In today’s high-interest rate environment, the cost of home ownership can be hard to swallow -- especially for first-time homebuyers. Elevated mortgage rates and high home prices can make it feel like buying your first home is out of reach, but these programs can help.
Three of the main barriers to homeownership are down payments, credit access and affordability, according to a 2018 report from the Urban Institute. First-time homebuyer programs are designed to help you overcome these obstacles and unlock the long-term benefits of owning a home.
“The biggest challenge that first-time homebuyers face right now is the belief that they can’t purchase right now. You’ll see more individuals staying on the sideline, versus taking that first step of determining if they actually can purchase,” said Derrick Nutall, vice president of Citi mortgage’s community lending team.
Understanding all of the home loan options available to you and comparing different mortgage programs will help you better decide if now is the right time to buy your first home. Here are eight of the best mortgage options to consider as you embark on the process of buying your first home.
How do first-time homebuyer loans work?
The cost of buying your first home can seem overwhelming -- not to mention expensive. But there are several government-sponsored or private programs available to help with your down payment and closing costs. Each state offers some form of assistance to first-time homebuyers. These programs commonly offer the following:
- Down payment assistance: These types of programs can help satisfy the minimum down payment required for a mortgage, and come in the form of an interest-free loan or a grant. While you do not have to repay a grant, in some cases you might also receive forgiveness for a down payment loan. Depending on the program, your loan might be forgiven after a period of time -- typically five years, though it could be longer -- years, as long as you agree to live in the home until the forgiveness period ends. If you refinance or sell your home before then, you’ll have to pay back your loan in full.
- Tax benefits: Certain first-time homebuyer programs offer incentives to reduce your tax liability, helping you keep more money.
- Flexibility with mortgage requirements: Certain loans have more flexible requirements, making it easier to qualify for a loan. Examples include lower credit score requirements, lower down payments and higher debt-to-income ratios. (Your DTI ratio shows a lender how much debt you carry compared to how much money you make. Most lenders look for a DTI ratio under 43%.)
Do I qualify for a first-time homebuyer program?
Even if you’ve owned a home before, you may qualify as a first-time homebuyer. Many programs consider you a first-time homebuyer if you haven’t owned a home in the last three years. This distinction can make a significant difference for previous homeowners looking to reenter the housing market.
Best first-time homebuyer programs
1. FHA loan
- Minimum credit score: Minimum credit score of 580 (or 500 with a down payment of 10%)
- Minimum down payment: 3.5% (or 10% if your credit score is between 500 and 579)
- Other requirements: Mortgage insurance requirement
FHA loans are fixed-rate mortgages backed by the Federal Housing Administration and are considered more secure than conventional loans because they are backed by the US government. They’re one of the easiest mortgages to get approved for if you’re a first-time homebuyer with a low credit score and minimal down payment savings. FHA loans offer 3.5% down payment options for those with credit scores of 580 or above. If you have a credit score between 500 and 579, you can still get approved for an FHA loan, but will be required to make a 10% down payment.
You’ll need a debt-to-income ratio of 43% or less and a steady employment history to qualify. An FHA loan also requires a private mortgage insurance premium, or MIP. You’ll pay 1.75% of the loan amount upfront for MIP, and the annual cost can vary between 0.45% to 1.05% of your home loan amount, depending on your down payment and amount of financing.
You cannot cancel FHA mortgage insurance for FHA loans initiated after 2013 unless you put at least 10% down. In this case, your mortgage insurance can be canceled after 11 years. If your down payment was less, MIP will be canceled once your entire mortgage is repaid.
To qualify, you must be a first-time homebuyer or have not been a homeowner in three years.
2. VA loan
- Minimum credit score: Varies by lender
- Minimum down payment: 0%
- Other requirements: Borrower must be an active or retired service member or spouse; origination fee
To be eligible for a VA loan you must be an active or retired member of the US military or the spouse of one. If you qualify, you can take advantage of a mortgage with no down payment or private mortgage insurance requirements. VA loans are backed by the US Department of Veterans Affairs and are issued by private lenders. Although VA loans offer down payment benefits, you will need to pay an origination fee between 1.4% and 2.3%, which can typically be rolled into the loan amount.
To qualify for a VA loan, you need to provide a Certificate of Eligibility and have verifiable income. There is no minimum credit score as the minimum required score varies by lender, but many lenders like to see a credit score of at least 640 or higher.
3. USDA loan
- Minimum credit score: 640
- Minimum down payment: 0%
- Other requirements: Home purchase in a qualifying rural area; funding fee
USDA loans are 30-year fixed mortgages backed by the US Department of Agriculture for low- to moderate-income homebuyers in rural areas. And you might qualify even if you live near the city or in a suburb -- approximately 97% of land in the US is eligible for a USDA loan. This home loan offers 100% loan financing, so it does not require a down payment. USDA loans do not require private mortgage insurance but have a 1% upfront funding fee due at the time of closing and a 0.35% annual fee that will be built into your monthly mortgage payments. Unlike other mortgage insurance, funding fees on USDA loans cannot be canceled once you reach 20% equity.
You’ll typically need a 640 credit score or higher to qualify, but requirements vary by lender.
4. Fannie Mae conventional loan
- Minimum credit score: 620
- Minimum down payment: 3%
- Other requirements: Private mortgage insurance for down payments less than 20%
The Fannie Mae conventional mortgage is one of the most common types of mortgages in the US, offering 15-year and 30-year fixed mortgages. As a conventional loan, this mortgage type is not backed by the US government and is instead backed by banks and lenders. A conventional mortgage allows you to put as little as 3% down. You’ll also need to purchase private mortgage insurance if you put less than 20% down. You can cancel your mortgage insurance once you reach 20% equity in your home.
You need a credit score of at least 620 for fixed-rate and 640 for adjustable-rate mortgages to qualify. Keep in mind the conventional loan limit for a single unit in the US is $726,200. A more expensive home would require a different type of home loan, known as a jumbo loan.
5. Freddie Mac Home Possible loan
- Minimum credit score: 660
- Minimum down payment: 3%
- Other requirements: Income cannot be higher than 80% of area median income
This conventional loan is also not backed by the federal government but offers benefits for first-time homebuyers. The Freddie Mac Home Possible loan program only requires a 3% down payment but does require a minimum credit score of 660 for a fixed-rate mortgage. To qualify, your home must be located in an underserved area or your income must be no greater than 80% of the median income for that area.
PMI is required if your down payment is under 20%. This can be canceled when you reach 20% equity in your home.
6. Fannie Mae HomeReady loan
- Minimum credit score: 620
- Minimum down payment: 3%
- Other requirements: Complete homeowner education course
The HomeReady mortgage program is similar to the Freddie Mac Home Possible program, but it’s slightly easier to qualify for if you have a lower credit score. The HomeReady Mortgage program requires only 3% down and a minimum credit score of 620. You will also have to complete a homeownership education course.
Unlike the FHA loan, this program does not place geographical restrictions on mortgage limits. You can also use grants and gifts from nonprofit organizations, churches or family members to help fund your down payment, and no minimum personal funds are required.
You’ll also need to purchase PMI if your down payment is under 20%, but you can cancel your mortgage insurance once you reach 20% equity in your home.
7. Good Neighbor Next Door loan
- Minimum credit score: 500
- Minimum down payment: $100
- Other requirements: Minimum of three-year occupancy in the home
The Good Neighbor Next Door mortgage program incentivizes primary and secondary school teachers (from pre-K through 12th grade), law enforcement officers, emergency medical technicians and firefighters with a 50% discount on a property’s listed price. This program offers down payments as low as $100 and requires a credit score as low as 500 to 580. You must agree to live in US Department of Housing and Urban Development-approved revitalization areas for 36 consecutive months to receive the discount.
8. Energy Efficient Mortgage loan
- Minimum credit score: Varies
- Minimum down payment: Varies
- Other requirements: Varies
For FHA borrowers, this mortgage allows you to qualify for a larger loan amount to finance energy-efficient improvements to your home. To qualify, you’ll order an energy assessment that will provide suggestions on how to lower your home’s energy use. An EEM mortgage can be used in conjunction with other mortgages like conventional loans, FHA and VA loans. You do not need to make a larger down payment for this additional funding, nor do you need to requalify.
First-time homebuyer requirements
Once you’ve established whether you qualify as a first-time homebuyer, there are other requirements to meet. Qualifications may vary, but here are a few to consider.
- Credit score: Most first-time homebuyer programs have minimum credit score requirements. The good news is that first-time homebuyer programs tend to have lower minimum credit score requirements than conventional lenders. You’ll typically need a 620 credit score, but that number may be higher or lower, depending on the program.
- Income restrictions: Some programs, like USDA loans and Fannie Mae’s HomeReady loan, come with income restrictions. In these cases, your household income must be near or below the area median income where you’re buying. However, many programs have no income limits.
- Minimum down payment: Minimum down payments are typically 3% to 5% of the purchase price. If you qualify for a VA loan or a USDA loan, you may not need to make a down payment at all.
- Debt-to-income ratio: Divide your total monthly debts by your gross monthly income to get your DTI. Like your credit score, your DTI helps lenders determine your capacity to make consistent payments toward your loan. A DTI below 43% is generally the standard among lenders.
- Intended use of the property: It’s not unusual for first-time homebuyer programs to require you to live in the home as your primary residence for a certain amount of time. And, if you sell your home or stop using it as your primary residence before a certain period of time, you may be on the hook to pay back a loan or grant. Make sure you fully understand a program’s terms before applying.
Some first-time homebuyer programs may also require you to complete a homeowner education course. This isn’t the case for all first-time homebuyers, but your lender may request this.
What are the benefits of first-time homebuyer programs?
A first-time homebuyer program can help make homeownership more affordable and accessible by offering lower mortgage rates, down payment assistance and tax incentives. Additionally, many programs require you to take a homebuyer education class, which can help prepare you for the realities of homeownership.
These programs help reduce the barrier to homeownership, making it easier for more prospective homebuyers to qualify for a mortgage, says Nutall.
How to choose a mortgage lender
Finding a suitable lender, let alone one that works specifically with first-time homebuyer programs, can be challenging.
To find the best mortgage lender for your first home purchase, start by figuring out your budget, deciding what you want in a home and determining the best type of mortgage loan for your situation. It’s advantageous to work with a lender that has experience dealing with the exact type of loan you want. This is especially true when you’re taking advantage of a government program, such as a VA loan or FHA loan.
Compare offers from a handful of mortgage lenders. This will help you find the best overall deal on your home loan. Interest rates and loan fees aren’t fixed, so it’s best to shop around and negotiate both of these costs. Communicating with a wide range of lenders (banks, credit unions or brokers) will help you get access to different mortgage programs and an array of loan terms.