Grants And Resources For First-Time Home Buyers

Kevin GrahamSeptember 03, 2019

*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

If you’re tired of renting and giving your money to a landlord instead of investing in property of your own, in a lot of ways, your timing has never been better. The economy is at near full employment, and mortgage rates have stayed very low.

However, while you might have the income for a mortgage payment, buying a home does require a significant upfront investment in terms of both down payment and closing costs that you may not have. Younger home buyers in particular may not have the savings necessary to buy a first home of their own without having to wait several years to attain that goal, particularly in expensive markets. The good news is that low (and in some cases no) down payment options combined with grants and other resources available to first-time home buyers have helped bring the goal of buying one’s first home within reach.

Types Of Home Buying Assistance Available

The first thing to understand when looking at resources is that there are really two different types of home buying assistance: grants to help with a down payment or closing costs and programs that give you an actual discount on the property or loan.

In general, lenders can accept most grant programs you qualify for as long as it’s not awarded in such a way that you would be the only person ever eligible. If you get a discount on the property, it can be harder to get a loan under those circumstances because many of these programs have stipulations that you must stay in the home for a certain amount of time or are only available for people in certain lines of work. Lenders generally don’t like anything that imposes sale restrictions because in the event you default on the mortgage, the lender could very well end up having to sell the property to try to recoup their cost. Sale restrictions limit the potential market.

Who Qualifies As A First-Time Home Buyer?

With many grants and resources available requiring you to be a first-time home buyer, it can be useful to define what a first-time home buyer is exactly. This is where things get a bit tricky.

When it comes to these grants, each one you look at may have different definitions of who qualifies for each particular program, so they really need to be looked at on an individual level.

However, there’s at least one loan option targeted specifically at first-time home buyers. We’ll get into the details of that later, but most major mortgage investors define a first-time home buyer as follows:

A first-time home buyer is someone purchasing a primary residence who also hasn’t held any kind of ownership interest in a residential property in the last 3 years prior to their closing date.

There are exceptions. For instance, you can have had property in the last 3 years if your previous property was something that didn’t have a permanent foundation or couldn’t be brought up to compliance with applicable building codes in your area.

Is There A Grant For First-Time Home Buyers?

The short answer is yes. There are many grants available for first-time home buyers. You just need to know where to look. Most grants are location-based, so it depends on the funding available in your area. A really good place to start is the Department of Housing and Urban Development (HUD). They have a list of grant options as well as other forms of assistance for property purchases for both first-time home buyers and others.

How Do You Qualify For Down Payment Assistance?

As mentioned above, every down payment assistance program has different requirements, so it’s hard to pinpoint a specific list of criteria. That said, there are down payment assistance programs available through both the government as well as nonprofits dedicated to serving specific segments of the community. The following is a non-comprehensive list of some of the things that may qualify you for a grant:

·      Homeownership status:Many programs are targeted specifically at first-time home buyers, for example.

·      Income status:Many grant programs are aimed at helping low- to moderate-income individuals. It’s not uncommon for a grant to have an income restriction.

·      Where you live:In addition to state and regional resources, many homeownership programs are made available to residents right in their local city or county.

Other Forms Of Home Buying Assistance

The following programs aren’t grants and aren’t just for first-time buyers, but they are useful for helping you afford a home in the right situation. Let’s run through several of them.

Good Neighbor Next Door

The number of properties available for this is limited, and there are strict eligibility requirements, but the Good Neighbor Next Door program could allow qualified buyers to get a good deal on a house. Here’s how it works.

The program is available to law enforcement officers, firefighters, emergency medical technicians and teachers who teach anywhere from pre-K through high school. They can get a 50% discount on a home in an area designated for revitalization. The goal is to boost economic development in the area.

In exchange for the deep discount, you agree to occupy the home for at least 3 years. If you don’t occupy the home for that time, HUD requires that you pay back the full amount instead of the discounted price. This is enforced through what’s known as a silent second mortgage. No interest or payments are due on it provided you meet the occupancy requirement.

There are two downsides to this program. To begin with, many lenders, including Quicken Loans®,1 won’t give you a mortgage because the requirements of the silent second end up restricting the sale of the property. Secondly, you’re restricted in terms of where you can live, if there are even homes available for the program in your area.

USDA Direct Loan Program

If you live in a rural area or on the edge of suburbia and meet the guidelines for having a low or very low income, you may be able to qualify for a USDA direct loan if you’ve been unable to get affordable financing elsewhere to obtain safe housing.

Like other USDA loans, there’s no minimum down payment required. In addition, these loans are available for longer terms of anywhere between 33 and 38 years. The property you’re buying has to be your primary residence, and you have to show an ability to repay the loan. Depending on your circumstances, you may sometimes be able to get lower interest rates as well. Finally, because the loan comes directly from the USDA, there are no guarantee fees.

VA Native American Direct Loan

If you’re a Native American who also happens to qualify for a VA loan for military service, one potential option for you would be to look at a VA Native American direct loan.

For qualifying veterans looking to buy or get a rate/term refinance, this loan option offers you the ability to get into a home with no down payment. More than that though, the government sets an interest rate that’s at or below some of the best market rates you can get. It’s a 30-year fixed mortgage, and the rate currently is 3.75%. This could fluctuate based on activities in the financial markets. Finally, there’s a lower funding fee of 1.25% to get this loan. It can be built into the loan or paid at closing. The loan has to be for property on tribal land.

VA Grants For Those With Service-Connected Disabilities

If you have a service-connected disability, the VA has a couple of options to help you get into a home that’s specially adapted to help you live independently or with family in an environment that minimizes the barriers imposed by your disability. These can be used to buy an adapted home, remodel an existing one or even construct a new one that will allow you to live in a more conducive environment.

There are a couple of different housing grants as well as one specific to assistive technology to help you in your home, so we recommend checking out the VA’s page on this.

In addition to these grants, any qualifying veteran who receives VA disability income as a result of a service-connected disability qualifies to have their funding fee waived, which can significantly lower their loan costs.

Which Loan Is Best For First-Time Home Buyers?

There are many options for loans, so how do you know which one is right for you? Let’s briefly go over the options.

Conventional Loans

Fannie Mae has a couple of loan options specifically targeted at first-time home buyers.

One very special program is HomePath Ready Buyer™. If you buy a home owned by Fannie Mae, you pay as little as 3% down, and then you can receive up to 3% back on your closing costs in the form of seller concessions from Fannie Mae. In order to qualify for this program, you have to be a first-time home buyer and also take a homeownership education course, which most people can complete in 4 – 6 hours. The cost for the course is $75, but you can get it back as part of your closing cost assistance.

The downside of this particular option is that you have to purchase a Fannie Mae foreclosure. When purchasing a foreclosure, it’s important to know what kind of shape the house is in because they’re typically sold as is. Because mortgage investors are trying to recoup as much money as possible on the sale, they’re not inclined to put a ton of extra work into the home.

If buying one of these homes doesn’t sound right for you, Fannie Mae has a similar program with a 3% down payment, but you can buy any house you want. The only thing you don’t get is the closing cost assistance. It also has to be a one-unit property.

Because it’s a conventional loan, you will need at least a median FICO®Score of 620 in order to qualify. In order to give yourself the best possible chance to qualify, we recommend keeping your debt-to-income ratio (DTI) at or below 43%.

You should know that if you make a down payment of less than 20%, you will have to pay for private mortgage insurance (PMI). This can either be paid as a monthly fee tacked onto your mortgage insurance payment or as lender-paid mortgage insurance (LPMI), where you pay a higher rate in exchange for not having to pay an extra fee for mortgage insurance on a monthly basis. Finally, there is a third option where you can pay for part or all of the cost of a mortgage insurance policy upfront at closing in order to get a lower rate than you otherwise would with LPMI or avoid a higher rate altogether while at the same time avoiding the additional monthly fee.

FHA Loans

Although there’s nothing specific to first-time home buyers here, FHA loans may be particularly attractive to this group for a couple of reasons.

First, you’ll have the ability to qualify to purchase a home with a median FICO® Score of 580 or better. However, to qualify with a score that low, you’ll need to have very little existing debt. With credit scores between 580 and 619, both front-end and back-end DTI are considered. The front-end ratio, also known as the housing expense ratio, takes a look at how much of your income is being spent on your mortgage payment. You need to be spending no more than 38% of your income on housing. Additionally, when your other installment and revolving debts are added in on the backend, your overall DTI can be no higher than 45%. It’s good to be aware of this because you’re limited in how much house you can afford at lower credit scores.

Once you get above 620 in your credit score range, you may be able to qualify for more home than you otherwise could on many other loan programs. The FHA doesn’t have a specific maximum DTI percentage. Instead, it’s based on risk factors such as the size of your down payment as well as your credit score, among other factors.

The second advantage of an FHA loan is that the down payment required is fairly reasonable at just 3.5%. It’s worth noting that if you make the minimum down payment, you’ll end up paying mortgage insurance for the life of the loan, but you can always refinance into a conventional loan once you reach 20% equity and avoid mortgage insurance in the future. If your down payment is 10% or more, you’ll pay mortgage insurance premiums (MIP) for 11 years. In addition to annual mortgage insurance premiums, there’s an upfront premium that’s 1.75% of the loan amount.

USDA Loans

In addition to the direct loan mentioned above, the USDA also guarantees loans made by other lenders. There’s no down payment required.

Just like with the direct loan, you have to live in a qualifying rural area. Income restrictions are looser, but all the adult members of your household may not make more than 115% of the area median income in order to qualify.

USDA loans guaranteed through lenders have two guarantee fees that function like mortgage insurance. There’s an upfront fee of 1% of the loan amount. Added to this is an annual fee equal to 0.35% of the average unpaid principal balance based on the original amortization schedule as if you weren’t paying ahead to pay less interest.

The USDA doesn’t require a specific minimum credit score, but lenders can set their own policies. Quicken Loans requires a 640 median credit score. Your DTI should be no higher than 46%, with no more than 34% of that being housing expenses.

VA Loans

VA loans are available for eligible active-duty service members, reservists, veterans or surviving spouses of those who passed in action or as a result of a service-connected disability.

There’s no down payment required, and instead of monthly mortgage insurance, there’s a one-time funding fee that can be paid at closing or built into the loan. This fee is anywhere between 2.15% and 3.3% if your down payment is less than 5%. The fee varies based on whether you’re in the regular military or reserves/National Guard as well as whether it’s your first time using a VA loan or a subsequent use. If you make a higher down payment, your funding fee will be lower. Finally, veterans receiving VA disability and eligible surviving spouses don’t have to pay a funding fee.

If you weren’t discharged by reason of a service-connected disability, you must meet minimum requirements for service time. If you’re getting a fixed-rate loan, your DTI can be no higher than 60%. If it’s an adjustable rate mortgage (ARM), the maximum DTI is 50%. Although the VA sets no guidelines for minimum credit score, lenders can again set their own guidelines. At Quicken Loans, a 620 median FICO®Score is required.

You now have a better understanding of some of the grants, programs and options available for first-time home buyers. If you’re ready to apply, you can do so online through Rocket Mortgage® by Quicken Loans. You can also give one of their Home Loan Experts a call at (800) 785-4788.

1Quicken Loans®and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.

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    Kevin Graham

    Kevin Graham is a Senior Blog Writer for Quicken Loans. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Quicken Loans, he freelanced for various newspapers in the Metro Detroit area.