Homeownership has a lot of benefits, but it also comes with a few significant barriers to entry that first-time home buyers might be unprepared for.
With so many confusing terms and such large sums of money involved, many aspiring homeowners need a little extra support when they’re looking to purchase their first home, often in the form of financial help.
Fortunately, because homeownership is good for communities and the economy at large, there are plenty of programs and grants available to help get people into a home who otherwise might not be able to afford one.
To assist you in getting the help you need, here’s our run-down of our favorite home buyer friendly programs. While some of these are specific to first-time home buyers, many of them can benefit buyers of every experience level.
HUD Home Buyer Programs
The Department of Housing and Urban Development (HUD) offers many resources for educating and assisting hopeful home buyers. If you’re a first-time buyer who needs assistance but aren’t sure where to start, the HUD website can help you figure out what you need to do.
For information specific to your area, check out HUD’s list of local homebuying programs, or scroll further down this page for information on programs specific to first-time home buyers in your state.
Not only is HUD a useful resource that can connect you to counseling, home loan and down payment assistance programs, but the department also has some programs of its own to help potential homeowners.
Many of HUD’s homeownership programs work by providing local governments or non-profits with grants that are then used at the discretion of those organizations to help their communities. However, there are a couple that are available directly to the public.
Good Neighbor Next Door
The HUD Good Neighbor Next Door Sales Program aims to make housing affordable for teachers, law enforcement officers, firefighters and emergency medical technicians. To qualify for this program, applicants must:
- Be employed full-time in one of these positions
- Certify that they intend to continue this employment for at least one year past closing
- Not have owned another home for one year prior to submission of a bid for purchase
- Agree to live in the home as their primary residence for three years
With this program, a limited number of HUD homes in designated revitalization areas are available at a 50% discount to employees in these professions. At this time, Quicken Loans® doesn’t offer financing for homes purchased through this program.
HUD also sells the homes it owns through the Single Family Property Disposition Program. These homes are FHA foreclosures available via auction on the HUD homes website.
If you’re hoping to get a good deal on a home, it could be worthwhile to take a look at the HUD listings in your area. Keep in mind, though, that not every HUD home will be a steal; these homes are sold as-is, meaning you’ll pay for any repairs that are needed.
To purchase a HUD home, you’ll need to work with a real estate broker who is registered with HUD. You’ll also want to make sure you have any property you’re considering inspected before you make an offer.
During the initial bidding period, HUD homes are generally available only to those who plan on living in the home, so you won’t have to worry about competing with investors.
HUD homes can be financed as any other home – look into your loan options to figure out what works best for you.
The Federal Housing Administration (FHA) is a division of HUD that provides mortgage insurance on loans made by FHA-approved lenders. If you’re unsure of whether you’ll be able to qualify for a mortgage, an FHA loan may be able to help you out.
Because these loans are insured by the federal government, the lender is protected from the risk of default, allowing them to have more lenient requirements for FHA applicants. This makes an FHA loan a good option for first-time home buyers and those with shakier credit histories.
What are the requirements to qualify for an FHA loan? FHA sets its own rules for the types of mortgages it insures; however, an individual lender may have its own requirements on top of that.
In general, you’ll need a credit score of 580 or higher to qualify for an FHA loan, and you’ll have to have enough cash to put at least 3.5% down.
Your allowed debt-to-income ratio (DTI) will typically depend on your credit score – lower scores will require a lower DTI, ideally keeping it below 43%, while better scores may be able to go up to 50%.
Those interested in an FHA loan should be aware that they’ll be required to pay a mortgage insurance premium (MIP) either for the life of the loan if they make a down payment of less than 10%, or 11 years for down payments above 10%.
FHA’s 203(k) Rehab Loans
For first-time home buyers who dream of taking a fixer upper and making it their own but aren’t sure how to finance it, a 203(k) loan can help make that dream a reality.
A 203(k) loan works like a regular FHA mortgage while allowing you to roll the costs of any necessary repairs or improvements into the loan. Instead of having to take out multiple loans, including a construction loan, you only need to take out a single mortgage loan to cover your costs.
The cost of the rehabilitation must be at least $5,000. The amount you can borrow will be determined either by the value of the property before rehabilitation plus the costs of rehabilitation, or the appraised value of the property after rehabilitation.
To obtain a 203(k) loan, you’ll need to work with an FHA lender that offers this specific type of loan. Then, you’ll work with licensed contractors to get bids for all the work that needs to be done. You’ll probably want to work with contractors who have experience with 203(k) loans, as they’ll be familiar with the process and all the additional paperwork that goes into it.
According to HUD.gov, houses in a wide range of disrepair can be eligible for these loans. These include houses needing “relatively minor” repairs (provided they exceed $5,000 in cost) to “virtual reconstruction,” as long as the home’s existing foundation system remains in place.
Keep in mind that you are restricted to FHA and lender guidelines when it comes to the types of repairs you can do. For the most part, the repairs and renovations you’ll need to rehab on the home will be eligible, meaning you can use your loan funds to pay for them. However, certain things aren’t allowed, such as the purchase or repair of luxury items. Unfortunately, this means that you won’t be able to use a 203(k) loan to put a hot tub in the backyard.
Currently, Quicken Loans doesn’t offer the FHA 203K loan option.
Pulling together the cash for a down payment is often one of the biggest barriers for first-time home buyers, so for those who are eligible, a no-down-payment loan can be a godsend.
As you might be able to infer from the name, USDA loans are guaranteed by the U.S. Department of Agriculture. The USDA offers these loans to provide affordable home financing for people in rural areas.
USDA loans require no down payment and generally have lower monthly payments when compared to comparable balances on other loan types. This is because USDA loans have guarantee fees that the homeowner pays to insure the mortgage, which usually end up costing significantly less than the private mortgage insurance or mortgage insurance premium you’d pay on a conventional or FHA loan.
What do you need to qualify? In general, you’ll need a credit score of at least 640 and a low DTI. However, USDA loans are different from other mortgages in that they have additional requirements based on location and income.
As we already mentioned, USDA loans are meant to provide financing in rural areas. However, as long as you don’t live in or around a major population center, your area likely qualifies for USDA financing. You can check the USDA’s eligibility map to find out.
In addition to being in an eligible area, you’ll also have to meet income requirements. To qualify, your entire household can’t bring in a combined income that exceeds 115% of the median income in your area. That includes the annual pay for each adult in your household, regardless of whether they’re on the loan. Check out the USDA’s helpful income eligibility calculator to see if your household qualifies.
VA Loans and NADL
VA Loans make home financing more affordable for veterans, service members and their spouses. If you belong to one of these groups and are trying to get into your first home, a VA loan can help you do it.
These loans are guaranteed by the Department of Veterans Affairs. They offer a variety of benefits, including 0% down, more lenient credit requirements, no mortgage insurance and, often, better rates.
VA guidelines don’t establish a minimum credit score requirement and allow higher DTI than other loan programs. However, check with different lenders to see what their own individual standards are. Many lenders will require a minimum credit score of at least 620.
Unless you’re exempt, you’ll also pay a funding fee with a VA loan in lieu of mortgage insurance. This fee is usually less than the cost of mortgage insurance that you’d pay on other loans, and is often added to the loan balance.
The property you choose will need to meet VA requirements and be move-in ready, meaning that there aren’t any major problems.
Last, but not least, you’ll need to be eligible for a VA loan based on your length of service and the time period you served. You can check out the VA website for more information.
Additionally, the VA has a program specifically for Native American Veterans, called the Native American Direct Loan program, or NADL. These loans allow eligible Native American Vets to finance homes on Federal Trust Land. According to the VA, these loans are easy to qualify for and require no down payment. They also have minimal closing costs and, typically, relatively low interest rates.
Loans made through the NADL program are made directly through the VA and not available from any other lender.
Low Down Payment Conventional Loans
Government-backed loans aren’t the only ones that offer affordable financing options. There are several conventional loan options that allow down payments as low as 3%, with varying eligibility requirements.
Fannie Mae and Freddie Mac, the government-sponsored enterprises that help create the standards that conventional mortgages must conform to, have introduced special programs that allow lenders to offer down payment options below 5%. These rates traditionally have been as low as you can go. In order to obtain one of these loans, you’ll need to work with an approved lender.
You’ll also need a decent credit score and low DTI if you plan on getting the lowest down payment possible. Lower down payments make you more of a risk in the eyes of the lender, so you’ll want to compensate for that in other areas.
The benefit of getting a conventional low down payment mortgage – as opposed to an FHA loan – is that you’ll be able to stop paying mortgage insurance when you reach 20% equity in your home. However, you might get a better rate with an FHA loan.
HomeReady and Fannie Mae Standard
With a Fannie Mae-backed loan, your two options for low down payments are Fannie Mae’s HomeReady program, or its standard 97% LTV option.
The HomeReady program is designed to help low- to moderate-income borrowers be able to purchase a home. HomeReady borrowers can get a home with a down payment as low as 3%. They also receive homeownership education as part of the program, to encourage sustainable homeownership.
If you don’t live in a low-income area and make equal to or greater than the median income in your area, you aren’t eligible for HomeReady. You can use Fannie Mae’s map to see if you are eligible. HomeReady isn’t exclusive to first-time homebuyers.
On the other hand, Fannie Mae’s standard 97% LTV option is exclusive to first-time home buyers. However, a first-time home buyer is defined as a borrower who hasn’t owned a home in the past three years.
This option also allows you to put down as little as 3%. (LTV – or loan-to-value ratio – refers to how much of the home purchase is covered by a loan. So, if you’re putting 3% down, you have a 97% LTV.)
This option has no income limits and no homeownership education requirement.
Home Possible and HomeOne℠
Freddie Mac also has two low down payment programs that mirror Fannie Mae’s offerings: Home Possible and HomeOne℠.
Home Possible is similar to Fannie Mae’s HomeReady in that it aims to serve low- to moderate-income borrowers. It offers a 3% down option with similar income requirements; check out Freddie Mac’s eligibility tool to see if you qualify.
With Home Possible, a homeownership education course is required, but only if all borrowers on the loan are first-time home buyers.
Home Possible is available to all qualified buyers, regardless of whether they’ve owned a home in the past.
HomeOne℠ is Freddie Mac’s other 3% down mortgage program. Like Fannie Mae’s standard 97%, it has no income limits, regardless of the area you’re purchasing in. At least one borrower must be a first-time home buyer. If you and all your co-borrowers are, one of you will need to complete a homeownership education program, as with Home Possible. You can view the HomeOne℠ FAQ page for more information. At this time, Quicken Loans doesn’t offer HomeOne℠ loans, but we do offer mortgages through Home Possible.
First-Time Home Buyer Programs in Your State
While all the options listed above are helpful programs for first-time home buyers, if you’re looking for grants or down payment assistance, you’ll likely have more luck at the local level.
It behooves your state and municipality to help community members get into homes of your own, so make sure you’re taking advantage of any and all programs that are available to buyers in your area.
To make it easy, we’ve provided a list of links to some local first-time home buyer information for every state.
- North Dakota
- South Dakota
- District of Columbia
- North Carolina
- South Carolina
- West Virginia
- New Mexico
If you want even more local opportunities for home buyer assistance, check with your city’s housing commission, or talk to your real estate agent. They’ll be able to help you find first-time home buyer grants in your area, determine your eligibility and set you up for home buying success.
Additionally, you may want to check out your area’s Mortgage Credit Certificate (MCC) guidelines. The MCC is a program that allows eligible home buyers to use a portion of the money paid on mortgage interest as a tax credit. Rules vary from state-to-state, so check out the rules for your state to find out if you’re eligible.
Other First-Time Home Buyer Options and Resources
Outside of specific programs or grants, there are other avenues for first-time buyers to get help in their homeownership journey.
You may not know this, but more and more employers are beginning to offer some form of housing assistance to their employees. This doesn’t just benefit the employee; there are many benefits to offering housing assistance, including increased employee retention and increased productivity.
Employer housing assistance can include connecting employees to local financial assistance programs, providing home buyer education or even offering payment assistance for the various services you’ll enlist when going through the home buying process.
Talk with your employer to find out if they offer any benefits or help for hopeful homeowners.
First-time home buyers have the ability to tap into certain types of retirement accounts to help fund their home purchases. However, you probably want to think carefully if you’re considering this option, and speak with a financial advisor first, as tapping into these savings before retirement can be risky.
While you ordinarily incur penalties for early withdrawals from your tax-advantaged retirement accounts, the IRS makes certain exceptions for first-time homebuyers, as a way to encourage homeownership.
Under these exceptions, first-time home buyers can withdraw up to $10,000 from a traditional IRA without incurring the 10% early withdrawal penalty (though they will pay any applicable taxes on the withdrawal).
If you have a Roth IRA, you can always withdraw the sum of contributions you’ve made because you’ve already paid taxes on them. First-time home buyers can also withdraw up to $10,000 of the account’s earnings (i.e. interest you’ve accrued by having the money in the account) penalty-free. For accounts that are at least five years old, you won’t pay income tax on your withdrawal, otherwise, the funds count as taxable income.
Additionally, you can borrow from your 401(k). But keep in mind that you’re doing just that – when you borrow from your 401(k), you’re taking out a loan that you’ll have to repay and pay interest on.
However, you’re borrowing money from yourself, which means you’re paying yourself when you repay the loan. Plus, when you borrow money from your 401(k) for a home purchase, you’ll have a longer repayment period than the usual five years.
If you’re considering using retirement funds to help fund your home purchase, consider speaking with a tax professional to find out how a loan or withdrawal would affect you.
For more information on the process of purchasing your first home, check out Zing University, our comprehensive course for first-time home buyers.
To take the next step, you can go over your options online with Rocket Mortgage® by Quicken Loans. One of our Home Loan Experts would also be happy to talk to you if you give us a call at (800) 785-4788. If you have any questions, you can let us know in the comments below.
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