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5 first-time homebuyer programs to know

First-time homebuyer programs can help you purchase your first home, even if you have below-average credit, low income, or a smaller down payment

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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as "Credible" below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.

First-time homebuyer programs make the dream of homeownership more realistic. Learn more about the types of programs available. (Shutterstock)

Only 28% of first-time homebuyers put down 20% or more in 2021, according to a National Association of Realtors Confidence Index Survey. While that number may seem low, it makes more sense when you consider that Americans are dealing with crippling inflation and high levels of personal debt.

Additionally, many buyers are taking advantage of programs that help first-time homebuyers get into a home, often with down payments lower than 20%. These programs are especially valuable when the market is competitive.

Credible makes it easy to research your mortgage options and compare rates from multiple lenders.

What are first-time homebuyer programs?

First-time homebuyer programs are usually government-sponsored programs that help people buy their first home. The federal government manages several programs, but state and local governments also oversee programs to assist first-time buyers. 

While program features vary by state, they typically offer low interest rates, down payment assistance, and more flexible qualification requirements. 

FREDDIE MAC TO STRENGTHEN AFFORDABLE HOUSING PROGRAM

Who qualifies for first-time homebuyer programs?

Specific qualifying criteria can vary by program, but eligibility requirements typically include the following:

  • First-time homebuyer — Programs generally require you to be a first-time homebuyer, which also includes buyers who haven’t owned a home in the past three years.
  • A fair credit score — First-time homebuyer programs usually don’t require pristine credit scores. You may qualify for some programs with a sub-600 credit score. By contrast, you typically need a minimum credit score of at least 620 to qualify for a conventional loan.
  • Income within limits — Some local programs may limit their assistance to homebuyers below a specific household earning limit, which may derive from the local median income. That number could vary widely depending on where you live. For example, California, Hawaii, and New York may have higher income limits than states with less-expensive living costs.
  • Home within purchase limits — As with income limits, some homebuyer assistance programs will only cover homes below a specified purchase price or a defined percentage of the list price.
  • Lower debt-to-income (DTI) ratio — Some programs may look at your debt-to-income ratio, which measures how much of your total monthly income goes toward your debt payments. Most lenders look for a ratio of roughly 36%, but some may accept borrowers with a DTI ratio as high as 50%.

Types of first-time homebuyer programs

Different programs help buyers with different aspects of the homebuying process. To find homebuyer assistance programs in your area, check out these helpful resources:

Government-backed loans

One of the most common ways to get help buying your first home is to apply for a government-backed mortgage through the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), or the Department of Veterans Affairs (VA). 

These agencies don’t create loans; approved mortgage lenders offer these specialized loans, and the government insures them to reduce the lender’s risk. That’s how lenders can finance mortgages with low interest rates, reduced closing costs, and other benefits that help homebuyers purchase a home.

Here’s a quick look at what each program offers first-time homebuyers:

  • FHA loans — FHA loans allow you to qualify for a mortgage loan with a minimum credit score of 580 and as little as 3.5% down. You may be eligible with a credit score as low as 500, but you’ll have to put 10% down.
  • VA loans — VA loans have lower interest rates than other types of home loans, and qualified service members and veterans may obtain a loan without a down payment. The Veterans Administration offers these loans, and the VA doesn’t have a minimum credit score requirement. But lenders may set their own minimums.
  • USDA loans — USDA loans also may be financed without a down payment for some rural homes in designated USDA areas through the department’s Rural Development Single Family Housing Guaranteed Loan Program. The USDA doesn’t set a minimum credit score requirement for these loans, but lenders may have minimums.

WHAT YOU NEED TO KNOW BEFORE MAKING A DOWN PAYMENT ON YOUR HOME

Down payment assistance programs

One option to help with your down payment is a down payment assistance loan, which is a second mortgage you take out with the first mortgage to buy your home. 

These second mortgages come with low interest rates and are designed to help you with your down payment and closing costs. Down payment loans typically come in one of two forms:

  • Deferred-payment loans — You don’t have to repay these interest-free loans until you sell or refinance your first mortgage.
  • Forgivable loans — As its name suggests, these loans are forgiven if you remain current on your mortgage payments and stay in the home for a specified period, which varies by program.

With Credible, you can easily check mortgage rates from multiple lenders without affecting your credit.

Grants

You may qualify for a grant to help you cover your down payment. Requirements vary by provider, but this assistance is often given to low- or moderate-income buyers who don’t earn at least 80% of the median income for their area.

For example, you might consider applying for a down payment assistance grant through the National Homebuyers Fund. You may be eligible to receive down payment assistance of up to 5% of the mortgage loan amount for a down payment and closing costs.

The good news is you can apply for more than one grant, so it’s wise to apply for any grant you may be eligible for. Refer to your local or state government for information on first-time buyer down payment assistance programs.

Closing assistance

Most first-time buyer programs offer a helping hand to cover your closing costs in addition to a lower down payment. 

For example, Fannie Mae’s HomePath Ready Buyer program provides closing costs assistance of up to 3%. You may receive assistance through a grant, forgivable loan, or a low-interest loan, but the program only covers Fannie Mae’s foreclosed properties.

State-level programs

Although many buyer assistance programs are available from national sources, other programs are offered on a state-by-state basis. You can find a wide array of programs with varying features depending on your state. View an extensive list of state homebuying resources from HUD.

FIRST-TIME HOMEBUYER GUIDE: 10 STEPS TO GET YOU STARTED

Challenges of getting a mortgage as a first-time homebuyer

The primary objective of these homebuyer programs is to give first-timers an advantage since they face so many challenges as new buyers, such as: 

  • May have little credit history — Conventional mortgage loans usually require a minimum credit score ranging from 620 to 650, which can be challenging if you have little or no record of credit payments. By contrast, government-backed loans may allow you to get into a home with a credit score as low as 500.
  • May have other debts — As a general rule, the higher your debt-to-income ratio, the more difficult it will be to qualify for a mortgage loan. First-time homebuyer programs often have more flexible eligibility criteria to help buyers.
  • May have lower income if just starting out professionally — Lenders generally require your monthly mortgage and housing-related expenses to represent 28% or less of your gross monthly income. Many loan programs, including USDA and HomeReady loans, may help low-income buyers achieve homeownership.
  • May not have a large down payment saved — Many existing homeowners have built up equity in their homes, which they can draw on for a down payment on their next property purchase. First-time homebuyers don’t have that luxury, and saving for a down payment is one of the most challenging obstacles first-time homebuyers face.
  • May lack homebuying knowledge — Many first-time homebuyer programs and loans may require you to take a homebuyer education course. This can be beneficial for you if you’re unfamiliar with the homebuying process, and many include supplemental information about working with real estate agents, choosing an affordable mortgage, and budgeting for homeownership expenses.

To explore your mortgage options, visit Credible to compare rates and lenders.