First-time home buyer programs: A complete guide

Are you wondering how you’re going to afford your first home? You’re not alone. First-time home buyers across the country are looking for any way to save on the growing cost of homeownership. Thankfully, first-time home buyer programs are available at the federal, state and local levels to increase access to homeownership: the cornerstone of the American dream. Find out below where to find these valuable programs and whether you qualify for their enticing benefits.

What are first-time home buyer programs?

First-time home buyer programs provide financial assistance to new home buyers that need help overcoming some of the barriers to homeownership. High down payments, closing costs and home prices can keep people from entering the housing market, so first-time home buyer programs provide assistance to address these (and many other) concerns directly. First-time home buyers can find these programs through national organizations, state housing finance agencies (HFAs), local governments or nonprofit organizations.

Who qualifies for first-time home buyer programs?

The specific eligibility requirements for first-time home buyer programs will vary by each program. However, there are some common aspects between the programs. One of the most common is the 3-year rule for the definition of a first-time home buyer. This rule follows the Department of Housing and Urban Development’s (HUD) definition of first-time home buyer as anyone who has not owned a primary residence in the last 3 years. 

However, there are also some caveats to the 3-year rule. HUD will also consider you a first-time home buyer if you are:

• A single parent who has only owned a home with a former spouse
• A displaced homemaker who has only owned with a spouse
• An individual who has only previously owned a mobile home not affixed to a foundation
• An individual whose previous home was not in compliance with government building codes and the home cannot be brought into compliance for less money than the cost of constructing a new home

5 first-time home buyer programs to consider

1. Good Neighbor Next Door

HUD’s Good Neighbor Next Door program is designed to help public servants afford a home. If you are a teacher, police officer, firefighter or emergency medical technician (EMT), HUD will pay for 50% of the list price of the home in specific revitalization areas. Initially, you must sign a second mortgage for the 50% discount, but you do not have to pay interest on this silent loan that is forgiven once you live in the home for more than 3 years.

The program begins when HUD puts an eligible home on the market. Eligible buyers have 7 days to submit an offer on the home. If there are multiple offers, the buyer is chosen by a random lottery.

2. Home Possible^® And HomeReady^®

Freddie Mac’s Home Possible^® program and HomeReady^® from Fannie Mae allow low-income borrowers to afford a home with just a 3% down payment, flexible credit requirements and low closing costs. One of the unique benefits of this program is that it allows friends and family to contribute money toward your down payment, which lenders typically don’t allow for conventional mortgage loans.

Both programs come with a loan level price adjustment (LLPA) credit of 1% of the loan amount up to $3,500 or up to $2,000 if the loan amount is below $200,000. This credit allows first-time home buyers to avoid fees that Fannie Mae and Freddie Mac usually charge on conventional loans. If your income is lower than 50% of the area median, you can receive a grant of $2,500

3. Habitat for Humanity

If you are below 60% of your area’s median income level, you could be eligible to receive assistance from the nonprofit organization Habitat for Humanity. If you are selected by the organization, you will contribute to the program by performing “sweat equity,” physically helping to build your home, other participant’s homes, taking homeownership classes or performing other forms of volunteer work.

4. Federal Housing Finance Agency (FHFA) Mortgage Assistance and Education

The FHFA can be a useful resource for mortgage assistance and education for those in need. The FHFA also offers education programs for first-time home buyers and previous homeowners. Educational materials include online courses, advice on how to shop for a mortgage and tips for avoiding common mortgage-related scams.

5. State Housing Finance Agency programs

Every state in the country has a housing agency that may provide housing assistance programs for low- to moderate-income families and first-time home buyers. Available programs include some or all of the benefits in the following section. Keep reading to find out more.

Other types of first-time home buyer programs and assistance

Down payment assistance

Saving enough money for a down payment is one of the largest hurdles stopping first-time home buyers from entering the housing market. Many potential home buyers have good credit, solid income and job security, but not enough money saved up to put down enough money to buy a home.

Down payment assistance programs provide first-time home buyers with the money they need to afford a down payment. The assistance can come in many forms, including a second mortgage that may or may not be forgivable after a certain number of years. Down payment assistance can also be a grant (more on that below).

Closing cost assistance

Closing costs are another upfront expense that acts as a barrier to homeownership for first-time home buyers. With so many other expenses to consider, many first-time home buyers forget to budget for closing costs that can be 3% – 6% of the purchase price of the home. Closing cost assistance programs can provide the funds to cover a portion (or all) of the closing costs for your first home purchase.

One key element to consider for both closing cost and down payment assistance programs is whether you can use them for both types of upfront costs or whether they are exclusive. For example, some down payment assistance programs will allow you to use a portion of the assistance on closing costs as well. However, some programs mandate that you use the money exclusively on closing costs or a down payment. That’s why it is important to understand the details of the assistance program you are applying for.

Grants

First-time home buyer grants are one of the most direct forms of assistance available. These assistance programs offer cash to first-time home buyers, giving them a free boost toward their dream of homeownership. You typically don’t have to repay grants if you meet certain conditions, such as living in the home as your primary residence for a certain number of years. Grants may be designated for specific expenses such as a down payment or closing costs or have little restrictions on them.

Education

Many programs require their participants to take first-time home buyer classes in order to qualify to receive assistance. However, you should not look at these valuable education resources as merely a means to an end. These classes can provide extremely useful information on the housing market, the home buying process and the long-term necessities of owning and maintaining a home. They also provide detailed instructions of the intricacies of preparing to buy a home, such as budgeting, determining how much you can afford and applying for a mortgage.

Tax benefits

First-time home buyer tax credits can save you money in an indirect way that may surprise you. One of the most prominent tax credits are mortgage tax credit certificates (MCCs) which are administered by state and local Housing Finance Agencies (HFAs). These certificates give you a dollar-for-dollar federal tax credit based on a percentage of the mortgage interest payments you make on your home. The percentage is typically between 10% – 50% with a max tax credit of $2,000.

While the federal government does not directly administer first-time home buyer tax credits, state and local governments may have their own first-time home buyer tax benefit programs.

More loan options for first-time home buyers

First-time home buyers can use their benefit programs with several types of home loans.

• FHA loans: A type of mortgage loan backed by the Federal Housing Administration. Government backing allows lenders to set more lenient borrowing standards for FHA loans, so first-time home buyers with lower credit scores or less money saved for a down payment can still afford to purchase a home.
• VA loans: A type of mortgage loan backed by the U.S. Department of Veterans Affairs (VA). VA loans are reserved for veterans, active-duty service members, qualifying surviving spouses, as well as reservists and U.S. Coast Guard members. If you qualify for a VA loan, you could get a home loan without providing a down payment.
• USDA loans: A type of mortgage loan backed by the U.S. Department of Agriculture. USDA loans are reserved for homes in certain rural areas but do not require a down payment to qualify.
• Conventional loans: Conventional loans are not backed by the federal government, so they may come with stricter lending requirements. However, they are much more widely available than government-backed loans and can still offer great deals for first-time home buyers.

First-time home buyer programs: FAQs

Here are the most common questions we receive about first-time home buyer programs.

Are there any risks to using first-time home buyer assistance?

First-time home buyer assistance programs are generally good-faith efforts designed to help low- to moderate-income families and individuals buy their first home. However, there is some inherent risk to buying a home, even with assistance programs. If you cannot make the mortgage payments, there is always a risk that you will lose your home to foreclosure.

How do I find first-time home buyer programs in my state?

HUD’s website is a great resource for local home buying programs, including first-time home buyer programs, in each state. You should also research your state’s HFA to see what first-time home buyer programs they offer. To start off your search, simply searching for “first-time home buyer programs in X” is a good place to start.

What FICO^® score do you need for first-time home buyer programs?

The FICO^® score that first-time home buyer programs require will vary depending on the program. Since many loan programs are administered through approved private lenders, these lenders may also have a significant say in the FICO^® score required for a loan. Generally, a minimum credit score of 580 is usually required to buy a house, but a first-time home buyer program may require a lower or higher score.

The bottom line

First-time home buyer programs offer numerous ways to make buying your first home a reality. Whether it’s through help with the down payment, closing costs, taxes or invaluable education resources, first-time home buyer programs can help you get the resources you need to buy a home. If you’re ready to become a first-time home buyer, start a mortgage application today!