What Is a First-Time Homebuyer Loan?

Definition and Example of a First-Time Homebuyer Loan

A first-time homebuyer loan is a mortgage with features that target the needs of first-time homebuyers. Not having a good credit history or significant savings for a down payment can make homeownership less accessible to many. First-time homebuyer loan programs can help by having a lower minimum credit score and/or down payment requirement so it’s easier to qualify. Usually featuring more lenient requirements, this type of loan is a good option if you have challenges affording upfront costs or meeting higher credit score requirements.

A popular option for first-time homebuyers is the Federal Housing Administration (FHA) loan program. It offers easy credit qualifying and as little as 3.5% for a down payment.

How Does a First-Time Homebuyer Loan Work?

A first-time homebuyer usually refers to someone who hasn’t owned a principal residence within the last three years. This means you could meet this definition as a past homeowner.

First-time homebuyers can also include someone who has only owned a place with a spouse and is either displaced or a single parent. Many suitable loans, however, aren’t exclusive to first-time buyers and are available to anyone who meets the financial criteria and buys a qualifying property.

What makes first-time homebuyer loans appealing is that you might not need to make a down payment at all, or you might only need to pay 3% to 10% down. However, making a down payment under 20% can mean paying for mortgage insurance (PMI) on a conventional loan, while other programs with low down payment requirements may have similar costs. Some lenders do offer incentives that waive mortgage insurance requirements, though.

First-time homebuyer loans also work by offering flexibility in other areas. For example, if you owe a lot of debt relative to your income, your lender might allow a higher debt-to-income ratio if you have a high credit score to compensate. If you earn below your area’s median income, you could gain access to loan programs that allow for flexible down payment sourcing and provide lower rates for interest and PMI. In addition, if you’re concerned about your credit, some options allow for subprime credit scores with a higher down payment.

Once extended, first-time homebuyer loans work like other mortgages. You’ll make monthly mortgage payments and pay interest and any other required costs until you’ve paid off the loan. Since your lender has let you borrow the money, your home is the lender’s collateral until you’ve paid off your debt. That means they can potentially seize the home if you don’t meet your obligations.

First-Time Homebuyer Assistance Programs

Local and state agencies and private organizations offer special first-time homebuyer programs to help with upfront costs. Used in conjunction with a qualifying mortgage program, such programs provide a grant, interest-free loan, or forgivable loan toward your down payment and/or closing costs. For example, you might get assistance worth 5% of your home’s price. Such programs usually target borrowers with low or moderate incomes and may focus on particular groups such as military personnel, first responders, or recent graduates.

The primary qualification is to meet the typical first-time homebuyer criteria, but some programs consider whether it’s your first home in the target area instead. In addition, you’ll need to meet the program’s credit score and income requirements. You’ll usually also need to buy a property in the program’s area, take a homebuyer’s education course, and reside in the home for a set number of years to avoid repaying forgivable assistance.

Types of First-Time Homebuyer Loans

You can find various government and conventional loan options that can fit your needs as a first-time homebuyer. Qualifications, fees, and terms vary by type.

FHA Loans

Federal Housing Administration (FHA) loans are loans backed by the government that can help those with credit challenges—and they don’t have income limits. You can qualify with a credit score as low as 500, and down payment amounts range from 3.5% to 10% depending on your credit score. These loans require upfront and annual mortgage insurance premiums, so it can be a more costly option for certain borrowers.

VA Loans

U.S. Department of Veterans Affairs (VA) loans allow you to buy a primary residence without a down payment, loan amount limit, or mortgage insurance, although you do pay a funding fee. You’ll need to have a qualifying military service relationship or meet the criteria for surviving spouse. These loans offer additional flexibility since the program doesn’t have a credit score requirement and offers flexibility for income. This allows lenders to assess your overall financial picture.

USDA Loans

The government-backed U.S. Department of Agriculture (USDA) loan program can help you buy a primary residence in an eligible rural area. This income-based loan option requires that you don’t make over 115% of the area’s median income. If you qualify, you can avoid a down payment. Like with the FHA loan, there are upfront and ongoing mortgage insurance payments required. There’s no program-specific minimum credit score, so lenders can decide.

Conventional Loans

Unlike the government-backed programs, conventional loans will be guaranteed by the agencies Freddie Mac or Fannie Mae. They typically have more stringent requirements for credit scores and down payments, and require PMI. However, there are more flexible first-time homebuyer programs that target people with low or moderate incomes.

The Freddie Mac Home Possible and Fannie Mae HomeReady programs allow for 3% down payments and require a 620 or higher credit score. Depending on the program, you can qualify if you don’t exceed 80% to 100% of your area’s median income. In addition, you may use alternative income sources such as rental income for showing your ability to afford the mortgage.

Freddie Mac also has the HomeOne program for first-time homebuyers. This has the same low 3% down payment requirement, but without the income requirements of the Home Possible program.

Housing finance agencies also have access to special income-restricted Fannie Mae and Freddie Mac programs that are compatible with down payment assistance programs.

How To Get a First-Time Homebuyer Loan

You can obtain first-time homebuyer loans through credit unions, banks, and other institutions. Meeting with a lender will provide insight into first-time homebuyer loans and programs for which you might qualify. This will require discussing your financial situation and the upfront costs involved in buying a home. You’ll also consider decisions such as whether to get a 15-year loan or a 30-year loan, choose a fixed or adjustable rate, or pay points to reduce your interest rate.

You’ll eventually provide information and documentation for a mortgage preapproval. This tells your potential approved loan amount as well as the interest rate and other costs involved. Expect to submit several financial documents throughout the mortgage process, including proof of income and bank statements as well as consent to credit checks. Shopping around is a good idea so you can compare competing offers before you choose one lender.

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