Loans, Grants, and Programs for First Time Home Buyers — Plus Mistakes to Avoid

Katie McBeth
A young couple with a baby are sitting on the floor of the kitchen in their new home, enjoying pizza and smiling.

Purchasing your first home is a major milestone in many people’s lives. It is also an extremely expensive endeavor. For many, the idea of purchasing a home is a far-off dream that may seem unattainable.

Luckily, there are programs that were created to make the home buying process a little more accessible for everyone — particularly for first time home buyers. These programs can help first timers if they have a low credit score, only a small percentage of a down payment, work for specific entities, or if they are low to middle income families. They can provide anything from a reduced interest rate to closing cost assistance and more.

Below is more information on each program, why you should apply, in what ways they help you save, and how to find a loan office that will help you realize your dream of owning a home.

Table of Contents

First Time Home Buyer Loan Programs

There are a host of different programs available to first time home buyers, and the majority of them are provided by the US Department of Housing and Urban Development (HUD) or your local state housing authority.

As with any major purchase, there are some things you need to finalize and research before you can start your housing and lender search. One of the most essential steps is knowing ahead of time where you would like to live. Every state has different laws and housing authority regulations that you will need to know before you can apply to a loan program. Additionally, the market of your local area (not just your state, but the city and neighborhood of your choosing) will have an impact on the sale, escrow, and loan application process.

There will be more steps that you need to take — which are covered in further detail below — but knowing where you’d like to purchase a home will help get you started on your search for the right loan program to assist you. Below are brief summaries of each program, including what it offers and who qualifies for each.

FHA Loans

FHA stands for the Federal Housing Authority, which is a sub-department of HUD. This loan program was created to help stimulate the economy by providing FHA-insured loans to those with a low credit score and those that cannot provide a large down payment. The lender is approved by the FHA, and the FHA insures the loan so that if a borrower defaults on the mortgage the lender is covered.

The overall criteria of FHA loans is:

  • Must have a credit score of 580 and above.
  • Must be able to provide a down payment that is 3.5% of the purchase price of the home.
  • If your credit score is between 500-580, then the lender may approve your application if you put down a larger down payment of 10% of the purchase price of the home.
  • Borrowers must pay for private mortgage insurance in order to be approved.

It’s also important to keep in mind that FHA loans do have a limit, and those limits vary from state to state. Be sure to check with the HUD’s website to both find an approved lender, as well as investigate the FHA loan limits in your area.

FHA Section 203(k)

There is also a loan program that is specific to “fixer-upper” homes, or homes that need remodeling due to structural issues or internal damage. These loans allow borrowers to take out mortgages that will equal the price of the home after it has gone through a remodel — which can help borrowers pay for the improvements that they need to make on the house.

The down payment on a Section 203(k) loan can be as low as 3%, but many of the other criteria for FHA loans still apply to this version as well.

VA Loans

VA stands for the US Department of Veterans Affairs, which is the branch of the government that backs these loans. Like most government-sponsored loan programs, VA loans have some unique benefits that are aimed at helping specific groups; in this case service members and their spouses.

In order to apply for a VA loan, you must be an active or veteran service member, or be married to one. However, unlike FHA loans, VA loans have less requirements in order to apply. Some of the unique benefits VA loans have include:

  • There is no down payment requirement.
  • Private mortgage insurance is not required, unlike other loan programs. There is, however, a funding fee (military members that experienced a service-connected injury or disability are exempt from this fee).
  • There is no credit score requirement for VA loans, as the lender ultimately is the one making that decision. However, on average, credit scores can be at about the same level as FHA loans (580) or slightly lower.
  • VA loans also have lower interest rates, lower closing cost rates, no penalties for prepayment, and more.

On the reverse, VA loans do have one specific requirement that other government-sponsored loans do not have, which is the Certificate of Eligibility (COE) from the VA. This COE shows that the borrower applying to the loan meets the specific qualifications of the VA’s program. You can apply for your COE either online or by mail.

USDA Loans

USDA stands for the United States Department of Agriculture, which is a branch of the government that helps set regulations and provide assistance to farmers, ranchers, and agriculturalists. Their division of Rural Development offers a home assistance buying program that can help those living in rural areas purchase a home.

The requirements for this loan include:

  • You must be living in a rural area. You do not need to own or operate a farm or ranch in order to apply.
  • You must meet the income requirements for this loan, which varies from state to state and is based on the average median income in that area.
  • A credit score of 640 is preferred, but for anyone with a credit score lower than 640 they may still be approved, depending on the decisions of the lender.

Similar to VA loans, the USDA loan has some unique benefits that can help borrowers afford a home: namely there is a fixed mortgage payment rate, low interest, and no down payment requirements. For more information on this program, you can visit the USDA’s website on single family housing programs.

EEM: Energy Efficient Mortgages

Energy efficient mortgages — also known as “green” mortgages — are backed by the government through either the FHA or VA. They are designed to help borrowers afford the renovations needed in order to make a home more energy efficient and environmentally friendly. The extra costs that you accrue from making those renovations is just rolled into the overall cost of the mortgage.

The only additional requirements for EEMs is the completion of a home energy assessment that determines what renovations may be needed in order to improve the home. It’s best to do this as early as possible in the loan buying process. For additional information, as well as case studies that illustrate the financial benefits of this loan, visit the HUDs website on EEM Home Owners Guide.

Native American Direct Loans (NADL)

These loans are unique to Native American veterans and their spouses, and is designed to help them purchase homes that are on federal trust land. An NADL is backed by the VA, and these loans have the same requirements as VA loans.

As with VA and FHA loans, the overall mortgage limit is dependent on the region in which you live. For those living on tribal/federal land, the limit for most NADLs is set at about $424,100, but some areas with higher property values may allow a higher loan amount.

For more information on these loans, visit the VA’s website on their NADL program.

First Time Home Buyer Grants and Assistance

Besides the programs set up by and insured by the federal government, there are grants and programs located in your state, county, municipality, or city that may be specific to assisting first time home buyers. To find out more about these programs, you can check either your state or local community website to see if they have more information. Additionally, contacting your local HUD-Approved Housing Counseling Agencies may provide you with more information on these programs.

Each region will offer different assistance options, but below are some explanations on what those programs are designed to do and how you can find out more information.

First Time Home Buyer Credit

This assistance program was one created after the housing market crash in 2008, and was a tax provision included as a part of the Housing Economic Recovery Act (HERA) of 2008.

This program offered first time home buyers a unique opportunity to receive a significant tax credit of about $7,500 for the year in which they purchased their new home. Unfortunately, this credit only lasted from 2008-2010, and was officially expired on April 30th, 2010. Homeowners who purchased their first home during that time frame, but didn’t claim the credit, are still eligible to claim the tax credit to this day. It’s best to contact a tax professional in order to assess how to redeem that credit. However, for everyone else, those credits are no longer available, but some states and local agencies have created their own form of a tax credit.

The best way to find out if your state offers a first time home buyer credit is to check your state’s .gov website, or to contact your local HUD Housing Counseling Agency. Qualifications and requirements will vary greatly depending on the state you’re in, who is offering the credit, and your income level, so be sure to do thorough research on your options.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are both government-sponsored entities that work with approved local lenders to offer mortgage assistance to low-income and middle-income families. Similar to FHA loans, these government sponsored loans can help borrowers find lenders that can offer a competitively low interest rate, even with a down payment as low as 3% of the purchase price of the home.

Fannie Mae also offers resources for housing education through their Know Your Options website.

Good Neighbor Next Door

The Good Neighbor Next Door Program is a HUD sponsored program that offers housing aid to law enforcement officials, teachers (pre-K through 12th grade only), fire fighters, and emergency medical technicians. This program does have some strict rules, but can offer a 50% discount off the list price of eligible homes. According to the program’s website, some of the regulations include:

  • You must agree to live in the home for at least 36 months (3 years).
  • This program is only available for homes located in regions known as “revitalization areas.”
  • You must use a HUD-registered real estate broker during the property bidding process.

Use their website to search for available properties in your area.

HUD Dollar Homes

Another program that HUD offers is their Dollar Home program. This allows low-income families the opportunity to buy FHA-owned homes for only a dollar. These homes were acquired due to foreclosure, and if the FHA is unable to sell the home within six months of the foreclosure, then they can decide to put it up for the dollar home program. The community can then purchase the home, remodel it as needed, and sell it to low-to-moderate income families in order to help them acquire a home at a significant discount.

To find out if any dollar homes are available in your area, check the HUD’s Dollar Home website.

State and Local Programs

Besides all the above programs and discounts, your local State Housing Finance Authority (HFA) may be able to help you with additional programs and assistance. Below is a list of local HFA websites by state:

Tips for First Time Home Buyers

As mentioned earlier, it’s important to know where you would like to purchase a home before you start searching for the right housing assistance program for you. However, there is a lot more information to consider, as well, when it comes to purchasing your first home.

Below are some of the most essential bits of information to keep in mind while you search for your first home:

Understand the Costs of Home Ownership

Be aware of your budget and what you can afford with your current income. Your lender will also take this information into consideration, and if they believe you cannot afford the home of your choosing, they will deny your loan application. You do not want to shop for a home that takes up your entire income or budget. It can make it easier to apply for a mortgage if you prepare ahead of time: consider the monthly cost (PITI) of the loan, any closing costs, “hidden” costs, and more that you will need to pay for on a regular basis.

You also want to keep in mind the area in which you’re purchasing your home: Is the home located in an area that has a Homeowners Association (HOA) that includes monthly or yearly fees? Does that area have high property taxes, or are utilities expensive for that area? All of these expenses will need to be taken into consideration.

Additionally, there are many different closing costs that you will need to prepare for before the home can become yours. Luckily, your lender will help you out by creating a “Good Faith Estimate” early on in the escrow process that should lay out all the additional fees and costs. Be sure to read this thoroughly, ask for clarification if something seems off or confusing, and keep an eye out for any errors or mistakes.

Manage Your Credit

It is also very important to be aware of your credit score, and prepare your credit score ahead of time if you can. Although some loan programs will allow for a lower credit score, it’s still important to know what your score is, how you can improve it, and if any recent marks disqualify you from applying to a loan in the near future — such as a bankruptcy, past foreclosure, or any other derogatory marks within recent years.

Also keep in mind that credit checks can affect your credit score, so be sure not to request too many “hard checks.” Additionally, if you do shop around for a loan (which is always advised), be sure to do it within a few days or weeks time so that the credit bureaus will be more lenient on the amount of inquiries you’ve had. You cannot dispute or remove credit inquiries from your credit report unless you’ve suffered from identity theft.

Shop Around for a Lender

Although applying to some programs may limit your choices to FHA or VA-approved lenders, this doesn’t mean you should settle for the first result. In fact, it’s always best to shop around and compare lenders, as some may offer more competitive interest rates or might be able to help you find additional assistance programs in the area.

Do your research, read reviews, and ask them about their rates. Keep a list of your top three options, and research them at the pre-approval phase. There are also plenty of online tools that can help you compare mortgage rates, interest, down payments, and more.

Get a Real Estate Agent You Trust

Besides shopping around for a lender, you should also shop around for a real estate agent that is knowledgeable, experienced with your situation, familiar with the area you’re buying a home, and is easy to get along with and friendly to you. They should be excited to help you find the right home and answer all your questions, and some may even know about additional programs in the area that could help you out.

Again, do your research, read reviews, and ask them about their experience and rates. Once you find the right agent, they could be your agent of choice for your next home sale or purchase.

Prepare to Negotiate

A common mistake for first time home buyers is not knowing how to negotiate the price of the home, or not knowing that that’s even an option. As with car sales, home prices — as well as closing costs, transfer fees, and more — can and should be negotiated between you and the seller. Typically, these negotiations will happen during the escrow process, after home inspections have been done, and before closing papers are signed or finalized. You might even be able to get the seller to complete certain renovations, repairs, or other adjustments to the home.

Of course, it’s also important to know the status of your local housing market. If it’s a “buyer’s market” then you may have more power to negotiate as a purchaser. However, if it’s a “seller’s market” then the seller may have multiple people lined up behind you to purchase the home, so you have a lot less power to be able to negotiate. Your real estate broker should be able to help give you ideas on what to ask or if it’s worth it to ask during this process.

Plan Ahead

Finally, as with any big purchase, you need to be thorough about your research and properly plan ahead for this major milestone. Here are some things to keep in mind besides what’s listed above:

  • When shopping around for a lender, you can ask them for quotes and pre-approval. A pre-approval letter can only be acquired when the lender has had a thorough look at your finances, existing debt, and credit score. Once they’ve assessed everything, their letter will state how much they are willing to lend to you as well as their terms. You can use this to shop around for more rates, and when it comes time to accept an offer, you’ll have a good idea of what to expect.
  • Be familiar with the escrow process. It can take up to a month for the process to be completed, and you will need to speak with your borrower, get housing inspections done, and sign a whole lot of paperwork in the meantime.
  • Finally, be sure to also keep in mind the cost of moving, and any potential appliances or large purchases that you will need to make now that you own a home. Budgeting for these things appropriately can save you from having to wait until the next paycheck before you buy a couch or other essential items.

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