- First-time homebuyers, as defined by the U.S. Department of Housing and Urban Development, can get help from state programs, tax breaks, and federally backed loans.
- Before you begin looking, consider the type of residence that will serve your needs, what you can afford, how much financing you can secure, and who will help you conduct your search.
- Buying a home involves finding the property, securing financing, making an offer, getting a home inspection, and closing on the purchase.
- Once you’ve moved in, it’s important to maintain your home and also keep saving.
The First-Time Homebuyer Advantage
Buying a home is still considered a key aspect of the American dream. As a first-time buyer, you have access to state programs, tax breaks, and federally backed loans if you don’t have the usual minimum down payment—ideally 20% of the purchase price for a conventional loan—or you’re a member of a certain group (see the Important callout, below). And you may qualify as a first-time buyer even if you’re not a novice.
A first-time homebuyer, according to the U.S. Department of Housing and Urban Development (HUD), is someone who meets any of the following conditions:
- An individual who has not owned a principal residence for three years. If you’ve owned a home but your spouse has not, then you can purchase a place together as first-time homebuyers.
- A single parent who has only owned a home with a former spouse while married.
- A displaced homemaker who has only owned with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local, or model building codes—and that cannot be brought into compliance for less than the cost of constructing a permanent structure.
6 Questions to Consider Before You Buy
Your first step is to determine what your long-term goals are and how home ownership fits in with those goals. Perhaps you’re simply looking to transform all those “wasted” rent payments into mortgage payments that give you something tangible: equity. Or maybe you see home ownership as a sign of independence and enjoy the idea of being your own landlord. Buying a home can also be a good investment. Narrowing down your big-picture homeownership goals will point you in the right direction. Here are six questions to consider.
1. How’s your financial health?
Before clicking through pages of online listings or falling in love with your dream home, do a serious audit of your finances. You need to be prepared for both the purchase and the ongoing expenses of a home. The outcome of this audit will tell you whether you’re ready to take this big step, or if you need to do more to prepare. Follow these steps:
Look at your savings. Don’t even consider buying a home before you have an emergency savings account with three to six months of living expenses. When you buy a home, there will be considerable upfront costs including the down payment and closing costs. You need money put away not only for those costs but also for your emergency fund. Lenders will require it.
One of the biggest challenges is keeping your savings in an accessible, relatively safe vehicle that still provides a return so you’re keeping up with inflation.
- If you have one to three years to realize your goal, a certificate of deposit may be a good choice. It’s not going to make you rich, but you aren’t going to lose money either (unless you get hit with a penalty for cashing out early). The same idea can be applied to purchasing a short-term bond or fixed income portfolio that will give you some growth, but also protect you from the tumultuous nature of stock markets.
- If you have six months to a year, keep the money liquid. A high-yield savings account could be the best option. Make sure it is FDIC insured (most banks are) so that if the bank goes under you will still have access to your money up to $250,000.
Review your spending.You need to know exactly how much you’re spending every month—and where it’s going. This calculation will tell you how much you can allocate to a mortgage payment. Make sure you account for everything—utilities, food, car maintenance and payments, student debt, clothing, kids’ activities, entertainment, retirement savings, regular savings, and any miscellaneous items.
Check your credit. Generally, to qualify for a home loan, you’ll need good credit, a history of paying your bills on time, and a maximum debt-to-income (DTI) ratio of 43%.2 Lenders these days generally prefer to limit housing expenses (principal, interest, taxes, and homeowners insurance) to about 30% of the borrowers’ monthly gross income, though this figure can vary widely depending on the local real estate market.
2. Which type of home will best suit your needs?
You have a number of options when purchasing a residential property: a traditional single-family home, a duplex, a townhouse, a condo, a co-operative, or a multi-family building with two to four units. Each option has its pros and cons, depending on your homeownership goals, so you need to decide which type of property will help you reach those goals. You can save on the purchase price in any category by choosing a fixer-upper, but be forewarned: The amount of time, sweat equity, and money required to turn a fixer-upper into your dream home might be a lot more than you bargained for.
3. Which specific features do you want your ideal home to have?
While it’s good to retain some flexibility in this list, you’re making perhaps the biggest purchase of your life, and you deserve to have that purchase fit both your needs and wants as closely as possible. Your list should include basic desires, like size and neighborhood, all the way down to smaller details like bathroom layout and a kitchen fitted with durable appliances.
4. How much mortgage do you qualify for?
Before you start shopping, it’s important to get an idea of how much a lender will give you to purchase your first home. You may think you can afford a $300,000 home, but lenders may think you’re only good for $200,000 based on factors like how much other debt you have, your monthly income, and how long you’ve been at your current job. In addition, many realtors will not spend time with clients who haven’t clarified how much they can afford to spend.
Make sure to get preapproved for a loan before placing an offer on a home: In many instances, sellers will not even entertain an offer that’s not accompanied with a mortgage preapproval. You do this by applying for a mortgage and completing the necessary paperwork. It is beneficial to shop around for a lender and to compare interest rates and fees using a tool like a mortgage calculator or Google searches.
5. How much home can you actually afford?
Sometimes a bank will give you a loan for more house than you really want to pay for. Just because a bank says it will lend you $300,000 doesn’t mean you should actually borrow that much. Many first-time homebuyers make this mistake and end up “house-poor” with little left after they make their monthly mortgage payment to cover other costs, such as clothing, utilities, vacations, entertainment, or even food.
In deciding how big a loan to actually take, you’ll want to look at the house’s total cost, not just the monthly payment. Consider how high the property taxes are in your chosen neighborhood, how much homeowners insurance will cost, how much you anticipate spending to maintain or improve the house, and how much your closing costs will be.
6. Who will help you find a home and guide you through the purchase?
A real estate agent will help you locate homes that meet your needs and are in your price range, then meet with you to view those homes. Once you’ve chosen a home to buy, these professionals can assist you in negotiating the entire purchase process, including making an offer, getting a loan, and completing paperwork. A good real estate agent’s expertise can protect you from any pitfalls you might encounter during the process. Most agents receive a commission, paid from the seller’s proceeds.
10 first-time homebuyer programs in 2021
- 1. FHA loan
- 2. USDA loan
- 3. VA loan
- 4. Good Neighbor Next Door
- 5. Fannie Mae or Freddie Mac
- 6. Fannie Mae’s HomePath ReadyBuyer Program
- 7. Energy-efficient mortgage (EEM)
- 8. FHA Section 203(k)
- 9. State and local first-time homebuyer programs and grants
- 10. Native American Direct Loan
1. FHA loan
- A loan insured by the Federal Housing Administration
- Best for: Buyers with low credit and smaller down payments
Insured by the Federal Housing Administration, FHA loans typically come with smaller down payment and lower credit score requirements than most conventional loans. First-time homebuyers can buy a home with a minimum credit score of 580 and as little as 3.5 percent down or a credit score of 500 to 579 with at least 10 percent down.
Unfortunately, you’ll need to pay mortgage insurance with FHA loans if you put down less than 20 percent. Your overall borrowing costs can be higher since you’re paying an upfront premium and annual premiums. Unlike homeowners insurance, this coverage doesn’t protect you. Instead, it protects the lender in case you default on the loan.
2. USDA loan
- A loan program 100 percent guaranteed by the U.S. Department of Agriculture
- Best for: Borrowers with lower or moderate incomes purchasing a home in a USDA-eligible rural area
The U.S. Department of Agriculture, or USDA, guarantees loans for some rural homes, and borrowers can get up to 100-percent financing. This doesn’t mean you have to buy a farm or shack up with livestock, but you do have to buy a home in a USDA-eligible area.
USDA loans have income limits based on where you live and are geared toward folks who earn low or moderate incomes. You typically need a credit score of 640 or higher to qualify for a streamlined USDA loan. Otherwise, you’ll have to provide extra documentation on your payment history to get a stamp of approval.
3. VA loan
- A loan backed by the U.S. Department of Veterans Affairs that allows no down payment for military personnel, veterans and their families
- Best for: Active-duty military members, veterans and their spouses
Qualified U.S. military members (active duty, veterans and eligible family members) can apply for loans backed by the U.S. Department of Veterans Affairs, or VA.
VA loans are a great deal because they come with lower interest rates compared to most other loan types and don’t require a down payment. Borrowers, however, will need to pay a funding fee that is required on VA loans, but it can be rolled into your monthly loan costs. Some servicemembers may be exempt from paying the fee.
Other VA loan perks include no minimum credit score or mortgage insurance requirements. The VA can negotiate with the lender on your behalf if you find yourself struggling to keep up with mortgage payments.
4. Good Neighbor Next Door
- A U.S. Department of Housing and Urban Development (HUD) program that provides housing aid for law enforcement officers, firefighters, emergency medical technicians and teachers
- Best for: People employed in one of the qualifying professions
The Good Neighbor Next Door program, sponsored by the U.S. Department of Housing and Urban Development (HUD), provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers.
Qualified participants can receive a discount of 50 percent on a home’s listed price in “revitalization areas.” You can search for properties available in your state using the program’s website. You must commit to living in the home for at least 36 months.
5. Fannie Mae or Freddie Mac
- Conventional loans backed by Fannie Mae or Freddie Mac, which require only 3 percent down
- Best for: Borrowers with strong credit but a minimal down payment
The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac set borrowing guidelines for loans they’re willing to buy from conventional lenders on the secondary mortgage market.
Both programs require a minimum 3 percent down payment. To qualify, homebuyers will need a minimum credit score of 620 (though some lenders have different thresholds) and a relatively unblemished financial and credit history. Fannie Mae accepts a debt-to-income ratio as high as 50 percent in some cases.
You’ll need to pay for private mortgage insurance, or PMI, if you’re putting less than 20 percent down, but you can get it cancelled once your loan-to-value ratio drops below 80 percent.
6. Fannie Mae’s HomePath Ready Buyer Program
- A program that provides 3 percent in closing cost assistance to first-time buyers; must complete an educational course and buy a foreclosed Fannie Mae property
- Best for: First-time homebuyers who need help for closing costs and are willing to buy a foreclosed home
Fannie Mae’s HomePath ReadyBuyer program is geared toward first-time buyers interested in foreclosed homes that are owned by Fannie Mae. After taking a required online homebuying education course, eligible borrowers can receive up to 3 percent in closing cost assistance toward the purchase of a HomePath property.
The trick is finding a HomePath property in your market, which might be a challenge since foreclosures typically account for only a small chunk of listings.
7. Energy-efficient mortgage (EEM)
- Backed by FHA or VA loan programs and allows borrowers to combine the cost of energy-efficient upgrades into a primary loan upfront
- Best for: Homebuyers who want to make their home more energy-efficient but lack upfront cash for upgrades
Making “green” upgrades can be costly, but you can get an energy-efficient mortgage (EEM) loan that’s insured through the FHA or VA programs.
An EEM loan lets you tack the cost of energy-efficient upgrades (think new insulation, a more efficient HVAC system or double-pane windows) onto your primary loan, without requiring a larger down payment.
8. FHA Section 203(k)
- Borrow the funds needed to pay for home improvement projects and roll the costs into one FHA loan with your primary mortgage
- Best for: Homebuyers interested in purchasing a fixer-upper who don’t have a lot of cash to make major home improvements
If you’re brave enough to take on a fixer-upper but don’t have the extra money to pay for renovations, an FHA Section 203(k) loan is worth a look.
Backed by the FHA, the loan calculates the home’s value after improvements have been made. You can then borrow funds needed to pay for home improvement projects and roll the costs into one loan. Improvements must cost more than $5,000 and you’ll need to make a minimum 3.5 percent down payment. You’ll also want to make sure you’re working with a contractor who is familiar with 203(k) loans and their timeline.
9. State and local first-time homebuyer programs and grants
- First-time buyer programs and grants, available through states or cities, for down payment or closing cost assistance
- Best for: First-time homebuyers who need closing cost or down payment assistance
Many municipalities offer first-time homebuyer grants and programs in an effort to attract new residents. The aid comes in the form of grants that don’t have to be repaid or low-interest loans with deferred repayment. Some programs may have income limits.
Before buying a home, check your state’s housing authority website for more information, or contact a real estate agent or local HUD-approved housing counseling agency to learn more about first-time homebuyer loans in your area.
First-time homebuyer programs:
10. Native American Direct Loan
- VA-backed program providing direct home loans to eligible Native American veterans to buy, renovate or build homes on federal trust land
- Best for: Eligible Native American veterans
The Native American Direct Loan (NADL) provides financing to eligible Native American veterans and their spouses to buy, improve or build a home on federal trust land. This loan differs from traditional VA loans in that the VA is the mortgage lender.
The NADL has no down payment or mortgage insurance requirements, and closing costs are low. You’re not limited to only one property — you can get more than one NADL. However, eligible properties are only located in certain states, so you’ll need to make sure the homes you’re looking at meet the requirements.
What are the benefits of first-time homebuyer programs?
First-time homebuyer programs, grants and loans are available to help people become homeowners. These programs are a form of financial assistance extended to qualified buyers, usually those who meet certain income restrictions and have strong credit scores.
Diego Corzo, a Realtor with Keller Williams Realty, says that first-time homebuyer programs can create a win-win situation for both the homeowner and the local government, since it can help stimulate the economy in the area.
“Some cities or counties already allotted the funds to these programs and want to use them up,” Corzo says. “These programs are designed to help provide some stability for the community, and (local governments) might lose funding if it doesn’t get used up.”
Here are a few different ways you could benefit from these programs:
- Grants: Some areas offer cash to put towards home-related costs such as your down payment or closing costs.
- Assistance with closing fees: Some loans place a cap on how much is charged for closing costs.
- Deferred payments: Some loans won’t charge interest and won’t need to be repaid until the homeowner sells the home or pays off the mortgage.
- Savings on interest: Some organizations offer to pay for or subsidize interest, or help borrowers qualify for loans with lower interest rates.
- Loan forgiveness: Homeowners who stay in the home for a certain period of time will have a portion of their debt cancelled.
- Down payment assistance: Some programs allow homebuyers to put down a small down payment, or none at all.
Not all of these types of assistance will be available in your area or for your situation. There are also certain restrictions, such as financial need, so do some research or speak with a mortgage professional to see if you qualify.
What to consider with first-time homebuyer programs
Before seeking out first-time homebuyer programs, it’s crucial that you first make sure you meet the definition of a first-time homebuyer. Many nonprofit and government programs consider you a first-time home buyer if you haven’t owned a home within the last three years. This includes investors who own rental or investment properties, whether or not it’s considered your primary residence.
Some government-backed programs, such as an FHA or USDA loan, require that the property meets certain standards before qualifying. There could be income restrictions for local and state programs, as well.
Regardless of what programs you may qualify for, purchasing a home is a major financial decision and shouldn’t be taken lightly. That means look at what you can afford, which includes factoring in maintenance costs.
Once you figure out a realistic budget, speak to a reputable lender that is knowledgeable about first-time homebuyer programs.
“Lenders who have ample knowledge about first-time homebuyer programs in your area and knowing what you might qualify for can save you thousands of dollars in the long run,” Corzo says.
The Buying Process
Now that you’ve decided to take the plunge, let’s explore what you can expect from the homebuying process itself. This can be a chaotic time with offers and counteroffers flying furiously, but if you are prepared for the hassle (and the paperwork), you can get through the process with your sanity intact. Here is the basic progression you can expect:
Find a home
Make sure to take advantage of all the available options for finding homes on the market, including using your real estate agent, searching for listings online, and driving around the neighborhoods that interest you in search of for-sale signs. Put some feelers out with your friends, family, and business contacts, too. You never know where a good reference or lead on a home might come from.
Once you’re seriously shopping for a home, don’t walk into an open house without having an agent (or at least being prepared to throw out the name of someone you’re supposedly working with). You can see how it might not work in your best interest to start dealing with a seller’s agent before contacting one of your own.
If you’re on a budget, look for homes whose full potential has yet to be realized. Even if you can’t afford to replace the hideous wallpaper in the bathroom now, you may be willing to live with it for a while in exchange for getting into a place you can afford. If the home meets your needs in terms of the big things that are difficult to change, such as location and size, don’t let physical imperfections turn you away. First-time homebuyers should look for a house they can add value to, as this ensures a bump in equity to help them up the property ladder.
Consider your financing options and secure financing
First-time homebuyers have a wide variety of options to help them get into a home—both those available to any purchaser, including Federal Housing Authority (FHA)-backed mortgages, and those geared especially to novices. Many first-time homebuyer programs offer minimum down payments as low as 3% to 5% (vs. the standard 20%), and a few require no down payment at all. Be sure to look into or consider:
- HUD’s resource list. Although the government agency itself does not make grants directly to individuals, it does grant funds earmarked for first-time homebuyers to organizations with IRS tax-exempt status. The HUD website has details.3 The FHA (and its loan program) is part of HUD.4
- Your IRA. Every first-time homebuyer can withdraw up to $10,000 out of their individual traditional IRA or Roth IRA without paying the 10% penalty for early withdrawal (but you’ll still pay taxes if you use a traditional IRA). That means a couple could withdraw a maximum of $20,000 ($10,000 from each account) to use toward a first-home purchase. Just know that if you don’t repay the money within 120 days—and you’re under 59½ —it becomes subject to the 10% penalty.You also will owe income taxes on the withdrawal(s).5
- Your state’s programs. Many states, including Illinois, Ohio, and Washington, offer financial assistance with down payments and closing costs, as well as with expenses to rehab or improve a property, for first-time homebuyers who qualify.6 7 8Typically, eligibility in these programs is based on income and, often, the size of a property’s purchase price.
- Native American options. Native American homebuyers can apply for a Section 184 loan.9 This loan requires a 1.5% loan up-front guarantee fee and a 2.25% down payment on loans over $50,000 (for loans below that amount, it’s 1.25%). Section 184 loans can only be used for single-family homes (one to four units) and for primary residences.10
Don’t be bound by loyalty to your current financial institution when seeking a preapproval or searching for a mortgage: Shop around, even if you only qualify for one type of loan. Fees can be surprisingly varied. An FHA loan, for example, may have different fees depending on whether you’re applying for the loan through a local bank, credit union, mortgage banker, large bank, or mortgage broker. Mortgage interest rates, which of course have a major impact on the total price you pay for your home, can also vary.
Once you’ve settled on a lender and applied, the lender will verify all of the financial information provided (checking credit scores, verifying employment information, calculating DTIs, etc.). The lender can preapprove the borrower for a certain amount. Be aware that even if you have been preapproved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, such as finance a car purchase.
Some authorities also recommend having a back-up lender. Qualifying for a loan isn’t a guarantee your loan will eventually be funded: Underwriting guidelines can shift, lender risk-analysis can change, and investor markets can alter. Clients may sign loan and escrow documents, and then be notified 24 to 48 hours before the closing that the lender has frozen funding on their loan program. Having a second lender that has already qualified you for a mortgage gives you an alternate way to keep the process on, or close to, schedule.
Make an offer
Your real estate agent will help you decide how much money you want to offer for the house, along with any conditions you want to ask for. Your agent will then present the offer to the seller’s agent; the seller will either accept your offer or issue a counteroffer. You can then accept, or continue to go back and forth until you either reach a deal or decide to call it quits.
Before submitting your offer, take another look at your budget. This time, factor in estimated closing costs (which can total anywhere from 2% to 5% of the purchase price), commuting costs, and any immediate repairs and mandatory appliances you may need before you can move in. Think ahead: It’s easy to be ambushed by higher or unexpected utilities and other costs if you are moving from a rental to a larger home. You might request energy bills from the past 12 months, for example, to get an idea of average monthly costs.
When you review your budget, don’t overlook hidden costs, such as the home inspection, home insurance, property taxes, and homeowners association fees.
If you reach an agreement, you’ll make a good-faith deposit and the process then transitions into escrow. Escrow is a short period of time (often about 30 days) during which the seller takes the house off the market with the contractual expectation that you will buy it—provided you don’t find any serious problems with it when you inspect it.
Have the home inspected
Even if the home you plan to purchase appears to be flawless, there’s no substitute for having a trained professional do a home inspection of the property for the quality, safety, and overall condition of your potential new home. You don’t want to get stuck with a money pit or with the headache of performing a lot of unexpected repairs. If the home inspection reveals serious defects that the seller did not disclose, you’ll generally be able to rescind your offer and get your deposit back. Alternatively, you can negotiate to have the seller make the repairs or discount the selling price.
Close—or move on
If you’re able to work out a deal with the seller, or better yet, if the inspection didn’t reveal any significant problems, you should be ready to close. Closing basically involves signing a ton of paperwork in a very short time period, while praying that nothing falls through at the last minute.
Things you’ll be dealing with and paying for in the final stages of your purchase may include having the home appraised (mortgage companies require this to protect their interest in the house), doing a title search to make sure that no one other than the seller has a claim to the property, obtaining private mortgage insurance or a piggyback loan if your down payment is less than 20%, and completing mortgage paperwork. Other closing costs can include loan-origination fees, title insurance, surveys, taxes, and credit-report charges.
Congratulations, New Homeowner! Now What?
You’ve signed the papers, paid the movers, and the new place is starting to feel like home. Game over, right? Not quite. Homeownership costs extend beyond down payments and monthly mortgage payments. Let’s now go over some final tips to make life as a new homeowner more fun and secure.
With homeownership comes major unexpected expenses, such as replacing the roof or getting a new water heater. Start an emergency fund for your home so that you won’t be caught off-guard when these costs inevitably arise.
Perform regular maintenance
With the large amount of money you’re putting into your home, you’ll want to make sure to take excellent care of it. Regular maintenance can decrease your repair costs by allowing problems to be fixed when they are small and manageable.
Ignore the housing market
It doesn’t matter what your home is worth at any given moment except the moment when you sell it. Being able to choose when you sell your home, rather than being forced to sell it due to job relocation or financial distress, will be the biggest determinant of whether you will see a solid profit from your investment.
Don’t rely on the sale of your home to fund your retirement
Even though you own a home, you should do your best to save the maximum in your retirement savings accounts every year. Although it may seem hard to believe for anyone who has observed the fortunes some people made during the housing bubble, you won’t necessarily make a killing when you sell your house. If you want to look at your home as a source of wealth in retirement, once you’ve paid off your mortgage, consider the money you were spending on monthly payments as a source of funding for your living and medical expenses in retirement. Also, retirees often want to stay put (despite all the articles you see about downsizing or retiring in exotic locales).