A guide for first-time home buyer programs in the USA

Buying your first home is a dream for many Americans. But it can be notoriously difficult to climb onto the property ladder. This is when it becomes most important to do your research.  

For first-time home buyers in the United States, there are many first-time home buyer programs whose sole aim is to get you into your first home sooner and at a more affordable cost. The best option for you will be the mortgage that suits your current financial situation and your long-term financial goals. Here is everything you need to know about first-time home buyer programs in the US. For the mortgage professionals who frequently visit our website, this can be an excellent article to pass along to the first-time home buyer you are working with who has questions about these programs. 

How do you qualify for a first-time home buyer program in the USA? 

A first-time home buyer is anyone who has not owned their primary residence in the last three years, according to the US government’s definition. That three-year cut-off point is based on the upcoming purchase property closing date. (The date of the mortgage application does not impact eligibility for certain first-time home buyer program benefits.)  

First-time home buyers can gain access to assistance programs and home loans that repeat home buyers might not be privy to. If you have owned a property previously, perks open to first-time buyers may still be open to you (if, as mentioned, you have not owned a home in at least three years). First-time home buyers can also include:  

• Single parents 
• Children 
• Displaced homemakers 
• Renters 
• People living rent-free 

First-time home buyer program requirements 

Before meeting any requirements for first-time home buyer programs, you will first have to make sure you meet basic home loan requirements set by your lender and your loan program.  

Let’s look at some of typical first-time home buyer qualifications: 

• Credit score: 620 minimum 
• Down payment: 3% minimum 
• Debt-to-income ratio: Less than 43% 
• Steady income: even self-employed people can get mortgages 
• Two-year employment history 
• Clean credit score 

These qualifications are dependent on which type of home loan you get and can vary. For instance, if you apply for assistance for your down payment, the program may come with its own specific guidelines. For this reason, it is important to speak with your lender early in the process to determine what you will need to qualify as a first-time home buyer.  

First-time home buyer programs benefits  

If you qualify as a first-time home buyer, you may be eligible for significant benefits, depending on your situation. Here are two benefits available to eligible first-time buyers: 

• Down payment assistance programs (DPAs) 

• Financial assistance options  

Let’s take a closer look at each of the benefits.  

Down payment assistance programs (DPAs) 

You can secure significant benefits from down payment assistance programs (DPAs) if you are new to the home-buying process. DPAs help with your upfront costs, which include down payment and even closing costs. While requirements vary, depending on the program, most accept first-time buyers with low to moderate income.  

Here are three different types of down payment assistance that are available:  

• Low-interest loan: This is money that you repay alongside your mortgage 
• Interest-free loan: With this type of loan, there are no monthly payments, and the loan is forgiven in stages, which means you do not owe anything after a certain period 
• Home buying grant: This grant is essentially a cash gift, with no conditions 

Read more: What are the home loans for first time buyers in the US?

Financial assistance options 

It is important to ask your mortgage lender and professional about financial assistance options such as payment grants, tax credits, and closing cost assistance (among others), since they are usually not advertised.  

While some financial assistance options are more restricted, others allow you to select the level of help you need. In Florida, for instance, the Florida Housing Finance Corporation allows residents to select the following: 

• Florida assist: This allows residents to borrow as much as $7,500 at 0% APR and no monthly payments. You can repay the entire amount if there is a sale, refinance, transfer, etc. 
• HFA Preferred and HFA Advantage PLUS: In this case, you might be able to borrow a Freddie Mac or Fannie Mae second mortgage between 3% and 5% of the value of the first loan. Because 20% of the loan is forgiven at the end of each year of the second mortgage’s five-year term, you will owe nothing in the fifth year. 
• The Florida Homeownership Loan Program: This benefit allows you to borrow a second mortgage at 3% over 15 years, which you repay monthly alongside your initial mortgage. 

As the post below shows, there are many first-time home buyer programs out there which you may not be aware of. Talk to a trusted mortgage professional to learn your options. 

What credit score is needed for first-time buyers? 

The credit score needed for first-time home buyers depends primarily on the loan type and the mortgage lender, among other factors. Generally, however, a credit score of 620 is ideal for most first-time buyers applying for a conventional mortgage.  

The minimum credit score required for first-time home buyer programs can vary widely, anywhere from 500 to 700. While it is possible to secure a mortgage with poor credit, you usually need either good or exceptional credit to qualify for the best loan terms.  

First-time home buyer programs: Credit scores and loan types 

There are several types of home loans out there, and each has its own minimum credit score. While these do not necessarily apply strictly to first-time home buyers, here is a look at the basic loan types and the credit score requirements for each: 

Conventional loans. Most conventional loans usually require a credit score of at least 620 or, in some cases, 660. The most common mortgage loans, conventional loans are not government insured and conform to the standards set by government-sponsored entities Freddie Mac and Fannie Mae.  

Jumbo loans. Jumbo loans are a type of non-conforming home loan and usually require a minimum credit score of at least 700. Compared to conventional loans, jumbo loans carry higher loan amounts.  

FHA loans. FHA loans are insured by the Federal Housing Administration and have a minimum credit score requirement of 500 when you make a down payment of 10% or 580 when you make a down payment of 3.5%.  

VA loans. VA loans are insured by the Department of US Veterans Affairs and have no minimum credit score. However, most lenders require a credit score of at least 620. VA loans were created and designed for eligible members of the US military, their spouses, and eligible beneficiaries.  

USDA loans. USDA loans are insured by the US Department of Agriculture and, like VA loans, do not have a minimum credit score set by the federal agency. However, lenders usually require a credit score of at least 580. USDA loans are designed for low- to moderate-income home buyers who want to buy a property in rural regions. 

If you have a solid credit score, you will have more loan type options. Your options become limited if your credit score is considered weak. 

First-time home buyer programs: Why credit scores matter 

Your credit score is important because it determines your interest rate and the payment terms on your mortgage loan. (To determine loan terms, lenders use a risk-based pricing model.) The more likely you are to pay off your bills on time, based on your credit history, the lower the interest rate on your home loan is likely to be. If your credit score is low, you will likely end up paying more.  

Which loan is best for first-time homebuyers? 

Generally, the best loan types for first-time home buyers in the US are those that offer lower up-front costs and lower down payment options, as well as less strict credit score requirements. In each of these respects, FHA loans fit the bill.  

The Federal Housing Administration (FHA), which is a part of the US Department of Housing and Urban Development, offers different mortgage loan programs to Americans. FHA loans offer lower down payment requirements—you can pay as low as 3.5% of the purchase price of the property—and are easier to qualify for than conventional loans. FHA loans are also ideal for first-time home buyers because they have more relaxed requirements around credit scores, in addition to lower up-front costs.  

Before applying to an FHA loan, however, it is important to consider the mortgage insurance premium you will have to pay, which is rolled into your mortgage payments. Private mortgage insurance is an insurance policy that protects your mortgage lender or titleholder if you default on your mortgage payments, pass away, or otherwise fail to meet the contractual obligations of your mortgage. 

What is Biden’s $25,000 downpayment toward Equity Act? 

Due to President Joe Biden’s Down Payment Toward Equity Act, which is still making its way through Congress, first-time home buyers may be eligible for a $25,000 grant in near future. The act—which was also referred to as the $25,000 First-Time Buyer Home Grant—was one of Biden’s promises to help Americans buy quality homes.  

The Down Payment Toward Equity Act is a first-time home buyer grant bill that will provide buyers with a $25,000 grant to purchase their first home. The grant money can also go toward different home-buying expenses that may otherwise prohibit the owner from purchasing a home.  

Here are a few of the items the Downpayment Toward Equity Act grant could be used for: 

• Down payment 
• Interest 
• Closing costs 

Down Payment Toward Equity Act requirements 

If you want to apply for the $25,000 grant, you will have to fill out an application and meet these requirements:  

• Purchase a property for the first time 
• Ensure the property is your primary residence, not a secondary residence or a vacation home 
• Be a first-generation home buyer, have been in foster care, or be someone whose parents defaulted on their home loan 
• Meet income limitations in your region  
• Use a government-backed mortgage 

Funding options for first-time home buyers 

Until the Down Payment Toward Equity Act gets passed in Congress, there are options that are currently available to first-time home buyers in the US, including:  

• Employer-sponsored programs 
• First-Time Home Buyer Tax Credit 
• Closing cost assistance programs  

To give you a better idea of the specific requirements, here is a closer look at each: 

Employer-sponsored programs 

It’s true—some employers are creating incentives to help their employees cover down payments and closing costs. In this case, your employer might give you a loan or a grant that is forgivable over time. Your labor union may also help with closing costs.  

Any first-time home buyer programs you use will vary depending on your employer and what, if anything, they offer. Most employer-assisted programs are joint efforts with state governments. Before relying on these programs, it is important to speak with HR representatives or managers.  

First-Time Home Buyer Tax Credit 

The First-Time Home Buyer Tax Credit, which is also working its way through Congress, would provide a $15,000 tax credit for first-time buyers. The program would refund up to $15,000 in tax liability to first-time home buyers retroactively to Dec. 31, 2020.  

The tax credit would be like others the IRS gives for certain home improvements and upgrades, such as the Energy Efficient Home Improvement Credit. Many homeowners claim their mortgage interest paid as an annual tax deduction, but the First-Time Home Buyer Tax Credit would be specifically designed to help prospective owners climb onto the property ladder. 

Closing cost assistance programs  

These first-time home buyer programs are buyer stimulus plans that could pay up to 100% of your closing costs, which includes mortgage fees, title expenses, and transfer taxes. Closing cost assistance programs require home buyers to meet minimum credit standards and income thresholds. Homes must also meet minimum quality and safety standards.  

There are plenty of options for first-time home buyers in the US. If you are eligible, an FHA loan may be the cheapest option. But before committing to one of these programs, it is important to understand the possible long-term implications. Does it make sense for your financial goals? By considering both the short- and long-term, you will be able to enjoy your dream home—minus the stress.  

As we have seen, there are many factors that can affect your mortgage rate. It can be a very tricky road to navigate, and we advise you to speak to the best mortgage professional in your area for assistance. They can help you see the bigger picture.  

Do you have experience with first-time home buyer programs in the US? Let us know in the comment section below.