Guide to first-time homebuyer loans and programs
Key takeaways
- Many first-time homebuyer programs operate at the state level, through a state housing finance agency.
- Federal programs are also available, often benefiting specific groups, such as veterans or essential workers.
- Assistance may also be available through nonprofits or employer-sponsored programs.
If you’ve never owned a home — or you have, but not recently — you might qualify for a first-time homebuyer loan or assistance. First-time buyer loans typically have more affordable rates and more flexible requirements, such as a lower minimum down payment or credit score. Many help buyers afford the costs of closing and the down payment through grants and low-interest loans.
The median age of first-time homebuyers is 38 years old, according to the National Association of Realtors.
First-time homebuyer programs by state
Each U.S. state operates a housing finance authority (HFA) to encourage homeownership, among other responsibilities. Browse HFAs and other first-time buyer resources by state:
Low-down-payment conventional loans
Conventional loans are the most popular type of mortgage, requiring only 3 percent down. This makes them an attractive option for first-time homebuyers who might have limited savings. Low-down-payment conventional options include:
- Conventional 97 mortgage: This conventional loan, backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, requires just 3 percent down and a minimum credit score of 620. It also requires private mortgage insurance (PMI), a type of policy that protects your mortgage lender should you stop paying back your loan. You’ll pay these insurance premiums until you have 20 percent equity in your home.
- HomeReady mortgage: Like the Conventional 97 program, Fannie Mae’s HomeReady mortgage program requires just 3 percent down. You will have to pay for PMI, but it might be less expensive.
- Home Possible mortgage: Freddie Mac’s Home Possible mortgage program is the counterpart to the HomeReady mortgage, with a 3 percent minimum down payment.
- HomeOne mortgage: This Freddie Mac-backed mortgage also allows for just 3 percent down with PMI. It’s available only to first-time homebuyers.
- HFA Preferred and HFA Advantage: HFA Preferred and HFA Advantage loans, available through state housing finance agencies (HFAs), also offer just 3 percent down. Fannie Mae backs HFA Preferred loans, and Freddie Mac backs HFA Advantage.
You won’t get your low-down-payment conventional loan directly from Fannie Mae or Freddie Mac, however. Instead, you’ll work with a mortgage lender of your choosing, which might be a bank, online lender or credit union.
Government-backed mortgage loans
The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Department of Agriculture (USDA) back mortgage programs that are often an option for first-time homebuyers. Here’s an overview:
- FHA loan: Insured by the Federal Housing Administration, FHA loans allow you 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. If you put down less than 20 percent, you’ll pay FHA mortgage insurance premiums (MIP), similar to the insurance you’d pay for a low-down-payment conventional loan. There’s a difference, though: You can’t typically stop paying FHA MIP unless you refinance out of an FHA loan entirely.
- VA loan: The VA guarantees home loans for eligible members of the U.S. military, veterans and surviving spouses. These loans typically don’t require a down payment, though there is a funding fee.
- USDA loan: USDA loans don’t require a down payment, but you’ll need to purchase in a designated rural area and meet income limits based on your location.
If you’re open to a home that needs a little work, consider an FHA 203(k) loan. These mortgages include financing for the home itself and necessary repairs, and they have financial qualifications similar to those for standard FHA mortgages.
Other federal first-time homebuyer programs
Aside from the best-known government-backed loan options, there are a few other federal homebuyer programs, which may have generous financial terms. These include:
- Good Neighbor Next Door: Through this U.S. Department of Housing and Urban Development (HUD) program, law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers could buy a home in a “revitalization area” for 50 percent off. You can search for properties available in your state on the program’s website.
- HomePath ReadyBuyer: This Fannie Mae program offers first-time buyers 3 percent in closing cost assistance when buying a foreclosed home. Keep in mind that you must take an online homebuyer education course and that you’ll be limited in your choice of properties.
- Energy-efficient mortgage (EEM): This type of mortgage allows you to tack the cost of improvements — like new insulation, a more efficient HVAC system or double-pane windows — onto your primary loan, without requiring a larger down payment. Conventional and government-backed options are available. You’ll need a home energy assessment to qualify.
- Native American Direct Loan (NADL): These loans, guaranteed by the VA, allow Native American veterans and their spouses to buy a home with no down payment. If you’re not a veteran, consider HUD’s Section 184 loan, which provides loans to eligible Native American homebuyers for just 2.25 percent down.
Down payment assistance (DPA) options
Saving for a down payment is a big hurdle for most first-time homebuyers. That’s where down payment assistance comes in. Options include:
Down payment assistance loans
Many states’ first-time homebuyer programs offer a lower-cost first mortgage to help you buy the home, then a second mortgage to help you cover your down payment and closing costs. These second mortgages are commonly structured as either:
- Low-interest loans: A loan with a below-market mortgage rate that you’ll repay over the course of a few years
- Deferred-payment loans: A no-interest loan you’ll repay when you sell the home, refinance or pay off your first mortgage
- Forgivable loans: A second mortgage you won’t have to pay back so long as you keep the home as your primary residence for a certain amount of time and stay up-to-date with your mortgage payments
Other down payment assistance options
- Down payment grants: A down payment or first-time homebuyer grant is essentially free money to help you cover your down payment or closing costs. You must usually earn no more than 80 to 100 percent of the median income in your area and meet credit score and home price requirements to qualify.
- Down payment savings match: These programs match participants’ down payment savings up to a certain amount. The money can only be used for your down payment and closing costs. You might hear these programs called Individual Development Accounts, or IDAs.
- First-generation homebuyer help: Some states have earmarked funds specifically to assist first-time homebuyers whose parents never owned a home. Rhode Island’s housing finance agency, for example, is piloting a program that provides a $25,000 forgivable assistance loan to eligible borrowers. Michigan has a similar program which also offers up to $25,000.
Other options for first-time homebuyers
Nonprofit programs
Nonprofit program options tend to be reserved for first-time homebuyers with incomes that are significantly lower than the median income in their area, or buyers who fit certain demographic or other criteria.
- Neighborhood Assistance Corporation of America: The Neighborhood Assistance Corporation of America (NACA) is a nonprofit that provides low-rate mortgages to low- and moderate-income borrowers without requiring a down payment, closing costs or any mortgage insurance. The nonprofit doesn’t use credit scores to qualify you, either: Instead, it looks at other factors, such as rent payment history.
- Habitat for Humanity: If your annual income is 60 percent or less of the median income in your area, you might qualify for Habitat for Humanity’s homeownership program. Along with not exceeding the income threshold, you’ll need to contribute sweat equity — in other words, help build the home or a home for another applicant — to qualify.
Employer-sponsored programs
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 being a first-time homebuyer or having worked for the employer for a certain amount of time.
First-time homebuyer programs for students
If you recently graduated from college, you might be eligible for help buying your first home. For example, the state of Ohio offers a Grants for Grads program with up to 5 percent down payment assistance for anyone who finished an academic program in the last 48 months. These programs typically come with a requirement to stay put for a given time — in Ohio, it’s five years — or you’ll need to repay the funds.
Mortgage tax deductions
As a first-time homebuyer, you might be eligible for a federal tax break through a mortgage credit certificate (MCC), usually up to $2,000 per year. There is a fee to buy the MCC, but if you plan to stay in your home long-term, the math might work in your favor.
In addition, homeowners who itemize their taxes can deduct interest paid on mortgages on their annual federal income tax return. You can only deduct the interest on up to $750,000 of mortgage debt if married filing jointly, or up to $375,000 if single.
How to apply for a first-time homebuyer loan or program
Your mortgage lender can help you determine whether you qualify for a first-time homebuyer program and apply for one if you do. You can also check out your state’s housing finance agency (HFA) website to learn about eligibility criteria and search for participating lenders.
Before you apply, start preparing financially. Look into building your credit to buy a home and saving for the upfront costs of homebuying, such as the down payment and closing costs.
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