HUD has loan programs that broadly help low- and moderate-income applicants qualify for a mortgage
For more specific homebuyer programs, it’s best to check out your state and local governments
First-time buyers can get better loan terms, closing cost assistance, or grants that don’t need to be repaid
Many assistance programs require the borrower to complete a homebuyer education class
Buying a home is an expensive investment. The average price of a home in 2020 was $381,500, according to the Federal Reserve Bank of St. Louis (based on U.S. Census data for the first three quarters). Many people often take out a mortgage to pay for a home. First-time homebuyers will be glad to know that there are programs, many of them from the federal and state government, that can help reduce costs.
Some of these loan programs can help you save interest (check out today's mortgage rates here), or pay for upfront costs, like a down payment, while others simply make it easier for less-qualified borrowers to get a mortgage loan at all.
First-time homebuyer programs are not a one-size-fits-all group, and specific terms always vary by the lender. Let’s dive into the different types of assistance programs for first-time homebuyers you might come across during your homeownership research, and at the end we'll show you where to find homebuyer programs in your state.
Who is considered a first-time homebuyer?
Someone who has never bought a house is obviously a first-time homebuyer, but they’re not the only ones. The Department of Housing and Urban Development (HUD) defines a first-time homebuyer as anyone who hasn’t owned a house within the last three years.
What is a homebuyer program and how does it work?
Homebuyer programs come in a variety of flavors and help borrowers save in different ways. They generally fall into three categories:
The purpose of many homebuyer programs is to help less qualified borrowers get a mortgage by easing up requirements. One of the biggest factors that affects getting approved for a mortgage is your credit score and income. These loan programs have a lower minimum credit score requirement and typically a maximum income level to qualify. If you earn more than the maximum, then you might not be eligible for one of these programs.
Down payment and closing cost assistance
Other homebuyer programs provide down payment and closing cost assistance. (You might see this referred to as a DPA — down payment assistance programs.) When you take out a mortgage, you’ll still need to pay some money upfront. Closing costs are made up of multiple fees and may be as high as 6% of the home purchase price. The down payment is a lump sum of money you put towards the house. Putting down 20% is not required, but it will lower your monthly mortgage payment and loan-to-value ratio, and free you from paying private mortgage insurance (PMI).
The down payment and closing costs require you to spend a lot of money upfront, which may be difficult for many people to save up for. Down payment assistance programs can be offered as a loan with generous terms, such as loans that are automatically forgiven after a certain amount of time.
You may be able to find a homebuyer assistance grant that doesn’t need to be repaid. However, homebuyer grants are rare. They are often only offered at the state level or at local community organizations and may come with strict eligibility requirements.
Mortgage tax credit
Finally, another type of homebuyer program helps make housing affordable through a tax credit. Eligible applicants can get a mortgage credit certificate, which can directly lower the amount of tax you owe by returning some of the mortgage interest back to you on Tax Day.
Homebuyer programs, including first-time buyer programs, may come with further restrictions. There are usually limits on the home’s purchase price and type. (For example, you may be restricted to only single-family homes or manufactured homes.) and limits on the borrower’s income. Many loan and mortgage programs use the area median income (AMI) when determining eligibility.
You may also be eligible for certain programs when you choose to buy a home in a target area that is in need of revitalization.
Most loan programs require the borrower to live in the home as their primary residence for a certain number of years to ensure you aren’t just flipping the property. Finally, as part of a homebuyer program, you most likely have to attend a homebuyer education class to learn the ins and outs of your mortgage loan and homeownership.
Government homeownership programs
Government agencies have many programs in place to help people find a home. With these loans, the government does not loan you the money directly. Rather the Department of Housing and Urban Development (HUD) allows HUD-approved lenders to offer you a loan at a reduced rate, and with more generous terms, by insuring the loan against the risk of default.
Most of these loan programs are not exclusive to first-time buyers. But they are more lenient than conventional loans when it comes to qualifying requirements, so they provide a way for people who are not in great financial standing to own a home. Many low-income families are not able to do so otherwise.
Here’s a rundown of government loan programs that can be helpful for first-time homebuyers:
The Federal Housing Administration insures loans for borrowers and does not have any income level requirements. People with mediocre and and less-than-average credit scores can qualify for an FHA loan with a downpayment as little as 3.5%. FHA loans can also help borrowers who may have recently faced bankruptcy or foreclosure.
Learn more about FHA loans.
Loans for veterans
VA loans, which are partially backed by the government, have some of the most favorable terms of any loan program. There is no down payment, no prepayment penalty, and no mortgage insurance. While there is a funding fee, VA loans have lower closing costs compared to conventional loans. These loans are only for eligible military members and veterans.
Native American veterans can also apply for a Native American Direct Loan if they’re buying or improving a home on federal trust land.
If you want to buy a house in an eligible rural area and have low income, you can get a 30-year fixed-rate mortgage through the USDA loan program. There is no minimum credit score.
Good Neighbor Next Door sales program
Only open to police officers, firefighters, grade school teachers and emergency medical technicians, this homebuyer program can help save up to 50% of the list price on homes in targeted areas or revitalization areas. HUD also requires borrowers of Good Neighbor Next Door to live in the home as a primary residence for at least three years.
Unlike the loan programs mentioned above, the Housing Choice Voucher (HCV) program is specifically intended for people who are first-time homeowners. People who qualify for Section 8 housing can get financial assistance more akin to a grant for buying a home.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored enterprises that set the standard for conforming mortgages. They provide cash flow for lenders who offer loan programs for low- and moderate-income borrowers, which can help them qualify for a mortgage as well as down payment assistance, and other programs. You don’t apply for this loan program (or get this type of mortgage) from these companies directly, but through their participating lenders.
First-time homebuyer programs by state
The best place for a first-time buyer to look for a loan program is their state government, which manages it through a housing and finance-related department.
See the chart below for links to find a homebuyer program in your state. Also make sure to check your county, which may offer even more assistance and opportunities for you to find affordable housing.
District of Columbia