First-Time Homebuyer Guide: Loans, Programs, and Grants

Learn about programs designed to help first-time homebuyers.

Amid the excitement of buying a home for the first time, it can feel a little overwhelming, both emotionally and financially. Thankfully, there are state and federal programs as well as products that make homeownership for first-time buyers affordable and accessible.

Read on to learn more about first-time homebuyer credits and programs, plus uncover tips about how to find programs in locations where you want to buy your home.

Who Qualifies as a First-Time Homebuyer?

Qualifications for being a first-time homebuyer vary depending on eligibility requirements set by the agency providing the loan program.

Naturally, if you never owned a home before, you'll qualify as a first-time homebuyer. However, you may also qualify for some first-time homebuyer assistance if:

• You haven't owned a home in the last three years
• You've only owned a home that wasn't permanently affixed to a foundation, such as a mobile home
• You've owned an investment property that didn't serve as your primary residence
• You've previously shared ownership of a home with a former spouse

First-time homebuyer program qualification can also vary depending on the state where you buy your home and your income—many programs are designed for applicants with low to moderate incomes.

What Are First-Time Homebuyer Programs?

First-time homebuyer programs are designed to help individuals overcome common financial barriers to homeownership. They include government-backed programs and lender-specific initiatives that can offer benefits like a reduced down payment, lower interest rates, assistance with closing costs, or tax breaks.

Common first-time homebuyer programs (which aren't all exclusively for first-time buyers) include:

• Down payment assistance programs
• State and local housing programs
• Homebuyer education courses

Let's dig a little deeper into these programs and how they work.

First-Time Homebuyer Loan Options

There are a number of loans that first-time homebuyers can consider after deciding they're ready to become a homeowner. Each has its own requirements and unique benefits.

FHA Loans

FHA loans can be a desirable option for first-time homebuyers because they're designed to make homeownership more accessible, especially for those with limited savings or less-than-perfect credit.

Because they're insured by the government through the Federal Housing Administration (FHA), FHA loans typically have flexible credit score requirements and require a lower down payment. With an FHA loan, you could make a down payment as little as 3.5% of the purchase price.

USDA Loans

USDA loans are another type of government-backed mortgage, but these loans are specifically for eligible buyers in designated suburban and rural areas. They typically don't require a down payment and often have a lower interest rate than other loan types, making them attractive to first-time buyers who live outside of city centers and would like a budget-friendly option.

VA Loans

Another government-backed loan option is a VA loan. For first-time military homebuyers, VA loans are a benefit of service that offer a cost-effective path to homeownership.

VA loans are available to eligible veterans and active-duty service members, along with some surviving spouses and members of the National Guard and U.S. Armed Forces Reserves. They offer zero down payment, no private mortgage insurance (PMI) requirement, and interest rates that are typically slightly lower than conventional mortgage loans.

Conventional Loans

Conventional loans aren't backed directly by the government, but many lenders offer special programs for first-time buyers, including conventional options with as little as 3% down. With stronger credit, buyers can take advantage of competitive rates and potentially avoid mortgage insurance sooner (and pay much less overall) than with an FHA loan.

First-Time Homebuyer Tax Benefits

First-time homebuyers can sometimes recoup some of their homebuying expenses through tax breaks. Some states offer tax incentives for first-time homebuyers. These programs typically come with individual requirements for income or property size, so check your state's website to see if you qualify.

First-time homebuyers are also eligible for the same tax benefits that are typically available to all homeowners, such as mortgage interest deduction. And, you can deduct mortgage points you paid upfront to reduce your loan's interest rate. Consult your tax advisor for specific details.

First-time homebuyers may also be eligible for a Mortgage Credit Certificate (MCC), which is a federal tax credit for the mortgage interest you'll pay each month. The credit can be worth up to $2,000 per year, but the amount varies by loan, property location, and your MCC terms.

First-Time Homebuyer Assistance Programs

Down payments and closing costs are homebuying expenses to consider beyond your monthly mortgage payment. Most mortgages require a down payment, and closing costs are usually about 3%–6% of the loan amount when buying a home. First-time homebuyer assistance programs can help with these costs.

These programs are typically grants or loans that are low- to no-interest, and many are offered by states to first-time homebuyers. They have different requirements for credit scores, income limits, minimum down payments, types of property, and mortgage insurance. To explore what options are available to you, check with your state's housing agency.

First-Time Homebuyer Grants

First-time homebuyer grants are funds that typically don't require repayment. Like other assistance programs, grants can be found at the local, state, and federal level and have their own features and qualifications.

Some grants can also be combined with other first-time homebuyer programs or mortgage credit certificates. It's a good idea to check your local government and state's website to see if you qualify.

First-Time Homebuyer Courses

Some classes are required for homebuyers who are applying for assistance programs and grants. Even if you are not required to take one, a homeownership course may be worth taking to help prepare you for owning a home.

Subjects covered may include budgeting for your mortgage, home maintenance, and juggling other debts, such as car and other debt payments. Many courses are offered in partnership with HUD.

Nonprofits or Charitable Programs for First-Time Homebuyers

Many nonprofit organizations and charitable programs also can help reduce upfront costs, provide counseling, or even offer down payments or closing cost grants to first-time homebuyers.

Habitat for Humanity

Habitat for Humanity helps eligible first-time homebuyers purchase affordable homes through a unique model that emphasizes community involvement and long-term affordability. Instead of making a traditional down payment, buyers contribute “sweat equity” by helping build their own home or other Habitat projects.

The homes are sold at cost, with a 0% interest mortgage in many cases, and monthly payments are designed to be affordable based on the buyer's income. Habitat for Humanity also provides homeownership education to prepare buyers for the responsibilities of owning a home.

The Neighborhood Assistance Corporation of America (NACA)

NACA is a nonprofit organization that offers an affordable homebuying program, especially for low-to-moderate income first-time homebuyers.

The program includes no down payment, no closing costs, no PMI, and lower-than-market interest rates. This can be helpful for buyers who may not qualify for a conventional or FHA loan. NACA's process can be intensive between workshops and financial counseling, but it's designed to help buyers enjoy long-term homeownership.

Finding First-Time Homebuyer Programs in Your State

Knowing how to find first-time homebuyer assistance options can be essential for many reasons. Here are a few steps to help you get started:

• Check with your state's Housing Finance Agency (HFA). Most states offer their own homebuyer assistance programs through an HFA. These programs may feature down payment assistance, below-market interest rates, and closing cost grants.
• Visit the U.S. Department of Housing and Urban Development (HUD) website. HUD provides a directory of local and state homebuying and assistance programs.
• Consult your lender or a local real estate agent. Industry professionals typically have more knowledge of state and municipal programs you may qualify for, because they've worked with them in the past.

Final Thoughts: Assistance for First-Time Homebuyers

First-time buyers can access numerous forms of assistance aimed at making homeownership more affordable. These loans, grants, and other programs can be found at the local, state, and federal level, and they can be a tremendous resource for customers who qualify.

If you're ready to begin the homebuying process and explore your affordable first-time homebuyer options, get started today.