Between high mortgage rates and high home prices, it’s a tough housing market for first-time homebuyers. Thankfully, there are programs like down payment assistance and low-down-payment mortgages for which you might qualify. Read the guide below to learn more about your options as a first-time homebuyer.
[Read: Best Mortgage Lenders]
First-Time Homebuyer Programs by State
Many state and local governments offer down payment assistance, tax credits or grants for residents who are buying their first home. The terms, availability and eligibility requirements of these programs will vary based on where you live. Here are a few types of location-based first-time homebuyer programs:
— Down payment assistance grants are typically need-based gift money that doesn’t need to be repaid. In most cases, you’ll have to fall under a certain income threshold to qualify for a first-time homebuyer grant through a state or local government agency.
— Down payment assistance loans are second mortgages used to cover closing costs or a down payment. Under some programs, these loans can be partially or fully forgiven once certain criteria are met, such as living in the house full time for a number of years.
— First-time homebuyer loans are mortgages that are repaid with interest. Borrowers in some areas may be able to qualify for a first-time homebuyer loan through a state housing agency that has less-strict eligibility requirements than a conventional mortgage lender.
— Tax credits are used to reduce the amount you pay in federal or state taxes. For example, first-time homebuyers in Ohio are able to deduct up to an additional $2,000 worth of mortgage interest paid to lower their tax bill through the state’s program. Although current federal tax credits aren’t limited to first-time homebuyers, congressional lawmakers introduced a bill in March 2023 that would implement a first-time homebuyer tax credit of up to $15,000.
— Subsidies are a form of mortgage assistance that can effectively lower your monthly mortgage payments. Depending on the location, you typically need to meet certain income requirements to qualify for a subsidy.
You can see a full list of programs by state on the Department of Housing and Urban Development website. You should also contact your local city or county government to learn more about first-time homebuyer assistance in your area.
Conventional Loan Programs for First-Time Homebuyers
With a conventional 97 mortgage, first-time homebuyers may be able to secure a home loan with as little as 3% down — in other words, a 97% loan-to-value ratio. The program guidelines are determined by Fannie Mae and Freddie Mac, and these mortgages are offered through conventional lenders like banks and credit unions.
Borrowers who are first-time homebuyers may be required to take a homeownership education course to qualify, and some programs determine your eligibility based on the area median income. Keep in mind that mortgage insurance is typically required for those with a down payment of less than 20%. Here are a few common conventional loan programs for first-time buyers:
— HomeReady: First-time or repeat homebuyers who make at or below 80% of their area median income and have limited cash for a down payment may qualify for a Fannie Mae HomeReady mortgage. This program requires at least 3% down, and applicants with nontraditional credit, like thin credit profiles, may qualify. HomeReady boasts lower-than-standard mortgage insurance coverage requirements, which can save borrowers money on their monthly payments.
— Home Possible: A Freddie Mac Home Possible mortgage gives low-income borrowers (at or below 80% of the area median income) a way to buy a home with less-than-stellar credit and as little as 3% down. For this program, Freddie Mac allows the use of a co-borrower who doesn’t live in the home, giving applicants the opportunity to enlist the help of a creditworthy friend or relative to qualify. Home Possible is open to first-time or repeat homebuyers.
— HomeOne: The Freddie Mac HomeOne program allows first-time homebuyers to get a mortgage with as little as 3% down, and it doesn’t have income thresholds like with a Home Possible mortgage. HomeOne accommodates various types of properties, including single-family homes, condos and townhomes.
Get in touch with several mortgage lenders to explore which options are available to you.
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Government-Backed Mortgages With Low or No Down Payment
Mortgages that are insured by government agencies often come with more lenient eligibility criteria for an applicant’s credit score and down payment. Although these mortgages aren’t limited to first-time homebuyers, they can provide a good option for borrowers who are purchasing their first property. Here are a few types of government-insured mortgages that first-time homebuyers should consider:
FHA Loans
An FHA loan is a mortgage that’s insured by the Federal Housing Administration, which allows borrowers to buy a home with as little as 3.5% down. This type of mortgage has less stringent credit score requirements than with a conventional loan; the minimum credit score needed is 580, although borrowers may qualify with a credit score as low as 500 if they come prepared with a 10% down payment.
The main drawback to borrowing an FHA loan is the mortgage insurance requirement. Regardless of the down payment, FHA borrowers are required to pay an up-front mortgage insurance premium, or MIP, that’s equal to 1.75% of the loan amount. The up-front MIP can be financed into your loan amount or paid in cash. Additionally, annual mortgage insurance is added to your monthly payments.
You can seek this type of government-backed mortgage through FHA-approved lenders. Keep in mind that the property’s purchase price must meet the FHA loan limits for your area.
VA Loans
Active-duty and retired military personnel may be eligible for a zero-down-payment mortgage through a VA loan from the Department of Veterans Affairs. Since the VA guarantees a portion of your loan, you may qualify for a lower interest rate than you would get with other types of mortgages. This also allows you to put 0% down without needing mortgage insurance.
To qualify for a VA home loan, you’ll need a Certificate of Eligibility that proves to the lender you meet the military service requirements. VA loans don’t require a down payment, but you’ll have to pay a VA funding fee worth between 1.25% and 3.3% of the total loan amount, which can be rolled into the loan amount. For first-time VA loan borrowers, the fee is capped at 2.15%.
USDA Loans
A mortgage either backed or funded by the U.S. Department of Agriculture is known as a USDA loan. These no-down-payment mortgages are designed to help low-income homebuyers purchase homes in designated rural or suburban areas, defined as those with a population of less than 35,000. The income limits vary based on the size of your household and the area’s median income.
[Read: How to Get a Mortgage With No Down Payment. ]
Homebuyer Grants and Credits from Mortgage Lenders
In addition to first-time homebuyer programs offered by state and local governments, mortgage borrowers may also qualify for down payment assistance grants or closing cost credits through their lender. These funds do not need to be repaid, but they may count as taxable income. Here are a few mortgage lenders that offer homebuyer assistance:
| What Is It? | Who Qualifies? | |
| Bank of America | The America’s Home Grant is a lender credit worth up to $7,500 that can be used toward nonrecurring closing costs. The Bank of America Down Payment Grant, worth 3% of the purchase price (up to $10,000), is available in select markets. | Must purchase a home within a certain geographical area. The loan-to-value ratio must be 80% or greater. Maximum income and loan amount limits apply. Homebuyer education is required for the $7,500 lender credit. |
| Citi | Citi’s Lender Paid Assistance Program is a lender credit worth up to $7,500 that can be used toward eligible one-time closing costs. | Must purchase a home in a low-to-moderate-income census tract or one of seven designated cities, earn less than 120% of the area’s median household income, and complete a qualified homebuying class. |
| Chase Bank | The Chase Homebuyer Grant is a lender credit up to $7,500 that’s first applied toward discount points, then closing costs. The remaining funds can be applied toward a down payment. | Must purchase a home within an applicable census tract using a Chase DreaMaker, Standard Agency, FHA or VA mortgage. First-time buyers may be required to take a homebuyer education course. |
| PNC Bank | The PNC Closing Cost Assistance Grant is worth up to $5,000 and can be used toward closing costs. | Must be purchasing a property in a designated low-to-moderate income census tract or earn 80% or less of the area’s median income. |
| Wells Fargo | The Wells Fargo closing cost credit is worth up to $5,000 and can be used toward closing costs. In select markets, the Homebuyer Access Grant provides $10,000 in down payment assistance. | The $5,000 lender credit is for buyers in select markets who earn up to 80% of the area’s median income. The $10,000 down payment assistance grant is for buyers in one of eight eligible cities who earn up to 120% of the area’s median income. |
Mortgage Tips for First-Time Homebuyers
— Start locally. Your local mortgage loan officer should have a comprehensive understanding of the first-time homebuyer programs you may be eligible for in your area. Do your research, too: It might pay off to reach out to your state and local housing agencies to get a better idea of the programs available to you.
— Plan ahead. While first-time homebuyer programs like down payment assistance and tax credits can potentially save you thousands, you should still make sure you can afford closing costs if there are any hiccups in the application process. If necessary, it may make sense to wait and save up for a down payment instead of relying on homebuying assistance programs.
— Compare offers. Reach out to multiple lenders during the mortgage preapproval process so you can find the offer that makes the most sense for you financially. You may be able to find a lower rate by comparing offers from at least three lenders, and you may find that you qualify for down payment assistance through a certain bank or credit union. To minimize the negative impact to your FICO credit score, you should limit your mortgage shopping to a 45-day window. Multiple credit inquiries in this time frame will count as a single inquiry.
— Understand your options. With so many types of mortgages available, it will take some ambitious legwork to find the right home loan for your needs. Be sure to compare everything at your disposal, such as fixed-rate versus adjustable-rate mortgages and conventional versus government-backed mortgages. If you get overwhelmed, reach out to a financial advisor who can guide you through the process.
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A Guide to First-Time Homebuyer Programs originally appeared on usnews.com
Update 11/07/24: The story was previously published at an earlier date and has been updated with new information.
