First-Time Homebuyer’s Guide to Mortgage Loans, Programs and Incentives

Couple buying a house with a real estate agent.
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First-time buyers often face a number of obstacles to purchasing their home. With an average age of 35, according to the National Association of Realtors, first-time homebuyers are 23 years younger than the average repeat buyer. That younger age may correlate with comparatively lower income, limited credit history and difficulty saving enough money for a down payment and closing costs. That’s why federal, state and local governments as well as mortgage lenders offer special programs, loans and incentives to help put renters on the path to homeownership.

See: 3 Things You Must Do When Your Savings Reach $50,000

Mortgage Loans and Programs for First-Time Homebuyers

First-time homebuyers have a number of mortgage loans and programs to choose from. Some are reserved for first-time buyers, while others simply have the lower credit, income and down payment requirements many first-time buyers want or need.

Fannie Mae HomeReady

The Fannie Mae HomeReady mortgage is geared to buyers who’ve been unable to save up a large down payment, who have nontraditional income, such as rent from a boarder, or who have other financial challenges that make it difficult to finance a purchase with a traditional loan. The loan is specifically for low-income borrowers, so income restrictions apply. However, there’s no personal funds requirement, so you can use gifts and grants for your down payment.

  • Down payment required: 3% (5% with adjustable-rate mortgage)
  • Minimum credit score: 680 with less than 25% down
  • Income restrictions: No more than 80% of area median income for property’s location
  • Homeownership counseling: Required if all occupying borrowers are first-time borrowers
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Fannie Mae Standard

Fannie Mae standard home loans also let you purchase with just 3% down as long as at least one borrower is a first-time homebuyer. Standard loans have no income limits.

  • Down payment required: 3% (5% with adjustable-rate mortgage)
  • Minimum credit score: 620
  • Income restrictions: None
  • Homeownership counseling: Required if all occupying borrowers are first-time borrowers

Freddie Mac Home Possible

Freddie Mac’s Home Possible mortgage is for very-low-income and low-income borrowers. In addition to having low down payment requirements and flexible credit criteria, Home Possible lets you apply with a non-occupying co-borrower.

  • Down payment required: 3%
  • Minimum credit score: 660
  • Income restrictions: No more than 80% of the area median income for the area where the home is located
  • Homeownership counseling: Required

FHA Mortgage Loan

An FHA mortgage is a mortgage loan insured by the Federal Housing Administration. This government-backed loan program is a popular choice for first-time borrowers because you don’t need a big down payment or high credit score to qualify. Plus, you can receive up to 6% in closing costs from a third party. And unlike the conventional loans backed by Freddie Mac and Fannie Mae, there are no income restrictions. However, the property must meet the Department of Housing and Urban Development’s standards for safety and habitability.

  • Down payment required: 3.5% with a credit score of 580 or higher; 10% with a credit score of 500 to 579
  • Minimum credit score: 500
  • Income restrictions: None
  • Homeownership counseling: Encouraged but not required
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VA Mortgage

If you’re an active-duty military member, a veteran or a family member of an eligible individual, you can use a VA-guaranteed mortgage to buy a home with no money down — unless the home costs more than you’re approved for or its appraised value is less than the purchase price. The Department of Veterans Affairs places no restrictions on home value or income, and while lenders are free to impose their own credit score requirements, the VA has none.

  • Down payment required: None
  • Minimum credit score: Set by lender
  • Income restrictions: None
  • Homeownership counseling: Not required

USDA Loan

The U.S. Department of Agriculture guarantees loans for low- and moderate-income buyers who purchase a home in a location designated “rural.” The department uses that term liberally — outlying suburban areas often qualify. Borrowers can use a USDA loan to purchase with no money down and roll closing costs into the loan. While you do have to demonstrate the ability to manage debt, there is no minimum credit score requirement other than the one imposed by your lender.

  • Down payment required: None
  • Minimum credit score: Varies by lender
  • Income restrictions: Vary by location; program map is located on the USDA website
  • Homeownership counseling: Recommended but not required

Section 184 Indian Home Loan Guarantee Program

The Section 184 Indian Home Loan Guarantee Program helps American Indian and Alaska Native families, villages, tribes and tribally designated housing entities purchase a home on or off native land. You can use the loan for an existing home or new construction. The loans are available to buyers in participating tribes who purchase a home in a select area through an approved lender. You can find more information to help you determine your eligibility on the program’s webpage.

Good Neighbor Next Door

Good Neighbor Next Door is a HUD program that gives law enforcement officers, teachers (pre-K through 12th grade), firefighters and emergency medical technicians discounts of up to 50% on the purchase of an eligible home in a select revitalization area. The discount is a second mortgage that you only have to repay if you fail to live in the home as your primary residence for at least three years.

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State Loan Programs

The preceding loan programs are all backed by organizations, agencies and departments that operate at the federal level. But many states also have loan programs for first-time or low-income borrowers. The loans often work in conjunction with state-provided down payment and/or closing cost assistance.

You’ll find information on your state’s housing department website. Here are examples of the kinds of loans states make available:

  • Iowa: Lower-income Iowa residents can purchase a home with 3% down, sometimes with reduced-price mortgage insurance coverage.
  • Maryland: Maryland has several loans, including the low-interest MMP 1st Time Advantage loan and the MMP Flex loan that provide secondary financing for the down payment and closing costs.
  • Nevada: Nevada’s Home Is Possible loan offers first-time homebuyers competitive rates and interest-free down payment assistance.
  • New York: The State of New York Mortgage Agency offers low-interest mortgage loans to qualified first-time buyers.
  • Tennessee: The New Start Loan Program helps very-low-income and low-income Tennesseans build a primary residence in Tennessee.
  • Texas: The My First Texas Home program is a low-interest 30-year loan with up to 5% interest-free down payment assistance. The program allows borrowers to work through this program to obtain an FHA, VA or USDA mortgage.

Lender Programs

Some lenders, including many of the largest banks, have their own proprietary loans for first-time homebuyers. As with state loans, lenders often make loans available as part of a wider program to assist first-time and/or low-income borrowers. Here are a few that could help you finance your first home purchase:

  • Bank of America Affordable Loan Solution mortgage: This is another 3%-down loan, and you can borrow up to $726,200 — $1,089,300 if you put down 5% or more.
  • Chase DreaMaker mortgage: This Chase loan requires just 3% down and has flexible credit requirements and income limits.
  • Wells Fargo Dream Plan Home mortgage: This loan requires 3% down, and if you’re eligible, you could qualify for up to $5,000 toward one-time closing costs.
  • PNC Community Mortgage: This PNC-exclusive loan lets you buy with 3% down, only $500 of which must be your own funds. Remarkably, this loan has no mortgage insurance requirement.
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Habitat for Humanity

Habitat for Humanity builds homes for those with a demonstrated need for safe, affordable housing. The program is for prospective homeowners with very low income — not more than 60% of the median income in the area where the home will be located.

The prospective homeowner partners with Habitat throughout the entire process. You contribute sweat equity by participating in the construction of your home or the home of another Habitat home recipient, or by working in a Habitat for Humanity ReStore. And, of course, you must be able to pay an affordable mortgage with payments limited to 30% of your gross monthly income. The payments go back into the Habitat program to help provide more homes.

Down Payment and Closing Cost Assistance

Down payment and closing cost assistance, available at the local, state and national levels as well as through some mortgage lenders, comes in the form of grants or loans.

Grants are money you receive free and clear as long as you meet the program’s requirements. For example, a grant might require that you maintain the home as your primary residence for some period of time to avoid having to repay the money.

If you don’t qualify for a grant, you might be able to finance some or all of your down payment and/or closing costs. In some cases, they can be rolled into your mortgage loan. Otherwise, it’s a separate loan secondary to your first mortgage.

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You’ll find that some programs have strings attached. You might have a limited choice of homes, for example, or have to work with a real estate agent that partners with the lender.

Freddie Mac Affordable Seconds

Affordable Seconds are secondary financing for low- and moderate-income borrowers who need additional financing to purchase a home or for a down payment or closing costs. There are restrictions on the types of entities that can fund Affordable Seconds and the types of first-lien loans you can use them with. Talk with your loan officer to find out if secondary financing is feasible with your loan type and your financial situation.

Fannie Mae HomePath

HomePath is Fannie Mae’s program for real-estate-owned properties — foreclosed property it has repossessed. Fannie Mae repairs many of its properties to make them market-ready before listing them for sale. If you purchase a HomePath property and live in it as your primary residence, you could qualify for 3% closing cost assistance.

To qualify, your income must be at or below 100% of the area median income where the property is located, and you must take Fannie Mae’s HomeView homebuyer education program or a program provided by an agency approved by the U.S. Department of Housing and Urban Development. Also, you’ll need a real estate agent to submit a bid on your behalf.

State Assistance Programs

Even if your state doesn’t have special mortgage loans for first-time homebuyers, there’s a good chance it has a grant or loan that provides assistance with down payments and closing costs. To find a program in your state, check your state’s housing website or HUD’s directory of state FHA offices.

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How To Get Help With Your First Home Purchase

The more you know about the homebuying and financing process, the better able you’ll be to set a realistic budget and select the right loan for your needs. These resources are an excellent starting point for a successful homebuying journey:

  • HUD counseling services: A HUD-approved counselor can answer your questions about buying and financing a home. They’re available for in-person appointments and by phone. You can use HUD’s directory of counseling agencies to find one near you.
  • Freddie Mac CreditSmart: CreditSmart provides free education and tools to help you learn about credit, track your budget and measure progress toward your financial goals. You’ll find program information on the Freddie Mac website.
  • Fannie Mae HomeView: This education program from Fannie Mae includes a free online course that teaches you everything you need to know about the homebuying process. You can access it from any device and return whenever you want to use the program’s tools and resources. The course page is located on the Fannie Mae website.

The information related to the Chase DreaMaker mortgage was collected by GOBankingRates and has not been reviewed or provided by the issuer of this product. Product details may vary. Please see the issuer’s website for current information. GOBankingRates does not receive commission for this product.

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