If you're interested in making the move to purchase a home, several first-time homebuyer programs can make your goal more affordable upfront and possibly even improve your chances of qualifying. Many of these programs have federal- or state-government backing and can include special home loan options, funds toward your closing costs and down payment and even reductions in the purchase price.
While some programs require a particular affiliation, others help any low-to-moderate-income individual who meets the program requirements. Take a look at some of the most popular homebuying programs to consider.
Read More: Buying a House for the First Time
Federal Housing Administration Loan Program
Offered through the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) loan program can help first-time homebuyers who have a hard time making a large down payment. The program also suits those who struggle with meeting the higher minimum credit score requirements that conventional home loan programs require or those who have a lower income or higher debt-to-income (DTI) ratio. You have a lot of flexibility in housing options as long as they have FHA approval, and you just need to live there primarily.
You can take advantage of this program with a credit score as low as 500 and make a 10 percent down payment, but you can put down just 3.5 percent with a score of 580 or above. The FHA also allows you to receive your entire closing costs and down payment funds as a gift to remove further barriers. Your DTI ratio can reach 50 percent in certain circumstances, and this can make qualifying easier if you struggle with debt.
Besides the higher chance of qualifying with FHA loans, this program offers the advantage of interest rates that tend to be below those of conventional programs. However, the downside of using the FHA loan program is the mortgage insurance charged upfront at 1.75 percent of the loan you're taking out plus another 0.85 percent annually. You can apply for this program through any lender that offers FHA programs, and many of them do.
Read More: What Makes a Home FHA Eligible?
HUD Good Neighbor Next Door Program
Alongside FHA loans, the HUD offers a program called Good Neighbor Next Door that allows you to receive an incentive toward the price of a qualified home and then finance the remaining balance with an FHA-backed loan. This homebuying program works for people interested in homeownership in areas that the HUD deems as needing revitalized. It requires that you're either a full-time K-12 teacher, emergency medical technician, police officer or firefighter to qualify.
This program works by offering borrowers a 50 percent discount on the home's price if they agree to live there for three years. The discount comes in the form of a second mortgage that the HUD forgives after you meet the three-year primary resident requirement. To find whether housing listings exist in the area that interests you, use the HUD's Home Store website that gets updated weekly.
As another benefit to the program, the HUD allows for just a $100 down payment for the FHA loan you take out for the remaining home price. However, keep in mind that some houses in the program may need repairs and renovations, and this can require committing to do the work yourself or taking out a special loan to fund the work. If the home is in a less desirable area, keep in mind that this can also affect the resale value later.
U.S. Department of Agriculture Loan Program
The U.S. Department of Agriculture (USDA) offers a guaranteed loan program for individuals who fit two criteria: They make a low or moderate income, and they seek to purchase homes in rural areas. As long as you make no more than 115 percent of the housing area's median household wage, then you can take advantage of several benefits that make buying a home more affordable up front. You just have to choose a qualified home and agree that it'll be your primary residence.
With USDA loans, you can avoid making a down payment, pay a low interest rate and have options for funding closing costs through external help. While lenders might require a credit score of 640 or higher, the USDA doesn't set a standard and allows for flexibility when it comes to your credit history, DTI ratio and cash reserves. The USDA also lets you roll costs for needed repairs into the loan and can even allow for new builds.
If you opt for this program, the main limitations include the income restrictions and locations, since you might prefer to live in an area closer to the city. You also have to pay mortgage insurance with USDA loans.
Veterans Affairs Loan Program
The U.S. Department of Veterans Affairs (VA) has created the VA loans program to help military service members, surviving spouses, veterans and reservists with buying a house with certain benefits not available through conventional mortgage programs. The program requires applicants who are finished serving to have received an honorable discharge. The minimum service requirements start at 90 days and can go up to 24 months depending on the type of service and role. Interested applicants apply for a Certificate of Eligibility through the VA before they meet with a lender to get started with the loan.
When you opt for a VA loan, you usually don't have to worry about making a down payment or paying mortgage insurance premiums. Rather, you pay a one-time VA funding fee you can roll into the loan. There is flexibility with the DTI ratio as long as you have a steady income and cash reserves. Credit requirements tend to be more flexible since the VA doesn't set a standard and lets lenders decide based on the overall financial picture. You also have flexibility with properties as long as the seller is open to VA loans and the property can pass the required inspection.
Like with FHA loans, VA loans often have competitive interest rates that mean less money paid over the loan term. However, one downside of this option is that not everybody qualifies under the service requirements. Further, the funding fee and no down payment often mean homeowners end up with a larger loan to pay.
Read More: Veterans Administration Housing Assistance
Freddie Mac Home Possible® Program
The mortgage loan company Freddie Mac has a special program called Home Possible that helps low- and moderate-income homebuyers get financing when they might otherwise struggle with meeting down payment and credit requirements. You don't face any geographical restrictions like you would with the USDA program. That means you can buy any qualifying property as long as you make no more than 80 to 100 percent of the median income in the home's area.
The minimum down payment for Home Possible is just 3 percent, and Freddie Mac lets you obtain these funds from external sources like loans and assistance programs. While a typical minimum credit score for the program is 660, Freddie Mac does approve some individuals who don't have a credit history if they can make a larger down payment and agree to other terms.
Borrowers do pay mortgage insurance until they have an 80 percent loan-to-value ratio, but the premiums may be less than through other options. Further, Freddie Mac requires a homebuying course. You can learn more about this program through most lenders since this is a type of conventional mortgage widely offered.
Fannie Mae HomeReady® Program
Very similar to the Home Possible program, Fannie Mae's HomeReady program also suits homebuyers with moderate incomes or lower and offers most of the same benefits. For example, you can make just a 3 percent down payment and get those funds from other sources, and the income limits range from 80 to 100 percent of the area's median income. You must also take a homebuyer's education course to qualify for this mortgage program.
The main difference is that HomeReady allows for a lower (620) minimum credit score. So, your lender might recommend this option if you don't meet the somewhat stricter standards for Home Possible.
Fannie Mae HomePath® Program
If you'd like to save some money by purchasing a foreclosed property and don't mind putting work and money into repairs, then you might consider Fannie Mae's HomePath ReadyBuyer program for first-time homebuyers. This program requires you to buy one of the properties that you'll find on the HomePath listings website and take a homebuyer's education course.
If you qualify for the program, you can get as much as 3 percent in assistance for your closing costs. Another benefit of this homebuying program is that you can still choose from flexible loan options such as FHA, VA and conventional loans. Therefore, qualifications depend on the loan program you choose.
Local Homebuyer Assistance Programs
The HUD website maintains a list of links to state homebuyer assistance programs that can offer help with down payments and closing costs and work together with popular mortgage loan options. You can usually find these programs through your state's housing development authority or housing finance agency, and many of them serve first-time homebuyers who don't exceed area income limits. Borrowers usually need to work with local lenders affiliated with the programs as well as complete homebuyer counseling coursework.
Here are some examples of the programs offered in three different states:
- California: California's MyHome Assistance program for first-time homebuyers allows you to get a secondary loan for as much as 3.5 percent ($11,000 maximum for most people) of the home's price so you can more easily pay any down payment and closing costs. Requiring maximum incomes that vary by county, this benefit works along with state versions of mortgage programs like FHA, VA and conventional loans.
- Florida: Florida offers a forgivable second mortgage with between 3 and 5 percent in down payment and closing cost assistance as well as a nonforgivable deferred second mortgage without interest and with a $7,500 limit. There's another second mortgage option that lets you borrow as much as $10,000 with a low interest rate over 15 years to help with upfront costs.
- Illinois: The Opening Doors program gives homebuyers access to $6,000 in funds to use for their closing costs and down payment when they go with the accompanying mortgage program. While the money is through an interest-free second mortgage, it is forgiven after five years have passed.
If you opt for such a program, know that you may have to pay back forgivable assistance if you move before the minimum residency period expires. So, it's important to explore all options before picking a program.
Picking a Homebuying Program
Since you have many programs for first-time homeowners to choose from and many requirements to sort through, it helps to work with a lender in your area who specializes in first-time homeownership. They can look at your income, credit score and cash reserves and suggest the programs that offer the best fit and highest likelihood of approval. But before you start picking lenders, check with your state's housing website to make sure you find someone affiliated with any local programs that interest you.
Whether you take advantage of a down payment assistance program or just choose a loan program geared toward first-time buyers, keep in mind that researching and negotiating will help you get the best deal for your home financing. Rather than going with the first lender that preapproves you for a specific program, try out a few different options to make sure you get the best mortgage rates and end up with a monthly mortgage payment you can afford.
Also, ask about any specific conditions that come along with a specific homebuying program. Many assistance programs require you to reside in the home for a significant period of time to qualify, while others take away the forgiveness provision if you have to move for some reason. So, keep your future plans in mind to avoid picking a program that doesn't benefit you fully in the end.
- U.S. Department of Housing and Urban Development: About Good Neighbor Next Door
- Consumer Financial Protection Bureau: FHA Loans
- The Mortgage Reports: 2021 FHA Loan Guide: Requirements, Rates, and Benefits
- U.S. Department of Housing and Urban Development: Let FHA Loans Help You
- NerdWallet: Compare Current Mortgage Rates
- U.S. Department of Housing and Urban Development: HUD Homes
- U.S. Department of Housing and Urban Development: Good Neighbor Next Door
- U.S. Department of Veterans Affairs: VA Guaranteed Loan
- U.S. Department of Veterans Affairs: Eligibility Requirements for VA Home Loan Programs
- Lending Tree: Minimum Mortgage Requirements for 2021
- U.S. Department of Agriculture: Single Family Housing Guaranteed Loan Program
- LendingTree: Comparing the HomeReady® and Home Possible® Loans
- Fannie Mae: HomeReady® Mortgage
- Fannie Mae: HomePath® ReadyBuyer
- Fannie Mae: Search for Thousands of Foreclosed Homes, Instantly.
- California Housing Finance Agency: MyHome Assistance Program
- Illinois Housing Development Authority: Getting an IHDA Loan
- U.S. Department of Housing and Urban Development: Local Homebuying Programs
- Florida Housing Finance Corporation: Down Payment Assistance Programs
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.