“Home is the first point of investment. The first and most important thing to invest in is your home. And your investment in your home will be a magnet for many other different kinds of investments.” – Hendrith Vanlon Smith Jr
Buying a home for the first time costs more than most people expect. In fact, 65% of U.S. homeowners say homeownership turned out to be more expensive than they anticipated before buying, according to a survey by Unlock Technologies.
The gap between expectation and reality is where a lot of first-time buyers get caught off guard. Learning how first time home buyer loans work before you apply for a mortgage helps you avoid costly surprises down the line.
Who Qualifies as a First-Time Home Buyer?
According to the U.S. Department of Housing and Urban Development (HUD), as a “first-time home buyer,” you qualify if you haven’t owned a primary residence in the last three years.
Single parents who previously owned a home with a former spouse can also qualify, and so can displaced homemakers who co-owned a home with a spouse.
First-time homebuyer programs set their own rules, so eligibility isn’t one-size-fits-all. Programs aimed at low- to middle-income borrowers have income limits, meaning your annual income has to fall within a specific range.
Lenders also layer on their own requirements, so you’ll need to meet both sets of criteria.
Before you apply, check your credit score and calculate your debt-to-income ratio. These two numbers can determine which programs you’re eligible for and what kind of loan terms you’ll get.
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How to Find First-Time Home Buyer Programs in Your State
- Go to HUD’s website and click on your state. You’ll get a list of local programs and state housing finance agencies in your area.
- Visit your state’s housing authority website and browse their listed programs. Agencies like the California Housing Finance Agency and the Texas State Affordable Housing Corporation run assistance programs built specifically for first-time buyers.
- Check your city or county government’s website under the housing or community development section. Local governments sometimes fund programs you won’t find at the state level.
- Ask your lender which programs they work with. They often know about down payment assistance or grants that are hard to find on your own.
- Search for HUD-approved nonprofits in your area. They connect eligible buyers to affordable housing programs and usually offer educational resources alongside them.
Types of First-Time Home Buyer Programs
Here are the first-time homebuyer programs you can get.
Down Payment Assistance
Down payment assistance programs help cover that gap if you haven’t saved enough. These programs are grants or low- to no-interest loans, and many are exclusive to first-time homebuyers.
Closing Cost Assistance
On top of your down payment, you’ll also owe closing costs, which can be 3% to 6% of the total loan amount. Both government-sponsored and private programs can help cover these costs through grants or loans.
Home Buyer Education Programs
Homebuyer education programs cover loan options, the buying process, and how to apply for a mortgage. Many are free or low-cost. Some first-time homebuyer programs also require you to complete a specific course before you can qualify.
Nonprofit First-Time Home Buyer Programs
Nonprofit programs are generally reserved for buyers earning well below the median income in their area or those who meet specific criteria.
- Neighborhood Assistance Corporation of America (NACA) offers low-rate mortgages to low- and moderate-income borrowers with no down payment, no closing costs, and no mortgage insurance. NACA also doesn’t use your credit score to qualify you. Instead, it looks at your rent payment history and similar factors.
- Habitat for Humanity works with buyers whose annual income is 60% or less of the area median. You’ll also need to contribute sweat equity, meaning you help build your own home or another applicant’s.
Employer-Sponsored Programs
Employer-assisted housing (EAH) programs help employees buy homes, typically near their workplace. Assistance can be a forgivable loan paired with required homeownership education.
Most of these programs are limited to certain occupations and may require a minimum tenure with the employer.
Programs for Students
Recent graduates may qualify for state-level buying assistance. Ohio’s Grants for Grads program offers up to 5% down payment assistance to anyone who has finished an academic program within the last 48 months.
Most programs like this require you to stay in the home for a set period, or you’ll have to repay the funds.
Mortgage Tax Deductions
As a first-time homebuyer, you may qualify for a federal tax break through a mortgage credit certificate (MCC), worth up to $2,000 per year. There’s a fee to get one, but it can pay off if you plan to stay in the home long-term.
Homeowners who itemize can also deduct mortgage interest on their federal return, up to $750,000 of mortgage debt if married filing jointly, or $375,000 if single.
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Types of Loans for First Time Home Buyers
Here are the most common home loans available to first-time homebuyers.
Conventional Loan
Conventional loans aren’t backed by any government program. Private lenders offer them, and they make up most new home loans. First-time buyers who have had time to build their credit rating and save up tend to qualify more easily for these.
FHA Loans
FHA loans come from private lenders but are regulated and insured by the Federal Housing Administration (FHA). The FHA doesn’t lend the money itself.
These loans accept down payments as low as 3.5%, work with lower credit scores than most conventional loans, and cap the loan amount by county.
VA Loan
VA loans help veterans, servicemembers, and eligible surviving spouses buy homes through private lenders.
Most borrowers won’t need a down payment, and the loans come with competitively low interest rates, limited closing costs, and no private mortgage insurance (PMI).
USDA Loans
USDA loans are government-backed mortgages for low- and moderate-income borrowers buying in eligible rural areas.
Run by the U.S. Department of Agriculture (USDA), they’re also called rural development or RD loans. First-time buyers open to purchasing outside urban centers can use USDA loans to buy their first home.
How to Qualify for a First-Time Home Buyer Loan or Program
Your mortgage lender can tell you which first-time homebuyer loans you qualify for and guide you through the application. Your state’s housing finance agency (HFA) website also lists eligibility criteria and participating lenders in your area.
Before any of that, get your finances in order. Work on building your credit score and saving for costs like the down payment and closing costs. The stronger your financial position, the more loan options you’ll have.
How to Compare Different Mortgage Prices
Mortgage lenders set their own rates, fees, and property tax policies, which means the same loan type can cost more with one lender than another. Shopping around is the only way to know if you’re getting a fair deal.
When comparing loans, look at the interest rate, monthly payments, closing costs, repayment terms, and loan type. Getting quotes from multiple lenders gives you enough to actually compare.
Most home loans fall under one of three rate structures:
- Fixed-rate mortgage: Your interest rate stays the same for the life of the loan, regardless of market changes. Rates tend to start higher than variable options.
- Variable-rate mortgage: Your rate moves with the market. When rates drop, you pay less. When they rise, you pay more.
- Hybrid-rate mortgage: Starts with a fixed rate, then switches to a variable rate on a set reset date. It can work in your favor if you plan to sell or refinance before the switch happens.
How to Get Approved for First-Time Home Buyer Loans
- Check your finances first. Review your credit score, DTI ratio, income, and savings, then set a budget that includes your down payment and closing costs.
- Research programs you qualify for. Many require a homebuyer education course before you can apply. Most are available online, so get it done early.
- Get preapproved before house hunting. It tells you how much you can borrow and lets you make offers without delays.
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Frequently Asked Questions
What is the best loan for a first time buyer?
It depends on your income, credit score, down payment, and where you’re buying.
What credit score is needed for a home loan?
Around 620 for most mortgages. Government-backed loans like FHA and VA loans typically accept lower scores than conventional loans.
What is the 3 7 3 rule in mortgage?
It comes from the Truth in Lending Act (TILA). You get your Loan Estimate within 3 business days of applying, must receive it 7 days before closing, and if your APR shifts beyond a set threshold, a new 3-day waiting period kicks in before you can close.
Conclusion
Buying your first home takes preparation, so don’t rush the process. The more prepared you are, the less likely you are to get caught off guard by the costs.
“The house of your dreams is the house where you stopped dreaming of your dream house because you already own it!” – Mehmet Murat ildan
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