First-Time Homebuyer Programs and Assistance

FHA loans are government-insured mortgages designed for first-time buyers and those with lower credit scores. Key features: 3.5% down payment with a 580+ credit score (10% down with 500-579 score), debt-to-income ratio up to 43% (sometimes higher with compensating factors), and seller can contribute up to 6% toward closing costs. The downside: FHA requires mortgage insurance premium (MIP) of 1.75% upfront (rolled into the loan) plus 0.55% annually for the life of the loan on most terms. On a 300,000 USD loan, that is 5,250 USD upfront and 138 USD per month. FHA loans work best for buyers with credit scores between 580-680 who cannot save a large down payment.

VA loans offer the best terms available: zero down payment, no private mortgage insurance, competitive interest rates (typically 0.25-0.5% lower than conventional), and no maximum loan amount in most areas. Eligibility: 90 days of active duty service during wartime, 181 days during peacetime, 6 years in the National Guard or Reserves, or surviving spouse of a veteran who died in service or from a service-connected disability. The VA funding fee (1.25-3.3% of the loan amount) replaces mortgage insurance and can be rolled into the loan. Disabled veterans are exempt from the funding fee. Apply for your Certificate of Eligibility (COE) through va.gov or your lender.

USDA loans offer zero down payment for homes in designated rural areas (which include many suburbs and small towns). Income limits apply: typically 115% of area median income (check eligibility at eligibility.sc.egov.usda.gov). There is a 1% upfront guarantee fee and 0.35% annual fee, both lower than FHA mortgage insurance. USDA loans require a 640+ credit score for automatic approval (lower scores require manual underwriting). The property must be in an eligible area and serve as your primary residence. About 97% of the US land area qualifies as USDA-eligible, including many areas that most people would not consider rural.

Conventional loans from Fannie Mae (HomeReady) and Freddie Mac (Home Possible) allow 3% down payment with income limits (typically 80% of area median income). Advantages over FHA: private mortgage insurance (PMI) cancels automatically at 78% loan-to-value (FHA MIP stays for the life of the loan on most terms), PMI costs are often lower for buyers with 720+ credit scores (40-80 USD per month per 100,000 USD borrowed), and no upfront mortgage insurance fee. The 3% down conventional loan is often cheaper than FHA for buyers with credit scores above 720. Run the total cost comparison for your specific scenario.

Every state has a housing finance agency (HFA) that offers programs for first-time buyers. Common offerings: down payment assistance grants (free money, typically 3-5% of purchase price), forgivable second mortgages (forgiven after 5-10 years of residency), low-interest second mortgages for the down payment, and below-market interest rate first mortgages. Find your state HFA at ncsha.org/housing-finance-agencies. Income limits usually apply (80-120% of area median income). Many programs combine down payment help with a competitive first mortgage rate. These programs have limited funding and can run out, so apply early.

Many cities and counties offer their own homebuyer programs on top of state programs, and they can often be layered together. Examples: city down payment grants (2,000-25,000 USD depending on the city), employer-assisted housing programs (some large employers and hospitals offer 5,000-10,000 USD in down payment help), community land trust programs (reduced purchase prices in exchange for shared equity), and Habitat for Humanity partnerships (sweat equity homeownership). Search your city name plus first-time homebuyer program or contact your city's housing department. These programs are often under-publicized and have less competition than state programs.

A Mortgage Credit Certificate (MCC) provides an annual federal tax credit of 20-50% of your mortgage interest paid (depending on the state), up to a maximum of 2,000 USD per year. On a 250,000 USD mortgage at 7%, you pay roughly 17,000 USD in interest in year one. An MCC at 25% gives you a 2,000 USD tax credit (not a deduction, a dollar-for-dollar reduction in taxes owed). This saves 2,000 USD per year for the life of the loan. MCCs are issued by state HFAs and can be combined with other first-time buyer programs. Apply through participating lenders before closing on your home.

The federal definition of first-time homebuyer is anyone who has not owned a principal residence in the past 3 years. This means: you owned a home 4 years ago and sold it (you qualify), you owned an investment property but never lived in it (you may qualify), you owned a mobile home that was not permanently affixed (you may qualify), and single parents who owned a home with a former spouse (you qualify). Some state programs have different definitions. If you are unsure whether you qualify, contact a HUD-approved housing counselor (free service) at hud.gov/counseling or call 800-569-4287.

Most down payment assistance programs require completion of a HUD-approved homebuyer education course. Options: online courses through Framework (ehomeamerica.org or Framework.org, 75-125 USD, takes 6-8 hours), in-person classes through local HUD-approved counseling agencies (often free or 25-50 USD), and one-on-one counseling sessions (free through HUD-approved agencies). The course covers: budgeting for homeownership, understanding mortgages, the home buying process, and maintaining your home after purchase. Complete this early in your search. The certificate is required before closing and is valid for 1-2 years depending on the program.

Most assistance programs cap eligibility at 80-120% of the area median income (AMI). AMI varies significantly by location: a family of 4 earning 90,000 USD qualifies in some counties but not others. Programs typically count gross household income (all adults living in the home), not just the buyer's income. Income documentation needed: last 2 years of tax returns, last 30 days of pay stubs, and documentation of all income sources (child support, freelance work, investment income). Some programs allow income averaging over 2 years (helpful if your income recently increased). Check specific program income limits before applying to avoid wasting time on programs you do not qualify for.

Not every lender participates in state and local assistance programs. Many large banks do not offer HFA programs or down payment assistance. Look for: lenders listed as participating on your state HFA's website, local credit unions (often participate in the most programs), and mortgage brokers who specialize in first-time buyers. Ask specifically: Do you offer [your state] HFA programs? Do you work with [your city] down payment assistance? An experienced lender can identify all programs you qualify for and layer them for maximum benefit. The wrong lender will only offer their standard products and you will miss thousands in free assistance.

Many programs can be combined. A common stack: FHA or conventional first mortgage with a below-market rate from your state HFA (saves 0.25-0.5% on interest rate), plus a state down payment assistance grant covering 3-5% of the purchase price, plus a city-specific forgivable second mortgage for closing costs (3,000-10,000 USD), plus a Mortgage Credit Certificate saving 2,000 USD per year in taxes. On a 250,000 USD home, this combination could reduce your out-of-pocket costs from 15,000 USD (6% down plus closing) to under 2,000 USD while saving you 200-400 USD per month compared to a standard mortgage.

Most assistance programs operate on a first-come, first-served basis with annual funding caps. State programs may run out of funds partway through the fiscal year (especially popular programs with large grants). Submit applications as early as possible once you find a home. Have a backup plan: if your preferred program runs out, know which alternative programs you qualify for. Some programs have waitlists that open periodically. Sign up for email notifications from your state HFA and local housing agencies to be alerted when new funding cycles begin or programs reopen.