How To Qualify for First-Time Home Buyer Loans and Grants: 2023

Understanding first-time home buyer loan requirements

As a first-time home buyer, you’ll have access to special mortgage programs with low down payments and flexible guidelines, provided you meet all first-time home buyer loan requirements for income, credit score, and debt-to-income ratio, to name a few.

You may also find yourself eligible for a grant that can provide valuable assistance with your down payment and closing costs.

These first-time home buyer grants are available in every state, presenting a fantastic opportunity for individuals with decent credit but limited funds to fulfill their homeownership aspirations.

In this article (Skip to…)

• Loan requirements
• Conventional loans
• Government loans
• Grants and down payment assistance
• Nationwide loan programs
• Finding first-time buyer programs
• FAQ

>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:

Not all the rules listed above are necessarily set in stone. That’s because first-time home buyer loan requirements vary by program.

Furthermore, none of the government agencies listed above actually underwrite their own loans. Instead, borrowers will obtain financing through an approved lender. And each lender is allowed to set its own criteria.

However, here’s what you can generally expect:

• Debt-to-income ratio should generally not exceed 45%
• Credit scores should be 580 or above
• Down payment requirements of at least 3% of the home purchase price
• Loan limits restrict the maximum loan amount based on property location and program type
• Income limits determine eligibility for moderate and low-income individuals
• Home purchase price limits will vary depending on location, but maximum loan amounts are $ in most areas
• Refinancing options have their own requirements

These programs prioritize low-income home buyers, offering flexible underwriting and down payment options.

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.

1. Conventional loans for first-time home buyers

Conventional mortgages are popular with first-time home buyers due to their flexibility and accessibility. Here are a few programs:

• Conventional 97: The Conventional 97 loan allows for a down payment of just 3% and is geared towards first-time buyers, though it’s not limited to them. Borrowers must have a credit score of at least 620 and the loan must be for a single-family home
• HomeReady: Fannie Mae’s HomeReady loan is designed for low- to moderate-income buyers. It requires a 3% down payment and offers reduced mortgage insurance premiums. Borrowers must complete an online homebuyer education course to qualify
• Home Possible: Freddie Mac’s Home Possible helps moderate- and low-income home buyers, allowing for down payments as low as 3%. Borrowers must have a credit score of at least 620, and income limits may apply

Keep in mind that first-time home buyers with a down payment of less than 20% pay private mortgage insurance (PMI). They can drop PMI once their loan-to-value ratio reaches 78%, which usually takes most new homeowners between 2 and 3 years.

2. Government-backed first-time home buyer loans

The federal government insures government-backed loans, which gives lenders more confidence and often makes these loans more affordable for first-time buyers.

• FHA loans: Backed by the Federal Housing Administration, the FHA mortgage is a low-down payment loan that only requires a 3.5% minimum. It also offers more flexible credit score requirements than conventional loans, making this type of mortgage an attractive choice for first-time buyers. However, borrowers are on the hook to pay mortgage insurance premiums (MIP) for the life of the loan
• VA loans: The Department of Veterans Affairs makes VA loans available to veterans, active-duty military service members, and their families. VA loans require no down payment and do not require mortgage insurance, which can significantly reduce the monthly payment
• USDA loans: The U.S. Department of Agriculture offers USDA loans designed for rural and suburban home buyers who meet specific income requirements. These loans offer 100% financing, meaning no down payment is required, and have competitive interest rates

3. State and local first-time home buyer programs

State and local governments often offer programs specifically for first-time home buyers, including down payment assistance (DPA) loans and grants, closing cost assistance, and home buyer education.

• DPA loans and grants: Down payment assistance can come in the form of a loan or a grant. While loans must be repaid—often concurrently with the mortgage—grants do not need to be repaid. Eligibility requirements vary but often include income limitations and completion of a homebuyer education course
• Closing cost assistance: Many state and local programs offer loans or grants to cover closing costs. Like DPA programs, these usually require borrowers to meet certain criteria, such as income limits and first-time buyer status
• Home buyer education: Many of these programs require participants to complete a homebuyer education course. These courses help borrowers understand the responsibilities of homeownership, including budgeting, maintaining a home, and understanding the terms of their mortgage

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

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

4. Nationwide first-time home buyer loan programs

Nationwide home buyer programs offer a variety of options to first-time home buyers across the country. Some of these programs are specifically designed for certain groups of people or for buying specific types of properties. Let’s take a closer look at some of these programs.

Good Neighbor Next Door

The U.S. Department of Housing and Urban Development (HUD) runs the Good Neighbor Next Door program, which provides significant discounts on homes for public employees like teachers, firefighters, emergency medical technicians (EMTs), and law enforcement officers. Eligible individuals can receive a discount of 50% off the list price of a home in revitalization areas. In return, the buyer must commit to living in the property as their sole residence for 36 months.

HomePath Ready Buyer

Fannie Mae’s HomePath Ready Buyer program is designed for first-time home buyers who plan to purchase a HomePath property. After completing an online homebuyer education course, eligible buyers can receive up to 3% in closing cost assistance toward the purchase of a HomePath property. Homes that Fannie Mae has foreclosed on are the properties in this program.

Energy-Efficient Mortgage (EEM)

An Energy-Efficient Mortgage (EEM) is a federal program that allows home buyers to finance the cost of making energy-efficient improvements to a new or existing home as part of their FHA, VA, or conventional home loan. The idea is to save on utility bills, which can help offset the additional mortgage cost. The improvements must be cost-effective, meaning the money saved on energy bills should exceed the cost of the improvements.

Native American Direct Loan (NADL)

The Native American Direct Loan (NADL) program is a VA-backed program that provides eligible Native American Veterans and their spouses the opportunity to use their VA home loan guaranty benefit on federal trust land. The program offers many benefits, including no down payment, a low interest rate, and limited closing costs. The buyer must intend to occupy the property as their primary residence.

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.

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 getting 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 the resources available to you.

Benefits of first-time home buyer loans

First-time home buyer loans offer several significant benefits that make the process of buying a home more attainable.

• Flexible down payment minimums: One of the primary advantages is the reduced down payment requirements compared to conventional loans. This lower initial financial outlay can make the dream of owning a home a tangible reality for many first-time buyers
• Potentially lower mortgage rates: These loans frequently offer lower interest rates, especially for borrowers with good credit. Lower rates translate into more affordable monthly repayments and a lower total repayment amount over the life of the loan. Even for those with less than stellar credit, the rates can still be competitive, particularly with FHA mortgages
• Reliable fixed interest rates: The certainty of a fixed-rate loan can provide peace of mind to new homeowners with consistent monthly mortgage payments that shield them from fluctuations in the market, allowing them to budget their finances with confidence
• Forgivable and deferred loans: Some first-time home buyer loan programs also offer forgivable loans for down payment and closing cost assistance after a certain period of consistent repayment. This benefit not only reduces the upfront costs of buying a home but can also save a significant amount over the course of the loan

Common mistakes when applying for a first-time home buyer loan

Embarking on the path to homeownership can be both exciting and overwhelming. As a first-time home buyer, it’s easy to make mistakes. Meeting first-time home buyer loan requirements and recognizing potential pitfalls before you apply can save you both time and money in the long run.

Not choosing the right mortgage loan program

One common mistake is not thoroughly understanding the type of loan for which you’re applying. It’s crucial to know whether you’re getting a fixed-rate loan or an adjustable-rate loan, as this will impact your repayments.

Also, understanding the down payment requirements, whether mortgage insurance is required, and what kind of property you can purchase (e.g., single-family, duplex) are all vital details.

Not improving credit scores before applying

Another common error is neglecting to check and improve your credit score before applying. Your credit score impacts your loan eligibility and the interest rate you’ll receive. By not taking the time to improve your credit, you may end up paying higher interest rates than necessary.

Not saving enough money to close the loan

Finally, many first-time buyers do not save enough for down payments, closing costs, and other expenses associated with buying a home. Although there are programs with low or no down payment requirements, it’s generally beneficial to have a sizable down payment to reduce your monthly repayments and the total cost of the loan.

FAQ: First-time home buyer loan requirements

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.