Buying a home can be a wonderful experience. Yet as a first-time homebuyer, or even someone who hasn’t purchased a home in several years, there can also be a lot of stress involved in trying to qualify for a mortgage loan—whether that be high mortgage interest rates, saving enough for the down payment, or just the myriad of steps involved in the process.
The good news is, there are valuable resources that can make home buying easier and more affordable for first-time buyers. The following guide will help you understand how first-time homebuyer programs work and where to find some of the best options for your situation.
Learn more: How to buy a house step by step.
What is a first-time homebuyer program?
There are many different types of first-time homebuyer programs—at both the federal and state levels. In general, these types of programs and mortgages aim to make homeownership more affordable for borrowers who have either never bought a home in the past or those who haven’t owned a home for several years.
In some cases, a first-time buyer program may feature a low-interest mortgage, a lower down payment requirement, and credit score standards that are easier to satisfy. Depending on the program, your lender may also let you combine a first-time homebuyer loan with down payment and closing cost assistance to make the overall goal of homeownership more attainable.
“Talk to a local expert who knows both the nationally available first-time homebuyer programs and the locally funded down payment assistance programs,” says Casey Flemming, mortgage advisor at Silicon Valley Mortgage and author of Buying and Financing Your New Home.
Types of first-type homebuyer programs
Below are nine programs and loans to consider if you’re in the market to purchase a home as a first-time homebuyer. Researching your choices in advance can help you make sure you find the best financing option for your situation when you’re ready to start the homebuying process.
Government-backed home loans
There are several federal homebuyer programs available that could work well for first-time homebuyers and repeat borrowers alike. The federal government doesn’t issue the mortgages below, but rather insures them.
If you take out a government-backed home loan and default, the federal government repays a portion of the loan to the lender. This arrangement reduces the risk involved for the lender and can make homeownership more accessible to borrowers.
Here are some of the most common types of government-backed mortgage loans and some basic details on how the loans work.
- FHA loans: The Federal Housing Administration backs FHA loans and requires borrowers to have a FICO® Score of at least 580 plus a minimum 3.5% down payment for this type of mortgage. Some lenders may work with borrowers with a FICO Score as low as 500 if they provide a 10% down payment. But it’s important to understand that not all lenders are willing to approve borrowers under these conditions.
- VA loans: The U.S. Department of Veterans Affairs backs loans for eligible active-duty military service members, qualified veterans, and surviving spouses. If you qualify for a VA loan, you may be able to purchase a home with no down payment, limited closing costs, and no private mortgage insurance. You may, however, have to pay a VA funding fee. It’s also worth noting that there’s no minimum credit score requirement for VA loans, but different lenders may set their own loan qualification criteria.
- USDA loans: The U.S. Department of Agriculture insures USDA loans. These loans don’t require a down payment and feature no minimum credit score requirement. But some lenders may require a FICO Score of 620 or higher for USDA mortgages. You must also buy in a USDA-designated eligible rural area to qualify for this type of financing. And, know that these loans are meant for lower income homebuyers, so high earners likely will not qualify.
As you can see above, credit score and down payment requirements tend to be more forgiving with government-backed home loans. But it’s still important to make sure you don’t rush into purchasing a home unless you’re confident you can afford the financial commitment.
“Homebuyers who just barely squeak in to qualify should use caution,” says Fleming of Silicon Valley Mortgage. “In my opinion, loans are sometimes made to people who are almost certainly going to fail in the long run. If a homebuyer has a credit score that is just enough to qualify and debt-to-income ratios that are just under the limit, I recommend they work on their finances before jumping into homeownership.”
Low-down payment conventional loans
Conventional loans are another option first-time homebuyers can consider when searching for mortgage programs. But trying to save the traditionally recommended 20% down payment for this type of loan (to avoid private mortgage insurance) could be a challenge for many people, especially if you’re trying to buy a home for the first time.
On a positive note, both Fannie Mae and Freddie Mac—privately held mortgage companies that were created by Congress and are backed by the government—offer conventional loan programs designed to make homeownership more affordable for first-time homebuyers. Below are four low-down payment conventional loan programs and some basic details about how they work.
- Fannie Mae HomeReady®: This conventional loan program features a down payment requirement that can go as low as 3%. Low-income borrowers can also apply for a $2,500 credit to use toward their down payment and closing costs. (Note: This credit is only available for a limited time, as of this writing.)
- Fannie Mae Conventional 97 Mortgage: Fannie Mae also offers a 97% LTV (loan to value) mortgage with a 3% down payment requirement. Even high-income borrowers may qualify for this program, but you need to be either a first-time homebuyer or someone who hasn’t owned a home in the last three years to be eligible. All first-time buyers must complete a homeownership education class.
- Freddie Mac Home Possible®: This conventional mortgage program helps qualified low-income borrowers purchase a home with a down payment as low as 3% of the purchase price. Gifts from family members and financial assistance from an employer can also count toward down payment fund sources. The program is available for first-time homebuyers and repeat borrowers.
- Freddie Mac HomeOne®: This home loan program also features a 3% down payment requirement for qualified first-time homebuyers and borrowers who haven’t owned a home in the last three years. If you’re a first-time borrower, you’ll need to complete a homebuyer education course to be eligible for financing.
Other first-time homebuyer programs
In addition to the national first-time homebuyer programs and loans mentioned above, there are numerous state-level programs to consider. Nonprofit organizations and other agencies may be good resources for borrowers as well.
Here are a few options to help guide your research.
State-based first-time homebuyer programs
Many states offer down payment assistance for first-time homebuyers. These programs may come in the form of grants, low-interest loans, or loans with forgivable interest or deferred payments for first-time borrowers.
You may be able to find information about homebuyer programs in your area by searching the U.S. Department of Housing and Urban Development (HUD) website. It may also be worthwhile to seek out a HUD-certified housing counseling agency to get advice on what resources are available to you. The Consumer Financial Protection Bureau (CFPB) offers a Find a Counselor tool, or you can call the CFPB at 855-411-2372, or the HOPE Hotline at 888-995-4673.
Also, you can visit the National Council of State Housing Finance Agencies website to see if programs are available from your local state housing finance agency. Last but not least—another valuable resource could be your loan officer or realtor.
“A skilled lender should know all about the programs available in the market they serve,” says Matthew Dunbar, senior vice president of the Southeast Region for Churchill Mortgage. “Realtors should know about these programs as well.”
Nonprofit programs
In general, nonprofit homebuyer programs exist to serve low-income families or those with specific housing needs. Below are two well-known nonprofit homebuyer programs.
- Neighborhood Assistance Corporation of America (NACA): NACA is a nonprofit program that aims to make homeownership more accessible for low- to moderate-income borrowers in underserved communities. The program offers low-interest mortgages with no down payment requirements, no closing costs, and no mortgage insurance. You don’t have to be a first-time homebuyer to qualify for financing and the program also doesn’t consider your credit score.
- Habitat for Humanity: Habitat for Humanity is a program that helps low-income families (households whose incomes don’t exceed 60% of the area median income) secure safe and affordable housing. Qualified prospective homeowners partner with the program and provide “sweat equity” throughout the process by either helping to build homes (theirs and the homes of others), taking homeownership classes, or volunteering at a Habitat ReStore.
The takeaway
With home prices having skyrocketed over the past several years, buying your own place can feel out of reach. But first-time homebuyer programs and loans have the ability to help make homeownership more accessible for many would-be borrowers.
So, take the time to do your research and explore your options to see if the available resources could save you money or help you reach your goals faster.
“Diligence is the most important step in the homebuying process for a first-time buyer,” says Churchill Mortgage’s Dunbar. “Go online. Do your own research. And once you find a lender you’re comfortable working with, don’t be afraid to ask questions. At the end of the day, this transaction is about the borrower—and your lender should be providing you expertise.”
