Understanding First-Time Home Buyer Programs, Loans And Grants

If you’re a first-time home buyer, it pays to know that you have options. Things like growing your credit score and saving for a down payment aren’t easy. Buyers that are already homeowners can sell their current house to make the down payment, but not first-timers. If you’re buying a house for the first time, there are several programs you should know about that can help you achieve homeownership.

There are a variety of programs for first-time home buyers. With that comes a variety of qualifications. Still, there are some general qualifications you should know about.

According to the Department of Housing and Urban Development (HUD), a first-time home buyer is anyone who hasn’t owned a primary residence in the last 3 years. If a borrower meets the criteria, they’re considered first-time home buyers.

There are some exceptions to this rule. For instance, if you’re a single parent who has only ever owned a home with a former spouse while married, you may also be considered a first-time home buyer. And if the property you owned and lived in for the last 3 years lacked a permanent foundation or wasn’t in compliance with state or local building codes, you may qualify as an exception.

The government offers a wide variety of programs to help first-time home buyers purchase a home. Many of these programs will come with additional requirements, including limits on your income or the geographic location where you’re buying a home.

There are several different types of assistance provided to qualifying first-time home buyers. These include:

• Down payment assistance
• Closing cost assistance
• First-time home buyer loans
• First-time home buyer education
• First-time home buyer tax credits

Let’s go over each of these in more detail.

Down Payment Assistance

For first-time home buyers, down payment assistance programs offer help to make buying a home possible. Since the down payment is often a big hurdle for first-time buyers, having assistance is crucial. These programs can offer help in the form of grants, matched savings or loans.

Down payment assistance programs exist at the federal level, but most programs are offered by state and/or local governments.

Closing Cost Assistance

A down payment isn’t the only money you’ll need to buy a home. Closing costs usually cost 3% – 6% of the purchase price and cover such expenses as the appraisal, title search and loan origination fees. These upfront costs can be a deterrent, especially when you’re already paying a percentage of the purchase price in the form of a down payment.

That’s why there are programs available to help with closing costs. For instance, the Fannie Mae HomePath Ready Buyer program may offer one-time closing cost assistance of up to 3% of the purchase price.

First-Time Home Buyer Loans

There are many first-time home buyer loans to choose from. Here are some of the most popular types of home loans available.

• Conventional loans: These are loans offered by private lenders. They require a FICO^® Score of at least 620 and a debt-to-income ratio (DTI) of 50% or less. Though they have stricter credit requirements, they can require only a 3% down payment and come with more favorable interest rates.
• FHA loans: FHA loans are secured by the government. Some lenders offer them to applicants with a credit score as low as 500. However, they can come with higher fees and interest rates than other loan types.
• USDA loans: The U.S. Department of Agriculture (USDA) guarantees mortgages in specific rural areas. These can require no down payment. You must meet location and income restrictions to qualify for a USDA loan.
• VA loans: Military veterans have the option to get a loan from the VA. These loans have minimal requirements, including zero down payment.

First-Time Home Buyer Grants

A grant is money that’s given to a recipient and usually comes with specific requirements that may require repayment if you don’t comply with the terms. For instance, a grant may specify that you must use the funds for your primary residence to qualify. Grants are often provided to help homeowners cover their down payment or closing costs on their home purchases.

You can find grants in your area by asking your loan officer or real estate agent for recommendations. You can also check with local nonprofits to see if they offer any grants for first-time home buyers.

First-Time Home Buyer Education

You may be required to attend first-time home buyer classes as part of any assistance you receive. These classes will walk you through budgeting, applying for a mortgage, determining how much house you can afford and other home topics. These classes familiarize you with the home buying process as well as introduce you to home maintenance. That makes them a great introduction to being a homeowner.

1. Good Neighbor Next Door  

HUD’s Good Neighbor Next Door program allows teachers, police officers, firefighters and EMTs to bid on HUD-owned homes and buy them for 50% of the list price. These homes are in specific neighborhoods marked for revitalization. All bidders submit identical bids and the winning bid is chosen at random. Here are a few requirements:

• Must be a teacher, firefighter, police officer or EMT working in the community where the home is
• Must be an eligible, preapproved bidder with HUD
• Must occupy the home for a minimum of 3 years after purchase

2. First-Time Home Buyer Government-Backed Loans

The federal government backs a few different types of mortgages. These can be perfect for first-time home buyers because of their low requirements.

• Federal Housing Administration (FHA) loans: FHA loans have lower credit score requirements than conventional loans, making them easier to attain.
• Department of Veterans Affairs (VA) loans: VA loans are mortgages offered to qualifying veterans and spouses that require no down payment or mortgage insurance.
• U.S. Department of Agriculture (USDA) loans: USDA loans are loans designed for low-income applicants buying homes in rural areas. They also require no down payment and can come with longer repayment terms.

3. HomePath Ready Buyer Loan Program  

Fannie Mae’s Ready Buyer™ program is a conventional loan that requires home buyers to only put 3% down on the purchase of a HomePath home. These HomePath homes are often distressed properties sold as is for a discount. If you’re willing to put the work in to restore them, you could get a home for a good price. You may also qualify for a 3% closing cost reimbursement.

4. Home Possible

The Freddie Mac Home Possible^® mortgage program is another program that allows buyers to apply for a conventional mortgage with as little as 3% down. It allows friends and family members to contribute toward your down payment, making it a great option for first-time home buyers.

5. First-Time Home Buyer Tax Credits

While there is currently no federal first-time home buyer tax credit, they do exist at the state and local levels in some areas. First-time home buyer programs can offer tax benefits called mortgage tax credit certificates (MCC). These certificates can give you a certain percentage back on your taxes due to mortgage interest paid. The percentage is typically 10% – 50%, with a deduction up to $2,000, and is determined by the local Housing Finance Agency (HFA). 

6. Habitat For Humanity

Habitat for Humanity^® is a nonprofit organization that creates and advocates for affordable housing. Applicants who do not exceed an income of 60%  of the area median income are eligible. Anyone is welcome to apply with them. Know that applicant selection takes place on the community level. Each area may have different criteria that would make you a better applicant.

7. Federal Housing Finance Agency (FHFA) Mortgage Assistance

The FHFA has resources for homeowners who have fallen behind on their mortgage. Particularly, they offer mortgage assistance in response to homeowners that have been affected by disasters or the COVID-19 pandemic. They also may be able to give guidance to other homeowners who can no longer pay their mortgage.

8. Federal Housing Finance Agency (FHFA) Mortgage Education

Whether you’re a first-time home buyer or have bought multiple homes, the FHFA offers mortgage education to get you up to speed with the market. This education includes publishing the Federal Reserve Board’s 5 Tips for Shopping for a Mortgage. Other parts of the available online education include helping home buyers avoid mortgage-related scams.

Buying a home is a large financial decision. It makes perfect sense that many people have several questions when it comes to the process. Here are the answers to some frequently asked questions about first-time home buyer programs.

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

While there aren’t any direct risks with using first-time home buyer assistance, there are negatives that could result from buying a home. For example, you could get a grant to help you with a down payment and buy a house you can’t afford. The same goes if your friends or family help you make the down payment. There’s also risk if you buy a distressed property because the home could require costly repairs that you’re not prepared for.

Do I have to pay back first-time home buyer grants?

Unlike most loans, first-time home buyer grants do not need to be paid back. First-time home buyer grants are essentially gifts awarded to go toward the home purchase. Because of that, they can be more difficult to get and have more stringent requirements than first-time home buyer loans.

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

A simple online search for “first-time home buyer programs in X” is a good place to start. Visit your state’s HFA site to look for specific programs that they have. Also, search for area housing nonprofits to see which may have grants, education options or other forms of housing assistance.

How do I apply for first-time home buyer loans?

Applying for a first-time home buyer loan is like applying for any type of loan. Once you’ve chosen your lender, you’ll need to submit personal and financial information to apply. This includes your name and SSN, address, income statements, bank statements and other asset information. From there, the lender will either deny you or approve you and quote you an interest rate and loan terms.

When you’re a first-time home buyer, it pays to know your options. You may qualify for some sort of assistance, like a grant, loan or a more favorable mortgage. By researching these programs, you can take advantage of help towards your home purchase. As long as you buy a home you can afford, they have hardly any downsides.

Do you want to get connected with a great loan for a first-time home buyer? Start the mortgage approval process with Rocket Mortgage^®. Our Home Loan Experts can get you the info you need to buy your first home.