First-Time Homebuyer Programs Everyone Should Know About

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By Clever Real Estate Updated October 21, 2021


First-time homebuyers sitting on floor

When you buy a home for the very first time, you likely have a lot of things going through your mind.

You're probably excited about finally becoming a homeowner and having a place to call your very own. You may also be stressed at the idea of navigating the real estate market to find a house that will work well for you. And paying for it all just may set you above the level of overwhelming.

It's totally normal to feel all of these things. Buying a house requires a lot from a person – both emotionally and financially. Your first home is likely the biggest purchase you have ever made. And, even if you sell it and move to another property, the home you own will always be your biggest financial asset.

Lenders know exactly what you as a first-time home buyer need from a loan. Which is why there are a number of first-time homebuyer programs to help you make the leap from someone who wishes they owned a home into someone who actually does.

First-Time Homebuyer Programs Everyone Should Know About

The great thing about these homebuyer programs is that they come to fit a variety of needs. Whether you make a moderate income and are just looking for a little boost towards ownership or you come from a low-income family and need major housing assistance, there is a program out there that can accommodate all of your needs.

There are short-term grants and home loans, payment assistance programs, and educational opportunities. So, no matter what kind of support you need, you can get it.

In this article, we’ll explain the most common first-time homebuyer programs in the United States. We'll also take a look at who these programs are best for—making your choice even easier.

FHA Loans

First things first, you need to know what FHA stands for.

As a first time homebuyer, you will be hearing this abbreviation quite a bit. FHA stands for the Federal Housing Administration. This agency is an arm of the United States Department of Housing and Urban Development.

Sometimes, you will see the department abbreviated as HUD. All you really need to remember is that these two organizations often work as a team to help Americans secure home loans.

What do FHA loans do?

The FHA exists to help people who might not qualify elsewhere receive a mortgage. It does this by insuring part (but usually it insures all) of the mortgage loan. By insuring the mortgage, the FHA is telling the mortgage lenders, "Hey, if this person defaults on their mortgage, you don’t need to worry. We'll pay for it!" (Remember, when you default on your mortgage, it means that you start missing payments and eventually stop making payments altogether).

When lenders see that you have the backing of the FHA, they feel a lot better about lending you money for your home because they know that, if the worst should happen, that you're still "good for it."

The FHA loan is so popular among first-time homebuyers because it helps people whose credit is not the best qualify for a mortgage anyway. Perhaps you made some poor financial decisions in your younger days that brought down your score, or maybe you are still in your younger days right now and simply haven’t had time to build up your number. That's where the FHA loan comes in.

Even if your credit score is around 580, you can still qualify for an FHA loan in many instances. The great part about it is you only need to put 3.5% down as a down payment. This is still a pretty good deal when you consider that the current national average for a down payment is 20%.

Some Caveats About FHA Loans

An FHA loan is not a get out of jail free card.

With that 3.5% down payment, the FHA needs to see a bit more skin in the game. Because of this, you are going to have to pay mortgage insurance premiums. These premiums are you doing your part to protect the lender in case you default.

You also have to pay the closing costs if you use an FHA loan to buy a home. But this is no need to panic. When you use an FHA mortgage, your closing costs are usually way lower than when you buy a house using a traditional mortgage.

Another small quirk of these loans: They don’t have a prepayment penalty!

With a typical mortgage, you might have to pay a fine for paying off the loan before the term is up. You owe that money because the lender misses out on lots of interest when you pay it off early. They don’t really like it when that happens. With an FHA loan, however, the interest rates are so low anyway that you can pay it off as fast as you want to.

Should I use an FHA loan?

An FHA loan is a great fit for you if you are a potential first-time homebuyer whose credit might not be the best. The best part about these loans is that they make buying a home really affordable. So not only will you be able to finally own a home, but also build up your credit in the process.

This way, when it’s time to buy your next home, you will likely be able to qualify for a traditional mortgage (if you stay on the ball!).

USDA Loans

Abbreviations are a common theme among first=time homebuyer programs. This next abbreviation stands for the United States Department of Agriculture. The USDA loan program helps out first-time homebuyers who are interested (or just willing, really) to move to rural areas within the US.

These loans are very low-interest loans and are usually given to lower-income homebuyers. Because of this, there isn’t usually a down payment required. And, if there is, it’s very small.

The rural area requirement works for two reasons.

The first is that by requiring those who would like financial assistance to live in less densely populated areas, the USDA is doing its part to decrease urban congestion. If fewer people live in the country’s main cities, there is less of a strain on the natural resources for those areas.

The second reason is that real estate tends to be cheaper in general in rural areas. It’s not like the USDA is insuring mortgages for penthouses in Manhattan or beach houses in Malibu. They are backing up homebuyers in the likes of rural Ohio, Illinois, and Texas.

So, even though the USDA will only insure its local lending partners to a certain amount, this amount typically covers the entire mortgage in these places.

Qualifying for USDA Loans

The qualification process for a USDA loan is very straightforward. If you would like to use one of these loans to buy your house, then you aren’t allowed to make more than 115% of the median income for the area you want to buy into. So, if the median income for your small slice of Minnesota is $54,000, you can only make up to $62,100 annually to qualify for the USDA loan in that area.

You also need to have a fairly average credit score. If you have a score of about 650+, then you usually can get good interest rates and skip the down payment. The whole process is likely to be easier for you with a score at least this high.

If your credit score is lower than 650, however, don’t worry! It doesn’t mean that you won’t be able to use this loan. It just means that you might have to make a down payment. The down payment will likely be about 10% of the purchase price. Remember, this is still way better than the current national average for a down payment, which is 20%.

Because these down payments are so low, you will need insurance for the mortgage. If you pay upfront, it may only amount to 1-2% of the total loan amount.

The Direct USDA Loan

In this loan, you receive the funding for your loan directly from the government.

Your mortgage lender is literally the USDA. To qualify for a direct USDA loan, you typically have to be a very low-income individual or couple. There are different cut off points for this loan that varies by location. For example, someone living in rural California would be allowed to make more than someone living in rural Kentucky, where the overall cost of living is lower.

The USDA also requires that you be an owner-occupier of the home you use the loan to purchase. An owner-occupier is a person who lives in the home that they own. While this might seem a little bit redundant, those in the real estate industry use this term to tell the difference between regular homeowners and people who own a property for profit. You are not allowed to make any profit from the home you purchase with a USDA loan.

People who use USDA loans typically take out 15 or 30-year fixed-rate mortgages.

VA Loan

A VA loan is one of the best first-time homebuyer programs to participate in. This is because there is no chance that using a VA loan could ever look bad to any lenders in the future. In this instance, VA stands for Veterans Affairs. This is because the team backing these loans is the US Department of Veterans Affairs.

VA loans are available to men and women who have served in the United States Armed Forces. These loans are also accessible to current members, as well as their surviving spouses. This means that if you are the widow or widower of military personnel (and they died in the line of duty or from service-related incident), you can apply for one of these loans to buy a home. If you are an ex-spouse, then you do not qualify.

Like most of the other loans discussed so far, these loans have many great features that make it easier for first time homebuyers to obtain a mortgage. These features are things like lower interest rates than conventional loans and small (or nonexistent) down payments.

The nice thing about using a VA loan is that you can look into a few different options before fully committing. If you want to, you can use the loan to cover a fixed-rate mortgage of 15 to 30 years, or an Adjustable Rate Mortgage of the same term.

Do I need PMI for a VA loan?

On a VA-backed loan, you don’t event need to get private mortgage insurance. They also don’t have any sort of prepayment penalty. As mentioned, a prepayment penalty is a fee for paying off your mortgage sooner than you are "supposed to." If you borrow with the VA, then you can pay off the loan as soon as you are able.

There is one downside, however. You have to pay for something called a VA Funding Fee. Basically, this fee can be anywhere from 1.25% to 2.15% of the loan. How much the fee actually is depends on which branch of the military you are.

You will also have to cover some of the usual fees that go along with buying a house. These are things like paying for the home appraisal.

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Good Neighbor Next Door

The Good Neighbor Next Door program is a great choice for all kinds of first-time homebuyers. This is because there isn’t an income restriction on this loan. Instead, qualified applicants must work in a certain profession instead.

In order to qualify for this loan, you must be a teacher (any level—just needs to be at an accredited school), police or correctional officer, firefighter, or an emergency service technician (EMT). If you work in one of these fields and you don’t mind living in a specific neighborhood that the HUD (remember what that means?) picks out for you, then this is a great option for you.

Participants live in areas called "revitalization areas." The US Department of Housing and Urban Development (just in case you forgot!) determines these areas. The general idea behind the program is to get "useful" professionals to move to and develop these in-need neighborhoods by offering them a pretty sweet housing deal.

Why use the Good Neighbor Next Door program?

Well, if you qualify for this program, you can receive up to 50% off of the listing price of one of these homes. The only "catch" to this hard-to-believe discount is that you have to be willing to live in the home for a minimum of 36 months. But that’s only three years. In the grand scheme of things, that’s not bad for a 50% off deal on an entire house.

In fact, most people don’t need much convincing that this is a great deal. As soon as an eligible home appears on the program’s official website, someone has usually snatched it up within the week. Because of how fast things move, if you see a house that you love and in an area you would be willing to move to, if you don’t already have loan pre-approval, you are going to miss out on it.

How to Start:

Before you even think about applying for the program, apply for a mortgage pre-approval instead. Next, you need to locate a real estate agent who is very familiar with the program and can help you find program listings in your area.

The program awards listings in an interesting way. Let’s say a lovely home in an interesting area pops up on the website and 10 people like it and submit offers. Because this isn’t a for-profit endeavor, the program selects the buyer through a random lottery instead of starting a bidding war.

If there are not any homes available through the program in your area (or if you keep losing out on homes because you are not the random entry chosen) don’t worry! The Good Neighbor Next Door team says that they will still help you buy a house. You just need to continue working with your program-qualified agent and they can help you negotiate the lowest price on a local home and take care of all the paperwork for you.

Which first-time homebuyer program should you choose?

The answer to this question is very subjective. As we outlined for you, while there are many different types of loans and programs available, whether or not you qualify for a particular one is a whole different story.

Before you decide which loan program you want to apply for, take a step back and be sure to ask yourself the following questions:

  • What is my credit score?
  • What is my profession?
  • Have I served in the armed forces?
  • How much money do I have to put as a deposit?
  • Where am I willing to live?

Once you have honest answers to these questions, you should realistically be able to eliminate the programs on this list that you don’t qualify for or don’t want to participate in.

That’s the easy part. Then, you can take the next steps towards becoming a homeowner: applying to the programs that are a good fit for you and working with the agencies to secure something you’ve always dreamed of: your very own home.

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Looking for a Realtor to help you buy your very first home? The team at Clever knows how all these programs work and would be happy to be there for you!

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