The myth of the first-time homebuyer loan

By ,
Ask a Lender
January 4, 2018


Key Points

Separate fact from marketing on first-time homebuyer programs

  • FHA loans are open to all borrowers but suit many first-time buyers.
  • Fannie Mae and Freddie Mac offer low-down payment loans.
  • Local and state programs offer numerous first-time homebuyer grants.
  • The VA and USDA offer low-cost loan programs for eligible first-time buyers.

Buying a house for the first time can feel like drinking from a fire hose. With mortgages in particular, new buyers are often faced with a deluge of information and pitches for first-time homebuyer programs. But what exactly is a first-time homebuyer loan?

Is there such a thing as a first-time homebuyer mortgage?

Very few mortgages are actually designed for — or limited exclusively to — first-time homebuyers. What often are called first-time homebuyer loans are simply mortgages designed to meet common conditions that first-time homebuyers need, such as lower down payments, looser credit requirements or subsidized interest rates.

Although loans designed for first-time buyers may make it easier for those with lower income or less in their savings to purchase a home, they often come with limits to how much house you can buy or lender protections such as mandatory mortgage insurance. As such, just because a loan is marketed toward first-time homebuyers does not necessarily mean it is the best option for you.

If you have saved enough money to make a 20-percent down payment, are looking at high-priced properties or have an income higher than the median income in your area, you might find better interest rates or loan conditions by comparing conventional lenders. For first-time homebuyers that need some financial or credit leeway, however, the following programs might be suitable.

Federal Housing Administration (FHA) loans

Anyone searching for first-time homebuyer programs will come across FHA loans, which are government-backed private mortgages with more lenient qualification requirements. FHA loans are not designed specifically for first-time homeowners, but their acceptance of down payments as low as 3.5 percent, credit scores in the 500s and reduced closing costs make them popular among new buyers. These looser requirements come with a cost, however. FHA borrowers who cannot afford a 20 percent down payment must carry mortgage insurance for the duration of their loan, which must be paid monthly along with the mortgage payment.

Fannie Mae and Freddie Mac programs

Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase the bulk of conventional mortgages from lenders, offer special programs that suit first-time homebuyers as well.

Freddie Mac’s Home Possible program offers mortgages with as little as 3 percent down for eligible first-time homebuyers. Fannie Mae also offers a 3-percent down program through their Home Ready initiative, although the program is not limited to first-time buyers. Fannie Mae’s HomePath ReadyBuyer program is a more specialized initiative that offers a closing cost rebate of up to 3 percent for eligible first-time homebuyers purchasing HomePath foreclosure homes.

Remember that being a first-time buyer is not the only qualification factor for these programs; you will need to meet credit and other financial requirements.

Local and state assistance programs

You’re more likely to find housing programs purely for first-time homeowners at the state or local level. These can include government-backed mortgages, down payment assistance, grants and tax rebates. Such programs often carry income limits or are tailored to certain neighborhoods, however. Contact your state housing financing agency (HFA) or explore your state’s page  on the U.S. Department of Housing and Urban Development’s website for programs in your area.

Loans for special populations

If you or your spouse is a veteran, live in an eligible rural or underserved area, or are an American Indian or Alaska Native, there are government-backed mortgage programs that could help you purchase your first home.

Department of Veterans Affairs (VA) loans are known for requiring no money down and no mortgage insurance on loan programs for active service members and veterans. An up-front funding fee does apply, however.

U.S. Department of Agriculture (USDA) loans also offer 100-percent financing, although mortgage insurance is required over the duration of the loan. To qualify for a USDA mortgage, the property you are purchasing must be located in an area designated by the program as underserved.

Programs from conventional lenders

Most major banks and many conventional lenders and mortgage companies advertise first-time homebuyer programs. Often, the programs they tout are little more than marketing terminology, but some conventional lenders do have loan programs that offer special financial benefits to first-time buyers. Many credit unions, for example, offer 100-percent financing, sometimes including closing costs. Some lenders even offer 3-percent grants for first-time homebuyers to help bring the loan up to standards set by Fannie and Freddie on conforming loans. These programs often carry high interest rates, however, so compare carefully to determine the best loan for you, be it government-backed or conventional.

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