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First-Time Homebuyer Programs and How You Can Qualify

by | Sep 26, 2022 | 1st Time Home Buyers

Qualifying: first time home buyer programs

The typical person in America has to save for many years before they can afford to make the down payment on a home. But most are unaware that there are special programs specifically designed for first-time homebuyers that could help them to make this purchase a lot sooner and easier.

Some of these programs could assist with making that big down payment or even help with the closing cost. Knowing what options are available to you will get you a step ahead. In this article, we’re going to take a look at some of the grants, home loans, and programs that may be available to you as a first-time homebuyer.

Qualifying for First Time Homebuyer Programs

It goes without saying that anyone who is purchasing their very first property is automatically a “first-time homebuyer”, but did you know that you could qualify even if you have owned a home before?

Most programs and government agencies that offer these types of grants and loans consider anyone who has not owned a home in the past 3 years to be a first-time homebuyer. Even if you once owned a home, you could still qualify for one or more of these programs, so long as it has been at least 3 years and you meet the other criteria.

However, if you own a rental or investment property, even if you do not live in it, you cannot be considered for these programs. Some government-backed loans, such as an FHA, USDA, or VA, require that your home also meet certain safety standards in order to be eligible. Some government programs also come with income restrictions that must not be exceeded.

Employer-sponsored programs and tax deductions are usually more flexible and you can even deduct your mortgage insurance on your personal home, even if you own other properties.

The only foolproof way to find out whether or not you may qualify is to speak with a home loan expert. But we will go over many of the programs that are available, who may be eligible for them, and how.

Low Down Payment Loans

There are many loan programs that could greatly benefit first-time homebuyers. Many of these have less restrictive qualification guidelines specifically to accommodate those with lower credit scores, down payments, or household incomes. While you may have special circumstances, it may be a lot easier to meet the requirements for some of these loan options than you may think. It is always worth it to explore and understand your options.

Low Down Payment – Conventional Loans

The two enterprises that set the borrowing guidelines for conventional loan programs are Fannie Mae and Freddie Mac. These programs are not available directly from these enterprises but instead are offered by many other types of lenders such as banks, credit unions, and online lenders. These programs all require a 3 percent minimum down payment, making them a very affordable option for potential homebuyers with strong credit that may not have much of a down payment to offer.

  • Conventional 97 Mortgage: Backed by both Fannie Mae and Freddie Mac, this program requires 3 percent down and a 620 minimum FICO credit score. The borrower must also pay for private mortgage insurance (PMI), as with most of these conventional loan programs.
  • HomeOne Mortgage: Backed by Freddie Mac, this program requires 3 percent down and requires PMI but is strictly available to first-time homebuyers and comes with some additional special criteria.
  • HomePossible Mortgage: Backed by Freddie Mac, this program requires 3 percent down and a 660 minimum FICO score.
  • HomeReady Mortgage: Backed by Fannie Mae, this program requires 3 percent down and a 620 minimum FICO score. If buyers using this loan purchase a HomePath property, they also receive a $500 credit towards closing costs. This loan also requires PMI, but offers more flexible underwriting. You can find more information about HomePath properties below.

Low Down Payment – Government Loans

These loans are mortgages that are backed by a government agency – the Department of Agriculture, the Department of Veterans Affairs, or the Federal Housing Administration. These loans are not created or funded by these organizations, instead being offered by government-approved lenders throughout the country. These programs are open to anyone who is a citizen or legal resident of the U.S.

  • FHA Loan: Insured by the Federal Housing Administration, this loan requires 3.5 percent down and a 580 minimum FICO score (or 10 percent down with a score as low as 500). Down payments of less than 20 percent will require FHA mortgage insurance as well. However.
  • USDA Loan: Insured by the Department of Agriculture, this loan covers 100 percent of the financing (or 0 percent down) for some rural homes. First-time buyers must have a 620 minimum FICO score. Additional fees are associated with this type of loan. It is worth noting that homes in a USDA-eligible zone include many lower-density areas, including suburbs and rural places, but not all of them are farms.
  • VA Loan: Insured by the Department of Veterans Affairs, this loan is available to qualified members of the military such as active duty, eligible family members, surviving spouses, and veterans. These loans do not require a down payment (100% financing) and offer lower interest rates than other types of loans. Borrowers must have a 620 minimum FICO score and there is an associated funding fee, but that fee can be rolled into the monthly cost of your loan. Some servicemembers may even be exempt entirely from this fee.

Forgivable Mortgages

Municipal governments and communities look favorably on forgivable mortgages because they encourage long-term homeownership and promote community investment. You may have heard of certain cities paying people to move there – this is an example of using forgivable mortgages as an incentive. These are downpayment loans where the lender writes off the mortgage once the buyer meets specific time-based conditions. 

Nonprofit Program Assistance

If you have a low to moderate household income, you may qualify for a charitable or nonprofit program. These non-government organizations can offer you educational and financial resources when you are ready to purchase a home. These usually come with income qualifications and tend to use “character-based” standards, as opposed to the typical risk assessment used by most mortgage lenders.

Just like with government-sponsored programs, many nonprofits and charities are region-specific. Visit the U.S. Department of Housing and Urban Development’s website to browse the running list of approved nonprofits available in your state or county.

Neighborhood Assistance Corporation of America

This nonprofit organization provides low-rate mortgages to qualifying borrowers without requiring a down payment or any closing costs. NACA provides low-income households with mortgage education and counseling and helps “financially unstable” families find lenders who are willing to work with them. There is no minimum credit score needed to qualify for NACA assistance.

Habitat for Humanity

Perhaps the most well-known housing organization, this international nonprofit offers “simple, decent, and affordable” housing for low-income families. These homes are built by volunteers, specifically for those in need, and Habitat for Humanity makes no profit on the closing. Even though they have built over 800,000 homes, this is still a much more affordable option than many local programs.

National Homebuyers Fund

This nonprofit public benefit corporation sponsors first-time and repeat homebuyers by paying up to 5 percent of the purchase price of a home. First-time homebuyers may qualify for this program alongside an FHA, VA, USDA, or even a conventional loan. Five years after closing, this loan is also forgiven. You cannot apply for this grant directly, however, and will have to find a participating mortgage lender to do so on your behalf.

Other Options

Still need more options? Here are some other incredible options for first-time home buyers.

Loans and Grants for Students

While repaying school loans might mean more difficulty in taking on a mortgage, students qualify for the same first-time homebuyer programs as non-students. The more flexible debt-to-income ratio requirements associated with some loans could be good options for those with a student loan balance.

There are also some states that offer first-time homeowner assistance exclusively for those who owe student loans. Consult with a real estate professional or check your state’s website to find which options you might qualify for.

Tax Deductions

There are federal and state deductions that you can file for that will save you money on your taxes by lowering your taxable income. Private mortgage insurance and mortgage insurance premiums associated with FHA loans are included, as are the funding fee for a VA loan and the guarantee fees for a USDA loan.

It is also possible to deduct the interest that you paid throughout the year on loans up to a certain amount for a primary and one secondary home. Be sure to check what deductions and credits are available from your local or state government.

Closing Cost Assistance

Certain private and government-sponsored programs are available to help pay the closing costs associated with purchasing a home. Typically costing between 3 to 6% of the total cost of a home, these fees are due at the end of the mortgage process. Similarly to down-payment assistance, which we will touch on later, closing cost assistance may be available through either a grant or a loan. The seller of the property may also be willing to help with the closing costs in the form of seller concessions, such as attorney fees, real estate tax services, or title insurance.

Energy-Efficient Mortgage

This kind of mortgage allows you to include the costs of energy-efficient upgrades for your home directly onto your primary loan without the need for a larger down payment. Because you are borrowing more money, this comes with a higher mortgage payment. There are also other requirements that you must meet, such as having an energy assessment performed.

Good Neighbor Next Door

Sponsored by the Department of Housing and Urban Development (HUD), this program provides housing aid for emergency medical technicians, firefighters, first responders, law enforcement officers, and teachers (pre-kindergarten through 12th grade). The homes available through this program are located in a “revitalization area” and are typically foreclosures. You must usually agree to live in the home for at least three years. Check the HUD program’s website to find a list of available properties.

HomePath Ready Buyer

As mentioned before, this program is structured for those interested in buying a foreclosed home owned by Fannie Mae. With the completion of an online homebuyer education course (Fannie’s Framework Homeownership), borrowers who qualify can get up to 3 percent in closing cost assistance towards this purchase. These homes sell in “as is” condition, so they may need repairs. But what you save may just make it possible to cover the extra costs of such repairs.

Native American Direct Loan

The NADL can provide loans to eligible Native American veterans and their spouses. This loan can be used to purchase, improve, or build a new home on federal trust land. Unlike a traditional VA loan, with a NADL loan, the VA is the mortgage lender. While there is still a funding fee associated with this type of loan, there is no down payment and no mortgage insurance required.

Down Payment Assistance Grants

Local, state, and federal governments also offer first-time homebuyer grants in order to help create new homeowners nationwide. Many charitable and housing foundations also offer such grants. Borrowers considered for these types of payments must usually be of low to moderate income, typically determined as not earning more than 80 percent of the area median income. Qualifying for these grants comes with a number of other requirements, such as a minimum credit score of 640 and a limit on the price of the home.

A grant can help you cover your down payment or closing costs and does not require repayment. Instead, the recipient performs the public good of homeownership, which is a cornerstone of the economy in the U.S. Make sure to check with the governmental bodies of whatever state or city you are looking to purchase your new home.

Down Payment Savings Match

These programs can help you to grow the amount you are able to put down on a home by matching your savings. Down payment savings match programs function over a specified period of time and match funds up to a certain limit. That money can then only be used to pay for the down payment and closing costs for buying a home.

One such program that some state agencies offer is an Individual Development Account. Some contribute as much as three dollars to every one that you save. If you qualify, you work with an assigned counselor to deposit those funds into a special account. Then, at closing, if you followed the plan and saved the required money, it will be matched by that agency.

Employer-Assisted Housing

Some employers have adopted housing incentives to help their employees cover the price of down payments and closing costs. EAH programs usually apply to neighborhoods near the workplace and could come in the form of a grant or a forgivable loan. Some labor unions may also offer this type of assistance. These types of programs are often limited to specific kinds of occupations and other restrictions may apply, but check with your manager or HR representative to ask if such an opportunity is available.

The Bottom Line

As you can see, there is a multitude of options available for those looking to buy a home for the first time. Whether it is a grant, a loan, or financial assistance, these options can help you with the down payments, closing costs, tax credits, or by educating you further about the process of homeownership. Some programs are offered by your local, state, or federal government. Some are offered by charities, nonprofits, or possibly even your employer.

The best way to find out what programs or assistance you could qualify for is to reach out to the housing authority in the town, city, or state where you are looking to buy a home. And know that, when you are ready to buy your first home, there are people who are willing to help you achieve your goal.

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