Which Mortgages and Programs Can Benefit First-Time Homebuyers?

If you’re a first-time homebuyer or you haven’t owned a home in a while, you might qualify for a first-time homebuyer loan or assistance. Many programs operate through state or federal housing finance agencies, nonprofit organizations, or employers.

As a first-time homebuyer living in a certain area and working in a certain profession, you could be eligible for a low-interest loan or grant to support your down payment and closing costs if you meet the financial requirements. These loans typically come with affordable rates and flexible requirements, including a lower credit score and a minimum down payment.

State-Operated First-Time Homebuyer Programs

Each U.S. state operates a housing finance authority (HFA) to encourage homeownership. Contact your state’s HFA to see if you qualify.

Low-Down-Payment Conventional Loans

Conventional loans are the most common type of mortgage. They attract first-time homebuyers with limited savings because of the 3% down payment requirement.

Low-down-payment conventional loans include:

• Conventional 97 mortgage: Backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, a conventional 97 mortgage requires a minimum credit score of 620, a 3% down payment, and private mortgage insurance (PMI). The PMI can be eliminated when the homeowner has 20% equity in the home.

• HomeReady Mortgage: Fannie Mae’s HomeReady mortgage program requires a 3% down payment and potentially less expensive PMI.

• Home Possible mortgage: Freddie Mac’s Home Possible requires a 3% down payment and potentially less expensive PMI.

• HomeOne mortgage: Backed by Freddie Mac, a HomeOne mortgage requires 3% down and PMI, which can be removed when the homeowner has 20% equity in the home.

• HFA Preferred and HFA Advantage loans: HFA Preferred loans, backed by Fannie Mae, and HFA Advantage loans, backed by Freddie Mac, are available through state housing finance agencies and require a 3% down payment. The loans are disbursed through a private mortgage lender, such as a bank, credit union, or online lender.

Government-Backed Mortgage Loans

The Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) back the following first-time homebuyer mortgage options:

• FHA loan: Insured by the FHA, an FHA loan is available to eligible homebuyers with a minimum credit score of 580 and 3.5% down, or a minimum credit score of 500 with 10% down. A down payment of less than 20% requires FHA mortgage insurance premiums (MIP), which must be paid throughout the loan duration unless the loan is completely refinanced.

• VA loan: The VA guarantees home loans for eligible members of the US military, veterans, and surviving spouses. Although a down payment is typically not required, a funding fee is included.

• USDA loan: Although a USDA loan does not require a down payment, the home must be in a designated rural area, and the buyer must meet income limits based on their location.

Funding for Fixer-Uppers

Homebuyers interested in homes that require work could be eligible for an FHA 203(k) loan. This loan has financial qualifications similar to a standard FHA mortgage and includes financing for the home and repairs.

Other Federal First-Time Homebuyer Programs

Lesser-known federal programs with generous financial terms for first-time homebuyers include:

• Good Neighbor Next Door: Provided by the U.S. Department of Housing and Urban Development (HUD), the Good Neighbor Next Door program enables law enforcement officers, firefighters, emergency medical technicians, and pre-kindergarten through 12^th-grade teachers to purchase a home in a revitalization area for 50% off.

• HomePath ReadyBuyer: The Fannie Mae program HomePath ReadyBuyer offers 3% in closing cost assistance to first-time homebuyers who complete an online homebuyer education course and purchase a foreclosed home.

• Energy-efficient mortgage: An energy-efficient mortgage (EEM) allows homeowners with a qualified home energy assessment to include the cost of improvements, such as new insulation, a more efficient HVAC system, or double-pane windows, in their primary loan without a larger down payment.

• Native American Direct Loan: Guaranteed by the VA, a Native American Direct Loan (NADL) enables Native American veterans and their spouses to purchase a home with no down payment. Non-veterans can consider HUD’s Section 184 loan, which provides loans to Native American homebuyers with a 2.25% down payment.

Down Payment Assistance Options

First-time homebuyers might qualify for down payment assistance through the following:

Down Payment Assistance Loans

Many states offer first-time homebuyer programs with a lower-cost first mortgage to purchase the home and a second mortgage to help cover the down payment and closing costs. The second mortgage can have one of the following structures:

• Low-interest loans: The loan has a below-market mortgage rate to be repaid over several years.

• Deferred-payment loans: This no-interest loan must be repaid when the home is sold or refinanced, or the first mortgage is paid off.

• Forgivable loans: The second mortgage need not be paid back if the home is maintained as a primary residence for a set time and the mortgage payments remain current.

Other Down Payment Assistance Options

The following are non-government payment assistance options:

• Down payment grants: A down payment grant is available to homebuyers who earn no more than 80% to 100% of the median income in their area and meet credit score and home price requirements. The grant must be used to help with the down payment and closing costs.

• Down payment savings match: Commonly called an Individual Development Account (IDA), a down payment savings match matches each participant’s down payment to a certain amount, which can be used for the down payment and closing costs.

• First-generation homebuyer help: Some states have specific funds to assist first-time homebuyers whose parents never owned a home.

Other Options for First-Time Homebuyers

First-time homebuyers who don’t qualify for the programs mentioned above might consider these options:

• Nonprofit programs: Nonprofit organizations might be able to help homebuyers with incomes significantly below the median income in their area or who fit demographic or other criteria.

• Neighborhood Assistance Corporation of America: The Neighborhood Assistance Corporation of America (NACA) is a nonprofit organization that provides low-rate mortgages to low- and moderate-income borrowers without requiring a down payment, closing costs, or mortgage insurance. Instead of credit scores, factors such as rent payment history are used to determine qualification.

• Habitat for Humanity: Homebuyers with an annual income that is 60% or less of the median income in their area might qualify for Habitat for Humanity’s homeownership program. Participants are required to help build their home or another applicant’s home.

Employer-Sponsored Programs

Employer-sponsored housing (ESH) programs help employees purchase homes in neighborhoods near their workplace. These loans are limited to specific occupations and include restrictions, such as being a first-time homebuyer and having worked for the company for a set time. The assistance could be in the form of a forgivable loan, along with completion of homeownership education. 

*This information is for educational purposes only.

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