Guides For First-Time Home Buyers

If you’ve never owned a home before, you may be eligible for first-time home buyer loans with benefits such as better mortgage interest rates, lower down payment requirements, and assistance with down payment and closing costs. Below is a comprehensive guide for your options.

Traditional Loans with Low Down Payment

Traditional loans are the most popular type of mortgages, and they only require a 3% down payment. This makes them an attractive option for first-time home buyers who don’t have enough savings to make a large down payment. These low-down-payment loans include:

  • Conventional 97 Mortgage: This traditional loan, supported by Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, requires only a 3% down payment and a minimum credit score of 620. You will also have to pay for Private Mortgage Insurance (PMI), a type of policy that provides security to your mortgage lender in case you stop making payments on your loan. You will continue to pay these premiums until you pay off the remaining balance to 80% of your home’s value.
  • HomeReady Mortgage: Similar to the Conventional 97 program, Fannie Mae’s HomeReady mortgage program also requires only a 3% down payment (with PMI, although it could be less expensive).
  • Home Possible Mortgages: Freddie Mac’s Home Possible Mortgages program is equivalent to the HomeReady mortgages, requiring a minimum down payment of 3%.
  • HomeOne Mortgage: This Freddie Mac-supported mortgage also offers a 3% discount with PMI, but it is only available for first-time home buyers.

You won’t get your low down payment traditional loan directly from Fannie Mae or Freddie Mac. Instead, you will work with your preferred mortgage lender, which could be your bank or credit union or an online provider.

Down Payment Assistance (DPA)

Down Payment Assistance Loans

Many first-time home buyer programs offer you a low-cost first mortgage to help you buy a home, then a second mortgage to cover your down payment and closing costs. These second mortgages are typically structured as follows:

  • Low-Interest Loans: A low-interest second mortgage that you will repay over several years.
  • Deferred-Payment Loans: An interest-free second mortgage that you will repay when you sell the house or refinance or pay off your first mortgage.
  • Forgivable Loans: As long as you stay in the house for a certain period (the exact duration depends on the program) and stay current with your mortgage payments, you won’t have to repay the second mortgage.

Down Payment Savings Match

Down payment savings match programs do just that: they match your savings to help increase your down payment. These programs only provide matching funds up to a certain amount, and the money can only be used for your down payment and closing costs.

One type of matching savings program is an Individual Development Account (IDA). If you qualify, you will work with a specific counselor to deposit money into an IDA over a set period. If you follow the savings plan, you will receive a match when you close on the house.

Down Payment Grants

Down payment or first-time home buyer grants are essentially free money to help cover your down payment or closing costs. They are typically given to low or moderate-income borrowers, who are generally defined as those who earn no more than 80 percent of the average income in their area. They may also have other eligibility criteria, such as minimum credit scores and maximum home purchase prices.

Government-Backed Mortgages

The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Department of Agriculture (USDA) support mortgage programs that often serve as an option for first-time home buyers. However, these loans are not made or funded by these agencies; they are offered through approved mortgage lenders throughout the U.S. Some lenders also specialize in certain types. Here’s an overview:

  • FHA Loans: Insured by the Federal Housing Administration, FHA loans allow you to buy a home with a minimum credit score of 580 and as little as 3.5 percent down, or as low as a 500 credit score and at least 10 percent down. If you invest less than 20 percent, you will pay FHA Mortgage Insurance Premiums (MIP), similar to the insurance you would pay for low-down-payment conventional loans. However, the difference: you cannot stop paying FHA MIP until you completely refinance your FHA loan.
  • VA Loans: The VA guarantees home loans for eligible American military members (active duty, veterans, and surviving spouses). They do not require a down payment, although there is a funding fee.
  • USDA Loans: If you are buying a home in a rural area, you may qualify for a no down payment USDA loan.

Good Neighbor Next Door

Under the supervision of the U.S. Department of Housing and Urban Development (HUD), the Good Neighbor Next Door program focuses on law enforcement officers, firefighters, emergency medical technicians, and pre-kindergarten through 12th-grade teachers. If you work in one of these professions, you can buy a home in a “revitalization area” at a 50 percent discount, provided you live in that house for at least three years. You can search for available properties in your state on the program’s website.

HomePath ReadyBuyer Program

The HomePath ReadyBuyer program by Fannie Mae is designed for first-time homebuyers interested in foreclosed homes. After taking a required online homebuyer education course, you can receive up to 3% in closing cost assistance towards the purchase of a foreclosed property that is now owned by Fannie Mae. This program isn’t for everyone, though: not only have you limited your property choices, but the options (like many foreclosed homes) may require a lot of repairs.

Energy-Efficient Mortgages (EEM)

Going green can be expensive, but you can finance them with Energy-Efficient Mortgages (EEM) (either conventional, FHA or VA-backed). This type of mortgage allows you to handle the cost of energy-efficient improvements (think new insulation, a more efficient HVAC system or double-pane windows) on your primary loan without the need for a large upfront payment.

However, EEMs come with larger mortgage payments (since you’re borrowing more), and there are some requirements, including an energy assessment. However, the larger payments may be worth it as you could save on your utility bills over time.

Native American Direct Loan (NADL) and Section 184 Program

The VA-guaranteed Native American Direct Loan (NADL), and the HUD-guaranteed Section 184 loan, provide financing to eligible Native American homebuyers. The Section 184 loan requires only a 2.25% down payment. The NADL program does not require a down payment, but it is only available to Native American veterans and their spouses.

Non-Profit Programs

Non-profit programs can offer exceptional value to first-time homebuyers in search of affordable mortgages. These options are reserved for homebuyers whose income is significantly less than their area’s average income and are typically set aside for low or moderate-income buyers, or buyers who meet certain demographic or other criteria.

Neighborhood Assistance Corporation of America

The Neighborhood Assistance Corporation of America is a non-profit organization that offers low-interest mortgages to low and moderate-income borrowers without the need for a down payment, closing costs, or any mortgage insurance. The non-profit does not use your credit score to determine your eligibility: instead, it looks at other factors like rental payment history.

Habitat for Humanity – Homeownership

If your annual income is 60 percent or less than the average income in your area, you may qualify for the homeownership program by Habitat for Humanity. In addition to the income limit, you will need to contribute sweat equity – in other words, help build a home or homes for another applicant – to qualify.

Employer-Sponsored Programs

Employer-Assisted Housing (EAH) programs help employees with housing needs, typically in areas close to the workplace. This assistance can come in various forms, such as forgivable loans with necessary homeowner education. Many large companies offer some form of mortgage assistance, including Amazon, Walmart, and the Chicago Public School District.

EAH programs are often limited to certain professions, and there may be other restrictions, such as being a first-time homebuyer, a specific term requirement, or an income limit.

Programs for Students

If you’ve recently graduated from college, you may be eligible for assistance in buying your first home. For example, the state of Ohio offers a graduate program with up to 5% down payment assistance for anyone who has completed an academic program in the last 48 months. These programs typically come with a requirement to stay for a certain period (in Ohio, it’s five years), otherwise, you will have to repay the funds.

Frequently Asked Questions for First-Time Homebuyers

What is a first-time homebuyer?

How can I apply for first-time homebuyer programs?

What are the benefits of first-time homebuyer programs?

What are education programs for first-time homebuyers?

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