How to qualify for first-time home buyer loans and grants: 2023

March 31, 2022 - 9 min read

Being a first-time home buyer has its perks

As a first-time home buyer, you’ll have access to special mortgage programs with low down payments and flexible guidelines.

You might even be in line for a grant to help with your down payment and closing costs.

First-time home buyer grants are available in every state. If you’ve got decent credit but you’re low on cash, you just might qualify for one.

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>Related: How to buy a house with $0 down: First-time home buyer

First-time home buyer loan requirements

Plenty of home loan programs cater to first-time buyers. Many of these programs have looser eligibility guidelines to accommodate borrowers with lower household income, credit scores, or down payments.

Here are the basic requirements to qualify for some of the most popular first-time home buyer loans:

First Time Home Buyer LoanMinimum Down PaymentMinimum Credit ScoreMaximum DTIOther Requirement(s)
FHA Loan3.5%58050%No income limit 
Conventional 97 Loan3%62043%No income limit
Fannie Mae HomeReady Loan3%62045%Income can't exceed 80% of area median income
Freddie Mac Home Possible Loan3%66045%Income can't exceed 80% of area median income
VA Home Loan0% 580-62041%No income limit / Must have an eligible military service history
USDA Home Loan0%64041%Income can't exceed 115% of area median income / Must buy in eligible rural area
FHA 203(k) Rehab Loan3.5%58045%$5,000 minimum rehab costs

Not all the rules listed above are necessarily set in stone.

For example, you might be able to qualify for an FHA loan with a credit score as low as 500, as long as you can make a 10% down payment.

Or you might qualify for a Fannie Mae loan with a debt-to-income ratio as high as 49.99% (must be below 50%), instead of 43%. But you’ll need other compensating factors (like a bigger savings account) to qualify.

So explore your loan options. Even if you have special circumstances, it’s likely easier to qualify as a first-time home buyer than you think.

Specialty first-time home buyer programs

Certain home buyers have access to special loan programs depending on their occupation or location.

For instance, the VA loan — backed by the U.S. Department of Veterans Affairs — is only available to veterans, active-duty service members, reservists, and members of the National Guard.

For those who qualify, a VA loan is often the best loan option. Zero down payment is required, and VA homeowners never pay private mortgage insurance (PMI).

Similarly, the USDA loan program allows zero down payment, reduced mortgage insurance costs, and below-market mortgage rates. But the U.S. Department of Agriculture only backs these loans in sparsely populated and rural areas, so not every home purchase is eligible.

Other home buying programs exist for public servants like teachers, firefighters, doctors, and other first responders.

For example, the Good Neighbor Next Door program can offer 50% off a home’s purchase price for teachers, firefighters, and EMTs. But they must buy a home listed for sale by the U.S. Department of Housing and Urban Development (HUD) in a targeted revitalization area.

Select mortgage lenders offer their own discounted programs for first-time home buyers, too.

Make sure you shop around for your first mortgage loan and ask lenders what they can offer for a first-time buyer.

How to qualify for first-time home buyer grants

The requirements to qualify for a first-time home buyer grant depend on the down payment assistance programs available where you live.

“Every state in the country has a housing finance agency, and all offer special programs for first-time buyers,” says Anna DeSimone, author of Housing Finance 2020.

She explains that first-time home buyer assistance typically comes in one of two forms:

  • First-time home buyer grants: Money towards your down payment and closing costs that does not have to be repaid
  • First-time home buyer loans: Money towards your down payment and closing costs that’s either repaid at a very low interest rate, or does not have to be repaid until you sell the home or refinance. First-time home buyer loans may even be forgiven (meaning, they don’t have to be repaid) if the buyer stays in the home a set number of years

DeSimone notes that agencies typically offer grants around 4% of the home purchase price. “And many programs also provide additional assistance to cover closing costs.”

Of course, whether or not you qualify for a first-time home buyer grant will depend on local guidelines.

Angel Merritt, mortgage manager with Zeal Credit Union, explains that each of these programs has different qualification requirements.

“Typically, you’d need a 640 minimum credit score. And household income limits may be based on family size and property location,” says Merritt.

How to find first-time home buyer programs

As a first-time home buyer, coming up with cash for the down payment and closing costs is one of the biggest hurdles.

Luckily, there are grants and loans available to help home buyers become homeowners.

The best way to determine if you’re eligible for a first-time home buyer program is to reach out to the housing authority in the town or city where you want to purchase a home.

Down payment grants, tax credits, and closing cost assistance generally are not advertised, so be sure to ask around.

  • Your real estate agent could help you find local grant programs. An experienced Realtor has likely worked with other borrowers who need a little help to get into their new home
  • Your loan officer can also help you find down payment and closing cost assistance. In particular, they can suggest programs the lender is willing to work with and has used in the past
  • If you work in the public sector, ask your employer. In some areas, nonprofits have grant programs or tax credits to help law enforcement officers, teachers, or emergency medical technicians, for example

Many grant programs are income-based, and many require borrowers to take a homebuyer education course to learn about homeownership and mortgage borrowing.

You may have to do some digging on your own to locate resources available to you.

Who is considered a first-time home buyer?

Anyone buying their very first home is automatically a “first-time buyer.”

But repeat buyers can sometimes qualify as first-time home buyers, too, giving them access to special loan programs and financial assistance.

“Under most programs, a first-time home buyer is a person who has not had any ownership in the past three years,” says Ryan Leahy, Sales Manager at Mortgage Network, Inc.

If you haven’t owned a home in the past 3 years, you’re considered a first-time home buyer.

Nonprofits and local governments, which offer the majority of first-time home buyer grants, use this three-year rule to define first-time homeownership.

That’s especially good news for “boomerang buyers” who owned a home in the past but went through a short sale, foreclosure, or bankruptcy.

Under the three-year rule, these people have an easier road back to homeownership through first-time home buyer grants and loans.

Home buying advice in today’s market

In general, first-time buyers need to verify at least two years of income and steady employment to qualify for a home loan. Though there may be ways to qualify with less than two years of employment.

Home buyers should also keep a close eye on their credit.

Credit score requirements start as low as 580 for an FHA loan. But many lenders may set their own, tougher guidelines.

And credit requirements may be subject to change from time to time, as we saw at the height of the Covid pandemic.

“Some lenders who previously accepted a 580 credit score for an FHA loan have increased that minimum to 620 to 660,” says Randall Yates, CEO of The Lenders Network.

He recommends doing all you can to get your credit in order before you apply for a home loan.

To improve your credit score, try:

  • Calling your credit card company and request an increase in your credit line
  • Keeping your balance below 30% of your allowed credit limit
  • If you can’t pay a bill on time, call your credit card company and ask for a deferral of payments without a negative report to your credit agency

And remember — first-time home buyer or not, you might find lenders willing to offer some flexibility with their guidelines.

Especially if you’re right on the edge of qualifying for your first mortgage, make sure you shop around and ask plenty of questions before settling on a loan.

And don’t be afraid to ask questions about the qualification requirements, suggests Merritt. “If your loan professional isn’t willing to explain everything, find another lender.”

Helpful information for first-time home buyers

As a first-time home buyer, you’ll learn a lot about the mortgage process as you go.

But there are a few things all first-time home buyers should be aware of before getting started.

Conventional loans vs. government loans

Conventional loans are what most of us associate with a mortgage.

Backed by Fannie Mae and Freddie Mac, conventional loans typically offer low rates and affordable mortgage insurance — especially for borrowers with high credit.

But many first-time home buyers end up taking out government-backed mortgage loans. These include FHA, VA, and USDA mortgages.

Government backing helps lenders offer low rates and low down payment loans — even to borrowers without great credit.

  • FHA loans are the most common government-insured loans. They’re backed by the Federal Housing Administration, and allow credit scores starting at 580 with a down payment of just 3.5%
  • VA loans are generally the best option for veterans and service members. They allow zero down payment and come with exceptionally low rates. Only veterans, active-duty service members, and their qualifying surviving spouses can get a VA loan
  • USDA loans, backed by the U.S. Department of Agriculture, also allow no-down-payment financing. However, they’re restricted to low-income and moderate-income buyers in rural areas

Government loans are designed to help home buyers purchase or refinance a primary residence. They’re not intended for vacation homes or investment properties.

It’s also important to remember the government does not lend the money to home buyers. Rather, it insures loans provided by approved lenders.

Lenders offering FHA, VA, and USDA loans can apply their own underwriting criteria. This means requirements and rates vary by lender. So it’s important to shop around for your best offer.

Mortgage insurance

Most home loan types require mortgage insurance if the borrower puts down less than 20%.

Mortgage insurance helps protect the lender in case you default on the loan. It’s paid for by the borrower.

The type of mortgage insurance depends on your loan type and down payment.

  • Conventional loans require private mortgage insurance (PMI), but only if the loan-to-value ratio (LTV) exceeds 80%. That means a 20% down payment lets you avoid PMI
  • FHA loans require an upfront and ongoing mortgage insurance premium (MIP). Unless you put down at least 10%, MIP payments continue throughout the life of the loan. If you make a 10% down payment, MIP continues for 11 years
  • USDA mortgage insurance works like FHA MIP, with both an upfront and annual fee. But USDA mortgage insurance rates are lower
  • VA loans do not require ongoing mortgage insurance, but they do charge an upfront ‘funding fee’ which can be rolled into the loan amount

Mortgage insurance sometimes gets a bad rap, but the cost is often worth it if it allows you to secure a new home loan at today’s low interest rates.

Other monthly costs

Your housing costs will include more than repaying your mortgage loan and interest.

Monthly mortgage payments also include:

  • Property taxes: Your mortgage loan servicer can split your annual property tax bill into 12 installments, with one added to each month’s payment. That will help you avoid a big bill from your county every 6 or 12 months.
  • Homeowners insurance: Lenders require homeowners’ insurance in case the property is damaged. Insurance companies charge premiums annually, but once again, your loan servicer can split up the cost and spread it across all 12 months
  • Mortgage insurance: Mortgage insurance is also paid monthly. Upfront mortgage insurance, if required, could be added to your loan amount which would affect your monthly payments

When combined, these costs could add several hundred dollars a month to your mortgage payment — so it’s important to include them in your budget.

What are today’s mortgage interest rates?

A first-time home buyer grant or loan could help cover your down payment and closing costs and remove your final hurdle to homeownership.

Combined with today’s low interest rates, these programs are making homeownership more accessible to first-time buyers.

Start the home buying process by getting pre-approval from a mortgage lender. Pre-approval verifies your mortgage eligibility and gives you a clearer picture of your home buying budget. This step is essential for all would-be homeowners.

Erik J. Martin
Authored By: Erik J. Martin

The Mortgage Reports contributor

Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.