First-time homebuyer programs, grants and loans
As a first-time homebuyer, you’ll need to put 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 how you’ll afford your new home.
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, you’ll want to review your income, savings, assets, and credit to understand your current purchasing power. This will also give you an idea of what kind of first-time homebuyer loans and programs you could qualify for.
First-time homebuyer programs, grants and loans work to make it even easier for you to find your dream home. You may be surprised at your eligibility.
First-time homebuyers definition
While the full definition from the Department of Housing and Urban Development is quite lengthy, the following criteria encompasses the majority of first-time homebuyers from a federal standpoint:
- An individual who has not owned 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 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 ask about 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 because they are backed by the federal government and come with few restrictions.
- FHA loans typically offer applicants reduced down payment options 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. This means that these loans may have 0% down payment options available.
- 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, 0% down payment options, 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 0% down payment options are available.
Fannie Mae and Freddie Mac
- Conventional loans with down payment options starting at 3% for homebuyers that meet minimum fico score requirements.
- Fannie Mae and Freddie Mac offer several programs including HomeReady for credit-worthy low income borrowers, HomePossible for low-to-very low income borrowers, and HomeOne for for qualified first-time homebuyers.
These two lenders have also recently adjusted the loan-level price adjustment (LLPA). These are additional fees assessed to conventional mortgage based on borrower and loan risk.
- 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
There are other federally sponsored loans and grants designed to assist low-to-moderate income earners, Native Americans and homeowners interested in energy-efficient renovations. A few of the available programs include:
- 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. Also, 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. This program is meant for a property that will require repair 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. This allows homeowners 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 discounts to qualified applicants. Advantages can include down payment options as low as 2.25%.
Section 184 loans are fully guaranteed by the federal government. These loans offer homebuyers low interest rates and “hands on” underwriting, in addition to low down payment options. 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. It’s well worth your time to explore these programs and discounts that are offered on the state and local level. Many of these programs for first-time homebuyers can assist with closing costs, down payment and home renovations.
While not all of these programs are specifically geared toward first-time homebuyers, you may still 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 and local 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. While FHA loans (under HUD) allow eligible homebuyers access to down payment 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. This would essentially 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 guidelines for underwriting.
Also, if a borrower is using assistance from a state, local, or non-profit organization, the program has to meet Fannie Mae Community Seconds guidelines to be an acceptable sources of funds.
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: 0% down payment options, 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. The 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. These homes are less expensive than similarity-sized homes in the same area because they are built by volunteers. The result is a well-built, affordable home whose construction you can feel great about participating in.
How can I start my journey to a new home?
As you can see, there are numerous programs that offer loans and grants to first-time homebuyers. 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. The programs available to borrowers on the federal, state and local level can provide an incentive to get into homeownership.
If you're ready to get started, a mortgage pre-approval is a great first step. Apply today and let the team at Guaranteed Rate help you get your first home.
*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.