The federal government and all 50 states offer first-time homebuyer loans with incentives from 0% interest to zero down payment amounts and reduced monthly costs. There's also plenty of programs to reduce your upfront and total home ownership costs.
To complement, Open Listings offers a commission refund of up to 50% at purchase, which can cover up to 1/3 of your down payment or all of your closing costs.
With Americans increasingly using loans to fulfill their dreams of homeownership, the Mortgage Bankers Association reports that 99% of all first-time borrowers successfully convert on their loans.
Thankfully, there are lots of government grants and first-time homebuyer programs designed to help you secure a great rate.
We're getting way, way deep into the weeds of all the options available to you as a first-time home buyer. We've outlined all loans you may qualify for, as well as the first-time homebuyer programs that could help make your home goals way more doable and affordable.
So, what mortgage options are available for first-timers?
1. FHA loans
The Federal Housing Administration (FHA) insures loans from private lenders to allow greater opportunities for moderate to low-income home buyers.
FHA loans are available to everyone. Individuals with a credit score of 580+ may qualify for a loan with as little as 3.5% down of the total purchase price.
Individuals with credit scores less than 580 must furnish a down payment that’s at least 10% of the purchase total. The loan amount maximum is $625,000 but may be higher in some counties.
Any down payment amount less than 20% will incur private mortgage insurance (PMI). This is a monthly premium that safeguards lenders from riskier loan amounts. If your down payment amount exceeds 10%, you will be able to cancel your monthly PMI once your total home value (equity) reaches 20% at market price.
FHA loans are best for buyers with low to average credit and minimal debt. Eligibility is affected by the debt-to-income ratio (DTI), which accounts for monthly debt payments and total debt overall. Recently, DTI has increased from 28/36 to 31/43.
This means that you’ll qualify for an FHA loan so long as no more than 31% of your total monthly income goes to paying off the mortgage amount. Also, no more than 41% of your monthly income may be used to pay off existing debt of any kind, mortgage included. Moving forward, having less debt will simplify the homebuying process.
To apply for an FHA loan, search for a guaranteed lender on the Housing and Urban Development website.
2. USDA loans
Thinking about making those small-town dreams come true?
The United States Department of Agriculture (USDA) provides 0% down payment, low-interest rate mortgages to rural property owners. “Rural” constitutes any town under 20,000 persons, so 97% of U.S. land qualifies for USDA financing. Approximately 109 million Americans are currently eligible for a USDA first-time home buyer loan.
To qualify, applicants must demonstrate their means to pay with an income of 115% the median income for the area.
Additionally, the home-in-question must be for less than 1,800 square feet and hold a market value below the area loan limit. In pricier markets, you could secure a USDA loan of up to $500,000.
Find the loan guarantee amount by location and discover where USDA loans are available with the USDA loan map.
Like FHA loans, the government sponsors the mortgage and private lenders handle the transaction. Three USDA loan programs exist:
- Direct loans: Reserved for low to very-low income applicants, these offer interest rates as low as 1%. Borrowers are subject to mortgage insurance (PMI) if down payments are under 20%.
- Loan guarantees: Similar to an FHA loan, the government insures the loan allowing a low-interest rate even without a down payment. Again, PMI applies to lower down payments.
- Home improvement grants and loans: To facilitate home repairs and upgrades, these financial gifts or low-interest loans can often total $27,500 for home upgrades.
Applicants with a credit score of 620+ will most easily qualify, while those with credits scores below 580 will receive a higher interest rate. Even those with no credit history may apply by providing proof of payment to monthly bills.
The DTI ratio for USDA loans is set at 29/41. This means that 29% of pre-tax income can go towards the monthly mortgage payment. A total of 41% of monthly pre-tax income can be used for all debt, including a mortgage.
The USDA also prioritizes these loans to those without “decent, safe or sanitary housing” and/or those who cannot receive a loan from traditional sources. If you’ve ever considered home buying an unlikely dream, a USDA loan may be a perfect fit for you.
To apply for a USDA loan, contact a guaranteed loan specialist in your state.
3. VA loans
VA loans are insured by the Department of Veterans Affairs and available to active or retired military service members or surviving spouses. They require no down payment and no mortgage insurance.
However, VA loans do require a one-time funding fee that varies by the amount of the down payment and type of service rendered. For example, a zero down payment would require a fee of 2.15% of the loan amount, but a 10% down payment needs only 1.25% of the total.
VA loans may only be used for a primary residence, and the loan limit will vary by county between nationwide averages of $417,000-625,000.
While the government doesn’t require a minimum credit score, private lenders who offer the loans do. Most ask for a credit score of 620+ and want proof that borrowers have income enough to repay the loan and don’t carry excessive debt. For those who serve, VA loans are a token of appreciation.
To apply for a VA loan, visit The Department of Veterans Affairs assistance portal.
4. Fannie Mae and Freddie Mac loans
Fannie Mae and Freddie Mac are government-sanctioned mortgage lenders that provide loans to low and moderate-income borrowers.
These lenders provide two options for first-time home buyers:
The HomePath Ready Buyer Program: The HomePath Ready Buyer Program allows potential buyers up to 3% in closing costs assistance for homes listed on HomePath.com, a site for foreclosed-on Fannie Mae properties. For a home of $400,000, you save $12,000 at signing.
To qualify for this first-time home owner grant, would-be buyers must complete a refundable, 4-6 hour homeownership education course.
Conventional 97 loans: This is a low down payment mortgage program that allows down payments as low as 3%. To be eligible for a Conventional 97 mortgage, you must fulfill the following requirements:
- The loan amount doesn’t exceed $421,000
- The property is a primary residence
- The home buyer hasn’t owned a home in the past three years
- The property is a single family unit
- The mortgage term is fixed at 30 years
Borrowers qualify with a credit score of 620+. For any down payments lower than 20%, mortgage insurance will be required. However, once house equity reaches 20%, PMI fees are canceled.
5. Energy-efficient mortgage (EEM)
Energy-efficient mortgage loans (EEM) are a government-sponsored home buyer program that allows you to borrow money to pay for energy-efficient upgrades. Aimed at creating “green” living spaces that save resources and lower utility costs, these are applicable to existing homes and future home purchases.
The program covers upgrades like:
- Double paned windows
- Modern HVAC
- Improved insulation
- Tankless water heaters
An upgrade is “energy-efficient” if the cost of the improvement is less than the total cost of the energy saved during the lifespan of the improvement. For example, if you install $250 windows to prevent heat loss in winter, those windows should save more than $250 during their use.
To assess home energy efficiency prior to improvements, you’ll need to complete a Home Energy Assessment.
EEM loans aren’t second mortgages but are rolled into an existing home loan. The benefit is that your down payment won’t increase, you’ll save money monthly throughout the loan term, and you’ll increase your home value. Overall, EEMs are a smart choice for energy-conscious homeowners.
If you qualify for a primary mortgage, you should qualify for an EEM. Three types of EEM are available:
- Conventional EEM: Available via lenders working with Fannie and Freddie Mac, this allows you to borrow up to 15% of appraised home value for improvements.
- FHA EEM: With benefits similar to FHA loans, you may borrow 5% of the whichever is the lower – you appraised home value, 115% of the median family home in your area, or 150% of the Freddie Mac limit for your area.
- VA EEM: Rolled into the VA loans for service members and family, this permits an additional $6,000 for home improvements are part of a refinance loan.
6. Good neighbor next door loans (HUD)
The Good Neighbor Next Door Program offers single family homes at a 50% discount to eligible applicants. These grants are available to pre-K-12 teachers, law enforcement officers, firefighters, and emergency medical technicians.
As an urban renewal program sponsored by The Department of Housing and Urban Development (HUD), this makes one-unit homes in revitalization areas available to applicants at a 50% discount. To find HUD-sponsored homes, check these California listings.
To qualify, you must be actively employed in these careers and live in the property for 36 months. An assessor will confirm your residency and ask you to submit proof to HUD every year.
This first-time home buyer grant is a second mortgage, meaning no interest or payments are required until the primary mortgage is complete. This simultaneously frees you from high monthly payments and lets you buy a bigger home.
Say you find a HUD home for $400,000. You’ll immediately save $200,000 and your first mortgage will be for $200,000. If you choose an FHA loan at 10% down, you’ll pay only 20,000 upfront – plus you'll save with an Open Listings commission refund of up to 50%.
For this $400,000 home, you’ll instantly recoup 50% of 3-5% of $400,000. That means you keep $12,000 cash in your pocket to be used at signing. Effectively, this will wipe out the closing costs and save hugely on your down payment amount every time.
With HUD and Open Listings savings combined, you could walk into a $400,00 home for only $8,000 down.
First-time home buyer programs in California and Washington
Besides federal assistance, every state offers a variety of first-time home buyer programs and grants. To participate, states require buyers to participate in a 5-hour educational course.
Afterwards, you’ll get prequalified for a loan amount to see how much you can afford. Next, sign up to find a home that fits your budget with the help of a trusted real estate advisor.
California first-time home buyer programs
CalHFA Conventional Program
The CalHFA Conventional Program is a first mortgage offering a 30-year loan term.
The maximum home amount may not exceed $421,000 and the income limits may not exceed the current rates. To determine your eligibility, income ceiling, and determine your interest rate, check with a CalHFA approved lending officer.
CalPLUS Conventional Program
The CalPLUS Conventional program is a first-time mortgage loan with a slightly higher interest rate than the CalHFA Conventional Program.
This loan may be combined with CalHFA Zero Interest Program to keep minimize closing costs and reduce the down payment.
Check here to see if you qualify.
California also offers state-sponsored versions of federal first-time home buyer programs:
- CalHFA FHA Program: 30-year fixed loan with low-interest rates
- CalPLUS FHA Program: 30-year fixed loan with higher interest but lower upfront costs
- Cal-EEM + Grant Program: Energy-efficiency grant attached to 30-year fixed loan
Washington first-time homebuyer programs
Home Advantage First Mortgage Program
The Home Advantage First Mortgage Program helps buyers (first-time or otherwise) qualify for a larger mortgage.
You may take a loan for up to 97% of the home’s purchase price or appraised value, whichever is lower. The Washington State Housing Finance Commission (WSHFC) offers these at below-market interest rates.
Eligibility requirements include:
- Annual income may not exceed $97,000
- Credit score of at least 620
- Total debt-to-income ration of 45%
- Single-family units only
- Borrower must occupy property as primary residence within 60 days of closing
Energy Spark Home Loan
Similar to EEM loans, Energy Spark Home Loans lower monthly utility expenses by lending money for energy-efficient home improvements. The goal is to incentivize buying new, energy-efficient homes or fixing older homes.
This provides a 0.25% interest rate reduction for a 30-year fixed mortgage and may be rolled into the Home Advantage First Mortgage program. Effectively, EEM loans lower both monthly payments and monthly energy bills.
To be considered eligible:
- New homes must exceed WA state building standards by at least 15%
- New homes must be certified “green” by home builder
- Older homes may be upgraded to 10% energy savings over current use
- Older homes require energy audit ($300-600)
House Key Opportunity First Mortgage Program
The House Key Opportunity First Mortgage Program is a state bond program which uses its proceeds to provide below-market mortgage loans. Meant for low to moderate income buyers, it helps those with modest means qualify for a larger mortgage with accommodating loan underwriting.
Eligibility requirements mirror those of the Home Advantage program above. The only variations are:
- Borrowers must be first time home buyers (haven’t owned a home within three years)
- Income limits and loan limits vary by home location and can be found here
Maximize your savings
First-time home buyer programs are available nationwide. Because the government wants to assist homebuyers, it offers numerous ways to earn 0% interest, zero down payment, and reduced-cost monthly payments.
To maximize your ultimate home value and minimize total costs, take advantage of the programs that complement your mortgage budget.
On top of that, if you buy with Open Listings, you’ll get a commission refund of up to 50%. When coupled with first time home buyer loans, it's often enough to take care of costly closing costs.
Ready to find your new home? Set up your Open Listings feed to house hunt 24/7. Never miss a potential house match.
This post was originally published in September 2017 and last updated in December 2017.