Buying your first home can feel a bit like running a gauntlet. Your finances and credit are under a microscope, you have to compete with other buyers to make a winning offer, and there’s all that paperwork to sign, too.
Shelling out big bucks for your down payment and closing costs, along with shopping for a mortgage, might seem daunting. You’re in luck, though, because there are numerous first-time homebuyer programs and grants to make home ownership more accessible to you. Here are nine of them that can help you crush your home ownership goals.
Read on to the end for specific state resources and programs.
9 first-time homebuyer loans and programs
- FHA loan
- USDA loan
- VA loan
- Good Neighbor Next Door
- Fannie Mae or Freddie Mac
- HomePath ReadyBuyer Program
- Energy-efficient mortgage
- FHA Section 203(k)
- Local first-time homebuyer programs and grants
If you’re not sitting on a pile of down payment cash and you have a spotty credit record, there’s a loan for that. Insured by the Federal Housing Administration, FHA loans typically come with smaller down payments and lower credit score requirements than most conventional loans. First-time homebuyers can buy a home with a minimum credit score of 580 and as little as 3.5 percent down, or a credit score of 500 to 579 with at least 10 percent down.
FHA loans have one big catch called mortgage insurance. You’ll pay an upfront premium and annual premiums, driving up your overall borrowing costs. Unlike homeowners insurance, this coverage doesn’t protect you; it protects the lender in case you default on the loan. It’s the price borrowers pay when they have less skin in the game.
You may not know it, but the U.S. Department of Agriculture, or USDA, guarantees loans for some rural homes and you can get 100 percent financing. This doesn’t mean you have to buy a farm, shack up with livestock or live in the boondocks, but you do have to buy a home in a USDA-eligible area.
USDA loans also have income limits based on where you live, meaning they’re geared toward folks who earn lower to moderate incomes. Typically, you need a credit score of 640 or higher to qualify for a streamlined USDA loan. If your score falls short, you’ll have to provide extra documentation on your payment history to get a stamp of approval.
Many U.S. military members (active duty and veterans) are eligible for loans backed by the U.S. Department of Veterans Affairs, or VA. VA loans are a sweet deal for eligible borrowers because they come with lower interest rates than most other loan types and require no down payment. A funding fee is required on VA loans, but that fee can be rolled into your loan costs and some service members may be exempt from paying it altogether.
Other VA loan perks include no PMI or minimum credit score. If you struggle making payments on the mortgage, the VA can negotiate with the lender on your behalf to take some stress from the equation.
The Good Neighbor Next Door program, sponsored by the U.S. Department of Housing and Urban Development, or HUD, provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers — the folks who help keep communities safe and well educated.
Through this program, you can receive a discount of 50 percent on a home’s listed price in regions known as “revitalization areas.” Using the program’s website, you can search for properties available in your state. You must commit to living in the home for at least 36 months so this may not be ideal if you plan to move sooner.
The names might sound a bit kitschy, but Fannie Mae and Freddie Mac are government-sponsored entities that keep the U.S. mortgage market going strong. The GSEs, as they’re called for short (government-sponsored enterprises), each set borrowing guidelines for loans they’re willing to buy from conventional lenders on the secondary mortgage market.
Both programs require a minimum down payment of 3 percent. Homebuyers also need a minimum credit score of 620 (or higher, depending on the lender) and a relatively unblemished financial and credit history to qualify. Fannie Mae accepts a debt-to-income ratio as high as 50 percent in some cases. You’ll still pay for PMI because you’re putting less than 20 percent down, but you can get it canceled once your loan-to-value ratio drops below 80 percent.
Fannie Mae’s HomePath ReadyBuyer program is a little-known initiative geared toward first-time buyers interested in foreclosed homes that are owned by Fannie Mae. After taking a required online home-buying education course, eligible borrowers can receive up to 3 percent in closing cost assistance toward the purchase of a HomePath property. The trick is finding a HomePath property in your market, which might be a challenge since foreclosures account for a smaller chunk of listings today.
Making a home more energy efficient is good for the environment, and good for your wallet by lowering your utility bills. Making green upgrades can be costly, but you can get an energy-efficient mortgage, or EEM loan, that’s insured through the FHA or VA programs.
An EEM loan lets you tack the cost of energy-efficient upgrades (think new insulation, a more efficient HVAC system or double-paned windows) onto your primary loan upfront — all without a larger down payment.
If you’re brave enough to take on a fixer upper but don’t have the extra money to pay for renovations, an FHA Section 203(k) loan is worth a look.
Backed by the FHA, the loan calculates the home’s value after improvements have been made. You can then borrow the funds needed to pay for home improvement projects and roll the costs into one loan with your primary loan amount. You’ll need a down payment of at least 3.5 percent, and improvements must cost more than $5,000.
In an effort to attract new residents, many states and cities offer first-time homebuyer grants and programs. The aid comes in the form grants that don’t have to be repaid or low-interest loans with deferred repayment to cover down payment or closing costs. Some programs may have income limits, too. Before buying a home, check your state’s housing authority website for more information.
Contact a real estate agent or local HUD-approved housing counseling agency to learn more about first-time homebuyer loans in your area.