Skip to Content

Knowledge Center

First-time Homebuyer Loan Programs: What Are the Options?

Whether they're newly minted college graduates, settling down to start a family or simply feel like the time is right, prospective first-time homebuyers come from a variety of different situations and backgrounds. Yet given current residential real estate price trends - increasing for 89 consecutive months on a year-over-year basis, according to the National Association of Realtors - something almost all of them share in common is their need for a home loan to put toward buying a home.

If this sounds like you, good news: There are lots and lots of first-time homebuyer loan programs available. So many, in fact, keeping them all straight in your mind can be harder than decluttering your home after the holidays or a recent move.

Your mortgage lender may not help you tidy up, but they can assist with clearing things up so you know more about each program. Let's go through some of the most popular first-time homebuyer loan programs to give you a better understanding of what's available and determine what may be worth further pursuing before you obtain a real estate agent. 

What is a first-time homebuyer?

Before we get down to brass tacks, it's helpful to understand the meaning of a first-time homebuyer, because the meaning is broader than what you might think. Of course, the most basic interpretation is, someone who has never purchased residential property. The U.S. Department of Housing and Urban Development's definition is rather expansive. According to HUD, a first-time homebuyer can also mean an individual who hasn't owned a house in the last three years.

An awareness of what circumstances are indicative of first-time homeownership can give you a better idea of whether you qualify for a specific loan program. With all that said, let's talk about the options that are out there, in no particular order:

USDA Loans

One of the more popular loan programs out there is officially known as the Rural Development Guaranteed Loan Program. For the sake of brevity, they're more commonly referred to simply as USDA loans - backed by the U.S. Department of Agriculture. 

Frequently, first-time homeowners are in financial situations where they may not be making as much money as they would like, such as if they're fresh out of college or have expenses associated with raising young children. USDA loans are tailor-made for these individuals because people with low-to-moderate incomes are eligible. 

Another characteristic of USDA loans is location. In other words, in order to apply for this program, the property that you seek must be within a rural area. On the surface, this may sound like this confines you to a very limited selection of houses to buy, which when paired with the historically low rate of inventory, may seem potentially problematic. However, as statistics from the U.S. Census Bureau show, 97% of America's land area is rural. Paired with the fact that only 19% of the population live in rural locations, you should have plenty of potential properties to select from, with new and existing-home supply levels starting to improve.

FHA Loans

Another government-backed mortgage offering is an FHA loan, which was developed by the Federal Housing Administration. Similar to the USDA loan program, FHA loans offer a lot of flexibility and may even be a bit more accommodating in certain respects because you can buy a house in the suburbs or the city. Yet unlike USDA loans, a down payment is required. Nonetheless, FHA loans are still highly flexible because the down payment can be as low as 3.5%.

There are lots of advantages that come with FHA loans, but if you had to narrow them down to just one or two, they're likely the down payment and closing costs. As previously mentioned, not only do many people spend as little as 3%, but the source of the money can be a gift from a friend or family member. Closing costs, meanwhile, can be included in your loan amount, so you can pay them off over time rather than all at once as a lump sum.

VA Loans

Are you a retired or active member of the Army, Navy, Air Force, Marines, Coast Guard or National Guard Reserves? The Veterans Administration has a loan product that may be right up your alley. You may not think of VA loans as a prototypical first-time homebuyer loan program, but if you served in one of the five branches of the military and were never dishonorably discharged, you likely have veteran status. You may also be eligible if you are a surviving spouse of someone who was in the armed forces.

This status gives you certain advantages as a first-time homebuyer. Chief among them with VA is no down payment, one of the most well-known features of this mortgage product. According to the most recent statistics available from the NAR, the current median price for an existing home in the U.S. is approximately $280,000. With a 3% down payment, that's $8,400. This is a considerable amount that you don't need to pay with a VA loan.

Another major advantage of VA loans is income limits - there aren't any, which can't be said for other first-time homebuyer loan programs, like USDA and state housing programs. Applicants must, of course, be gainfully employed and earning a steady income on an ongoing basis. Participating lenders - of which there are many - will go over your W-2 forms and tax documents to get a better idea of your salary and ability to make mortgage payments each month. Then again, this is true of all loans.

Conventional 3% Down

We've talked a lot about low down payments, as many people who are unable to buy a house cite this as an obstacle, according to a report from the Urban Institute. This mortgage was made with them in mind. As its title suggests, a conventional 3% down loan program - or 97 LTV (Loan-to-Value) mortgage - is geared for people who may not have tens of thousands of dollars to put toward a down payment and was created by Fannie Mae and Freddie Mac.

An additional reason why 97 LTV mortgages are ideal for first-time homebuyers is the type of loan most often selected upon entering the housing market. Overwhelmingly, the most common is fixed-rate. There are a few reasons as to why, but first and foremost is rates are predictable. In other words, once the interest rate is locked in, it stays that way for the life of the loan. There's a sense of security that comes with this fact, given mortgage rates are quite low today compared to 10 to 20 years ago. So should rates rise in the future, as they often do, the interest paid won't change. 

All this is to say that conventional 3% mortgages are exclusive to fixed-rate mortgages. There's also a maximum loan amount that you can borrow with this mortgage type. That number is presently $484,350.

Good Neighbor Next Door

When you think of truly noble professions, what ones come to mind? Police officer is certainly one of them, teacher is another and firefighter is in the conversation as well. If you recently graduated from college and now are in any of these occupations, HUD's Good Neighbor Next Door may be an ideal loan option. Relative to other mortgage programs, this one is fairly new and was launched in order to provide more of a financial opportunity for the nation's law enforcement, emergency responders and teachers to purchase a home affordably. For the amount of work they do, teachers are among the lowest paid professionals in the country, with the average public school teacher earning around $60,500, according to the most recent statistics available from the Department of Education's National Center for Education Statistics. Many contend that those in public services don't make the type of living they ought to either, with the mean annual wage for police officers at $65,400, according to data from the Bureau of Labor Statistics. 

This is made possible by cutting the list price of certain properties in half. Go to HUD's website and type in the address of a for-sale house you're considering to see whether it's eligible. 

The caveat to this mortgage product is only firefighters, police, emergency medical technicians and teachers can apply, to purchase eligible homes located in revitalization areas through the Good Neighbor Next Door Sales program. Additionally, there aren't as many participating lenders for this program compared to some of the others mentioned.

But in addition to 50% off the listed price, the down payment is eminently affordable: just $100.  

State Housing Programs

Although America is composed of "united" states, you wouldn't know it based on the cost of living from one to the next. Home prices are a classic example. In the Midwest, the median price for a house is $226,300, based on the latest calculations from the NAR. But if you reside in the West, the cost is $408,000. That's a considerable difference.

State housing programs are designed to make homeownership feasible by reflecting and adjusting to the cost-of-living factors that make a particular state unique. These are often available through state housing agencies, who partner with participating lenders by providing payment assistance programs. This assistance can be put toward the costs of home financing. 

First-time homes often fall under the banner of "fixer-upper." Here as well, state housing program can help to reduce the costs associated with renovations. 

There are some eligibility requirements to consider, which vary from state to state. For instance, what's considered a moderate income in Virginia may be quite different in Ohio or Massachusetts. 

This is something that your lender can go over with you more in depth, if this is avenue you'd like to pursue further. 

FHA 203k Rehab

Speaking of fixer-uppers, the Federal Housing Administration designed a loan program for properties that need some restoration to get looking as good as new. It's called the 203k loan program and is a popular choice among first-time buyers hoping to buy a house at a low price. Such homes may be in a state of disrepair and need financing above and beyond the list price. These loans include both the cost of buying and "rehabbing" - hence the name - the house.

There's a lot to like about 203k loans. The down payment can be as low as 3.5%, they're loan types are both fixed and adjustable-rate and you don't necessarily need a sterling credit score (700 or higher) to be approved for one.

As far as restrictions go, the funds for the renovation work must go to a licensed general contractor. In other words, DIY'ers need not apply. A construction consultant may also be a must-have in order to gain 203k loan approval. Participating lenders for this product aren't as numerous as some of the afore-mentioned either.

That's a lot of loans. And believe it or not, this isn't an exhaustive list. What's described is a sneak peek into the product itself and some of the factors to weigh as you and your loan officer narrow down the options that are best for you.

Here are a few other points to keep in mind in your homeownership journey:

  • You'll be hard-pressed to find a lender that offers every single mortgage product that's out there these days. It just isn't feasible. Nor will you be eligible for all of them. This is meant to give you an idea of what's possible. You may find that a first-time homebuyer loan program that is not in your wheelhouse is actually quite relevant to your situation. The only way of knowing is by bringing it up to your lender. Alternatively, they may reference a loan offering if your circumstances point to it as a possibility. 
  • Oftentimes, people who are new to homeownership will talk to friends about their situation and what loan product friends chose. This can give people an inkling into whether they too will qualify. The problem with this line of thinking is every borrower is a package: each comes with distinctions that make them unique. So, if you have a credit score or income that may seem low, it doesn't necessarily mean you won't be approved. Each application is assessed in conjunction with the other materials provided when applying. In short, don't assume anything. 
  • Don't worry too much about the approval process. Look at your lender as an advocate - they want what's best for you. If you're turned down, no worries. Your lender will offer suggestions on what you need to do to get the green light. 
  • All loan programs require minimum credit scores. However, how the credit score affects the interest rate is not as sensitive with state housing loans.

For more information on first-time homeownership, contact us today. We'll guide you home.