Government Home Loan Programs for First-Time Buyers

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Find out which type of government loan could help you land the home of your dreams.

First-time homebuyers can face several financial challenges when shopping for a new home. They may not have an established credit history. They may not have a suitable down payment to qualify for a traditional mortgage. Their debt-to-income ratio may be too high to qualify for lower mortgage rates.

What many first-time homebuyers don't realize is that there are alternatives to the traditional mortgage. Government grants and loan programs and even financing options have all helped millions of eager buyers become homeowners for the first time. 

Here's a look at some of the biggest programs and how you can take advantage of them.

Government-Backed Mortgage Programs

FHA Loans 

The U.S. Department of Housing and Urban Development oversees several programs that help people become homeowners. The biggest is the Federal Housing Administration Loan program. It works just like a traditional mortgage or home loan program: You'll still obtain a mortgage through a bank or lender of your choice. You'll still need to provide some form of down payment, though it is often less than the usual 20 percent required by traditional mortgages. The difference is the loan is backed, or secured, by the federal government. That means that if you default on the loan, the government becomes responsible for it. This guarantee reduces the risk to the lender, enabling them to give loans to people who may not otherwise qualify. 

FHA loans provide several advantages to buyers beyond the lower down payment requirements, such as competitive interest rates, lower credit score requirements, higher debt-to-income ratios and reduced closing costs. 

"For a borrower with a bankruptcy, foreclosure or other credit issue, the FHA loan has a much lower barrier to entry," says Stephen Moye, senior loan officer for Citywide Home Loans.

USDA Loans

The lesser-known cousin to the FHA loan is the USDA loan. Managed by the U.S. Department of Agriculture, the program is intended to boost homeownership of single-family homes in rural areas. The property does not have to be a farm to qualify. 

There are two program options: The first is similar to the FHA program except loans are guaranteed by the USDA, and the second offers low-interest, fixed-rate home loans through USDA Rural Development to low-income buyers. 

Neither option requires a down payment and payments are fixed, but there are income and geographical requirements that must be met.

VA Loans

Active-duty military, veterans of the U.S. military and surviving spouses of military members can take advantage of the VA loan program, managed by the U.S. Department of Veterans Affairs. Like the FHA loan program, loans are obtained through private lenders but in this case they are backed by the VA. These purchase loans, as they are called, offer access to lower interest rates, waive the down payment and private mortgage insurance requirements, cap closing costs, and do not require a minimum credit score. The VA loan program is a terrific benefit for veterans and military families. 

Loan Programs for Native Americans

Native American Direct Loan

The Native American Veteran Direct Loan program helps Native American veterans and their spouses buy homes on federal trust lands. Loans are made available through the VA for low-interest, fixed-rate mortgages. There are no down payment or private mortgage insurance requirements, and closing costs are low. For those wanting to buy a home on federally recognized trusts, allotted lands, Alaska Native corporations or Pacific Island territories, this is a helpful program.

Section 184 Indian Home Loan Guarantee Program

This program is available only to American Indian and Alaska Native families, Alaska villages, tribes, or tribally designated housing entities. Like FHA, VA and USDA loan programs, Section 184 provides a government-backed guarantee of the mortgage, reducing risk to lenders and making home ownership more accessible to qualified buyers. Highlights of the program include low down payment requirements and flexible underwriting terms. Section 184 loans can be used anywhere, not just on native lands, but must be used to finance single-family homes with a 30-year, fixed-rate mortgage.

Down Payment Assistance Programs 

HomePath Ready Buyer Program 

The HomePath Ready Buyer program is exclusive to first-time homebuyers under the federal Fannie Mae program. It requires participants to take a homeownership education course after which they can receive 3 percent toward closing costs on a HomePath property. They are also able to take advantage of the 5 percent down benefit and are not required to pay private mortgage insurance.

Fannie Mae Conventional 97% Loan-to-Value (LTV) Program 

Fannie Mae offers a 97 percent home financing option to first-time buyers who have good credit but cannot afford a high down payment. The program allows down payments as low as 3 percent of the purchase price, which is an even lower requirement than the FHA loan program. Borrowers must have a credit score of 620 or higher to qualify, and they will pay a slightly higher interest rate than with a conventional home loan, but this is offset by the lower up-front costs.

Home Purchase Programs

Good Neighbor Next Door

Also sponsored by HUD, the Good Neighbor Next Door program helps local teachers, firefighters, police officers and EMTs buy homes in revitalized areas. Discounts of up to 50 percent off a home’s list price are possible, but buyers must choose from a select list of homes that are located in certain geographic locations. They must also commit to living in the home for 36 months. Buyers must act fast to secure homes in this program, as eligible homes are typically only available through the program for seven days.

Grants and Vouchers

National Homebuyers Fund

The National Homebuyers Fund is a grant program that provides first-time buyers in all 50 states with up to 5 percent of the loan amount. The funds are provided either as a gift or as a zero interest rate second mortgage that is forgiven after three years. Income requirements are similar to FHA, VA and USDA loan programs.

Homeownership Vouchers

Low-income buyers and public housing residents can participate in HUD's Homeownership Voucher Program. This program offers subsidies to qualified buyers to help them pay their mortgage and other home expenses. Eligibility is based on the requirements set by HUD and local public housing agencies, but in general the program is for first-time buyers who meet minimum income and work requirements and complete a homeownership and housing counseling program.

State and Local Programs

State and local programs offer significant opportunities for first-time buyers but vary widely by area. State housing finance agencies, state HUD offices, mortgage lenders and local Realtors are your best resources for learning more about current programs and opportunities. 

"Most counties in each state have their own first-time homebuyer programs and set the requirements for each," said Hillary Legrain, vice president of First Savings Mortgage Corporation.

Start Your Search With a Mortgage Lender

Many programs are available to help first-time buyers afford a new home, but learning about the programs and determining your eligibility can be challenging. The best course of action is to meet with a local mortgage lender. Local lenders will be familiar with state and federal mortgage assistance programs as well as local resources that can help you get into the home of your dreams. Since the vast majority of home loan programs are accessible only through a lender, you'll have to meet with one eventually anyway.

Lenders can direct you to programs for which you qualify, and will help determine how much home you can afford, check your credit score, calculate your debt-to-income ratio and advise you of any red flags in your credit history that could make it difficult to get a loan. When you're ready to buy, the lender can prequalify you for a home loan, which will help you get into your new home even faster.

Liyya Hassanali is a Project Manager and Content Strategist for Kinship Design Marketing, a boutique agency that provides marketing strategies and content for architects, interior designers, and landscape designers. She is a 15+ year veteran of the marketing and advertising industry, working closely with her clients to provide written content that meets their marketing goals and gets results.

Liyya is passionate about home design and décor and is a confessed HGTV and Pinterest addict. When not providing content writing services for her clients, she can be found browsing home décor sites or spending time with her family.

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