A guide to first-time homebuyer down payment assistance

If you’ve never bought a home before and need help with the upfront costs, you might want to consider applying for a first-time homebuyer down payment assistance program. These programs, which include grants and loans, can make purchasing a home easier and more affordable.

But before you get too far in the homebuying process, it’s important to understand the different types of first-time homebuyer incentives and programs. That way, you know your options and which might work best for you.

Here are the main types of first-time homebuyer down payment assistance programs, as well as how to qualify and apply for them.

What is first-time homebuyer down payment assistance?

If this is your first time buying a house, you might feel like the process is complicated — not to mention expensive. For many first-time homebuyers, even saving for a down payment is difficult. In fact, the typical first-time buyer only puts down around 6% to 7% of the home purchase price.

Down payment assistance makes it easier to buy property. These programs help eligible borrowers afford a home via cash grants, tax incentives, and special loan programs like zero-interest, deferred, or subsidized loans. Some programs also provide financial assistance with closing costs and other gaps in financing.

Most down payment assistance programs are geared toward first-time buyers earning a low to moderate income. However, some programs are available for individuals who plan to buy a house in a specific neighborhood. Some are even designed for borrowers who work in a certain industry, such as education or public service.

Typically, these programs are funded by state or federal government agencies or nonprofit organizations. You can find a list of first-time homebuying assistance programs in each state on the United States Department of Housing and Urban Development (HUD) website. You can also check with your home lender about special loan programs.

One special loan program many lenders offer is an FHA-backed loan, which is used by 23% of first-time homebuyers. This type of loan is primarily intended for borrowers who’ve never owned a home before and requires as little as a 3.5% down payment. For borrowers who have a smaller down payment and lower credit score, FHA-backed loans may also be cheaper than conventional loans.

Types of first-time homebuyer down payment assistance

If you’re a first-time homebuyer, here are the main types of down payment assistance programs you could be eligible for:

• First-time homebuyer grants: State and local grant programs can help first-time buyers with their closing costs or down payment. For example, the National Homebuyers Fund (NHF) down payment assistance covers up to 5% of your home loan amount. Grants do not need to be repaid.
• First-time homebuyer loans: Certain lenders offer loans with minimal down payment and credit score requirements. This includes FHA loans, VA loans, and USDA loans. Like other home loans, these loans come with their own interest rates, repayment terms, and eligibility requirements.
• Needs-based down payment assistance: Different states have their own programs to help first-time borrowers with their down payment or closing costs. For example, Washington state’s Home Advantage down payment assistance program has a needs-based option that offers up to $10,000 to eligible borrowers. This program has a 1% interest rate and a maximum repayment term of 30 years.
• Special loan programs: Other special loan programs — like low-interest home loans, interest-free loans, forgivable loans, and subsidized loans — can help bridge any gaps in financing. Some of these loans operate like a second mortgage, while others will be forgiven after a period of time. Certain loans may be deferred until you decide to move, refinance, or sell your home.
• First-time homebuyer tax credit: Depending on where you live, you could qualify for a property tax credit. For example, the NC Home Advantage tax credit offers a yearly federal tax credit of up to $2,000 to North Carolina homeowners. If you qualify for this first-time homebuyer credit, you may also be eligible for down payment assistance through the NC Home Advantage mortgage program.
• IRS’s fee waiver: To finance your home purchase, you may be able to withdraw up to $10,000 ($20,000 for couples) from your individual retirement account (IRA) without penalty.

Other first-time homebuyer incentives may also be available in your state. Speak with your lender or loan officer about your options.

First-time homebuyer grants vs. loans

First-time homebuyer grants and loans can make it easier for first-time buyers to purchase a home. However, there are key differences between these two types of financial assistance.

How to qualify for first-time homebuyer down payment assistance

The eligibility criteria can vary for first-time homebuyer down payment assistance. However, here’s what you’ll typically need to qualify:

• Maximum income: Most down payment assistance programs have a maximum income limit based on where you buy and your household size.
• Minimum credit score: Certain down payment assistance programs have a minimum credit score requirement.
• Maximum sales price: Some lenders and agencies, like housing finance agencies, set a sales price limit on homes. If a property costs too much, it may be ineligible for assistance.
• Home type: Certain types of homes might not qualify for down payment assistance grants or loans.
• First-time homebuyer: Most down payment assistance programs are geared toward first-time buyers. If you’ve owned a primary residence in the past three years, you might not qualify.
• Targeted demographics: Certain programs are open to the general public, while others are only available for specific demographics, such as teachers, active military, veterans, or recent graduates.
• Education courses: Depending on your state and program, you may be required to take a homebuying education course before receiving assistance.

How to apply for first-time homebuyer down payment assistance

Just as it’s important to know how to buy a house, it’s also useful to know how to apply for down payment assistance. Although the process can vary, here’s how it generally works:

1. Do your research: Check with the HUD or your loan officer about the first-time homebuyer incentives and programs available in your city, county, or state. Look for lenders that offer special loan programs. Make a list of your possible options.
2. Reach out: Contact each organization or your loan officer with any questions or concerns you might have. This can also help you determine whether you qualify for assistance.
3. Review the eligibility criteria: Each down payment assistance program has its own eligibility criteria. This may include proof of residency, income limits, or minimum credit score requirements. Familiarize yourself with these before proceeding.
4. Gather your documents: Get your financial and personal information together so that you’re prepared for the application process. For example, you might need pay stubs, recent bank statements, proof of employment, and previous years' tax returns.
5. Complete the application: Once you’ve settled on a program — or programs — you can fill out the formal applications. Be prepared to provide additional information or documentation upon request.

First-time homebuyer down payment FAQ

How much will I put down with first-time homebuyer assistance?

This depends on your financial situation and goals. Many borrowers aim to put down 20% to avoid private mortgage insurance (PMI). With certain loans, like FHA-insured loans, you could qualify with a down payment as low as 3.5%. On a $350,000 home, that’s a $12,250 down payment.

Will down payment assistance affect my interest rate?

The interest rate on a down payment assistance loan depends on the program and state. Some loans come with a higher interest rate. Others have a rate that’s similar to the original mortgage.

Can I qualify for down payment assistance in every state?

Most states offer some kind of down payment assistance, but programs vary by location. To qualify, you’ll typically need to purchase a home in the state you’re applying for assistance.

Are there any income requirements to qualify for down payment assistance?

Down payment assistance programs typically come with income limits. Most are designed to help low- to medium-income households. The exact income threshold depends on your location.