A first-time homebuyer isn’t just someone purchasing a first home. It can be anyone who has not owned a principal residence in the past three years, some single parents, and others.
If the thought of a down payment and closing costs put a chill down your spine, realize that first-time homebuyers often have access to down payment assistance in the form of grants or low- or no-interest loans.
‘First-Time Homebuyer’ Under the Microscope
To get a sense of who qualifies for a mortgage as a first-time homebuyer, let’s take a look at the government’s definition.
The U.S. Department of Housing and Urban Development (HUD) says first-time buyers meet any of these criteria:
• An individual who has not held ownership in a principal residence during the three-year period ending on the date of the purchase.
• A single parent who has only owned a home with a former spouse.
• An individual who is a displaced homemaker (has worked only in the home for a substantial number of years providing unpaid household services for family members) and has only owned a home with a spouse.
• Both spouses if one spouse is or was a homeowner but the other has not owned a home.
• A person who has only owned a principal residence that was not permanently attached to a foundation (such as a mobile home when the wheels are in place).
• An individual who has owned a property that is not in compliance with state, local, or model building codes and that cannot be brought into compliance for less than the cost of constructing a permanent structure.
For conventional (nongovernment) financing through private lenders, Fannie Mae’s criteria are similar.
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Options for First-Time Homebuyers
First-time homebuyers may not realize that they, like other buyers, may qualify to buy a home with much less than 20% down.
They also have access to programs that may ease the credit requirements of homeownership.
Federal Government-Backed Mortgages
When the federal government insures mortgages, the loans pose less of a risk to lenders, so lenders may offer you a lower interest rate.
There are three government-backed home loan options. In exchange for a low down payment, you’ll pay an upfront and annual mortgage insurance premium for FHA loans, an upfront guarantee fee and annual fee for USDA loans, or a one-time funding fee for VA loans.
FHA Loans
The Federal Housing Administration, part of HUD, insures fixed-rate mortgages issued by approved lenders . On average, more than 80% of FHA-insured mortgages are for first-time homebuyers each year.
If you have a FICO® credit score of 580 or higher, you could get an FHA loan with just 3.5% down. If you have a score between 500 and 579, you may still qualify for a loan with 10% down.
USDA Loans
The U.S. Department of Agriculture offers assistance to buy (or, in some cases, even build) a home in certain rural areas. Your income has to be within a certain percentage of the average median income for the area.
If you qualify, the loan requires no down payment and offers a fixed interest rate.
The USDA has an interactive map to determine if a community is considered rural.
VA Loans
A mortgage guaranteed in part by the Department of Veterans Affairs requires no down payment and is available for military members, veterans, and certain surviving military spouses.
Although a VA loan does not state a minimum credit score, lenders who make the loan will set their minimum score for the product based on their risk tolerance.
Government-Backed Conventional Mortgages
Fannie Mae and Freddie Mac, government-backed mortgage companies, do not originate home loans; they buy and guarantee mortgages issued through lenders in the secondary mortgage market.
They make mortgages available that are geared toward lower-income, lower-credit score borrowers.
Freddie Mac’s Home Possible program offers down payment options as low as 3%. There are also sweat equity down payment options and flexible terms.
Fannie Mae’s 97% LTV program also offers 3% down payment loans.
Fannie Mae’s HomePath Ready Buyer program offers first-time homebuyers the ability to buy foreclosed properties with as little as 3% down and help with closing costs.
A Mortgage for Certain Civil Servants
If you’re a law enforcement officer, firefighter, or EMT working for a federal, state, local, or Indian tribal government agency, or a teacher at a public or private school, the HUD-backed Good Neighbor Next Door program could be a good fit. It provides 50% off the listing price of a foreclosed home in specific revitalization areas. In turn, you have to commit to living there for 36 months.
Homes are listed on the HUD website each week, and you have to put an offer in within seven days.
Only a registered HUD broker can submit a bid for you on a property.
If using an FHA loan to buy a home in the Good Neighbor Next Door program, the down payment will be $100. If using a VA loan to purchase a house through the program, buyers will receive 100% financing. If using a conventional home loan, the usual down payment requirements stay the same.
State, County, and City Assistance
It isn’t just the federal government that helps to get first-time buyers into homes. State, county, and city governments and nonprofit organizations run many down payment assistance programs.
HUD is the gatekeeper, steering buyers to state and local programs and offering advice from HUD home assistance counselors.
The National Council of State Housing Agencies has a state-by-state list of housing finance agencies, which cater to low- and middle-income households. Contact the agency to learn about the programs it offers and to get answers to housing finance questions.
Using Gift Money
First-time homebuyers might also want to think about seeking down payment and closing cost help from family members.
If you’re using a cash gift, your lender will want a formal gift letter, and the gift cannot be a loan. Home loans backed by Fannie Mae and Freddie Mac only allow down payment gifts from someone related to the borrower. Government-backed loans have looser requirements.
Want to use your 401(k) to make a down payment? You could, but financial advisors frown on the idea. Borrowing from your 401(k) can do damage to your retirement savings.
The Takeaway
First-time homebuyers are in the catbird seat if they don’t have much of a down payment or their credit isn’t stellar. Lots of programs, from local to federal, give first-time homeowners a break.
SoFi offers home loans with as little as 5% down. See how your rate and terms stack up against the competition.
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