Loan Programs for First-Time Homebuyers

Loan Programs for First-Time Homebuyers

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Buying a home for the first time can be a long and expensive process. Since many first-time homebuyers can't afford a full 20% down payment, there are government-backed loans and financial assistance programs that are designed to help buyers during the purchasing process. Below you can learn more about the benefits of these programs and whether you qualify.

Loans for First-Time Homebuyers

First-time homebuyer loans are designed to help future homeowners purchase homes without going into excessive debt. These loan programs vary based on your location, financial status, and the type of home you want to buy. These loans and programs offer benefits such as low or zero down payments, below-market interest rates, grants, and reduced closing costs. First-time buyer loan programs tend to be geared towards lower-income buyers and those with lower credit scores. If you have a good credit score and have a sizable down payment saved up, you'll likely find better loan rates and terms offered by conventional lenders.

General Qualifications for First-Time Buyers

First-time mortgage lenders generally provide loans to those who have never owned a home, although borrowers may still qualify for a loan even if they have previously owned a home. In order to be considered a first-time buyer, according to the U.S. Department of Housing and Urban Development (HUD) and other loan programs, you must meet at least one of these requirements:

  • You have never owned a home
  • You or your spouse haven't owned a primary residence for at least three years. Married couples can be considered first-time buyers even if one has owned a home previously.
  • You're a single parent who previously owned a home with a spouse
  • You have only owned a primary residence that didn't have a permanent foundation— for example, a mobile home.
  • You owned a home that wasn't in compliance with state or local building code and couldn't improve it to meet building code standards for less than the cost of building a new structure

Types of Loans

First-time homebuyer loans are offered by mortgage lenders—such as banks or credit unions—and are often backed by the government. This guarantee makes the loan investment less risky, allowing lenders to provide more affordable options for borrowers. Most of the loans below are not limited to first-time buyers, but are good options for those purchasing their first home.

First-Time Homebuyer Programs

Types of LoansBasic Requirements
FHA Loans
  • Two established lines of credit
  • A debt-to-income ratio of 31% or lower
  • No delinquent federal debts (loan defaults or unpaid taxes)
USDA Home Loans
  • Home must be located in an approved area
  • Cannot earn more than 115% of local area's average income
VA Loans
  • Must be an active duty service member, veteran, or eligible surviving spouse
Freddie Mac Home Possible® Mortgages
  • Minimum credit score of 660
  • One to four-unit homes including condos, townhomes, planned unit developments, or co-ops are eligible

Freddie Mac Home Possible Advantage® mortgages only accepts one unit residences

FHA Loans

A Federal Housing Administration (FHA) loan is government-insured and offered to homebuyers with low incomes or poor credit scores by mortgage lenders. FHA loans are suitable for buyers who have little money saved because borrowers can qualify for home loans for as little as 3.5% down. FHA loans also have lower eligibility requirements than conventional mortgages, but include the extra cost of monthly mortgage insurance premiums. There is no minimum income rule, but lenders evaluate each individual applicant based on their employment, debt, and income.

USDA Home Loans

The United States Department of Agriculture (USDA) home loan program provides financing to low-income homebuyers in rural areas. These loans are also government-backed, with the USDA guaranteeing 90% of mortgage loan amounts for approved lenders. There are two options for this type of loan: the guaranteed loan for the average-income borrower and the direct loan for low-income families.

Veterans Administration (VA) loans

VA loans are designed for active duty service members, veterans, and eligible surviving spouses. They provide competitive interest rates and no down payment, depending on income. Borrowers are not required to pay mortgage insurance, but they must pay a funding fee between 1.25% and 3.30% of the loan amount. Technically, there's no maximum debt-to-income ratio, maximum loan amount, or minimum credit score requirement. However, these elements will affect your mortgage cost and terms.

Freddie Mac Home Possible® Mortgages

There are two types of Freddie Mac Home Possible® Mortgages: the Freddie Mac Home Possible® and the Home Possible Advantage® mortgage. The Home Possible® allows for down payments as low as 5% for homebuyers, while the Home Possible Advantage® requires a 3% down payment. For both loan types, the borrower must pay for mortgage insurance until the loan reaches below 80% of the property's value.

First-time Homebuyer Financial Assistance Programs

In addition to loans, there are a number of first-time homebuyer assistance programs at the city, state, and federal levels. These programs tend to use the HUD definition of a first-time buyer. They also require you to take a homebuyer education course and occupy the home as your primary residence. The programs may provide assistance for down payments, closing costs, tax credits, and other expenses associated with buying a home.

For example, the Fannie Mae's HomePath Ready Buyer™ program allows homebuyers to purchase an eligible foreclosed home and receive a rebate for up to 3% in closing costs. Similarly, HUD's Good Neighbor Next Door program offers 50% off of list prices for single-family homes located in eligible revitalization areas. This program, however, is only available to full-time law enforcement officers, teachers, firefighters, and emergency medical technicians.

Most states and local governments have a variety of homebuyer programs to help first-time buyers qualify for mortgages and handle other costs associated with purchasing a home. Seattle, for instance, offers up to $45,000 in down payment assistance for homebuyers that have an income below 80% of the area median income. You can visit your state and municipality's housing website to find out if you're eligible for any programs.

First-time Homebuyer Tips

First-time homebuyer loan programs offer financial benefits such as lower interest rates and low down payments, but many of them require you to live in the home for a designated period or take homeowner education courses. Additional loan conditions may include the home price and loan type restrictions, and you risk losing benefits if you sell the home too soon. Here are some tips to consider when you want to purchase your first home:

  • Check your credit score and figure out how much you can afford to pay for a mortgage
  • Many lenders claim to have a first-time homebuyer program, but the rates may be similar to offers from conventional lenders
  • Ask about the specific support they offer
  • Remember that every time a lender performs a hard pull on your credit history, your credit score may decrease
  • If you have a credit score above 720 and have a high income, you may not qualify for these loans. It may be more beneficial to consider a conventional mortgage

Madison is a former Research Analyst at ValuePenguin who focused on student loans and personal loans. She graduated from the University of Rochester with a B.A. in Financial Economics with a double minor in Business and Psychology.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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