First-time homebuyers programs: What new buyers need to know

Nathan Law

Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own. Researching […]

Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.

Researching first-time homebuyers programs can help you qualify for a mortgage and become a homeowner. (iStock)

Buying your first home can be both exciting and scary. Homeownership is a huge financial commitment, and you may have heard that you need a large down payment, stellar credit and thousands of dollars to cover closing costs. Don’t panic.

Fortunately, plenty of programs exist at the state and federal levels to help first-time homebuyers. These programs range from down payment assistance to affordable loans, and even homebuyer education programs.

What are first-time homebuyers programs?

First-time homebuyers programs include a variety of grants and special loans for new would-be homeowners. The federal government backs some programs, as do some states, cities, counties and nonprofit organizations.

Types of first-time homebuyers programs

In many cases, first-time homebuyers programs are available even if you’ve owned a home before, as long as you haven’t owned a home in the past three years. Different first-time homebuyer programs have their own eligibility rules, but here’s an overview of the different types of programs available.

Government-backed loans

Government-backed mortgage loans are insured by the federal government. However, they’re not offered directly by the government.

Instead, the government guarantees it will pay off your loan if you run into financial troubles and can’t afford to make your monthly payments. This guarantee encourages lenders to make loans available to borrowers who might otherwise have trouble qualifying for a mortgage.

Grants

Grants provide funds that you can use toward a down payment and closing costs on a home. Grants for first-time homebuyers can come from state agencies and nonprofit organizations. They may be structured as gifts or as loans that will be forgiven as long as you stay in the home for a set number of years. 

Down payment assistance

Down payment assistance programs provide money to cover some or all your down payment. They’re generally offered by state agencies and nonprofit organizations and may come in the form of a grant or forgivable loan. 

Some banks also partner with nonprofits or government agencies on matched savings programs, which match savings deposited into special accounts to help borrowers save for a down payment.

Closing assistance

Some state agencies, nonprofit organizations and private mortgage lenders offer closing cost assistance programs to help you cover the closing costs. These programs may come as grants, forgivable loans, no-interest loans or lender credits.

Education

Homebuyer education programs can help you better understand what’s involved in buying and owning a home. The government agency administering the program will often require you to complete a homebuyer course before receiving program benefits.

If you’re thinking about buying a home, Credible lets you compare mortgage rates side by side.

Federal first-time homebuyer programs 

The federal government offers several programs and types of mortgages for first-time homebuyers. 

FHA loan

The Federal Housing Administration (FHA) is a part of the U.S. Department of Housing and Urban Development (HUD). It insures loans made by FHA-approved lenders throughout the U.S.

  • How it works: FHA loans are insured, which makes it easier for people to qualify for a mortgage since the federal government will repay the loan if borrowers quit making payments.
  • Eligibility requirements: The minimum credit score varies by lender but can’t be less than 500, according to HUD. You must intend to use the home as your primary residence and the home has to meet FHA appraisal standards.
  • Rates and terms: Rates vary by lender. FHA loans allow down payments as low as 3.5%, and you can sometimes roll the closing costs into the loan amount so that you don’t have to come up with a lot of cash out of pocket at closing.
  • Who it might be good for: Homebuyers without a lot of cash for a down payment and closing costs.

USDA loan

The USDA backs loans for borrowers interested in buying a home in a rural area.

  • How it works: The USDA guarantees loans for purchasing homes located in certain eligible areas.
  • Eligibility requirements: USDA loans don’t have a minimum credit score requirement but you have to meet the USDA’s income eligibility limits, which vary by location.
  • Rates and terms: Rates vary by lender. USDA loans don’t require a down payment, and you can use gifted money to pay closing costs.
  • Who it might be good for: Low- and moderate-income homebuyers interested in purchasing a home in a rural area.

VA loan

VA loans are federally guaranteed loans for qualifying veterans or active-duty service members.

  • How it works: The VA guarantees loans made by VA-approved lenders to qualifying veterans of the U.S. armed forces.
  • Eligibility requirements: VA loans don’t have a minimum credit score requirement.
  • Rates and terms: Rates vary by lender. Most VA loans don’t require a down payment but do require a one-time VA funding fee of up to 2.3% of the loan amount for first-time homebuyers.
  • Who it might be good for: Veterans, active-duty service members, reservists, National Guard members and surviving spouses of deceased veterans.

Good Neighbor Next Door

HUD’s Good Neighbor Next Door program is a homeownership program for homebuyers in certain professions.

  • How it works: The program aims to revitalize certain communities designated as revitalization areas. The Good Neighbor Next Door program isn’t a loan. Instead, it offers eligible borrowers 50% off the home’s list price and down payments as low as $100. Borrowers can use FHA, VA, conventional mortgages or cash to finance the purchase.
  • Eligibility requirements: You (or your spouse) must be a law enforcement officer, teacher, firefighter or emergency medical technician and commit to living in the property as your principal residence for at least 36 months.
  • Rates and terms: Rates vary by lender. HUD requires you to sign a second mortgage for the discounted amount. You don’t have to make payments on the “silent second” mortgage as long as you live in the home for 36 months.
  • Who it might be good for: Homebuyers in eligible professions interested in buying a home in one of the designated revitalization areas.

Fannie Mae’s HomePath Ready Buyer program

The HomePath Ready Buyer program is offered by Fannie Mae, a government-sponsored enterprise that purchases mortgages from lenders, ensuring lenders have cash available to make more loans.

  • How it works: If eligible, you can receive up to 3% in closing cost assistance toward the purchase of your home.
  • Eligibility requirements: You must be a first-time homebuyer and complete a homeownership education course.
  • Rates and terms: The HomePath Ready Buyer program isn’t a loan but it works in conjunction with other Fannie Mae mortgage products.
  • Who it might be good for: First-time homebuyers who need help coming up with cash for closing costs.

Energy-efficient Mortgage 

The FHA’s Energy-Efficient Mortgage (EEM) program can help you finance energy-efficient improvements to your home.

  • How it works: If you qualify for an FHA mortgage, you can finance the cost of certain energy-efficient home improvements into your loan.
  • Eligibility requirements: Other FHA loan requirements apply. In addition, you must get a home energy assessment to ensure the improvements you plan to make are cost-effective.
  • Rates and terms: Vary by lender.
  • Who it might be good for: Homebuyers who want to make energy-efficient improvements to their home.

FHA Section 203(k)

The FHA’s 203(k) program allows homebuyers to finance intended repairs, improvements and upgrades into their home loan.

  • How it works: If you qualify for an FHA mortgage, you can finance up to $35,000 into your loan for home improvements.
  • Eligibility requirements: Other FHA loan requirements apply.
  • Rates and terms: Vary by lender.
  • Who it might be good for: Homebuyers who want to buy a fixer-upper.

State first-time homebuyer programs

State housing authorities offer various programs to help first-time homebuyers qualify for a mortgage and afford the down payment and closing costs. The programs vary by state but can include down payment assistance, closing cost assistance, savings match programs, low or no down payment loans and more.

A good place to start your search for programs in your state is HUD’s State Information page. Select your state to find information on homeownership assistance programs in your state.

You can also find contact information for your state housing authority via the National Council of State Housing Agency’s Find a State Housing Finance Agency tool. 

As you’re researching first-time homebuyer programs, you can also compare mortgage rates using Credible.

What are the pros and cons of first-time homebuyer programs?

First-time homebuyer programs help make homeownership more accessible. But the advantages of these programs may come at the expense of other features. 

Pros of first-time homebuyer programs

  • Low or no money out of pocket at closing — Many of these programs help you buy a home by providing funds for the down payment and closing costs or financing those costs into your loan. This allows you to become a homeowner sooner than you would have if you’d saved up enough to cover these costs on your own.
  • Fixed interest rates — Many first-time homebuyer programs help you avoid the potential pitfalls of adjustable-rate loans by providing fixed-rate mortgages. These programs guarantee a fixed interest rate for the life of the loan, ensuring your monthly mortgage payment won’t go up if interest rates rise.
  • Relaxed requirements — Some conventional mortgages are only available to those with substantial income or cash reserves and strong credit scores. Many first-time homebuyer programs have less stringent requirements, making it easier to qualify for a mortgage.

Cons of first-time homebuyer programs

  • Lack of flexibility — Most first-time homebuyer programs have specific criteria that people must meet to afford a home or qualify for a mortgage. For example, they may have income limitations or only offer loans to people buying homes in certain areas. If you don’t fit their strict guidelines, you’ll have to look elsewhere.
  • Mortgage insurance — Some loan programs that offer low or no down payment require borrowers to pay for mortgage insurance. You pay the premium (upfront, monthly or both), but the insurance doesn’t protect you — it protects the lender if you default on your loan. These premiums can increase the cost of borrowing significantly.
  • Minimum property requirements — Many loan programs for first-time homebuyers require the property you’re buying to meet certain standards. For example, FHA borrowers must pay for an appraisal that verifies the home meets the guidelines outlined in HUD Handbook 4000.1. Things like having lead-based paint on the property, power or electrical issues and other safety and structural issues can disqualify the property.

How to buy a home for the first time

Buying your first home can be overwhelming. While the exact process varies from state to state and lender to lender, here’s a general overview of the steps you need to take.

Step 1: Talk to lenders to get prequalified or pre-approved

Getting prequalified essentially means providing basic information about your income and financial situation to get a ballpark estimate of how much home you can afford. The lender will give you a prequalification letter that you can show to a real estate agent or seller, so they know you can afford to buy a home.

If you want to take it a step further, you can get pre-approved. This involves having the lender run your credit, verify your income and estimate your interest rate and mortgage payments. Having a pre-approval carries more weight with sellers if you decide to make an offer on their property. They can trust your offer is genuine and are more likely to accept your offer.

As you’re going through the pre-approval process, be sure to shop around and compare multiple lenders, and research first-time homebuyer programs that you might be eligible for.

Credible makes it easy to compare mortgage rates so you can see what rates and terms you might qualify for.

Step 2: Look for the right property

With the help of a real estate agent, start looking for properties within your budget. While you don’t necessarily need an agent to buy a home, agents usually have access to more properties, including ones that aren’t officially on the market yet. They can also handle a lot of the paperwork on your behalf and have experience negotiating the best deals.

Step 3: Make an offer

Once you find a house you want to buy, it’s time to make a written offer with your agent’s help.

Most written offers also include an earnest money deposit — usually around 1% to 3% of the purchase price, although it can be as high as 10% in highly competitive markets.

Once you make the offer, the seller can either accept your offer, reject your offer or counter offer. If you end up buying the home, your deposit will go toward your down payment and closing costs. If you and the seller agree to the sale and later back out, you lose your deposit.

Step 4: Get a home inspection and appraisal

Most lenders require a home inspection and appraisal before they’ll approve a loan. The inspector will give you a list of problems they find and you can ask the seller to correct them. If the inspection uncovers major issues, you might reconsider the purchase. If the appraisal comes in lower than your offer amount, you may be able to negotiate a lower price with the seller.

Step 5: Finalize your financing

After you make an offer, your lender will begin the final loan approval process. They may ask for additional documentation during this process. Three days before closing on your loan, the lender should provide a closing disclosure, which summarizes your loan details, interest rate, monthly payment and how much you need to pay at closing. Make sure that the closing disclosure doesn’t vary too much from the loan estimate you received during the pre-approval process.

Step 6: Close on your new home

Your lender will schedule a closing meeting, which may take place at the title company’s office or your real estate agent’s office. You typically need to bring your I.D. and a cashier’s check for your closing costs and sign a stack of paperwork. Then you receive the keys to your new home.

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