Buying a Home: Special Programs for First-Time Buyers

Saving up a down payment is the biggest hurdle to buying a home for many families, especially when home values are increasing quickly. But various programs exist that might make this task easier for you.

First-Time Homebuyer Programs in Your State

Your state may have programs that make home ownership more affordable. Search online for the name of your state plus “down payment assistance program” or “first time homebuyer program” to see what’s available near you.

Here’s an example of how one program works. In Illinois, people buying in Boone, Cook, DeKalb, Fulton, Kane, Marion, McHenry, St. Clair, Will or Winnebago counties may be eligible for $7,500 in down-payment assistance on a 30-year, fixed-rate loan. The homeowner is only required to contribute the greater of $1,000 or 1% of the home’s purchase price (whichever is greater) as a down payment. Income limits and purchase price limits apply. As of January 2018, a family of any size with income of up to $94,800 could qualify for the program to buy a home priced up to $336,706.20 in Cook County, where Chicago is. 

If you work in a public service profession, additional programs may be available to you. California, for example, helps teachers through the Extra Credit Teacher Home Purchase Program by lending them $7,500 to $15,000 to combine with a CalHFA first mortgage loan. And the Ohio Heroes program helps police officers, firefighters, EMTs, paramedics, nurses, teachers and certain other public service workers, including volunteer firefighters, by offering a discounted mortgage rate and down payment assistance to qualifying applicants.

Section 184 Loans for Native American Homebuyers

American Indian and Alaska Native homebuyers may qualify for the Section 184 Home Loan Guarantee Program offered by the US Department of Housing and Urban Development. By promising to repay the lender if the borrower ends up in foreclosure, HUD encourages lenders to assist this group through low-down-payment loans with relaxed underwriting standards. Loans must be in eligible areas, which include but are not limited to tribal trust lands. Loan limits apply by county. Borrowers can put down as little as 2.25% on home purchases of more than $50,000. They also must use a Section 184 approved lender and pay up-front and (depending on loan-to-value ratio) annual mortgage insurance premiums.

 VA Loans

While not a program specifically for first-time buyers, Veterans Administration loans don’t require any down payment, so qualifying military servicemembers should investigate this option. VA borrowers must pay a one-time funding fee, but they do not have to pay mortgage insurance premiums. (Learn more in The Unique Advantages of VA Mortgages and Pros and Cons of VA Loan Down Payments.)

Mortgage Insurance

Mortgage insurance is also not geared specifically toward first-time homebuyers but toward anyone with a low down payment. The insurance protects the lender by allowing it to recoup a percentage of what it lent you if you go into foreclosure because you can’t repay your loan. As a result, lenders will work with riskier borrowers who otherwise wouldn’t qualify. Borrowers pay the insurance premiums monthly, and premiums are based on the borrower’s credit score, down payment percentage and loan type.

For example, if you put down 3% on a conventional loan, which is possible thanks to a program from Fannie Mae, and you took out a 30-year fixed-rate loan and your credit score was 700, your mortgage insurance rate would be 1.15% of the amount borrowed per year, divided into 12 monthly payments. If you borrowed $300,000, you would pay $287.50 per month in PMI. Your rate would be less than half that with a credit score of 760 or higher, though.

Mortgage insurance is payable until you have 20% equity in your home. The big question is whether it makes more sense to pay PMI or to keep saving until you have a down payment large enough to avoid PMI. The answer depends on your personal circumstances and housing market conditions. For example, if you’re starting a family or home prices are appreciating rapidly, you might be eager to buy as soon as possible to despite the additional expense. (For more, see 6 Reasons to Avoid Private Mortgage Insurance and Choose a Low Down Payment Program to Avoid PMI?)

Mortgage insurance is also a requirement with FHA loans, another HUD-guaranteed program. FHA loans require just 3.5% down, but borrowers must pay monthly mortgage insurance premiums for the life of the loan on top of an up-front mortgage insurance premium that they can pay in cash at closing or roll into the loan. These loans may be a good choice for borrowers with blemished credit who want to buy now but are improving their credit and may be able to refinance into a conventional loan without  mortgage insurance in a few years. (See Top Reasons to Apply for an FHA Loan and FHA Loans: Basics and Requirements.)

Retirement Account Loans and Withdrawals

If you have a retirement account such as a 401(k), 403(b), Roth IRA or traditional IRA, you can withdraw or borrow money to fund your down payment. The rules and consequences depend on which type of retirement account you want to tap and whether you’ll be able to repay the money you take out. The bottom line is that you might end up doing serious damage to your long-term finances by taking this route. (For details, see Can You Use Your IRA to Buy a House?, Can a 401(k) be used for a house down payment? and 8 Reasons to Never Borrow from Your 401(k).)  

Next, it’s time to apply for a loan