10 first-time homebuyer loans and programs

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There are many first-time homebuyer programs and grants available to help you afford your first real estate purchase, generally assisting with the down payment and closing costs. We’ve rounded up some of the best national grants, programs and loans for first-time homebuyers that can help get you into your first home without needing to make a 20 percent down payment.

10 first-time homebuyer programs in 2020

1. FHA loan

  • A loan insured by the Federal Housing Administration
  • Best for: Buyers with low credit and smaller down payments

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.

Unfortunately, you’ll need to pay mortgage insurance with FHA loans if you put down less than 20 percent. Your overall borrowing costs can be higher since you’re paying an upfront premium and annual premiums. Unlike homeowners insurance, this coverage doesn’t protect you. Instead, it protects the lender in case you default on the loan.

Learn more about finding the best FHA lender for you.

2. USDA loan

  • A loan program 100 percent guaranteed by the U.S. Department of Agriculture
  • Best for: Borrowers with lower or moderate incomes purchasing a home in a USDA-eligible rural area

The U.S. Department of Agriculture, or USDA, guarantees loans for some rural homes, and borrowers can get 100 percent financing. This doesn’t mean you have to buy a farm or shack up with livestock, but you do have to buy a home in a USDA-eligible area.

USDA loans have income limits based on where you live and are geared toward folks who earn lower to moderate incomes. You typically need a credit score of 640 or higher to qualify for a streamlined USDA loan. Otherwise, you’ll have to provide extra documentation on your payment history to get a stamp of approval.

3. VA loan

  • A loan backed by the U.S. Department of Veterans Affairs that allows no down payment for military personnel, veterans and their families
  • Best for: Active-duty military members, veterans and their spouses

Qualified U.S. military members (active duty, veterans and eligible family members) can apply for loans backed by the U.S. Department of Veterans Affairs, or VA.

VA loans are a great deal because they come with lower interest rates compared to most other loan types and don’t require a down payment. Borrowers, however, will need to pay a funding fee that is required on VA loans, but it can be rolled into your monthly loan costs. Some servicemembers may be exempt from paying it altogether.

Other VA loan perks include no minimum credit score or mortgage insurance requirements. The VA can negotiate with the lender on your behalf if you find yourself struggling to keep up with mortgage payments.

4. Good Neighbor Next Door

  • A U.S. Department of Housing and Urban Development (HUD) program that provides housing aid for law enforcement officers, firefighters, emergency medical technicians and teachers
  • Best for: People employed in one of the qualifying professions

The Good Neighbor Next Door program, sponsored by the U.S. Department of Housing and Urban Development (HUD), provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers.

Qualified participants can receive a discount of 50 percent on a home’s listed price in “revitalization areas.” You can search for properties available in your state using the program’s website. You must commit to living in the home for at least 36 months.

5. Fannie Mae or Freddie Mac

  • Conventional loans backed by Fannie Mae or Freddie Mac, which require only 3 percent down
  • Best for: Borrowers with strong credit but a minimal down payment

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac set borrowing guidelines for loans they’re willing to buy from conventional lenders on the secondary mortgage market.

Both programs require a minimum 3 percent down payment. To qualify, homebuyers will need a minimum credit score of 620 (though some lenders have different thresholds) and a relatively unblemished financial and credit history. Fannie Mae accepts a debt-to-income ratio as high as 50 percent in some cases.

You’ll need to pay for private mortgage insurance, or PMI, if you’re putting less than 20 percent down, but you can get it cancelled once your loan-to-value ratio drops below 80 percent.

6. Fannie Mae’s HomePath Ready Buyer Program

  • A program that provides 3 percent in closing cost assistance to first-time buyers; must complete an educational course and buy a foreclosed Fannie Mae property
  • Best for: First-time homebuyers who need help for closing costs and are willing to buy a foreclosed home

Fannie Mae’s HomePath ReadyBuyer program is geared toward first-time buyers interested in foreclosed homes that are owned by Fannie Mae. After taking a required online homebuying 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 typically account for a smaller chunk of listings.

7. Energy-efficient mortgage (EEM)

  • Backed by FHA or VA loan programs and allows borrowers to combine the cost of energy-efficient upgrades into a primary loan upfront
  • Best for: Homebuyers who want to make their home more energy-efficient but lack upfront cash for upgrades

Making “green” upgrades can be costly, but you can get an energy-efficient mortgage (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-pane windows) onto your primary loan, without requiring a larger down payment.

8. FHA Section 203(k)

  • Borrow the funds needed to pay for home improvement projects and roll the costs into one FHA loan with your primary mortgage
  • Best for: Homebuyers interested in purchasing a fixer-upper who don’t have a lot of cash to make major home improvements

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 funds needed to pay for home improvement projects and roll the costs into one loan. Improvements must cost more than $5,000 and you’ll need to make a minimum 3.5 percent down payment. You’ll also want to make sure you’re working with a contractor who is familiar with 203(k) loans and their timeline.

9. State and local first-time homebuyer programs and grants

  • First-time buyer programs and grants, available through states or cities, for down payment or closing cost assistance
  • Best for: First-time homebuyers who need closing cost or down payment assistance

Many municipalities offer first-time homebuyer grants and programs in an effort to attract new residents. The aid comes in the form of grants that don’t have to be repaid or low-interest loans with deferred repayment. Some programs may have income limits.

Before buying a home, check your state’s housing authority website for more information, or contact a real estate agent or local HUD-approved housing counseling agency to learn more about first-time homebuyer loans in your area.

First-time homebuyer programs by state:

10. Native American Direct Loan

  • VA-backed program providing direct home loans to eligible Native American veterans to buy, renovate or build homes on federal trust land
  • Best for: Eligible Native American veterans

The Native American Direct Loan (NADL) provides financing to eligible Native American veterans and their spouses to buy, improve or build a home on federal trust land. This loan differs from traditional VA loans in that the VA is the mortgage lender.

The NADL has no down payment or mortgage insurance requirements, and closing costs are low. You’re not limited to only one property — you can get more than one NADL. However, eligible properties are only located in certain states, so you’ll need to make sure the homes you’re looking at meet the requirements.

What are the benefits of first-time homebuyer programs?

First-time homebuyer programs, grants and loans are available to help people become homeowners. These programs are a form of financial assistance extended to qualified buyers, usually those who meet certain income restrictions and have strong credit scores.

Diego Corzo, a Realtor with Keller Williams Realty, says that first-time homebuyer programs can create a win-win situation for both the homeowner and the local government, since it can help stimulate the economy in the area.

“Some cities or counties already allotted the funds to these programs and want to use them up,” Corzo says. “These programs are designed to help provide some stability for the community, and (local governments) might lose funding if it doesn’t get used up.”

Here are a few different ways you could benefit from these programs:

  • Grants: Some areas offer cash to put towards home-related costs such as your down payment or closing costs.
  • Assistance with closing fees: Some loans place a cap on how much is charged for closing costs.
  • Deferred payments: Some loans won’t charge interest and won’t need to be repaid until the homeowner sells the home or pays off the mortgage.
  • Savings on interest: Some organizations offer to pay for or subsidize interest, or help borrowers qualify for loans with lower interest rates.
  • Loan forgiveness: Homeowners who stay in the home for a certain period of time will have a portion of their debt cancelled.
  • Down payment assistance: Some programs allow homebuyers to put down a small down payment, or none at all.

Not all of these types of assistance will be available in your area or for your situation. There are also certain restrictions, such as financial need, so do some research or speak with a mortgage professional to see if you qualify.

What to consider with first-time homebuyer programs

Before seeking out first-time homebuyer programs, it’s crucial that you first make sure you meet the definition of a first-time homebuyer. Many nonprofit and government programs consider you a first-time home buyer if you haven’t owned a home within the last three years. This includes investors who own rental or investment properties, whether or not it’s considered your primary residence.

Some government-backed programs, such as an FHA or USDA loan, require that the property meets certain standards before qualifying. There could be income restrictions for local and state government programs, as well.

Regardless of what program you may qualify for, purchasing a home is a major financial decision and shouldn’t be taken lightly. That means look at what you can afford, which includes factoring in maintenance costs.

Once you figure out a realistic budget, speak to a reputable lender that is knowledgeable about first-time homebuyer programs.

“Lenders who have ample knowledge about first-time homebuyer programs in your area and knowing what you might qualify for can save you thousands of dollars in the long run,” Corzo says.

The first-time homebuying process

Step 1: Figure out your budget (and stick to it)

Being honest with yourself, your real estate agent and your mortgage lender is key. You don’t want to wind up with a house you can’t afford. Do a thorough accounting of your own finances, and figure out how much you’ll really be able to lay out every month. Make sure to factor in maintenance costs and other emergencies.

Step 2: Get quotes from at least three lenders

Shopping around is one of the most important parts of getting a mortgage. You want to make sure you’re getting the best possible deal, so be sure to compare all the terms each lender is offering, including the APR, not just the interest rate.

Step 3: Get preapproved for a loan

Once you decide on a lender, you should get preapproved for your mortgage before you start shopping for a house. It will show sellers that you’re a serious buyer, and a preapproval will also help you cement your budget, because you’ll have a clearer picture of what your mortgage will be after you close. Be prepared for a lender to dig into all aspects of your financial life in order to preapprove you for a loan, so have all of your documents handy ahead of time.

Step 4: Find a good real estate agent

Working with a real estate agent who is knowledgeable about the area you plan to buy in will be a big help in your search. You want an agent who can help you find the right home, negotiate the best offer and recommend other professionals for any projects you want to do once you move in.

Step 5: Shop for your home

Make sure your agent really knows what you’re looking for, and do your research not only on the homes you’re going to see, but also on the neighborhood. It’s a good idea to visit the community you’re going to move to at different times of day, on weekdays and weekends, to see what the vibe is like — and, never buy a house sight unseen.

Step 6: Make an offer

Talk to your real estate agent about a reasonable offer and be prepared for some back and forth with the seller. The housing market today is very competitive, so you might have to negotiate against other prospective buyers. Even so, it’s important not to blow your budget. At this stage, it’s easy to let your emotions get the best of you, but you don’t want to be saddled with housing debt you can’t afford. No matter how much you love a particular home, you need to be prepared to walk away if the numbers ultimately don’t work for you.

Step 7: Negotiate closing costs

There are closing costs involved with any real estate sale, and there are many ways to pay them. They might be rolled into your loan (which tends to be more expensive in the long run) or the seller may be willing to pay some of your fees. Don’t ignore this part of transaction – you may be able to negotiate your way into waived fees and lower costs overall.

Step 8: Hire a home inspector

When you decide on a home you like and make an offer, it’s important to have the home thoroughly inspected before the deal can be finalized. You want to make sure there aren’t any unknown structural issues, or anything else that could affect the livability of your new place. Inspections usually take a few hours, and cost a few hundred to a few thousand dollars, depending on the size of the home.

Step 9: Get homeowners insurance and finalize move-in details

Homeowners insurance is usually required by the lender and helps to protect your investment. Just like with your mortgage, you should get quotes from several companies or work with an insurance broker who can shop rates for you. If your home is located in a federally-designated flood zone, you’ll need to buy flood insurance, too.

As you prepare for move-in day, contact your local utility, cable and internet providers to arrange new service for your move-in date. Don’t forget the largest task: hiring a reputable mover and packing.

Step 10: Seal the deal at closing

Once your offer is accepted and an inspection is completed, you’re on your way to closing. You’ll have to get updated pay stubs and other financial paperwork just before closing to prove your employment status hasn’t changed and that you’ll be able to make your mortgage payments. Within 24 hours of closing, you’ll do a final walk-through of the property to make sure repairs, if any, were made and that the home is vacant.

At the closing table, you’ll sign a lot of paperwork to finalize the loan and transfer ownership of the home from the seller’s name to yours. You’ll also be required to bring a cashier’s check made out to the escrow company, or wire closing funds to the company. Don’t forget to bring your identification, too.

After signing all of the closing documents, you’ll be handed the keys to your new home, and you’ll officially be a first-time homeowner.

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