Loan, grants, & programs, oh my! Navigating first time homebuyer loan resources

Coming up with the funds to afford a home can be challenging, particularly for first-time homebuyers who might have fewer savings set aside for their down payment and closing costs. Here’s a guide to exploring assistance programs, loans, and grants that can help you get more for your money as a first-time homebuyer.

Intro to first-time homebuyer programs and assistance

If you’re like most people, you’ll need to get a mortgage to finance the purchase of your first home. You’ll pay off the balance of your mortgage over time through recurring monthly payments, but there are also significant one-time closing costs (including your down payment, third-party fees, taxes, and insurance) that need to be paid upfront. Luckily, there are a few things you can do to mitigate these costs—after all, you shouldn’t plan to completely drain your savings or wipe out your cash reserves in the process of closing on a home.

For starters, build a budget that accounts for the hidden costs of buying a home. The listing price of a home is only part of the equation. There are also property taxes, mortgage insurance, interest rates, and lender fees that will determine how much you owe at the closing table and your monthly payment amount for years to come.

Working with a lender who doesn’t charge bogus fees is also going to give you a financial advantage right out of the gate. Be sure to shop around for the best mortgage lender—compare loan terms, interest rates, and look at factors like processing, origination, and commission fees (for reference, you’ll find none of these costs at Better Mortgage) to make sure you’re getting a competitive offer. Once you have a sense of your overall budget, you can zero in on how much you can afford to spend to close on your loan and where you might be able to save.

Average down payment for a house: first-time buyer edition

If you already own property, you have a pretty significant advantage when it comes to buying a home. You can tap into your equity to make above-asking offers and afford larger down payments, perks that sellers tend to favor. But first-time homebuyers don’t have the same competitive edge; in fact, one of the biggest challenges for first-time homebuyers is saving enough money for a down payment.

The 20% down payment minimum myth has been pretty thoroughly debunked at this point, but in case you haven’t heard: different types of loans offer different down payment options ranging between 3–20%.

Your down payment represents a significant portion of your closing costs, which also cover expenses like attorney fees, appraisal fees, and title insurance; while there’s some wiggle room on what the total amount comes to (usually between 3-6% of the loan amount) this money is due in full at closing. Check out the following resources that can help you reduce and manage the upfront costs of buying your first home:

Government loans and programs for first-time home buyers

When private lenders and banks review mortgage applications, they take a close look at things like credit history, income records, savings, and debt to get a sense of your ability to pay back your loan. Meeting the strict financial requirements for a traditional mortgage just isn’t possible for some people—particularly first-time homebuyers who might have fewer savings and less robust credit history. That’s where government and DPA loans come in:

Down payment assistance loans

DPA, or down payment assistance, can come in the form of loan or grant programs. Government loans offer more lenient qualifying standards and are either partially or fully backed by government entities, which means lenders don’t take on as much risk when funding them. Certain government loans are considered DPA loans (down payment assistance loans) because they’re designed to help level the playing field for loan applicants with fewer funds for a down payment.

FHA loans for first-time homebuyers

FHA loans are partially insured by the Federal Housing Administration and a popular resource among first-time homebuyers. Not only are FHA loans more flexible from a credit history perspective (borrowers with scores as low as 580 can qualify) but they also offer no income limits and down payment minimums as low as 3.5%.

Keep in mind that your exact down payment amount will depend on your credit score and DTI (debt-to-income) ratio. There are also limits when it comes to the amount you can borrow, so be sure to shop for homes in that price range.

FHA loans can be a good financing option for borrowers who want to minimize upfront costs, just be advised that the amount you pay at closing does impact your monthly mortgage payment. For example, you’ll have a higher principal amount to pay off over the life of your loan and there are additional costs such as mortgage insurance (MIP) which is usually equivalent to around 1% of the home’s value.

If your credit score is a significant roadblock in the mortgage process and you prefer to minimize closing costs, an FHA loan might offer a more accessible path to homeownership. Check out these articles to learn more about FHA loans and how to qualify:

-What is an FHA loan?
-FHA loan requirements
-Does Better Mortgage offer FHA loans?
-FHA vs conventional loans

USDA loans for first-time homebuyers

USDA loans are completely insured by the US Department of Agriculture. These loans come with some location-based restrictions (hint: candidates looking for homes in rural areas are the ideal candidates here) and offer buyers a 0% down payment option by financing the entire cost of the home. Not having to worry about the cost of a down payment can be a financial game-changer.

To qualify for a USDA loan, you’ll need to verify that your DTI (debt-to-income) ratio and your household income are both within the acceptable limit. Credit requirements are a bit more strict, with borrowers needing to have a score of 640 to qualify, and you will need to factor in the mandatory cost of mortgage insurance. If you’re interested in a USDA loan to help fund the purchase of your first home, check to see if your property is located in an eligible area.

Conventional loan options for first-time homebuyers

Just because you’re a first-time homebuyer doesn’t mean you can’t qualify for a conventional loan. You might even be able to nab a 3% down payment if your credit score and debt-to-income ratio are competitive enough. You can also consider loan programs geared toward affordable home options. For example, if you don’t mind purchasing a foreclosed property, the Fannie Mae HomePath® program offers buyers the chance to purchase a foreclosed property for as little as 3% down. This program also allows borrowers to apply for up to 3% back in closing costs.

First time homebuyer grants

Loans with flexible down payment options are a fantastic resource for first-time homebuyers, but they aren’t your only option. A homebuying grant is a form of financial assistance. It’s different from a loan because it doesn’t accrue interest and it doesn’t need to be repaid—ever.

DPA grants are typically reserved for first-time homebuyers (though you might fall into that category if you haven't purchased a home in a few years) and like government loans, tend to have specific qualifying criteria. These grants are usually offered at the local level. To learn more about first-time home buyer grants in your area, check online about your state’s available resources or contact a local real estate agent.

Having a less-than-perfect credit score or limited savings for a down payment doesn’t have to stand between you and your homebuying goals. The right type of loan or DPA grant program can help mitigate closing costs, and working with a lender who understands your homebuying budget and priorities is the first step. At Better Mortgage you can get pre-approved in as little as 3 minutes and instantly see which kinds of mortgages are available to you.