Programs For First-Time Homebuyers

Homeownership can make a big difference to your future. When you invest in a home instead of paying rent, you build equity and put yourself on a more beneficial financial footing.

Buying your first home can be daunting, but it's well worth the investment of time, energy, and money. There are special loans and grants for first-time buyers to help you get your foot in the door.

The 7 Best Programs and Mortgages for First-Time Buyers

As a first-time home buyer, you may have less money saved for a downpayment. You may not have an established history of good credit or you may have a debt-to-income ratio that is too high for a conventional mortgage. If you can't secure a standard mortgage for any of these reasons, there are other options.

The best mortgage loan for you to make the switch from renter to homeowner varies according to your personal circumstances.

Choose the most affordable option that you qualify for. For most first-time buyers, this will be an FHA loan, but there are others that you might want to consider as well. Aside from your mortgage loan, there are other programs you may qualify for that can help make your first home more affordable as well, depending on your career and where you live.

1. FHA Loans

An FHA loan is guaranteed by the Federal Housing Authority. The loan is issued by a regular bank, but because the government backs the loan, banks will give you more favorable terms on this type of mortgage loan than on a conventional mortgage.

You will generally need 3.5% for a downpayment, and you can qualify with a credit score as low as 580. The interest rate will generally be a little lower than a conventional rate, although rates change daily and vary based on many factors. You can only secure an FHA loan on a primary residence.

The one downside of an FHA loan is that you will be required to pay private mortgage insurance. PMI covers the lender in the event that you default on your loan.

In other words, you're paying insurance for the bank, not for yourself. Depending on your downpayment, you may be required to pay PMI for 11 years or you may pay it for the life of the loan.

Even with this cost, however, owning is a far better investment than renting, and an FHA loan is often your best option. If you refinance to a conventional mortgage, as many FHA borrowers do after a few years, you can eliminate this cost.

2. Conventional 97 Mortgages

Conventional 97 mortgages have low downpayment requirements as well. These mortgages are through Freddie Mac or Fannie Mae, and they require as little as 3% down. They offer competitive interest rates for borrowers with a credit score of at least 620.

There are some restrictions on the type and condition of the property you wish to purchase with Conventional 97 mortgages. These loans require you to pay PMI only until you've built 20% equity in the home.

3. Home Possible or Home Ready

These are special mortgage options that allow the borrower to qualify using alternative downpayment or income circumstances. The Home Possible program from Freddie Mac allows a co-signer on the mortgage who will not reside at the property. This can help the buyer secure more favorable terms, including lower interest rates.

The Home Ready program from Fannie Mae allows borrowers to use a percentage of rental income from a room or apartment in the home to boost their overall income. This can help them qualify for the loan or lower rates on the mortgage.

4. VA Loans

If you have served in the military and you are eligible for a VA mortgage loan, this may be the most affordable option for a first mortgage. You are required to have no downpayment at all and pay no PMI.

You'll need a credit score of at least 620 to qualify. This type of loan is only available to people who are serving or have served in the military.

5. USDA Loans

If you have a rural property in mind and you have a credit score of 640 or higher, you may want to look at a USDA mortgage loan. Like a VA loan, you can secure a mortgage with 0% down. You will pay some mortgage insurance, but generally at a lower cost than with a traditional property.

6. State, Municipal, and Privately Funded Programs

States, counties, and cities as well as some privately funded organizations offer grants and no-interest loans to first-time buyers as well. Many states offer $5,000 to $10,000 downpayment assistance to first-time buyers or low- to moderate-income buyers, known as DPA grants or loans.

Some municipalities also offer assistance to first-time buyers, such as funds for closing costs and other expenses. Ask your lender what programs are available in your local area.

7. Good Neighbor Program

If you are an EMT, police officer, teacher, or firefighter, the Good Neighbor Next Door program might be a helpful option for you. This program is offered by the Department of Housing and Urban Development and offers varying discounts in the form of no-interest, no-payment loans.

You are required to remain in the property for three years, after which your loan is forgiven. This program applies only to specific properties in areas targeted for revitalization.

The Best Guidance for First-time Buyers

Do your research before you shop for a home or a mortgage. Understand the process and requirements for buying a home upfront and you'll spare yourself a lot of frustration and confusion. Learn all you can about your credit score, mortgage rates, and insurance.

Know the difference between being pre-qualified and pre-approved for a loan. Explore all programs and options in your area or for people of your profession. Keep an eye on federal and state programs, as they change over time.

At FHA Insider, we can help. Contact us today and we'll show you the most advantageous programs available for buying your first home.