Thinking about purchasing your first home?
It might be more doable and more affordable than you’d think.
Qualifying first-time homebuyers have access to special mortgage products that other homebuyers don’t. You may even be able to finance your first residence without any down payment.
Below, we’ll walk you through first-time homebuyers loans (FTHB), including their benefits and what to know before borrowing.
What is a First-Time Homebuyers Loan?
A first-time homebuyer loan helps people become homeowners. Specific criteria and benefits of a first-time home buyer loan vary depending on the loan you choose and your geographic location. In general, though, this type of loan assists qualified borrowers who have at least a decent credit score and meet income restrictions.
First-Time Homebuyer Loan Programs
Although not all are exclusively just for first-time home buyers, the following loan programs make owning your first home more affordable.
- Insured by the Federal Housing Administration
- Great for individuals with low credit scores
- As low as 3.5% down
- Backed by the U.S. Department of Veterans Affairs
- For military personnel, veterans, and their families
- No down payment required
- Guaranteed by the U.S. Department of Agriculture
- For low-income borrowers moving to qualifying rural areas
- No down payment required
- Backed by the U.S. Department of Housing and Urban Development (HUD)
- For teachers, EMTs, firefighters, and law enforcement officers
- Provides a 50% discount on selected homes in revitalization areas
- Must live in the property for 36 months
Fannie Mae or Freddie Mac Loan Program
- Conventional first-time home buyer loans
- For borrowers with strong credit
- Requires a 3% down payment
Local or State Programs
- Varies depending on where you live
- Typically provide grants for a down payment or help with closing costs
Home Renovation Loan Programs
- Finance home purchase plus improvements in one loan
- Energy Efficient Mortgage Program
- FHA 203(k) Loans
- CHOICERenovation Loan
- HomeStyle Renovation
You might also qualify for First Time Home Buyer Grants.
Benefits of a First-Time Homebuyers Loan
When you borrow a first-time home buyers loan, you receive several perks that you wouldn’t get with a normal mortgage. Why? Because the whole point of the loan is to make purchasing a home more affordable for people who otherwise wouldn’t qualify for a traditional mortgage.
You May Not Need to Make a Down Payment
With most conventional mortgages, you need to save up a 15% to 20% down payment. First time home buyers can sometimes borrow and purchase a home with 0% down. That means a major obstacle to homeownership is now off the table. You won’t need to save up thousands of dollars for a down payment.
Whether you qualify for 0% down or not depends on the program you go with. For example, VA Loans and USDA Loans don’t require a down payment.
If you’re able to, you can always put down more than the minimum. Doing so would lower the amount you need to borrow, the overall cost of the home, and your monthly payment.
If You Do Need a Down Payment, It’ll Be Small
Other programs still require a down payment, but it’s a lot smaller. The amount is usually around 3% or 3.5%. For example, an FHA loan requires only a 3.5% down payment if your credit score is below 580.
On a $250,000 house, that’s only $5,250 you’ll need to save up. It might seem like a lot, but it’s much less than the $22,500-$30,000 you’d need with a conventional mortgage.
You Might Save Money On Fees
FTHB loans limit how much a lender can charge in fees. Your savings will vary depending on the program you choose. For example, some state programs provide borrowers with a grant that covers closing costs, which are often two percent to five percent of the purchase price.
It Frees Up Your Savings to Pay Down Other Debt
Do you already have substantial savings? If so, a first-time home buyer loan gives you flexibility. You can put your savings toward other financial goals instead of a large down payment.
Financial advisors like Dave Ramsey recommend paying off debt from student loans, credit cards, and medical bills before paying down a mortgage. Since mortgage interest rates are at a record low in 2020, it’s likely any other debt you have has a much higher interest rate. In other words, that debt is more expensive, even if it’s a smaller dollar amount than your mortgage.
What to Know Before Borrowing a First-Time Homebuyers Loan
First-time home buyer loans are riskier for a bank than a regular mortgage because you don’t own very much equity in the home. For that reason, these loans come with more restrictions than a conventional mortgage might, including limitations on the home you can purchase.
Make sure you’re aware of the following restrictions if you’re planning to go through a first-time homebuyers loan program:
You Might Not Be Able to Get the Home You Want
The loan programs restrict the type of house you can purchase. Some programs put a dollar limit on your purchase, so you may not be able to afford the nice expensive home you had your eye on.
On the flip side, you can’t purchase a rundown home either (unless you go with an FHA 203k rehabilitation loan or another renovation loan). The home must be in good condition and free from safety hazards like loose railings, lead paint, broken steps, etc.
For borrowers interested in the Good Neighbor Next Door Program, you can only purchase homes listed on the HUD database.
Not Every Seller Will Accept Your Form of Financing
Some sellers are wary of first-time home buying programs, especially FHA. Here’s why:
Sellers Fear Their Home Won’t Meet Health & Safety Standards
For FHA loans, the home needs a regular appraisal and a property evaluation. The appraiser must ensure the home meets HUD’s health and safety requirements. The requirements are stricter than just the typical appraisal a conventional mortgage lender requires.
A seller who doesn’t think their home can meet those standards as-is simply won’t accept FHA offers.
Sellers Also Fear FHA Loans Will Fall Through During Underwriting
A loan can then fall through during underwriting for a number of reasons, including a bad credit score, insufficient funds for closing costs, or too high of a debt-to-income ratio.
Sellers fear FHA loans will fall through because FHA borrowers have lower credit scores on average than conventional loan borrowers do. In a seller’s eyes, that increases the likelihood that an FHA loan would fall apart during underwriting.
Looking at the numbers, though, an FHA loan and conventional loan have similar success rates.
According to data from Ellie Mae’s Origination Insight Report from September 2020, FHA loans have a 74.9% closing rate, and conventional loans have a 77.6% closing rate. There’s only a 2.7% difference.
You Need to Live in the House
The goal of the loan program is to help people become homeowners, not landlords. You must live in the home you purchase, and it must be your primary residence for a specified amount of time. That being said, you cannot rent out the house right away.
You Might Need to Pay PMI
Most homebuyers who put less than 20% down when they purchase their home need to pay private mortgage insurance (PMI). It’s a fee equal to 0.5 to 1% of the mortgage that’s added to your monthly payment. PMI protects the lender if you stop paying your mortgage because it guarantees they’ll still get paid.
With some loans, you stop paying PMI as soon as you have 80% equity in your home. For other programs, you must pay PMI until you pay off the loan in full—or refinance.
First-Time Homebuyer Programs & Student Loans
If you have student loans, you’re probably wondering how those fit into the homebuying process.
Assuming you have a stable job and plan to stay in your area for a while, buying a home with a low-cost first-time homebuyer program vs. renting usually makes sense for student loan borrowers.
- A no or low down payment frees up your savings to pay down your student loans, which generally have a higher interest rate than a mortgage
- In most areas, paying a monthly mortgage is cheaper than renting, freeing up your budget for paying off student loans or other financial goals
Of course, just because it might make sense to buy in your area doesn’t mean you’ll be able to.
The main obstacle student debt holders face is having a debt-to-income (DTI) ratio that’s too high. Lenders like to use the 28/36 rule. No more than 28% of gross monthly income should go toward your housing expenses. No more than 36% should go toward total debt, including housing. If you already have a high DTI, you may need to pay down your loans more before purchasing a home.
At the very least, knowing your DTI ratio will help you decide on a feasible budget for your first home.
For more details on buying a house with student loans, check out these articles:
- Should I Pay off Student Loans or Buy A House?
- Buying a House with Student Loans: Everything You Need to Know
- Getting a Mortgage With Student Loans
Final Thoughts on First-Time Homebuyer Programs
As you can see, first-time homebuyer loan programs making homeownership more affordable for a larger number of Americans, including student loan borrowers. Just make sure you understand the ins and outs of whichever program you choose so that you know how much you’ll need to put down, whether you need to pay mortgage insurance, and what types of homes you can purchase.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. (1)The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation. (2)$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. (3)This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 1/27/2021. Variable interest rates may increase after consummation.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
Ascent: Ascent’s undergraduate and graduate student are funded by Bank of Lake Mills or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 12/1/2023 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs require interest-only payments, the shortest loan term, and a cosigner, and are only available to our most creditworthy applicants and cosigners with the highest average credit scores.
*The minimum amount is $2,001 except for the state of Massachusetts. Minimum loan amount for borrowers with a Massachusetts permanent address is $6,001.