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First-Time Home Buyer Programs

Updated: Apr 19, 2022



In this article:

  • Grants

  • Down payment assistance

  • Penalty-free IRA withdrawal

  • Closing costs assistance

  • Discounts

  • Interest reduction programs for buyers

  • First-time home buyer loans

  • State and local programs

  • Loan programs for Native Americans


About 46 percent of home buyers are purchasing a home for the first time, and with that first home can come particular financial hurdles around saving for a down payment, and paying for closing costs. About two-thirds (64 percent) of first-time buyers put less than 20 percent down on their first home, and a quarter put down 5 percent or less. Less than half of first-time buyers said they saved the majority of their down payments themselves.


Fortunately, solutions are available to provide assistance. Home buyer programs designed for first-time buyers include federal and local options, some that require as little as 3.5 percent down. There are also loan programs for all buyers with more flexible qualification requirements than conventional mortgages provide.


In fact, most first-time home buyer programs target buyers who have not owned a home in the last three years. So even if you’ve owned a home in the past, one of these buyer programs or grants could apply to you.


Start your home buying experience by calculating your home affordability. Familiarize yourself with the home buying process and get the ball rolling with loan pre-qualification; this won’t affect your credit score and doesn’t commit you to working with the lender. Then research on your own or work with a mortgage professional to find first-time home buyer programs or grants in your area. Here’s an overview of available options:


Grants


First-time home buyer grants are typically given in the form of a lump-sum payment that does not need to be repaid. You can apply a grant toward closing fees or your down payment to help reduce your total home buying costs. The grant does not cover the full purchase amount of your home. Keep in mind that some grants are given in the form of a low-interest loan with deferred repayment, meaning you’ll need to pay the money back later — often when you resell your home. Most grants have income, profession and/or neighborhood restrictions in order to qualify, in addition to the first-time home buyer requirement.


The federal government gives funds to states and other municipalities to distribute locally with guidelines around first-time ownership and home buyer education. Some cities offer substantial first home buyer grants that primarily target lower-income buyers. These grants are often available for buyers in specific professions like teaching or firefighting, or those buying in specific neighborhoods. Several nonprofits also offer grants to help first-time home buyers.


Benefits: Cash you do not have to pay back immediately, if at all.


Limits: Possible income limits, profession limits or neighborhood restrictions. Some grants are offered as an interest-bearing loan that you are required to pay back when you resell the home.


Down payment assistance


Programs designed for down payment assistance are typically reserved for low-income, first-time buyers acquiring a loan for their primary home. These programs work in conjunction with loan programs such as those offered by the FHA, VA, USDA, Fannie Mae and Freddie Mac.


If you qualify for a down payment assistance program, your state or local municipality will distribute funds, most commonly in the form of a second mortgage. These loans are often interest-free. Sometimes the loan will include deferred payments, to be repaid at the time you resell your home or if you decide to refinance. Other down payment assistance programs are lump-sum grants that you do not need to pay back.


Benefits: Upfront cash for your down payment.


Limits: There are income restrictions, and assistance is only available with an approved loan program. Funds are generally distributed as a second loan, and not all are offered at 0 percent interest.



Penalty-free IRA withdrawal


One of the options still available exclusively to first-time home buyers is the ability to take a penalty-free withdrawal from an IRA or Roth IRA to make a down payment. In other words, you can use cash from your retirement account to help with your home purchase. In this case, the IRS defines a first-time buyer as someone who has not owned their primary residence in the past two years. You’re still responsible for unpaid income tax on the amounts withdrawn, and there are maximum withdrawal limits. Before electing any IRA withdrawal option, talk with a tax professional about the implications of your choice.


Traditional IRA withdrawal


You can withdraw up to $10,000 from a traditional IRA to make a down payment on your first home. You will pay income tax on that money, but not the 10 percent early-withdrawal penalty


Roth IRA withdrawal


With a Roth IRA, things are a bit more complicated. But, assuming the IRA has been open for at least five years and you don’t take out more than $10,000 worth of earnings, the withdrawal should be tax- and penalty-free. Please consult a tax professional for more details.


Benefits: Tap into your savings without a penalty fee.


Limits: There are withdrawal limits, and there may be tax implications. There is always some risk when diverting funds from a retirement plan.


Closing costs assistance


First-time home buyers can qualify for programs that reduce closing costs. These are the fees that are paid at closing, when the property title is transferred to the buyer. Closing costs fluctuate based on your area, the type of home bought and the type of loan you get — and sellers may agree to cover some of these costs. Common closing costs include closing or escrow fees, title fees, appraisal fees, HOA transfer fees, survey fees, attorney fees and courier fees.


HomePath Ready Buyer Program


The HomePath Ready Buyer program offers up to 3 percent of a home’s sale price in closing cost assistance. In order to qualify for this benefit, you must be a first-time home buyer purchasing a HomePath property. (These are foreclosed homes owned by Fannie Mae that are offered at below-market prices and are identifiable by their “HomePath” branding on listings and in marketing materials.) To be considered a first-time home buyer, the property you’re purchasing must be your primary residence, and you cannot have purchased or owned a home in the past three years.


Buyers who qualify are then required to complete the HomePath Ready Buyer™ homeownership education course. Afterward, the course completion certificate must be attached to the initial offer and submitted by your real estate agent through the HomePath


Online Offers system. If your total closing costs are under 3 percent, the difference is not credited. Please consult your lender or real estate agent for more details and exact qualification requirements.


Benefits: Save up to thousands on closing costs, and other potential benefits such as a $500 earnest money cap.


Limits: You must complete the HomePath Ready Buyer™ course prior to making an offer; limited to Fannie Mae-owned properties.


Discounts


Another way first-time buyers can save money on their home purchase is through programs that offer discounts on or toward the property itself. Savings can be substantial through these programs, which are available through the U.S. Department of Housing and Urban Development (HUD). Some of these HUD discount programs include the Good Neighbor Next Door program that takes 50 percent off a home’s listed price, Energy Efficient Mortgage Loans that help homeowners finance improvements to save on future energy costs, and Homeownership Vouchers that can be used toward the purchase of a home. However, each program has specific buyer (and often, property) eligibility.


Good Neighbor Next Door program


If you’re a teacher (pre-kindergarten through 12th grade), firefighter, law enforcement officer or emergency medical technician, you are considered a “Good Neighbor” for the purposes of HUD’s Good Neighbor Next Door program. Designed to connect qualified buyers in these professions to single-family homes in targeted revitalization areas — all in the name of community revitalization — the Good Neighbor Next Door program offers a 50 percent discount off the home sales price. The property must be located in a specifically designated revitalization area (you can find eligible properties by searching the HUD Homes website).


Once listed, a property is only available for purchase for seven days; available listings are updated weekly. Buyers must also agree to live in the home as their principal residence for 36 months.


Benefits: Qualified buyers may benefit from a lower down payment as a result of the reduced sales price.


Limits: If more than one buyer is interested in a home, a lottery is held to determine who can submit an offer. Additionally, approved buyers must sign a second mortgage and promissory note in the amount of the discount. However, interest and payments are not required if the 36-month occupancy requirement is met.


Energy Efficient Mortgage (EEM) loan


Available through HUD, the Energy Efficient Mortgage program enables first-time home buyers to access cash to make energy efficient home improvements that lead to lower energy costs. First, buyers must qualify for a Federal Housing Association (FHA) backed mortgage for the purchase of a principal residence. Then, the costs of the energy efficient improvements are added to the total loan. Note that borrowers only need to qualify for the amount of the loan used to purchase the home, not the total loan amount.


Benefits: Home buyers can access more money to make improvements through their mortgage without having to provide more money upfront to qualify for the increased amount. Future energy bills will be lower than if upgrades hadn’t been made.


Limits: Prospective improvements must be cost-effective — future savings must be more than the cost of improvements made. Cost-effective tests and a home energy assessment must be completed before qualifying.


Homeownership vouchers


Another discount available via HUD is through the Housing Choice Voucher homeowner program. This program provides subsidies for home buying by allowing buyers to use vouchers toward the purchase of a property. This program is restricted to first-time home buyers who currently receive public housing assistance, along with those who meet low-income requirements. For more information, contact your local Public Housing Agency (PHA).


Benefits: Qualified first-time home buyers can use Housing Choice Vouchers as payment toward a residence and may receive monthly assistance for certain homeownership expenses. Some PHAs may offer an assistance grant for down payments; this is highly dependent on the agency.


Limits: Those accepted into the program may need to meet certain income and employment requirements. Pre-assistance homeownership and housing counseling programs may need to be completed as well.


Interest reduction programs for buyers


Mortgage payments are primarily made up of principal (the amount of money borrowed from a lender, not including interest or additional fees) and interest (the cost you pay to your lender for the amount borrowed, expressed as a percentage rate). Interest reduction programs can lessen the latter. You may qualify for a Mortgage Credit Certificate, which gives you a tax credit in interest paid or special financing at a reduced interest rate that lowers this cost.


Mortgage Credit Certificate


After a home purchase, state and local Housing Finance Agencies offer interest savings programs that allow qualified buyers with limited income to use a tax credit for a portion of their mortgage interest. The tax credit varies by state, but typically ranges between 20 and 40 percent of your total mortgage interest. However, the IRS limits the credit to $2,000 per year. Still, you can claim the remainder of your mortgage interest as an itemized deduction. Please consult a tax professional to learn more about the tax implications of this Mortgage Credit Certificate program, which has been around since 1984.


Benefits: You can save on total interest payments.


Limits: The program can have costly application fees, and there are income and home purchase price restrictions. The IRS limitations make the credit less impactful in high-cost-of-living areas.


First-time home buyer loans


Many government programs can help first-time home buyers extend their property search to homes that require a little more work. One such program, the FHA Section 203(k), can make it affordable to fix up that fixer-upper. The requirements for this FHA loan program take into consideration the limitations many first-time buyers face, such as not having enough saved for a down payment. Though these programs aren’t limited to first-time buyers, the flexible requirements make them best suited for a first-time homeowner loan.


FHA loan program


A Federal Housing Administration loan can be an affordable option for first-time home buyers because the qualification requirements are typically not as strict as for other loan programs. FHA loans are insured by HUD’s Federal Housing Administration and are designed to encourage lenders to lend to borrowers who don’t have perfect credit or significant upfront cash.


Credit score requirements: 580 or higher (lower scores accepted with higher down payments)


Minimum down payment: 3.5%


Limits: Mortgage Insurance Premium is required for almost all FHA loans.


USDA loan program


A U.S. Department of Agriculture (USDA) loan is an option for buyers looking for homes in approved rural locations, regardless of their intention to grow crops or raise livestock. USDA loans are great for first-time home buyers with limited income because they are fully guaranteed by the USDA, which lessens default concerns that lenders may have.


Credit score requirements: 640 or higher


Minimum down payment: Little or no money down


Limits: Strict eligibility based on income and location of home


VA loan program


A U.S. Department of Veterans Affairs (VA) loan is an option for U.S. military members, including veterans, active duty and their family members. VA loans are backed by the VA and representatives can help you through the process of acquiring the loan, or offer assistance if you are at risk of defaulting on your mortgage payments as a first-time homeowner.


Credit score requirements: No restriction


Minimum down payment: Funding fee only, can be rolled into the mortgage


Interest rate: Lower interest rates


Limits: Eligibility restrictions apply; the less you put down, the higher the VA funding fee will be.


Conventional loan program


In general, a conventional loan is an option for buyers with a credit score of 620 or higher. Conventional loans tend to be backed by Fannie Mae or Freddie Mac. Although conventional loans include basic eligibility guidelines, your lender might have stricter requirements, such as minimum down payments and debt-to-income ratios.


FHA Section 203(k)


It’s a conundrum: A fixer-upper may be priced lower than a newer property, but affording the actual improvements is another challenge. That’s where the FHA Section 203(k) loan comes in. Backed by the Federal Housing Association, this loan allows you to borrow funds to fix up a property that requires a lot of improvements. It’s not a solo loan product, though. In order to get the 203(k) loan, you must also be approved for an FHA loan. The 203(k) loan is then rolled into the FHA loan. There are loan amount restrictions as well: The 203(k) loan must be more than $5,000; the maximum is generally $35,000 (but can vary by county). You must also be able to afford a 3.5 percent down payment (at a minimum), though the down payment could be higher based on your credit score.


Limits: Though FHA loans have a lower down payment, there are some higher costs involved, such as costly mortgage insurance premiums, higher interest rates and a consultant inspection (paid for by the buyer). Further, if you are applying with a co-borrower, FHA considers the lowest median credit score between the two of you. Managing repairs to the home could be difficult and time-consuming.


State and local programs


Depending on the state, county or city where you live, there may be first-time home buyer programs that offer benefits ranging from down payment assistance to low-interest mortgages. Many local programs also go by different names, so be sure to check local sites and work with a local lender to find opportunities for which you may qualify.


State programs


Texas: The Texas State Affordable Housing Corporation has special programs for first-time home buyers along with home buyers who meet certain professional or income requirements. The Homes for Texas Heroes Home Loan Program offers a fixed interest rate loan with a down payment assistance grant or forgivable second-lien loan (of up to 5 percent) for those in helping professions (teachers, EMS personnel, firefighters, police officers, corrections officers, school nurses, school librarians, school counselors and veterans). First-time home buyers can also apply for a Mortgage Credit Certificate. The Homes Sweet Texas Home Loan Program offers similar benefits for low- and moderate-income buyers, but eligibility includes all professions (and it’s not limited to first-time home buyers).


Local programs


Houston, TX:Houston’s Housing and Community Development Department offers two programs for first-time home buyers in the city. One is the Homebuyer Assistance Program, which offers up to $30,000 in down payment assistance in the form of a no-interest, forgivable loan to income-qualified buyers. The Harvey Homebuyer Assistance Program offers the same, but it’s intended for Houstonians who were in the city when Hurricane Harvey hit on August 25, 2017. Both first-time home buyers and residents who need to replace a home damaged by Hurricane Harvey qualify for the Harvey Homebuyer Assistance Program.


Loan programs for Native Americans


If you are Native American, there are a couple of specialized programs to help you purchase a home with a zero or low down payment. One program is for Native American veterans, and another is for American Indian and Alaska Native families.


Native American Direct Loan (NADL)


This loan option is for Native American veterans and their family members. You may qualify if you are a Native American enrolled in an American Indian tribe or Alaska Native village, a Pacific Islander or a Native Hawaiian. (Non-Native American veterans married to Native Americans may also qualify.) Funded by the VA, this program provides financing to buy, build or renovate homes on Federal Trust Land. If approved, there is no down payment required, no private mortgage insurance and low closing costs.


Credit score requirements: No specific score is listed, but applicants must have good credit.


Minimum down payment: There is no minimum down payment needed if approved for an NADL loan.


Limits: There are strict eligibility requirements to qualify for the NADL program. There must be a Memorandum of Understanding between your tribal government and the VA regarding the use of trust lands. In addition, you must have a VA home loan Certificate of Eligibility, meet credit standards and have proof of income for mortgage and homeownership costs.


Indian Home Loan Guarantee Program


Established by Congress in 1992, the Indian Home Loan Guarantee Program is available through the HUD Office of Native American Programs. This program offers loans with a low down payment option and flexible underwriting for American Indian and Alaska Native families, along with Alaska villages, tribes or tribally designated housing entities. (Native Hawaiians can qualify for Section 184A loans.) Section 184 loans can be used for homes on or off native lands, but not all states are eligible locations.


Credit score requirements: There is no minimum credit score for this program.


Minimum down payment: 2.25 percent


Limits: Loans must be made in an eligible area; not all states are eligible.






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