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Ask Our Home Buying Expert

Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

Ask Our Home Buying Expert

Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

First-Time Homebuyer Programs

First-time homebuyer programs throughout the country help hopeful homeowners even if they are low- to moderate-income individuals. These programs also assist Americans in securing mortgages when they don’t have the best credit scores. Some even cater to specific professions like those in law enforcement, education and the military.

First-time homebuyer programs help people get low-interest mortgages when they can’t secure them elsewhere. Because government organizations back many of these loans, qualification requirements are a lot less strict than they are for conventional loans.

Below, we’ll explore a few programs to help you decide which is best for you.

FHA Loans

The Federal Housing Administration (FHA) works with local lenders nationwide to offer mortgages to people who may not qualify to get them anywhere else. Because the government insures portions of these loans, lenders feel more comfortable offering mortgages to people without the strongest credit history. It’s a solid option among the various first-time homebuyers programs.

FHA loan qualification is not as stringent when it comes to credit score. In fact, a credit score of around 580 can earn you an FHA loan with a 3.5% down payment. Down payments for conventional mortgages usually hover above 20%. In addition, FHA loan interest rates dip considerably lower than the rates for traditional loans.

Some lenders won’t even turn you away if your debt-to-income ratio (DTI) stands as high as 55%. If at least two years have passed since you’ve experienced bankruptcy, you shouldn’t have a hard time qualifying for an FHA loan either.

However, this doesn’t mean an FHA loan — or any loan for that matter — is a risk free solution, even for those exploring first-time homebuyer programs. Because you’ll likely be making a small down payment, you’ll be required to pay mortgage insurance premiums, the FHA’s version of private mortgage insurance (PMI). This type of insurance exists to protect the lender in case you default.

You’ll also need to pay closing costs. However, closing costs for FHA loans tend to be lower than they are for traditional mortgages. And unlike many conventional mortgages, FHA loans carry no prepayment penalty. This means you can make larger monthly payments and pay off the loan as quickly as you can without facing any repercussions.

You can also roll over the upfront insurance fee and down payment into the loan amount. However, you’ll end up paying more in the long run. You’ll also need to make a down payment around 10% if your credit score sinks below 580. But if you’re having trouble paying upfront costs, down payment assistance programs can help.

And unlike several conventional mortgage companies, FHA-backed lenders let you pay closing costs and down payments with gift money. But make sure the person giving you this money signs a short letter explaining that he or she doesn’t expect the money back.

FHA loans typically suit first-time homebuyers who have trouble securing loans elsewhere because of strict qualification requirements. But sticking to a solid repayment plan can help Americans with lower credit scores not only pay off a mortgage with a particularly generous interest rate but also boost their creditworthiness in the process.

USDA Loan

Among the options of special first-time homebuyer programs, the United States Department of Agriculture (USDA) issues low-interest mortgages to low-income Americans who wish to live in rural areas. However, the USDA broadly defines “rural,” so even some suburban locations fall under its radar.

USDA loans usually carry low-to-no down payments. Sound too good to be true? Well, the USDA insures local lenders to a certain amount. Thus, the government agency takes on less risk offering mortgages with modest rates.

The USDA offers two types of loans for first-time homebuyers. To qualify for a guaranteed USDA loan, you can’t make more than 115% of the median income for the designated area where you intend to live. A credit score around 640 typically helps you secure a guaranteed loan with a low interest rate and zero down payment. It may also put you through the streamlined process. This means you’ll skip most of the paperwork associated with conventional mortgages. If your credit score hangs below 640, you may need to make a larger down payment of about 10%.

With a Direct USDA loan, the government funds your mortgage directly. In other words, your lender becomes the USDA. These loans serve low- to very-low-income individuals and families. Income limits depend on location. In addition, you must be the primary resident of the home for which you’re taking out a USDA loan. You can’t make any income from the property or use it for any commercial purposes.

Because USDA loans require low down payments, you’ll need to take out insurance. The upfront premium can range from 1% to 2% of the loan amount. You’d also owe a monthly premium of about 0.35% to 0.40%. So let’s say you take out a $200,000 loan. You’re required to pay a 1% upfront insurance fee and a 0.35% premium throughout the year. In this case, you’d pay $2,000 upfront and a monthly premium of $58. However, you can factor the upfront premium into the mortgage amount. In this case, you’d transfer the fee into the loan and thus turn it into a $200,200 mortgage.

Qualified borrowers can take out 15- or 30-year mortgages with fixed-interest rates. To learn more about qualifications, visit the USDA loan website at www.rd.usda.gov. An interactive map displays designated areas and income limits for each.

VA Loans

First-Time Homebuyer Programs

The Department of Veterans Affairs (VA) issues loans to qualifying military members including first-time homebuyers.

VA loans usually carry lower interest rates than their conventional counterparts. VA-partnered lenders also offer loans with little-to-no money down. To qualify, you must meet certain requirements set by the VA and perhaps some set by specific lenders. You may be eligible for a VA loan if you’re:

  • A veteran with at least 90 to 181 days of continuous service
  • An active-duty service member for at least 90 continuous days
  • A National Guard or Reserve member for at least six years or honorably discharged member
  • The unremarried surviving spouse of a veteran or service-member who died in line of duty or from a service-related incident

If you qualify for a VA loan, you can shop around for different options.  You can find fixed-rate or adjustable-rate mortgages (ARM) with varying repayment terms ranging from 15 to 30 years.

In addition to favorable interest rates, VA loans offer some distinct advantages. For example, they require no PMI and carry no prepayment penalty. The VA also sets limits to how much lenders can charge in closing costs.

However, you will be required to pay a VA Funding fee that varies depending on your military status. It can range from 1.25% to 2.15% for most branches of the military and from 1.5% to 2.24% for Reserve and National Guard personnel. It can roll over into your loan amount at your request.

In addition, you’ll encounter some of the usual fees such as appraisal and recording fees. If you’re struggling to make payments, however, the VA counseling programs can help.

NADL

If you’re considering first-time homebuyer programs, it’s worth looking at Native American Direct Loans (NADL), which the VA backs for homes on Federal Trust Land. To qualify, you must meet the basic requirements for a traditional VA loan in addition to other terms. These requirements state you must:

  • Be a Native American enrolled in an American Indian tribe or Alaskan Native village
  • Be a Pacific Islander or a Native Hawaiian
  • Belong to a tribe that has set a Memorandum of Understanding (MOU) with the VA or
  • Be married to a qualified individual

With an NADL, you can borrow up to the limit for single-family homes on Federal Trust Land set by Freddie Mac. This number shifts annually. As of 2018, it stands at $417,000 for homes in the 48 contiguous states. That number goes up to $625,000 for loans on homes in Alaska, Hawaii and the South Pacific.

The VA sets the interest rate for NADLs, and they’re usually available through private lenders offering 30-year mortgages. The funding fee stands at 1.25% of the loan amount for active duty members and at 2% for reserve personnel.

Teacher Next Door (Good Neighbor Next Door) Program

First-Time Homebuyer Programs

Neighborhoods owe a lot to their teachers, police officers and other public servants. The Teacher Next Door program helps these people stay in their local communities by helping them pay off their homes. The initiative is also known as the Good Neighbor Next Door program. It’s sponsored by the U.S. Department of Housing and Urban Development (HUD).

Teachers, police officers, firefighters and emergency service technicians can get 50% discounts off the list price for homes in “revitalization areas.” Those areas are designated by the U.S. Department of Housing and Urban Development (HUD).

However, recipients must agree to live in these homes as their primary residence for at least 36 months. The program is also highly competitive. Eligible homes are listed on the Teacher Next Door program’s official website for only five days.

So the first step is to get preapproved. Afterward, a licensed Teacher Next Door agent helps you find listings available in your area. If multiple people submit applications for the same listing, the discount will be awarded through a random lottery.

Qualified teachers must work full time in a state-accredited public or private school serving local children in grades K through 12. Police officers must work full time for a law-enforcement agency affiliated with a governmental body or tribal government. Firefighters and EMTs must be employed by a fire department or an emergency response unit in the area where the home they’re interested in is located.

Teacher Next Door claims it will help you buy any home on the market if you don’t win a bid of if there aren’t any eligible homes in your area. Your agent will negotiate the lowest price and handle all the paperwork for you.

The program also provides benefits and grants to public service professionals like nurses to buy their first homes. For example, the program can help medical professionals acquire their first mortgage with low down payments and no application fees.

Mortgage Lender First-Time Homebuyer Programs

Freddie Mac and Fannie Mae are public government-sponsored enterprises that serve as two of the biggest players in the mortgage industry. They even work with local lenders nationwide to offer mortgages to low-income individuals who don’t have the most solid credit scores.

Fannie Mae, for example, offers Agency Affordable Financing HomeReady loans through several lenders. They’re meant for low- to moderate-income individuals. Down payments for these loans can sink to as low as 3%, and you can get one with a credit score as low as 620. Higher credit scores will help you secure even better rates. You may also be able to cancel mortgage insurance after your home equity reaches 20%. Fannie Mae’s Agency Affordable Financing Home Possible program also helps low-income individuals qualify for their first mortgage. Freddie Mac aims to meet affordable housing requirements set by the Federal Housing Finance Agency (FHFA).

In addition, you should reach out to local banks ranging from small ones to major franchises. Many offer programs that help first-time homebuyers qualify for mortgages. Wells Fargo, for example, runs yourFirst Mortgage. Through this program, you may be able to get a conventional loan with a down payment as low as 3% and you can still apply to down payment assistance programs.

State and Local First-Time Homebuyer Programs

No matter what state you live in, you should look into your local government housing agency to see if it has any first-time homebuyer programs for which you might qualify. The State of New York Mortgage Agency (SONYMA), for instance, offers down payment assistance and other tools and resources for low- to moderate-income first-time homebuyers. The agency considers a person who has not owned a principal residence in at least three years to be a first-time home buyer.

Some state housing programs will partner with mortgage lenders to offer 30-year fixed rate mortgages with competitive rates for qualifying applicants. In many cases, you can even combine these mortgages with other subsidies and grants.

HUD Dollar Homes

Property in HUD’s dollar program consists of single-family homes. The FHA (a division of HUD) acquired these homes through foreclosure. When the FHA can’t sell a particular property within six months after foreclosure, it falls into the program.

The FHA then sells such a home for $1 to local governments, faith-based organizations  and nonprofits helping low-income families find affordable housing. In order to land the deal, however, you’d have to contact the organizations that participate in the program. You’d also have to comply with the requirements they set.

The competition is fierce. Back in 2013, the local government of Gary, Indiana, made headlines when it put a few homes in the program. Within the first day, it got hundreds of applications. The town then chose 12 out of 25 finalists in a lottery the following month.

But if you’re feeling lucky, you can visit the HUD website. No new listings were available at the time of this writing. Even though you won’t find homes with $1 price tags, you should look into the HUD and local government agencies to locate first-time homebuyer programs.

Fannie Mae and Freddie Mac also back  some lenders. This makes it less risky for them to offer modest loans to people who don’t qualify for conventional ones.

Tips for Buying a Home

  • Regardless of how much help you get from federal programs, you should start your mortgage hunt after you know how much house you can afford.
  • Mortgage payments are just the tip of the iceberg when it comes to financing a home. Make sure you calculate closing costs and down payments. Ask your mortgage lender all about fees.
  • Buying a home is a major commitment. Consider talking to a financial advisor before you buy about how it will impact your financial plan. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
  • Several federally backed programs help first-time homebuyers secure mortgages. Check out the ones run by the USDA, VA and FHA.

Photo credit: ©iStock.com/Monkeybusinessimages,©iStock.com/Zinkevych, ©iStock.com/Warchi

Javier Simon Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISER and iGrad. Javier is a member of the Society of American Business Editors and Writers. He has a degree in journalism from SUNY Plattsburgh. Javier is passionate about helping others beyond their personal finances. He has volunteered and raised funds for charities including Fight Cancer Together, Children's Miracle Network Hospitals and the National Center for Missing and Exploited Children.
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