Rates & Affordability

Helpful Hints for First-Time Homebuyers

There's good news for Americans who think they can't afford to buy a house. There's a slew of government programs aimed at helping first-time homebuyers get a mortgage, often with very favorable terms.

For instance, there are conventional mortgages backed by Fannie Mae and Freddie Mac that require a down payment of just 3% for qualified buyers. Mortgages insured by the Federal Housing Administration (FHA) require a minimum downpayment of just at least 3.5%.

First-time home buyer programs are mostly run by state and local governmental agencies or non-profits. These agencies don't typically offer mortgages to buy a home. The more common type of first-time buyer assistance is giving qualified borrowers money to help pay for the down payment and closing costs on a mortgage, and some programs help first-timers get a reduction in the interest rate on their mortgage.

One common form of first-time buyer aid is to give qualified borrowers another loan—called a secondary loan-that can be used to cover the down payment and/or closing costs on the mortgage, which in lending parlance is called the primary loan. Typically, no interest is charged on the secondary loan, and in some instances, the loan amount is completely forgiven over time. Or, you may need to pay back the amount borrowed when you sell, move, or refinance your mortgage. Some programs make outright grants, rather than loans, meaning this money does not need to be paid back.

For example, California's MyHome program offers qualified first-time buyers up to 3.5% of their purchase price for the down payment, and repayment is not due until the mortgage is paid off, refinanced, or the borrower moves. Another California statewide program provides a loan of 3% or 4% to cover closing costs. In Tennessee, the Great Choice Plus program provides qualified borrowers with up to 5% of the purchase price to cover upfront costs. In Texas, a program not exclusively for first-timers, offers up to 5% of the mortgage amount for down payment help that is a grant, not a loan.

Who Is Eligible for a First-Time Buyer Program

Specific rules vary according to the state, county or city program. Some common guidelines:

  • Past owners can be first-time buyers. Typically, anyone who has not owned a home in the past three years is considered to be a first-time buyer.
  • Some programs are for all buyers. Down Payment Resource maintains a national database of around 2,400 programs that offer mortgage assistance. According to DPR about 40% of the programs aren't solely earmarked for first-time buyers.
  • You don't need sparkling credit scores. FICO® Credit Scores of at least 640 or so are typically all that's needed to qualify for a first-time buyer assistance (and not all programs check your credit scores.) FICO®Credit Scores range from 300-850. But chances are you may need higher credit scores of around 680 or so to qualify for an FHA-insured mortgage or conventional mortgage. (See: What is a Good Credit Score?)
  • Help Targeted to Public Service Workers. Some programs are specifically focused on helping teachers and public safety workers. The Good Neighbor Next Doorprogram is open to law enforcement, primary school teachers, firefighters and emergency medical technicians. The deal: 50% off the list price of a home that is in the program's database, as long as you agree to stay in the home for at least three years.
  • Income Limits Apply. These programs are designed to help low and moderate-income households afford a home. Eligibility is often linked to the local median income; the limit is typically more for households with multiple occupants. (See: A Multigenerational Solution to the Home Buying Squeeze)
  • Eligible Home Price Cap. Both conventional mortgages that offer a 3% downpayment and FHA-Insured mortgages that require a 3.5% down payment, have specific borrowing limits in the continental U.S. that range from $275,665 to $636,150 depending on where the home is. There may be a different limit to be eligible for first-time buyer assistance from a state or local agency.
  • Class required. Many programs require borrowers to complete a class (it can be online) that walks through the financial responsibilities of home ownership. There may be a fee for this class.

How to Find Programs You May Be Eligible For

  • Fire up your browser. Make a few different passes at an online search. First, type in the name of your state with the phrase "first time homebuyer program" and then again with "home buyer program." You should get results that send you to specific pages at your state's Housing Finance Agency. Then repeat the exercise, plugging in your county to see if there are local programs.
  • Sit down with a lender who specializes in first-time buyer programs. Not all lenders are authorized to offer FHA-insured loans. You can search online for FHA-approved lenders. And not all lenders are up to speed on how the 3% down payment for conventional mortgages work. Ask friends, family and real estate agents for recommendations of lenders that close a lot of mortgage deals for first timers, and that have experience adding state or local grants or loans to help get the deal done.

Grab Your Tax Credit

After you buy a home you may be eligible for additional financial help. Your main mortgage charges interest. All homeowners, regardless of income, can claim mortgage interest as a deduction on their taxes. A deduction reduces your taxes based on your tax rate. For example, if you have a $1,000 deduction and you are in the 25% tax bracket, your deduction reduces your taxable income by $250 ($1,000 x 0.25%).

An even better deal is a tax credit. A tax credit reduces your taxes dollar for dollar. If you have a $1,000 tax credit, your taxable income is reduced by the full $1,000.

If you meet certain income requirements, you may be eligible for a mortgage tax credit that allows you to claim a credit on up to $2,000 a year in mortgage interest payments. If your mortgage interest is more than $2,000, you can claim the rest as a tax deduction. That means you can reduce your taxable income for the year by $2,000. To claim this credit, you must obtain a Mortgage Credit Certificate (MCC) from your state or local housing agency.