Understanding First-Time Homebuyer Loans and Your Down Payment Options

While buying a home is intimidating, buying one for the first time can be even more daunting. You’re completely new to the process, people and commitment. And you’re probably wondering where you should even start. 

One of the first items on your to-do list, even before looking for a home, is knowing how you’re going to pay for it.  

Sure, you may have some savings specifically for this purpose but more than likely, you’ll need to apply for a mortgage. Fortunately, there may be home loans and programs specifically designed for first-time homebuyers like you.

What’s a First-Time Homebuyer Loan?

First-time homebuyer loans are specifically made to make homeownership more accessible to those who have never bought a home or haven’t bought a home in a long time. These types of loans often have more favorable terms and requirements, such as lower credit score and down payment requirements. 

If you don’t have as much cash saved for upfront costs or a less than “good” FICO® credit score, a first-time homebuyer loan might work for you. And the good news is that there are multiple types of programs offered.

Types of First-Time Homebuyer Loans

Federal Programs

Mortgages backed by the government are a common option chosen by many first-time homebuyers. A Federal Housing Administration (FHA) loan, for example, requires a credit score as low as 500 with at least a 10 percent down payment or a credit score of 580 with a 3.5 percent down payment.  

There are even loans specifically for eligible for military members and veterans from the U.S. Department of Veterans Affairs (VA). And if you’re looking to buy a home in a rural area, you may want to consider a loan from the United States Department of Agriculture (USDA).

Nonprofit Programs

If you have an income that’s significantly lower than the average in your area, there could be charitable or nonprofit options for your first home.  

Habitat for Humanity® is an organization that helps low-income families build or renovate their home. In addition, Neighborhood Assistance Corporation of America® (NACA) helps lower-income families obtain mortgages with lower interest rates and no down payments, closing costs or mortgage insurance.

Other Programs

Sometimes companies offer employees housing assistance, but the form of assistance can vary between employers. Make sure you double check with yours to see if they offer a program for you. 

Depending on where you live, your state could also offer first-time homebuyer programs. You can check the U.S. Department of Housing and Urban Development’s website to search for local programs in your area.  

The bottom line is that you may be able to choose from a wide variety of options to help you reach homeownership—you just need to search for them.

Down Payment Assistance Options

In addition to specific home loan programs, you may also be able to get help with your down payment. Many borrowers struggle to save for all the upfront costs of buying a home and these options help ease the burden.

Housing Finance Agencies (HFAs)

HFAs are nonprofit organizations that offer services to help make housing more affordable and accessible. Programs offered by HFAs vary by state but in general, they can include products with lower interest rates and down payment requirements or assistance for closing costs and down payments, which many borrowers lack the funds for.

Grants

A down payment grant can help you pay for your down payment or closing costs without having to pay it back. It’s essentially free money. However, there are usually requirements to be awarded these kinds of grants, such as a minimum credit score, maximum home price and a certain income range depending on your location.

Gifts

A family member or close friend can also help you with your down payment in the form of a gift. Guidelines for this type of assistance can vary between loan types so make sure you speak with your lender about the specific details.

First-Time Homebuyer Educational Courses

Keep in mind that while many of these home loans and down payment assistance programs are made for first-time homebuyers, many of them require you to take a first-time homebuyer educational course in order for you to qualify. These courses help you understand the full responsibilities of paying for a mortgage and owning a home. 

While you might think of this as a roadblock in some ways, these types of courses help prepare you for the weight of homeownership, including aspects you may not have thought about. The questions you had at the beginning of this process could be answered by your instructor and you may be able to come out of this class more confident in your choices.

Homeownership Could Be Yours

Understanding your financing options before you even start the home search is imperative. While being a first-time homebuyer can be unnerving, there are certain advantages available to you. And knowing how you can benefit from these different types of programs can help you get even closer to homeownership.

Down payment assistance requirements are based on the mortgage insurer or guarantor’s guidelines. Down Payment Assistance Program, which assists eligible homebuyers with purchasing a home, may fund down payment and closing costs. Down payment assistance programs are not eligible for all potential homebuyers. The United States Department of Agriculture Rural Development (USDA-RD) Single Family Housing Guaranteed Loan Program assists approved lenders in providing low to moderate income households purchase or build homes in rural areas subject to eligibility requirements. The maximum loan amount an applicant may qualify for will depend on the applicant’s repayment ability. The applicant’s ability to repay a loan considers various factors such as income, debts, and assets. Regardless of repayment ability, applicants may never borrow more than the area’s loan limit (plus certain costs allowed to be financed) for the county in which the property is located. Eligible borrowers can receive 100% financing without private mortgage insurance.