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First-time homebuyer benefits

Grant and loan programs designed for first-timers

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Written by Jennifer Schurman
Edited by Cassidy McCants
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First-time homebuyers made up 34% of all buyers in 2021, according to a report from the National Association of Realtors (NAR). Given that over a third of all home sales are attributed to first-time buyers, it makes sense that there are plenty of assistance programs and loans available to help new homebuyers finance their first homes.

If you’re a newbie when it comes to mortgages and homebuying, you might be able to get assistance with your down payment, closing costs and more. If you’re lucky (like one of our reviewers from Alabama), you’ll work with a mortgage lender and loan officer who can walk you step-by-step through the process. This isn’t always how it goes, though, so it’s important to have some knowledge of your options as a first-time buyer.

Benefits of being a first-time buyer

First-time homebuyers can take advantage of multiple programs and benefits catered to their needs. For instance, you might be concerned about your down payment, which is generally 6% to 7% of the home’s sale price for first-time buyers. However, there are programs to help cover your down payment as well as the closing costs (which average 2% to 5% of the sale price).

If the First-Time Homebuyer Act of 2021 passes, eligible homebuyers will receive a refundable tax credit of up to $15,000 dollars.

There are also loans that require small down payments, like Federal Housing Administration (FHA) 203(b) loans, and loans that don’t require down payments at all, like U.S. Department of Agriculture (USDA) Single Family Housing loans.

At times, the federal government has further incentivized homeownership by offering tax credits to first-time homebuyers. Unfortunately, the tax credit for first-time homebuyers from the 2008 Housing and Economic Recovery Act expired in 2010.

However, at the time of publishing, there’s a bill with Congress (the First-Time Homebuyer Act of 2021) that, if passed, would offer first-time buyers who qualify a refundable tax credit equal to 10% of their home’s purchase price.

How the credit would work: If your tax bill for the year were $5,000 and you received a refundable tax credit of $15,000, you would get a $10,000 check from the federal government for that year. Just be aware that if the bill passes in its current form, this tax credit is capped at a maximum of $15,000.

First-time homebuyer programs

Some initiatives for first-time buyers offer down payment and closing cost assistance; others reduce the sale price of a home. Federal and state government agencies typically offer these programs, but nonprofit organizations and individual lenders may also offer their own incentives.

The U.S. Department of Housing and Urban Development’s (HUD) Good Neighbor Next Door program and Fannie Mae’s HomePath Ready Buyer program are two popular options. Outside of these two programs, there are also state and local grant programs available, so check with your local housing authority or housing finance agency to learn more about those programs.

Good Neighbor Next Door

HUD’s Good Neighbor Next Door program earmarks certain homes in revitalization areas to be sold to eligible candidates for a 50% discount off the list price.

Eligible buyers may include teachers, law enforcement officers, firefighters and emergency medical technicians. Qualified buyers must also commit to living on the property as their primary residence for at least 36 months.

HomePath Ready Buyer

Fannie Mae’s HomePath Ready Buyer program can help cover some of the closing costs for individuals who complete a homeownership education course and purchase a HomePath-designated property.

How to qualify for a first-time homebuyer loan

Most first-time buyers (61%, according to NAR) choose to finance their homes with conventional loans. However, there are government-backed alternatives, including FHA, VA and USDA loans, that could be better for new buyers. FHA loans make up about 23% of loans taken out by first-time buyers; VA loans account for 6%.

All these mortgage options have varying credit score, down payment and debt-to-income (DTI) ratio requirements. Consider the following to find the right loan for you.

FHA loans

FHA loans are offered by Federal Housing Administration-approved lenders and backed by the federal government.

According to the National Association of Realtors, FHA loans account for about 23% of first-time buyers’ mortgages.

While the FHA offers a number of loan programs, its 203(b) loans are popular among first-time homebuyers because they tend to have lower down payment and credit score requirements than conventional loans. We’ve provided requirements for that program below, but other FHA loan programs may have different policies.

FHA loan requirements

  • Credit score: 500
  • Down payment: 10% for borrowers with credit scores between 500 and 579; 3.5% with a score of 580 or higher
  • DTI: Varies by lender; most require a DTI ratio of 43% or lower

VA loans

VA loans are available to active-duty military members, veterans and their surviving spouses. As with USDA and FHA loans, you can apply for a VA loan through an approved lender. To apply, you’ll need to show a VA Certificate of Eligibility, though.

VA-backed purchase loans are guaranteed by the U.S. Department of Veterans Affairs, making them more appealing to lenders. This, in turn, means that lender requirements for these loans are often very low. We’ve broken down what it takes to get a VA-backed purchase loan below.

VA loan requirements

  • Credit score: No credit score requirement
  • Down payment: No down payment required (as long as the home’s sales price does not exceed its appraised value)
  • DTI: No maximum DTI ratio; however, lenders must provide justification if your DTI is over 41%

USDA loans

USDA loans are available thanks to the U.S. Department of Agriculture, and they’re used for purchasing or refinancing properties in rural areas. As with FHA and VA loans, you can get USDA loans from approved lenders.

The USDA has multiple loan programs, but its Section 502 Guaranteed Loan Program is its most popular option for single-family homes. This program was created to encourage homeownership for low- to moderate-income earners in rural areas. We’ve included eligibility criteria for these loans below.

USDA requirements

  • Credit score: No minimum credit score requirement; lenders who offer USDA loans may require a score of at least 640, though
  • Down payment: No down payment required
  • DTI: 41% or lower; borrowers with higher credit scores and the ability to prove stable employment may have some flexibility

Conventional loans

Conventional mortgages are offered by private lenders (like banks and credit unions) without government backing, which means they tend to have stricter requirements. However, these criteria vary by lender.

Conventional loan requirements

  • Credit score: Varies by lender and loan amount; most require a credit score of at least 620
  • Down payment: Can be as low as 3%; 20% needed to avoid private mortgage insurance (PMI)
  • DTI: 36% or lower in most cases; if your DTI ratio is higher (generally up to 50%), you may still qualify if you have a higher credit score or cash reserves

How to qualify for a first-time homebuyer grant

First-time homebuyer grants generally cover part of your down payment or your closing costs. Grants may be preferable to loans because they usually don’t require repayment.

However, each grant program has varying requirements. Some require you to keep the home as your primary residence for a specified period of time (usually a few years). Some have income caps for qualifying recipients.

At the time of publishing, the Downpayment Toward Equity Act of 2021 has not made it through Congress, but if passed, it would require you to be a first-generation homebuyer using a government-backed mortgage.

It may take some legwork, but you’ll need to check out the eligibility criteria for each first-time homebuyer grant you’re interested in to see if you qualify.

Down payment assistance programs

Down payment assistance programs can help first-time homebuyers with the initial costs of buying a home. This type of assistance is generally offered as either a grant or a loan. The qualifications for assistance vary, but you’ll probably need a credit score of 620 or higher to qualify. You can also expect income restrictions, depending on your location.

Bottom line

If you’re a first-time homebuyer, there are a lot of incentives you can take advantage of to make the process easier. You may want to look into loan and grant programs that can make your initial costs easier to afford. Some options, like HUD’s Good Neighbor Next Door program, can reduce the purchase price of a home, but you may have to buy a property in a specific area to take advantage of this kind of assistance.

Government-backed loans, like FHA and USDA loans, tend to cater to first-time buyers since they usually have less stringent requirements than conventional loans. When comparing loan options, just make sure to evaluate the overall cost of the loan (including interest, closing costs, etc.) to find the best option for you.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
  1. National Association of Realtors, “2021 Profile of Home Buyers and Sellers.” Accessed April 26, 2022.
  2. Congress.gov, “H.R.2863 - First-Time Homebuyer Act of 2021.” Accessed April 20, 2022.
  3. U.S. Department of Housing and Urban Development (HUD), “ABOUT GOOD NEIGHBOR NEXT DOOR.” Accessed April 20, 2022.
  4. HomePath by Fannie Mae, “To be eligible for the closing cost assistance.” Accessed April 20, 2022.
  5. National Association of Realtors (NAR), “Tackling Home Financing and Down Payment Misconceptions.” Accessed April 20, 2022.
  6. U.S. Department of Veterans Affairs, “Purchase Loan.” Accessed April 19, 2022.
  7. U.S. Department of Agriculture (USDA), “Single Family Housing Programs.” Accessed April 19, 2022.
  8. House.gov, “Discussion Draft: Downpayment Toward Equity Act of 2021.” Accessed April 20, 2022.
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