebuyers with credit scores 620 and above.
- First-time homebuyers can take up to 3% off of closing costs via Fannie Mae’s HomePath ReadyBuyer™ program, a partnership with Framework, a leading provider of homeownership education, and HomePath.com, a division of Fannie Mae that sells foreclosed homes. Although this program is not widely used today, it exists as an available tool to access homes at reduced prices. To be eligible, all occupying borrowers must be first-time homebuyers, and at least one borrower must complete the HomePath Ready Buyer™ course, regardless of loan-to-value (LTV).
Other federal first-time homebuyer grants and loans
In addition to the above, there are other federally sponsored loans and grants designed to assist low- to moderate-income earners, Native Americans and individuals and families interested in energy-efficient renovations. This following list is just a sampling of what’s available:
- Good Neighbor Next Door
- Dollar Homes
- FHA Energy Efficient Mortgage program
- Section 184 Indian Home Loan Guarantee program
Good Neighbor Next Door
A HUD program that provides up to 50% off the price of a home in designated revitalization areas—a great way to ease into home ownership at a dramatically reduced price. Intended for police officers, firefighters, first responders and educators (pre-K through high school). Property bids must go through HUD-approved real estate brokers and eligible homebuyers must commit to live in the property for 36 months as his/her principal residence.
The Dollar Homes program offers significant below-market-rate reductions on foreclosed houses acquired by the Federal Housing Administration. Intended for low- to moderate-income families, participants should not expect the home of their dreams but a property they will have to fix up as part of a larger effort that combines homeownership and neighborhood revitalization.
FHA Energy Efficient Mortgage program
This program is designed to assist families with their utility bills by allowing them to finance energy-efficient improvements through their FHA-insured mortgage. This is a great way to incentivize energy efficiency for first-time homebuyers. Note: All borrowers must obtain an energy assessment to determine cost-effectiveness of improvements. Visit the EEM program page for more details
Section 184 Indian Home Loan Guarantee program
Specifically designed for Native Americans in select states and counties, these loans provide deep discounts to qualified applicants including down payments as low as 2.25%. Section 184 loans are fully guaranteed by the federal government and offer homebuyers low interest rates and “hands on” underwriting, in addition to low down payments. Go to the HUD website for a full list of participating lenders.
State government programs for first-time homebuyers
There are too many state and local government programs to present an itemized list for this article. However, suffice it to say, that it’s well worth your time exploring these programs and discounts that are offered on the state and local level, many of which assist with closing costs, down payment and home renovations. While not all of these programs are specifically geared toward first-time homebuyers, depending on your income (and other factors) you may qualify for discounts. If you live in a large enough community, you may even have access to city or county first-time homebuyer programs.
Down payment assistance (DPA) programs
Offered at the state level are numerous DPA grants that enable first-time homeowners to obtain assistance with their down payments. The mortgage industry has always relied on some form of down payment to secure mortgages, and while FHA loans (under HUD) allow eligible homebuyers access to down payments options starting at 3.5% of the principal, sometimes first-time homebuyers need additional help.
There are over 2,000 DPA programs available. Let’s look at a couple of the most popular:
The Chenoa Fund
Administered by the CBC Mortgage Agency, the Chenoa Fund** offers eligible homebuyers 3.5% down payment assistance, which in effect would cancel out the 3.5% down payment that FHA requires to obtain a mortgage. Chenoa doesn’t grant the funds outright; they offer qualified applicants a zero-interest second mortgage with a 30-year term. If the borrower makes 36 consecutive, on-time payments on the first mortgage, this second mortgage will be forgiven.
Applicants should expect to have a credit score of at least 620 and a DTI (debt-to-income ratio) of no more than 45%. If a payment is missed, all is not lost. You will be given an opportunity to contact Chenoa and restart your 36-month on-time payment agreement.
This Fannie Mae program enables eligible homebuyers to get assistance with down payments and/or closing costs from approved third parties. Community Seconds is a type of second mortgage and must meet certain Fannie Mae requirements.
Not-for-profit loans and programs for first-time homebuyers
The not-for-profit sector can also be a helpful place to turn when buying a home for the first time. Key sources of assistance include the following programs and organizations:
- Neighborhood Assistance Corporation Of America (NACA)
- National Homebuyers Fund (NHF)
- Habitat For Humanity
Neighborhood Assistance Corporation Of America (NACA)
The Neighborhood Assistance Corporation of America (NACA) is a not-for-profit organization that provides significant discounts to first-time homebuyers with a stated mission “to provide affordable homeownership to low- and moderate-income people and communities.”
While attending a NACA homebuyer workshop and speaking with a NACA counselor is required as part of the application process,*** the benefits are truly astounding: no down payment, no closing costs, below-market mortgage rates and no private mortgage insurance.
National Homebuyers Fund (NHF)
The NHF was established in 2002 as a nonprofit corporation to help stimulate and expand homeownership and build stronger communities. Cognizant of the many financial hurdles first-time homebuyers face, NHF provides down payment and/or closing cost assistance up to 5% of the cost of the mortgage. To learn more about requirements and benefits, please visit their website.
Habitat For Humanity
If you’re attracted to the notion of volunteer service and don’t mind putting in some serious sweat equity, then Habitat for Humanity offers qualified low-income homebuyers "simple, decent and affordable" housing. Because these homes are built by a corps of volunteers, they are less expensive than similarity-sized homes in the same area. The result—along with a reduced mortgage—is a well-built, affordable home whose construction you can feel great about participating in.
Under normal conditions, individuals who wish to withdraw funds from either their Roth or traditional IRA account do so under penalty, unless they are at least 59 1/2 years old. However, if you are a first-time homebuyer and would like to withdraw up to $10,000 to help pay for your first home ($20,000 for couples), the federal government has agreed that they will waive the 10% penalty.*
This is a phenomenal way for many people to tap into existing savings otherwise reserved for retirement. Those who decide to use IRA funds must repay the borrowed amount within 120 days to avoid incurring any penalties.
As you can see, there are numerous programs that offer loans and grants to first-time homebuyers, and regardless of income or credit score, a little research could yield significant savings.
The process of selecting your future home and securing an affordable mortgage can be a long and arduous journey; however, the many programs available to borrowers on the federal, state and local level can provide a much-needed incentive to take the leap into homeownership.
*Guaranteed Rate does not provide tax advice. Contact your tax advisor with any tax related questions.
** Chenoa Fund programs are allowed in all states except New York.
***NACA’s eligibility requirements consist of the following:
- No member of the household can have an ownership interest in any other property at the time of closing,
- Occupy the home over the life of the NACA mortgage,
- Participate in five actions and activities a year and at least one prior to NACA Qualification and one prior to closing in achieving NACA’s overall mission of economic justice; and
- Be willing to abide by NACA’s terms of membership, participation, and eligibility.
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