A Guide For First-Time Home Buyers: Programs And Benefits

Whether it’s a fixer-upper, a starter home or a forever home, buying a house is exciting – but there’s nothing quite like your first time. For decades, homeownership has been considered the fulfillment of the American dream, but the reality is that many modern Americans struggle to attain that dream without some sort of financial support.

If you’re feeling stressed about saving for a down payment or meeting strict mortgage loan requirements, it’s important to know you’re not alone and there are options available to help. In this article, we’ll explore the different types of first-time home buyer programs you should consider before buying your first home.

Who Is A First-Time Home Buyer?

As you might assume, a first-time home buyer is an individual who has never owned a home. However, the U.S. Department of Housing and Urban Development (HUD) also defines a first-time home buyer as someone who hasn’t owned a primary residence in the last 3 years.

First-Time Home Buyer Eligibility Requirements

But even if you don’t fit the general definition of a first-time home buyer, that doesn’t necessarily mean you don’t qualify as one. There are some exceptions. According to HUD, you are considered a first-time home buyer if you meet any of the following criteria:

• You (or a spouse) have not owned a primary residence during the 3-year period ending on the date of purchase of the property.
• You are a single parent who has only owned a primary residence with a former spouse while married.
• You are a displaced homemaker and have only owned with a spouse.
• You have only owned a primary residence that wasn’t permanently affixed to a permanent foundation in accordance with applicable building regulations.
• You have only owned a residence that wasn’t in compliance with state, local or model building codes and said property cannot be brought into compliance for less than the cost of constructing a permanent structure.

If you meet any of the criteria listed above, you’re one step closer to your goal of homeownership. However, that’s not all you’ll need to qualify. You will also need to meet the basic home loan qualifications as set by your mortgage lender and loan program. While home loan requirements vary depending on the specific type of loan, a borrower will typically need a credit score of at least 620, a down payment of at least 3% and a fairly low debt-to-income ratio. It is also important to have a steady income, and good credit and job history.

Understanding First-Time Home Buyer Programs

For first-time home buyers especially, there are many programs available that can provide financial assistance in the form of loans, grants or lower interest rates and less stringent approval requirements.

Before we dive into the individual loans and programs for first-time home buyers, let’s briefly review the different types of resources available.

Down Payment Assistance

When you close on your home, you’ll have to pay a percentage of your home’s purchase price up front; this is known as a down payment. Down payment assistance (DPA) programs aim to help first-time home buyers afford the down payment on their home. These programs usually take the form of loans, grants, employer assistance and special savings accounts, and can help to cover some of the expenses that come with purchasing a home.

Government-Backed Loans

Government-backed loans – such as FHA loans and VA loans – are ones insured by the government, which minimizes the risk for the lender and allows them to offer loans with lower interest rates and more flexible approval requirements. These types of loans may be an ideal choice for first-time home buyers with lower credit scores and a lower down payment.

Closing Assistance

Closing costs are the fees you must pay to finalize a real estate transaction. Similar to down payment assistance, closing assistance helps home buyers pay closing costs and may be available in several forms through government-sponsored and private programs.

Home Buyer Education

If you’re a first-time home buyer, some lenders suggest (and may even require) that you take a home buyer education course. There are both in-person and online options available. Such a course can give you a thorough understanding of the home buying process.

There are also many perks that you, as a first-time home buyer, gain access to when you sign up for an educational course. For example, you will learn about certain first-time home buyer programs, like Freddie Mac Home Possible^® and Fannie Mae HomeReady^®, which can offer access to lower down payments, flexible credit requirements, closing cost assistance, grant opportunities and more.

If home buyer education sounds like something you’d be interested in, take a look at the HUD’s list of approved courses. Your lender or real estate agent may also be able to help you find a quality first-time home buyer course.

First-Time Home Buyer Loan And Grant Options

Let’s now discuss some of the loans, grants and programs that are available to first-time home buyers.

Low-Down Payment Loans

As the name implies, low-down payment loans are ones that allow you to purchase a home without having to worry about a high down payment cost. First-time home buyers who wish to buy a home sooner than later may find the following loan options beneficial:

• Conventional 97: A Conventional 97 loan is one provided by Fannie Mae and Freddie Mac, which allows aspiring first-time homeowners to pay as little as 3% down on a home. This means that the loan-to-ratio (LTV) value can be up to 97% – meaning you can borrow 97% of the home’s value.
• HomeReady: The Fannie Mae HomeReady Loan program is a type of Conventional 97 loan. This program is designed to help low-income home buyers who have limited cash to put toward a down payment, as it requires only a 3% down payment. Borrowers must have a credit score of at least 620, satisfy income restrictions and undergo home buyer counseling.
• HomePossible: The Freddie Mac Home Possible loan is geared toward very low- to low-income borrowers who seek a low down payment solution with flexible funding sources. This program offers a down payment requirement of only 3%, which can come from flexible sources such as family, an employer-assistance program or secondary financing. With Home PossibleⓇ, the lowest qualifying credit score is 580. Depending on your credit score, you may encounter a price adjustment of up to 1.5% of the loan amount.
• HomeOne: The Freddie Mac HomeOne mortgage is available to first-time home buyers who need flexible financing, as they try to reach their goal of purchasing a single-family home. It offers a minimum down payment of 3% with no borrower geographic or income limits. However, some restrictions do apply. A home buyer education course is required for first-time home buyers. Additionally, approval is only offered for fixed-interest rate loans.

Government-Backed Loans

A bit earlier we considered what government backed loans are and why they can be a good choice for first-time home buyers. Now, let’s discuss some specific types of government-backed loans.

• FHA loans: FHA loans are backed by the Federal Housing Administration, which may make it easier to qualify and minimize down payment costs. FHA loans often require a minimum credit score of 580 for approval, although certain lenders may approve credit scores as low as 500. The exact down payment you’ll need will be determined by your credit history. However, borrowers who meet the 580 score requirement can put as little as 3.5% down on the home, while those with scores in the 500 – 580 range will need a down payment of 10% or higher. Keep in mind that mortgage insurance will be required for FHA loans, no matter your down payment. You’ll be required to pay a mortgage insurance premium (MIP) – typically made up of an upfront premium around 1.75% of the total loan amount paid at closing and an annual premium of around 0.45 – 1.05%.
• VA loans: VA loans are backed by the U.S. Department of Veterans Affairs, and available to eligible active-duty service members, veterans and qualifying military spouses. VA loans do not require a down payment, which may make them a great option for first-time home buyers. However, to qualify, you’ll need a credit score of 580 and a debt-to-income (DTI) ratio of 45% or lower. VA loans do not require you to pay mortgage insurance. However, mortgage lenders will charge a funding fee to originate the loan. The funding fee will be higher if it’s not your first time obtaining a VA loan.
• USDA loans: Backed by the U.S. Department of Agriculture (USDA), USDA loans are designed to help low- to moderate-income families in designated rural areas achieve the dream of homeownership. While they do not require a down payment, USDA loans are subject to certain income restrictions. Your adjusted gross income cannot exceed 115% of the median income of the area. To qualify, you’ll also need a credit score of at least 640.
• NADL loans: The Native American Direct Loan (NADL) is a type of VA loan specifically for Native American veterans who want to buy, improve or build a home on Federal Trust land. Like other types of VA loans, those who qualify for this form of financing will not be required to pay a down payment or mortgage insurance.

Good Neighbor Next Door

Good Neighbor Next Door (GNND) is a HUD program created to help eligible public service workers – such as pre-K-12 teachers, law enforcement officers, firefighters and emergency medical technicians – purchase homes at a discounted price. The program offers a 50% discount on eligible HUD homes.

And considering these HUD properties are typically foreclosures, they’re often affordable even before the hefty discount. This makes the program one of the best ways to make homeownership affordable if you qualify. But these properties also go fast as home inventory tends to be extremely limited. You can find available listings on the HUD Home Store website.

HomePath^® Ready Buyer™

Offered by Fannie Mae, the HomePath® Ready Buyer™ program allows first-time home buyers to purchase previously foreclosed homes with as little as 3% down. There’s even an option to apply for up to 3% in closing cost assistance. To qualify for the program, buyers must take and pass Fannie’s Framework Homeownership course before closing.

Energy Efficient Mortgage (EEM)

Sometimes referred to as a green mortgage, an Energy-Efficient Mortgage (EEM) program intends to help finance energy-efficient improvements in the home you’re buying. This type of product tacks the cost of these improvements onto the primary mortgage and may be a great option for those who are considering buying an older property with issues like an outdated furnace or HVAC system.

There are EEMs offered with conventional loan terms, but there are also EEMs backed by the FHA and the VA. To qualify, you’ll need to meet the requirements for those individual mortgage loan types.

Employer-Sponsored Programs

To make homeownership more attainable for their employees, some employers are beginning to offer housing incentives. These programs are typically a joint effort between the employer and the state government and may come in the form of a forgivable loan, down payment assistance or closing assistance.

But not every workplace offers such programs. To find out if your employer is participating in any home buying programs, speak with your manager or HR representative.

State And Location-Specific Programs

If you’re looking for government home buying assistance, many programs and grants are offered on the state and local level. That means the specific programs available to you will vary based on location. To learn about the resources in your area, check out the complete list of state-specific buying programs on the HUD website.

Nonprofit Programs

First-time home buyers may also find it helpful to look into nonprofit programs, such as:

• Habitat For Humanity: Habitat for Humanity is a nonprofit housing organization that helps families access safe and affordable housing. In doing so, they strive to create stronger communities. Habitat housing is geared toward those with a low to moderate income. Household income must not exceed 60% of the area median income. Habitat homeowners must also be willing to play an active role in the home building or buying process – this can include helping to build their own home, taking homeownership classes or performing volunteer work.
• Neighborhood Assistance Corporation of America (NACA): The Neighborhood Assistance Corporation of America (NACA) is a nationwide nonprofit, on a mission to eradicate the racial wealth disparity gap by lending based on an applicant’s character as opposed to their financial standing. To purchase a home through NACA, prospective home buyers must follow a series of steps, which include attending a home buyer workshop, meeting with a housing counselor and undergoing a homeownership preparation process until they are NACA certified. For more detailed information on these steps, be sure to visit the NACA website.  

Benefits Of Being A First-Time Home Buyer

As we’ve discussed in this article, first-time home buyer programs can be extremely beneficial for the buyers who qualify for them. By way of first-time home buyer programs, you may be eligible for:

• Discounts and incentives
• Low- or no-down-payment loans
• Flexible requirements
• Tax credit

The Bottom Line

If you’re struggling to save for a down payment, frustrated with less than perfect credit or simply looking for more ways to save on your home purchase, don’t overlook these options. With the support of the right first-time home buyer program, you could end up putting little or nothing down on a home or even receive up to a 50% discount on the home’s purchase price. With homeownership being more attainable, you can focus less on the financials and more on turning the house into a home.

Ready to start your home buying journey? Begin the approval process today!