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First-Time Homebuyer Programs Can Help You Purchase a House

Buying a home is a costly milestone. Before spending money on monthly mortgage payments, homeowners insurance and routine maintenance, you'll need to save for a down payment and closing costs.

The average price of a new home in September 2019 was $362,700, according to the U.S. Census Bureau. If you're putting down the traditional 20%, you'll need to save $72,540.

In addition to this daunting savings goal, home prices are outpacing millennials' income, according to a 2019 homeownership study from HireAHelper, a mover matching service. It's no wonder that saving nearly $90,000 in preparation for a home purchase can feel out of reach. But first-time homebuyer programs and grants can help.

What Is a First-Time Homebuyer Program?

Government agencies and some lenders offer special programs or grants to make homeownership more accessible for low- to moderate-income homebuyers who can't make a 20% down payment.

These programs may only require a down payment of as low as 3% of the property price, opening doors for first-time homebuyers. First-time homebuyer grants that help fund the gap on a down payment or closing costs also are available.

"There's still a misconception that homebuyers must have a 20% down payment, and this demotivates many buyers from speaking with a lender or learning about loan programs," says Rick Bechtel, executive vice president, head of U.S. residential lending at TD Bank and a former U.S. News & World Report contributor.

Indeed, not all consumers know that there are programs designed to make it easier to buy a home. In a 2019 survey from TD Bank, 42% of homeowners were not aware of these types of affordability programs.

[Read: Best FHA Loans.]

What Programs Are Available for First-Time Homebuyers?

If you're in the market for your first home but plan to make a lower down payment or if you are seeking a first-time homebuyer grant, these programs can help.

FHA Loan

Federal Housing Administration loans have been around since 1934. The program is offered by lenders and backed by the U.S. Department of Housing and Urban Development. FHA loans may require a lower down payment and credit score from homebuyers and have fewer closing costs.

For homebuyers with a FICO credit score of at least 580, down payments can be as low as 3.5%. If you're interested in making your future home more eco-friendly, HUD has an FHA Energy Efficient Mortgage program that allows you to roll the costs of energy efficient home improvements into your loan.

Although FHA loans can reduce how much of a down payment you need and may have lower credit score requirements, there's a caveat: All FHA loans require you to purchase mortgage insurance, which protects the lender if you miss a payment. You might pay an upfront mortgage insurance fee, monthly mortgage insurance premiums or both, depending on the type of FHA loan.

To learn more about whether an FHA loan is right for you, find a local FHA lender in your area using the HUD lender list search tool.

VA Loan

The U.S. Department of Veterans Affairs offers VA loans to eligible service members who are buying a primary residence or refinancing an existing home loan.

A VA-guaranteed loan doesn't require a down payment, though the lender might, and it doesn't require you to pay for mortgage insurance. There's also no loan limit, but the VA limits its guarantee beyond a certain point.

Eligible veterans receive a basic entitlement, or maximum guarantee, of $36,000, and typically, lenders offer mortgages of up to four times this amount without requiring a down payment. However, you will need to provide proof of sufficient income and qualified credit.

You'll also pay a one-time VA funding fee, which can be added to the loan total. If you're under VA disability, you're exempt from this fee. Eligibility includes service and discharge requirements, in addition to demonstrating that your credit history and income meet program requirements.

Visit the VA benefits website to learn more about applying for a VA home loan.

[Read: Best VA Loans.]

Native American Direct Loan

Another VA-supported loan assistance program is the Native American Direct Loan. A NADL is a loan that's available to Native American veterans and can be used toward the purchase, construction or improvement of a future home. The home must be on federal trust land, such as lands in tribal trusts or Alaska Native corporate villages. NADLs also can be used to refinance an existing NADL.

Benefits of this program include no down payment or mortgage insurance, a low interest rate and closing costs, and a loan limit of up to $417,000 in most locations.

For more information and to see if you qualify for a NADL, call the Regional Loan Center of jurisdiction at 877-827-3702 between 8 a.m. and 6 p.m. EST.

USDA Loan

If you're interested in purchasing a home in a rural area, the USDA loan program might be an option. The U.S. Department of Agriculture provides a 90% guarantee of USDA loans that are borrowed through an approved lender.

Some lenders require no down payment for USDA loans.

To qualify for a USDA loan, the property must be in an eligible location. Use the USDA's property eligibility tool to determine if your desired home is in a qualified area. The loan can be used to refinance an eligible loan, make improvements to an existing property or purchase a home.

Reach out to your state's Guaranteed Loan Coordinator to find a participating lender near you.

Good Neighbor Next Door

HUD offers the Good Neighbor Next Door program to firefighters, police officers, teachers and emergency medical technicians. In return for a 50% discount on the price of select single-family homes, homebuyers must agree to live in the property as their only place of residence for 36 months.

The homes available through this program are located in revitalization areas and are listed for sale exclusively for Good Neighbor Next Door applicants. You're also required to sign a second mortgage and note, which is released after you've fulfilled your 36-month residence in the property. The note confirms that you're required to make payments on the loan.

To find a home under the program, browse the HUD Homes map.

[Read: Best Mortgage Lenders.]

Fannie Mae and Freddie Mac Programs

Government-sponsored enterprises Fannie Mae and Freddie Mac each offer programs for homebuyers who plan to make a lower down payment. These programs, called HomeReady and Home Possible, are available through participating lenders. Both require a 3% down payment and private mortgage insurance. They offer the ability to cancel private mortgage insurance upon reaching loan-to-value requirements, which is generally 20%.

These programs require you to have a minimum credit score of 620. This might be an option for prospective homebuyers who have strong credit and low- to moderate-income but who don't have a sizeable down payment saved up yet.

State-Based Grants and Programs

Your state or city may offer first-time homebuyer grants and assistance programs.

"They are called down payment assistance program loans," says Ron Humes, owner and principal broker at HomeSelect Realty in central Kentucky. Some don't require repayment of the down payment, while others do, and some require homebuyers to take classes, he says.

The city of Los Angeles, for example, offers the Low Income Purchase Assistance program, which requires applicants to take an in-person eight-hour homebuyer education course from a city-approved provider.

Before moving forward with a loan, make sure you compare multiple programs and loan options available to you locally. Mortgage resource HSH offers detailed information on state homebuyer programs, as does the HUD website.

How Can You Find the Right First-Time Homebuyer Program?

Buying your first home can be a rewarding experience. But like with any other consumer loan, you'll want to explore the requirements and limitations of each assistance program.

When shopping for a loan, whether you decide to apply for a first-time homebuyer program or a conventional mortgage, calculate the total cost of the loan. Ask your broker clarifying questions about payments, fees, interest and any other potential costs. Addressing these critical details early can reduce the number of surprises along your homebuying journey.



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