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Buying your first home can be intimidating. The process is incredibly complicated, and you also have to come up with a pretty large chunk of change.
To get a mortgage, you’re going to need enough money to cover three things:
- A down payment: Anywhere from 0% to 20% of the home’s value, with most homebuyers typically putting down 12%
- Closing costs: An average of about $5,749, including expenses such as the title policy and appraisal
- Extra expenses: Inspections, moving costs, and more
And don’t forget your monthly payment, which includes principal and interest, but also homeowners insurance, property taxes, and potentially private mortgage insurance (PMI).
With all of these dollar signs, many of us might assume owning a home isn’t in reach, and don’t bother researching our options. Fortunately, many programs can help you afford or qualify for your first home purchase.
What is a first-time homebuyer program?
These programs generally make homebuying more affordable, whether it’s through down payment and closing cost assistance or a PMI waiver. The great news? Some programs don’t even require that you’re a first-time homebuyer, as long as you haven’t owned a property in the past three years. Most have some kind of eligibility requirement, though.
Other programs are simply mortgage loans that are ideal for first-time homebuyers. These may come with lower down payments, flexible eligibility requirements, and cheaper upfront costs.
Most of these mortgages are serviced by a traditional lender or a bank, so you’ll send your monthly payment to them like you would with any other loan. But it’s important to note that not every lender supports every loan program. Find someone who knows the ins and outs of exactly what kind of home and homebuyer qualifies. For example, an experienced real estate agent can help you sort through your options, or you can find a mortgage broker who frequently works with the program you want to apply through.
Find someone who knows the ins and outs of exactly what kind of home and homebuyer qualifies.
Here are several mortgage programs, in no particular order, that may appeal to first-time homebuyers.
1. FHA loan
FHA loans are ideal for borrowers with lower credit scores and smaller down payments.
While you can get these loans from private financial institutions, they’re backed by the Federal Housing Administration. And because mortgage lenders have more freedom to loosen their eligibility requirements, these loans are quite popular among first-time homebuyers.
If your credit score is between 500 and 579, you may qualify with a down payment that’s 10% of the purchase price. With a higher credit score, you can put down as little as 3.5%.
But heads up: With an FHA loan, you’ll pay an upfront mortgage insurance fee equal to 1.75% of the base loan amount. Over the life of the loan, you’ll also pay annual mortgage insurance between 0.45% and 1.05% of the loan amount.
For a $300,000 home, that means you’re putting down around $5,000 extra upfront and up to $250 on top of your monthly mortgage payment.
2. VA loan
VA loans are ideal for service members, veterans, and surviving spouses.
Eligible military members can take out low-cost mortgages backed by the U.S. Department of Veterans Affairs. You must be an active service member, veteran, or surviving spouse to qualify, and there’s no down payment or private mortgage insurance required.
The credit score requirements and closing costs depend on the lender. Most borrowers pay an upfront fee between 1.4% and 3.6% of the loan amount, which can be rolled into the loan.
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Let’s revisit buying a home for $300,000. While an FHA loan might cost you as much as $30,000 upfront and an extra $250 per month, with a VA loan you may only have to pay a $4,200 funding fee plus closing costs. But since you’re not paying anything toward the home upfront, you’re financing the full $300,000 with a VA loan—and paying interest on the whole amount.
3. USDA loan
USDA loans are ideal for low- to moderate-income homebuyers who prefer living in a rural area.
These loans are guaranteed by the U.S. Department of Agriculture, meaning the lender takes on less risk and isn’t as stringent about things like mortgage insurance. There are two types—“guaranteed” and “direct”—and neither requires a down payment.
But borrowers will need to meet income and credit score requirements. Plus, guaranteed loan borrowers pay two forms of mortgage insurance: an upfront fee equal to 1% of the loan size, and an annual mortgage insurance premium of 0.35% of the loan balance.
The home you purchase must be located in a “rural” area, but that doesn’t mean you have to buy a farm miles from nowhere. You might be surprised to learn that about 97% of land in the U.S. fits this description. A property in Massachusetts, for example, may be eligible and within a 30-minute commute from Boston.
4. Conventional home loans
Conventional loans are ideal for homebuyers with strong credit and smaller down payments.
Unlike FHA, VA, and USDA loans, these mortgages aren’t sponsored by the U.S. government. Most of them are backed by mortgage giants Fannie Mae and Freddie Mac, which work with lenders to set borrowing guidelines.
Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible loan both allow homebuyers to put down as little as 3%. With most lenders, the minimum credit score is 620, though there are a few exceptions for applicants with no credit score at all.
Income requirements, meanwhile, vary from one place to another. In Tampa, Florida, for instance, the income limit is around $55,000, while it’s closer to $75,000 in Raleigh, North Carolina. These limits also vary depending on the number of people in your household, meaning if you’re married with kids, you could potentially earn more and still qualify.
In Tampa, Florida, for instance, the income limit is around $55,000, while it’s closer to $75,000 in Raleigh, North Carolina.
Plus, your down payment can be gifted.
But keep in mind: If your down payment is less than 20%, your lender will require private mortgage insurance payments. This fee is baked into your mortgage payment every month until your loan-to-value ratio drops below 80%.
5. HUD homes
HUD programs are ideal for teachers, law enforcement, firefighters, and emergency medical technicians, as well as low-income borrowers.
There are a couple different programs sponsored by the U.S. Department of Housing and Urban Development (HUD).
The Good Neighbor Next Door program provides a substantial discount on homes located in “revitalization areas.” Teachers, law enforcement, firefighters, and emergency medical technicians may qualify for a discount of 50% off the listing price, though they’ll need to commit to living in the property for at least 36 months. You can find eligible homes on the program’s listings website.
Dollar Homes, also sponsored by HUD, is geared toward low- to moderate-income homebuyers. HUD says borrowers can purchase homes that were acquired by the FHA for just $1. A quick look at the listings shows most listings are above $1, but they are deeply discounted.
6. Native American Direct Loan
These loans are ideal for eligible Native American veterans.
The Native American Direct Loan allows eligible Native American veterans and their spouses to buy, improve, or build a home on federal trust land. You apply directly with the VA, which funds and guarantees these loans. There’s no down payment or PMI requirements, and closing costs are minimal. Homebuyers will need to meet credit and income requirements and live in the home that’s purchased.
7. State programs
Many local governments offer closing cost or down payment assistance programs.
In addition to national programs, many state and local governments offer programs for low-income or first-time homebuyers as a form of financial assistance. You may need to meet credit score or income requirements, so check eligibility guidelines.
Aid may come in different forms, including grants that don’t need to be repaid, low-cost loans with deferred repayment, interest rate discounts, and more.
To find a program near you, start by visiting HUD’s list of state web pages and choose your state. Then search for links to “home-buying programs” or “homeownership assistance.” These pages list various statewide and regional programs for many types of homebuyers.
For instance, Massachusetts offers the ONE Mortgage, a 30-year fixed-rate loan with a 3% down payment and low interest rate. There are no PMI fees, and qualified borrowers receive an extra subsidy to lower their monthly payments. If homebuyers find they need help with a down payment, the program also offer 15-year loans with interest rates around 1%.
It’s always a good idea to check eligibility requirements or ask a lender before moving forward. You can also check your state’s housing authority website for more information, ask a lender about first-time homebuyer assistance, or ask a HUD-approved housing counseling agency for help.