First-time homebuyer loan: What it is and how it works

First-time homebuyer loans can help eligible buyers access affordable mortgages with low down payments and other perks.

Read on to learn about several private and government-funded homebuyer loan options.

Key takeaways

  • First-time homebuyer loans are meant to help eligible buyers afford their first home.
  • Both the private sector—backed by Fannie Mae and Freddie Mac—and government agencies offer first-time homebuyer loans.
  • First-time homebuyer loans can make homebuying more accessible with low down payments, lower income requirements or capped fees.
  • Down payment assistance—in the form of grants and loans—can also help first-time homebuyers manage costs.

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What is a first-time homebuyer loan?

First-time homebuyer loans can help eligible buyers purchase their first home. Both federal and state loan programs as well as low-down-payment conventional loans are available for new homeowners.

Homebuyer eligibility may vary by loan, and some loans could require the borrower to purchase private mortgage insurance (PMI). PMI insures the lender if the borrower can’t make their monthly mortgage payments.

Low-down-payment conventional loans

Low-down-payment conventional mortgages may require as little as a 3% down payment. And they’re often offered through private lenders like banks and credit unions. However, these types of mortgages are backed by two government-sponsored entities—the Federal National Mortgage Association (also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). 

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are both regulated by the Federal Housing Finance Agency. Several low-down-payment conventional mortgage options offered by these two entities include:

  • 97% loan-to-value (LTV) standard mortgage: Backed by Fannie Mae, the 97% LTV standard mortgage is for first-time homebuyers. A loan-to-value ratio is the loan amount divided by the value of the home. So this option offers mortgages that cover 97% of the home with only 3% down. Eligible borrowers can take a homebuyer education course to qualify.
  • HomeReady mortgage: Backed by Fannie Mae, the HomeReady mortgage is for low-income borrowers. It features a 3% down payment and requires a minimum credit score of 620. The HomeReady mortgage allows for down payment and closing cost funds to come from gifts, grants or cash.
  • Home Possible mortgage: Backed by Freddie Mac, the Home Possible mortgage is for very-low- to low-income borrowers and is comparable to the HomeReady mortgage. The Home Possible loan features a 3% down payment and caps on credit fees. The down payment can be funded by things like sweat equity—using construction skills and materials instead of cash—and employer-assistance programs.
  • HomeOne mortgage: Backed by Freddie Mac, the HomeOne mortgage is for a range of first-time homebuyers. It features a 3% down payment and has no geographic or income limits. Borrowers must take out mortgage insurance if putting 5% or less down. They also take a homebuyer education course.

Down payment assistance programs

First-time homebuyers may qualify for down payment assistance offered by state or local agencies. Typically given in the form of a grant or “second mortgage,” these programs can help first-time and other eligible homebuyers cover a down payment and closing costs.

Down payment assistance grants

Down payment assistance grants are often a one-time sum to help first-time homebuyers who may earn low to moderate income. Generally, eligible borrowers can’t make more than 80% of the annual median income. A down payment assistance grant may also have a limit for the home purchase price or a minimum credit score.

Down payment assistance loans

A down payment assistance loan is a second mortgage that’s taken out at the same time as the initial mortgage. These types of loans can vary by their terms, such as:

  • Second mortgage loans: These amortized loans are used to pay for a down payment and closing costs. The interest rate can vary by state but might be comparable to or less than the original mortgage’s rate.
  • Deferred payment or forgivable mortgage loans: These “soft second” mortgage loans may not carry interest and could defer mortgage payments until the borrower sells or refinances the home. Many of these loans might also be forgiven after a specified period of time.

Government-backed first-time homebuyer loan programs

Unlike conventional loans offered through the private sector, government-backed loan options are sponsored by several government agencies. These loans can be ideal for first-time buyers, featuring low- to zero-down payments and lenient credit requirements. These loans are often restricted to certain communities, geographic areas or professions.

Federal Housing Administration loans 

Loans backed by the Federal Housing Administration (FHA) are aimed at helping low-income borrowers with lower credit scores purchase a home. An FHA loan can have a down payment as low as 3.5%, as long as the borrower has a minimum credit score of 580. FHA loans require borrowers to purchase mortgage insurance if their down payment is less than 10%.

U.S. Department of Veterans Affairs loans 

Loans backed by the Department of Veterans Affairs (VA) are designed specifically for veterans of the U.S. military. Borrowers show proof of service history and duty status to qualify. VA loans often feature no down payment, lower interest rates than other loans and no need for mortgage insurance.

U.S. Department of Agriculture loans

Loans backed by the U.S. Department of Agriculture can help low-to-moderate-income residents living in rural areas afford a home with no down payment. These loans help applicants buy, build or rehabilitate a home in an eligible area. Income eligibility requirements can vary state by state. 

Section 184 Indian Home Loan Guarantee program 

The Section 184 Indian Home Loan Guarantee program is backed by the Department of Housing and Urban Development (HUD). According to HUD, the Section 184 program was developed in 1992 to provide homeownership opportunities to Native American communities. An eligible borrower applies with a participating lender which reviews documentation and submits the loan to HUD for approval. The loan is for single-family housing and comes with fixed-rate interest for a period of 30 years or less.

What to consider when buying your first home

Purchasing a home for the first time is a big step. From saving for a down payment to shopping for a mortgage, there’s a lot to consider. Here are some tips for the homebuying process:

  • Check your credit score: A good credit score can help borrowers qualify for better financing or different types of loans.
  • Make a budget: Paying attention to expenses like closing costs, mortgage insurance and property taxes can help borrowers have a clearer picture of how much they can afford
  • Save for a down payment: Knowing the type of mortgage loan and its down payment requirements in advance can help with overall financial planning—and starting to save money
  • Shop for a mortgage: Understanding the specifics of a mortgage can help narrow down the housing market, and being pre-approved for a mortgage might make the offer process easier.

First-time homebuyer loans in a nutshell

First-time homebuyer loans can help you open the door to a new home. Whether the mortgage is secured from a private lender or the federal government, you may be able to make a low down payment and receive other benefits. It’s also possible to receive down payment assistance and get help with closing costs.

Read more about navigating the homebuying process and what questions to ask when buying a home.

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