First-time homebuyers are navigating one of the toughest real estate markets in modern history. Inventory is especially tight in many areas of the country as speculators buy these homes to flip for a quick profit. Plus, escalating costs are prompting builders to focus more on higher-end homes that boost their own profit margins.
Luckily, there are many first-time homebuyer programs and grants available to help people afford their first real estate purchase with the aid of benefits like lower down payments and closing costs. We’ve rounded up some of the best national grants, programs and loans for first-time homebuyers. It could get you into your first home without needing to make a 20 percent down payment. We’ll also go over some first-time homebuyer programs for California, New York, Pennsylvania, Texas and Florida, plus other considerations before participating in these programs.
Why use 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 licensed 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,” he 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 home buyers 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.
Here are 10 first-time homebuyer programs in 2020
- FHA loan program: A loan insured by the Federal Housing Administration. Good for those with low credit scores and little money saved for a down payment.
- USDA loan program: A loan program 100 percent guaranteed by the U.S. Department of Agriculture for lower-income borrowers in eligible rural areas.
- VA loan program: A loan backed by the U.S. Department of Veterans Affairs that allows no down payment for military personnel, veterans and their families.
- Good Neighbor Next Door buyer aid program: 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.
- Fannie Mae or Freddie Mac loan program: Conventional loans backed by Fannie Mae or Freddie Mac require only 3 percent down. Good for those with strong credit.
- HomePath ReadyBuyer 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.
- Energy-efficient mortgage program: Backed by FHA or VA loan programs and allows borrowers to combine the cost of energy-efficient upgrades onto a primary loan upfront.
- FHA Section 203(k) loan program: Borrow the funds needed to pay for home improvement projects and roll the costs into one FHA loan with your primary mortgage.
- Local first-time homebuyer programs and grants: Many states and cities offer first-time buyer programs and grants for down payment or closing cost assistance.
- Native American Direct Loan: This VA-backed program provides direct home loans to eligible Native American veterans to buy, renovate or build homes on federal trust land.
1. FHA loan
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 private mortgage insurance, or PMI, with FHA loans. Your overall borrowing costs can be higher since you’re paying an upfront PMI premium and annual PMI premiums. Unlike homeowners insurance, this coverage doesn’t protect you. Instead, it protects the lender in case you default on the loan.
2. USDA loan
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 you can get offers borrowers 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
Best for: Active-duty military members, veterans and their spouses.
Qualified U.S. military members (active duty, veterans and eligible family members) are eligible 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 loan costs. Some service members may be exempt from paying it altogether.
Other VA loan perks include no minimum credit score or private mortgage insurance (PMI) 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
Best for: Teachers, law enforcement, firefighters and emergency medical technicians.
The Good Neighbor Next Door program is sponsored by HUD. It 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
Best for: Borrowers with strong credit but minimal down payments.
These government-sponsored enterprises, or GSEs, 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. Homebuyers also need a minimum credit score of 620 (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 need to pay for PMI if you’re putting less than 20 percent down, but you can get it canceled once your loan-to-value ratio drops below 80 percent.
6. Fannie Mae’s HomePath ReadyBuyer Program
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)
Best for: Homebuyers who want to make their home more energy-efficient but lack up-front cash for upgrades.
Making so-called “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 upfront — all without a larger down payment.
8. FHA Section 203(k)
Best for: Homebuyers interested in purchasing a fixer-upper but 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.
9. State and local first-time homebuyer programs and grants
Best for: First-time homebuyers who need closing cost or down payment assistance.
Many states and cities 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.
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:
- California first-time homebuyer grants and programs
- Texas first-time homebuyer grants and programs
- New York first-time homebuyer grants and programs
- Florida first-time homebuyer grants and programs
- Pennsylvania first-time homebuyer grants and programs
- Illinois first-time homebuyer grants and programs
10. Native American Direct Loan
Best for: Eligible Native American veterans wishing to buy a home on federal trust land.
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 private insurance requirements, and closing costs are low. And you’re not limited to only one property — you can get more than one NADL. However, not all states are eligible.
What to consider in 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 a FHA or USDA loan, require that the property meets certain standards before qualifying. There could be income restrictions for local and state government programs. For example, Florida Housing may forgive $15,000 in down payment and closing cost assistance if you live in your home for at least five years.
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 maintenance costs. Once you figure out how much house you can afford, 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,” says Corzo.