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Published: Mar 03, 2022 19 min read
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Rangely García / Money

Buying your first home is an enormous investment in your future. It’s a place to put down roots, and it’s a great way to start building wealth that you can pass down to future generations. If the dream of homeownership feels out of reach, first-time homebuyer programs can help.

These programs are designed to help people buy their first house or primary residence, either through grants to cover a down payment or closing costs, mortgages with preferential terms, or other forms of aid. Here’s everything you need to know about how to find and qualify for these programs.

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What are first-time homebuyer programs?

There are a huge variety of assistance programs available for first-time homeowners. Some are administered on the national level, and some are managed by state and local governments. Generally, you’ll need to meet certain income, credit score or debt-to-income ratio requirements to qualify — though eligibility requirements differ for each program.

That’s why it’s important to research the options in your area: not every state, city or county will offer the same programs.

Is there currently a federal first-time homebuyer tax credit?

In the wake of the financial crisis in 2008, the federal government enacted a first-time homebuyer tax credit to help make it easier for families and individuals to purchase homes. The credit was worth up to $7,500 when it was introduced and was structured as either an interest-free loan or a fully refundable credit. Congress later increased the maximum credit to $8,000, but it only applied to homes purchased between 2008 and 2010.

While there were proposals to enact a new first-time homebuyer tax credit of up to $15,000 in 2021, the legislation did not become law.

How do first-time homebuyer programs work?

First-time homebuyer programs aim to make it easier for people to buy homes by reducing costs and other barriers. Some offer down payment assistance through grants — free cash that you don’t have to pay back. Others offer help with housing costs in the form of loans (in addition to your first mortgage) that you’ll have to pay overtime. Some of these loans come with extremely low interest rates or can be forgiven if you fulfill certain requirements. First-time homebuyers may also qualify for certain city or state tax deductions, as well as help from charities and nonprofits.

Benefits to using first time homebuyer programs

If a first-time homebuyer program is a fit for you, it can come with huge benefits. A first-time homebuyer program could:

  • Reduce or even eliminate your down payment or closing costs
  • Allow you to secure a lower interest rate on your mortgage
  • Make it easier to qualify for a loan, even you have poor credit or bankruptcy in your history

Downsides to using first time homebuyer programs

Of course, these programs come with certain drawbacks:

  • Your new home might have to meet certain standards based on the program you choose
  • You might have to pay extra fees
  • You might need to commit to living in your house for a certain amount of time
  • You might need to spend time completing a buyer education course
  • You might not qualify for the assistance programs at all if you have poor credit or your income is too high

Remember: It all depends on the specific program.

Types of first time homebuyer programs

These are a few types of popular first-time homebuyer programs. This is not an exhaustive list, but it will give you a good idea of what to look for in your local research.

Down payment assistance (DPA) programs

One of the first things you should do when you’re thinking about buying your first home is start accumulating your down payment — that’s the portion of the total cost of your new home that you pay up front. A mortgage allows you to pay the rest over time.

Conventional wisdom says that a 20% down payment is ideal (paying this much exempts you from needing private mortgage insurance), but that number isn’t generally feasible for first-time homeowners, most of whom generally put about 7% down. Down payment assistance programs help homebuyers cover their down payments through either loans or grants, and some can even be used to cover closing costs. Like many other first-time homebuyer programs, these are often administered on the local level and sometimes favor buyers in certain target areas. DPA programs may also require you to use a particular lender or mortgage product.

Down payment assistance: Grants

Many assistance programs offer grants to help you cover some or all of the down payment. Unlike a loan, this is money that you never have to repay. Lots of states offer these programs, though the eligibility requirements and grant amounts vary. The best way to learn more about DPA grants is to check with your state’s housing authority.

Down payment assistance: Loans

You can also get help with a down payment through a loan that often (though not always) takes the form of a second mortgage. These loans are usually interest free or extremely low-interest. They can often be forgivable if you live in your new home for a certain number of years, but you’ll be on the hook for the money if you move or refinance before that time is up. The forgiveness period varies by program. Other DPA loans are not forgivable, but you can defer payment until pay off your first mortgage, move or refinance.

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Good Neighbor Next Door

The Good Neighbor Next Door program is aimed at public service workers — think schoolteachers, law enforcement officers, firefighters and emergency medical technicians — and is sponsored by the U.S. Department of Housing and Urban Development. People in those professions can receive a 50% discount on the list price of HUD-owned properties in designated revitalization areas. (These are houses that had FHA mortgages and were transferred to HUD to sell after a foreclosure. It's a very limited pool of homes.) The program requires participants to sign a second mortgage for the discounted portion of the list price. You won’t have to make payments or pay any interest on that mortgage so long as you live in the home for at least three years.

Because of the significant savings on list price, Good Neighbor Next Door is a very affordable option for first-time homebuyers. But remember foreclosure properties are often in poor condition and come with their own challenges.

Fannie Mae’s HomePath Ready Buyer

Fannie Mae is one of two government-sponsored housing enterprises (the other is Freddie Mac). Fannie Mae offers this program to help first-time buyers purchase a foreclosed home. HomePath Ready Buyer will let you put as little as 3% down and provide closing cost assistance of up to 3%. To be eligible for that money, you’re required to complete a buyer education course. You’ll be limited to certain HomePath properties (which are foreclosed properties that Fannie Mae owns) — that means many of the homes on offer may need repairs or come with unexpected expenses.

Freddie Mac’s HomeOne Loan

Freddie Mac’s HomeOne mortgage program allows first-time homebuyers to put just 3% down on their new homes. Prospective buyers are required to take a homeownership education course, and you’ll be required to purchase private mortgage insurance if you put less than 5% down. There are no income limits and no credit score minimums in this program, though you’ll need to have a credit score to apply.

You can qualify for this program in just about any location in the country, though it does come with a loan limit of $647,200 for 2022 (as determined by the Federal Housing Finance Agency). That means it won’t make as much sense for prospective buyers in areas with an especially high cost of living.

Government-Backed Loans

Though government-back loans are not technically first-time homebuyer assistance programs, they are also designed to make homeownership more attainable for designated groups — and can be particularly helpful for first-timers.

Freddie Mac’s Home Possible mortgage

While the Home Possible program aims to make homeownership more accessible to lower-income Americans, regardless of whether they’ve owned a home before. While you are required to put at least 3% down, you can finance a down payment of up to 5% through a second mortgage. The main requirement of the program is that your income cannot exceed 80% of the median income in the area you’re looking to buy. While this program can be a great option for first-time homebuyers, you’re not required to be a first-time buyer to be eligible.

FHA loans

An FHA loan is a mortgage insured by the Federal Housing Administration but issued by a private lender. Because the loans are backed by the government, private lenders are able to offer lower down payments, lower interest rates and lower credit score requirements (compared to conventional loans). FHA loans are popular with low- and moderate-income borrowers who are buying homes for the first time.

With an FHA loan, you can put as little as 3.5% down. The minimum credit score necessary for an FHA loan is 500, though a score that low will require a 10% down payment. There are no income restrictions. You can even still qualify if you’ve filed for bankruptcy. But the loans also come with certain requirements. You’ll be on the hook for mortgage insurance premiums for the life of the loan, and there are also upper limits on the size of FHA loans that vary by location.

USDA loan

USDA loans are guaranteed by the U.S. Department of Agriculture. They were designed for low-income buyers living in rural areas, but many suburban buyers can benefit too — the USDA classifies a “rural” area as somewhere with less than 35,000 residents. You can find eligible areas with this map tool from the USDA. To qualify, you’ll generally need a credit score of at least 640 and your income can’t exceed 115% of the U.S. median family income. The perks? You won’t need to put any money down at all, but you’ll pay a one-time guarantee fee of 1% of your total loan amount, plus a 0.35% annual fee.

VA loan

VA loans are available to U.S. veterans, active duty service members, and surviving military spouses. They are backed by the U.S. Department of Veterans affairs but are issued by private lenders in the same way as FHA loans and USDA loans. If you fall into the eligible group, a VA loan can save you thousands as you purchase your first home. They provide 100% financing — you won’t need to put any money down — but there will be a limit on how much you can borrow to get that perk. You also won’t need to purchase private mortgage insurance, but you will have to pay an up-front funding fee of up to 3.6% of your total mortgage. There is no minimum credit score requirement set by the VA, but lenders may have their own minimums.

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How to apply for first-time homebuyer programs

While every first-time homebuyer program is a little different, there are a few things you should do to make sure you’re in the best possible position to be approved.

  • Start your preparation early — at least six months before you want to start seriously looking for your new home
  • Make sure you know your credit score
  • Have a good sense of your income and what you’re able to afford: Money’s home affordability calculator can help with that
  • Have a sense of where you’ll want to look and what kind of property you want to buy (it’s a good idea to know whether you’d be willing to buy a foreclosure property, for instance, or whether you’d be willing to look in a more rural area to qualify for a USDA loan)

When it’s time to choose a program that fits your needs, it’s ok to explore more than one option.

First, you’ll need to do your research about which program might be the best fit for you. For more information on programs across the country, the Department of Housing and Urban Development has information about first-time homebuyer programs in every state. You can also contact a HUD-approved counseling agency to learn more about your options. Once you have a program (or programs) in mind, it’s time to start the application process.

Eligibility requirements

First, make sure you meet all the eligibility requirements for the program you choose and that you have the supporting documentation you need to prove it.

Household income limits

Local programs might limit eligibility to households that make less than a certain amount of money per year, often a multiple of the local median income. That number will vary widely by state and county: more expensive states like New York and California tend to have higher income limits than states with lower costs of living.

Home purchase price limits

Some programs will also only cover homes up to a certain list price, or a certain portion of the list price. This will also vary depending on the program you choose.

Real estate history

It might sound counterintuitive, but you’re not automatically disqualified from first-time homebuyer programs if you’ve owned a home in the past. Oftentimes, first-time homebuyer programs are open to those who haven’t owned a primary residence within the last three years.

Occupancy

Generally speaking, first-time homebuyer assistance programs require the home you purchase be your primary residence. In other words, you can’t use these programs to purchase investment properties. You might also be required to live in your new home for a certain period of time, usually between about three and 10 years.

Credit score

Banks use credit scores to assess how likely you are to pay your debts, which means the number is a huge factor in mortgage lending decisions. A higher credit score tends to correlate with lower mortgage rates and down payments, but it’s not the end-all-be-all in the home-buying process. Many first-time homebuyer programs are designed to accommodate those with lower credit scores.

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Debt-to-income ratio

In addition to your credit score, some programs will consider your debt-to-income ratio, which is a measure of how much of your income each month goes toward paying debts (including your new mortgage). Most lenders look for a ratio below roughly 36% to 40%, but some go as high as 50%. If your debt-to-income ratio is high, it might be more difficult for you to secure funding.

Homebuyer education

Lastly, some programs will require you to complete a homebuyer education course. Fannie Mae’s HomeView course is one example. Courses generally include information about how to decide when you’re ready for homeownership, understanding the mortgage process and understanding the closing process. Courses generally don’t take more than a day or two to complete, and some charge a fee to enroll.

Application process

Contact participating lenders in your local area

Once you’re ready to apply, it’s time to start contacting mortgage lenders for quotes — it’s a standard to shop around for the best terms. You can work with a broker or a mortgage counselor to help make this process easier. Eventually, you’ll want to obtain pre-approval for your mortgage. You can also work with a real estate agent to identify eligible properties.

Apply

The application process will likely require all the typical documentation you’d need to get a mortgage (such as pay stubs, bank statements and tax forms), plus extras to verify your eligibility. Make sure to understand the specific program requirements.

Closing process

In order to close on your new home, make sure you’ve completed all the requirements of your particular program — inspections, appraisals, education courses and anything else you need to do. You’ll need to pull all your financial documents together, like pay stubs and proof of mortgage insurance, before you can sign and receive the keys to your new home.

First-time homebuyer program FAQ
How to qualify for a first-time homebuyer program?
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Eligibility requirements for first-time homebuyer programs vary widely. As a general rule, you can only qualify if you're looking to purchase a first home to use as a primary residence (not an investment property). And remember, you can still qualify even if you've owned a home at another point in your life: oftentimes, first-time homebuyer programs are open to those who haven't owned a primary residence within the last three years. Generally, grants and loans designed for first-time homebuyers will have income limits and credit score requirements. Some will require you to complete an educational course to learn about the homebuying process, and some may be limited to certain types of properties or geographic areas. Many are administered at the state and local level and require residency in order to qualify.
What are the benefits of first-time homebuyer programs?
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A first-time homebuyer program might reduce or even eliminate your down payment or closing costs, or it might mean you're able to secure a lower interest rate on your mortgage. These programs might allow you to qualify for a mortgage if you have poor credit, and you might still qualify even if you have credit issues like bankruptcy in your history.
What is the income cap for first-time homebuyer programs?
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Because there are so many different first-time homebuyer assistance programs across the country, there's no standard income cap. Many local down payment assistance grants tend to have income limits under $100,000 per year, though the limit varies widely by county and state. New York and California have programs with limits about $200,000 per year, for instance. You should do research in your local area to determine whether you might meet the criteria for any programs offered by your state.
How much should a first-time homebuyer put down?
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While the standard advice says homebuyers should be prepared to make a 20% down payment, this is far higher than most people actually put down, especially if it's their first home purchase. Some down payment assistance programs will cover your whole down payment, while others require borrowers to pay a portion of the down payment.

First time homebuyer program bottom line

If you’re daunted by the prospect of homeownership, there are programs and resources that can help. There are a huge variety of programs and options, so make sure to do your research as you begin the search for your first home.