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First-Time Home Buyer Programs, Grants And Resources

Miranda Crace11 Minute Read
July 08, 2021

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. Mortgage rates continue to be very low, and the fallout from the recent pandemic may have made renters yearn more than ever to own their own home.

The road to homeownership can be long, the effort may be worth it. Fortunately, there are many programs and resources available to help you get the money you need to buy your first home. Read on to learn why it may not be as impossible as you think to make the leap into homeownership.

Who Qualifies As A First-Time Home Buyer?

For the purposes of these programs, 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 3 years prior to their closing date.

But there are exceptions even to this liberal definition of the first-time homeowner. For instance, if the property you’ve owned and lived in for the previous 3 years lacked a permanent foundation or couldn’t be brought up to compliance with applicable building codes in your area, you may qualify as an exception to the 3-year rule.

Other Possible Eligibility Requirements

The U.S. government offers a wide array of programs to encourage homeownership, and different programs targeting diverse audiences may have requirements in addition to first-time ownership status, including income limits or restrictions on the geographic areas where eligible homes are located.

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What Types Of Home Buying Assistance Are Available?

There are many first-time home buyer resources meant to ease various pain points toward homeownership. These resources can essentially be broken up into two categories: grants to help with a down payment or closing costs and programs that give you an actual discount on the property or loan. Maybe you can afford a mortgage but can’t get a down payment together. Or you’ve got enough for a down payment but not a penny more for closing costs.

These resources are mostly offered through states, municipalities and local nonprofits, and they’re targeted specifically at first-time home buyers. A great place to start looking for help available where you live is the Department of Housing and Urban Development (HUD)’s website.

Down Payment Assistance

Particularly if you live in one of the most expensive areas of the country, it’s hard to save money for a down payment after you’ve paid the rent and other living expenses – even if you earn what might be considered a good salary if you were to live in an area with a lower cost of living.

One nationwide (with the exception of New York) source of down payment assistance is the Chenoa Fund. The Chenoa Fund is an affordable housing program administered by CBC Mortgage Agency (CBCMA), a federally-chartered government entity.

The Chenoa Fund provides up to 3.5% down payment assistance. Conveniently enough, that’s the down payment you need for an FHA loan. If you have a FICO Score of 620 or higher and a debt-to-income (DTI) ratio of 45% or less, you’ll get a second mortgage with no interest and no payments. If your income is less than 115% of your area’s median income and you make your mortgage payment on time for 36 months, the mortgage is forgiven. If you make more than 115% of your area’s median income, the DPA must be repaid.

If you make a late mortgage payment, you’ll be given a second chance at loan forgiveness. You get to reset the period, and the mortgage will still be forgiven if you make timely payments for the next 36 months.

How Do I Receive Home Buying Assistance?

From your perspective, it’s all money, but lenders care how any assistance offered to a prospective borrower is structured. You’ll need to take that into consideration when deciding what type of help best suits your needs.

Grants

In its strictest sense, a grant is money that’s simply given to a recipient – but most grants come with strings attached. If a grant requires you to do something in the future, like use the money for your primary residence, you could be forced to repay that money if you don’t comply with the terms. Lenders look on this as a debt, and carrying more debt may make them leery about lending you the money to complete the home purchase.

Silent Second Mortgages

Another way those offering home buying assistance maintain some control over the recipient is through a silent second mortgage. The terms vary from program to program, but a silent second mortgage is a type of mortgage that confers rights on the mortgage owner should the borrower default on the grant’s or loan’s terms.

For example, let’s say that you buy a house through the Good Neighbor program. It has a 3-year residency requirement, but your spouse gets an amazing job offer out-of-state and you have no choice but to move after 2 years. You may be required to repay some or all of the 50% discount you received when you purchased the home.

Many lenders choose not to participate in these programs that place a silent second mortgage on the property. That’s because lenders don’t want to take on the additional risk that you won’t comply, in which case the silent second mortgage holder might force the home into foreclosure. Nor do lenders want to take the risk, should you default on the mortgage, that the second mortgage lien will take precedence or reduce the amount that the lender can recoup. 

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

There’s a ton of new jargon to learn when you begin the journey to homeownership, and it can get very confusing very quickly. One of the basic types of mortgages available is known as a conventional mortgage. This is a traditional loan product offered by private lenders to consumers who need loans.

The wrinkle is that you’ll also apply to private lenders for other types of loans, like FHA, USDA or VA loans. The differences are in their various requirements.

Meet Fannie And Freddie

The difference between these various types of loans is the amount of risk that the lender is assuming. The government is intimately involved in the mortgage industry, and it serves a wide variety of functions. It regulates the industry, insures certain types of mortgages (like FHA, USDA and VA loans), and buys the loans originated by private lenders through Fannie Mae and Freddie Mac, which are government-sponsored entities (GSEs) that keep the mortgage industry liquid through its purchases.

Fannie Mae and Freddie Mac specify which mortgages they’re willing to buy by requiring that lenders adhere to certain requirements when issuing mortgages. Mortgages that meet those requirements are called qualifying loans.

Take Advantage Of Fannie And Freddie’s Low Interest Mortgages

To encourage more renters to become first-time homeowners, Fannie Mae and Freddie Mac sponsor loans for first-time buyers that require as little as 3% down payment. Fannie, by far the larger of the two GSEs, offers the HomeReady mortgage while Freddie offers the Home Possible program. The two programs offer very similar features. Both mortgages require only a 3% down payment and less stringent credit requirements for buyers of single-family homes. In addition, both allow parents or relatives to help you with your down payment.

This isn’t a government loan – it’s a conventional mortgage – but it is a loan Fannie or Freddie will buy after origination.

What You’ll Need To Get Approved

You’ll need a FICO® Score of at least 620 to qualify. In order to give yourself the best possible chance of getting approved, we recommend keeping your debt-to-income ratio (DTI) at or below 43%.

PMI

So where does that myth about the required 20% down payment come from? It’s the threshold that eliminates the private mortgage insurance (PMI) requirement. PMI is a form of insurance that lenders require for their protection in the case of mortgage default.

If you make a down payment of less than 20%, you’ll have to pay for PMI. PMI generally costs between 0.5% and 1% of the original loan amount per year, collected in monthly payments along with your mortgage. Once you reach 20% equity in your home, you can remove PMI.

FHA Loans

Although not specifically aimed at first-time home buyers, FHA loans can be a great choice for new homeowners. FHA loans are government-insured, meaning lenders are taking far less risk in the case of a default.

FHA loans are low down payment (3.5%) and low interest rate mortgages that have softer credit score and debt-to-income requirements than most conventional lenders. If your credit score is 620 or above, you may be able to qualify for more home than you otherwise could on many other loan programs.

The one frequently noted downside of an FHA loan is that you’ll have to make mortgage insurance premiums even after you reach a home equity of 20% or more, when most PMI is canceled. However, this problem can be easily solved by refinancing your mortgage once you’ve gathered sufficient equity in your home.

USDA Loans

The USDA also guarantees loans made by other lenders. To qualify, you must plan to purchase an eligible home in a rural or, in some cases, a suburban area. The USDA website offers an eligibility map that lets you search a property’s address for eligibility.

To get approved for a USDA loan, you also must meet their income restrictions. To qualify, the combined income of all the adult members of the household may not make more than 115% of the area median income (AMI). Fannie Mae offers an easy-to-use interactive map to find the AMI where you live.

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. These loans offer extremely lenient and competitive terms as a repayment of our collective debt to the members of America's Armed Services.

VA mortgages require no down payment, and they offer some of the lowest rates available. Veterans are charged a one-time funding fee that can be paid at closing or built into the loan, which is waived for those veterans receiving VA disability payments or for surviving spouses.

Help With Closing Costs

The down payment isn’t the only money you’ll need to buy a home. Closing costs can run from 3% to 6% of the purchase price and pay for things like the appraisal, title search and the loan origination fees. If you purchase a home through Fannie Mae’s HomePath Ready Buyer program, you can earn a credit to pay closing costs up to 3% of the purchase price.

Qualifications

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.

Use Of The Credit

A possible downside of this particular option on the use of this credit is that you must purchase a Fannie Mae-owned HomePath property to use the credit. These are homes that have been surrendered to Fannie Mae through a deed in lieu of foreclosure, and they’re typically sold as-is.

When purchasing a home as-is, it’s important to know what kind of shape the house is in. It’s crucial to have an experienced and reputable home inspector carefully examine the home so that you know what you’re getting into. For homes in need of significant repairs, Fannie Mae offers the HomeStyle home improvement loan that bundles your repair costs into your mortgage.

Deeply Discounted Housing And Special Mortgages

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®, 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 must 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 must 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.

The Bottom Line: Help Is There For The Asking As You Embark On Your Journey To Homeownership

The best way to figure out which path to choose is to keep reading about the first-time home ownership experience. Or, if you’ve done that, bring your questions to one of our Home Loan Experts, who can answer or find the answers you need.

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Miranda Crace

The Rocket Homes blog is here to bring you all you need to know about buying, selling and making the most of your home. Whether you’re thinking about becoming a homeowner, selling your current home or looking to keep your place in tip-top shape, our writers and freelancers bring their experience and expertise to meet you right where you are.