First Time Home Buyers Guide to Mortgage Programs and Grants

first time home buyersThere are few moments in life that are more consequential then when you buy your first home. Getting to that point requires an incredible amount of work, the first task of which is saving enough just for the down payment and all closing costs on the transaction. If you’ve done any of your preliminary homework, you know that amount is far from chump change. In fact, some people save for years just to afford those two important installments.

The good news is, as a first time home buyer you have a wealth of resources and assistance programs at your disposal to help make home ownership just a bit easier. But with the sheer amount of possibilities that are open to you in the form of federal grants, state programs, local government initiatives, tax credits, deductions and more, getting the right information can be tricky and it’s easy to become overwhelmed by the acronyms and fancy jargon that often comes with the mortgage industry.

Don’t worry, though – we’re going to break it all down for you and make things just a bit simpler to understand so you can have a successful and stress-free home buying experience.

Are You a First Time Home Buyer?

Let’s answer this question first. I know it seems like it might be pretty obvious, but the U.S. Department of Housing and Urban Development (HUD) has very specific guidelines to determine if you are a first time home buyer and qualify for the variety of programs and grants available to people who are entering this important phase of their life. If you meet any of the following criteria currently listed on the U.S. HUD website at, then congratulations, you’re a first time home buyer:

  1. An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
  2. A single parent who has only owned with a former spouse while married.
  3. An individual who is a displaced homemaker and has only owned with a spouse.
  4. An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
  5. An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

These qualifications are in place to make it easier for people just like you to realize the dream of home ownership.  If you fall under one of these HUD established definitions then you have a wide variety of options ahead of you.

The Department of Housing and Urban Development does not offer grants or loans outright, but instead works with state governments and non-profit organizations to help with the buying process and supplies information on the various requirements for prospective buyers who are looking to tap grant money and other financial assistance avenues. HUD is a terrific resource for identifying those organizations that are willing to offer such assistance to first time buyers.

Government Programs

If you visit the Housing and Urban Development website, you’re going to find programs designed to educate and assist buyers with the complex financial aspects of first time home ownership. These resources are funded by the federal government which then hands that money down to state and municipal entities, instead of directly to individuals.

It’s also important to keep in mind that a grant is not intended to, nor will it, pay for the full amount of a home. If you choose to opt in on a federal assistance program of any kind, HUD requires that you attend one of their official Housing Counseling Classes, which teaches first time buyers everything they need to know about getting their financial house in order so that they may qualify for a mortgage through one of these programs. It is crucial that you are eligible to qualify because government grants will be denied to anyone who is unable to use that money towards their mortgage.

Federal Housing Administration

Perhaps the most valuable resource that HUD offers is the Federal Housing Administration (FHA). This agency is in place for the express purpose of supplying mortgage insurance on loans from FHA-approved lenders throughout the country and other U.S. owned territories. The goal of the FHA is to make it easier for people to get into their first home by guaranteeing a portion of every loan so lenders are more willing to accept everyone, even individuals who have certain financial obstacles that would get them denied by traditional lenders.

FHA mortgage insurance minimizes the risks that come from buyers defaulting on their loans. In the event of default, a lender makes a claim for the amount with FHA and they can be made whole again through the guarantee. Think of it as having Uncle Sam as the co-signer on your loan. But keep in mind, the lender you work with must be FHA-approved in order to qualify and you will also need to meet some additional requirements as well.

Qualifying for FHA Loans

As usual, these transactions begin with your credit score and the better it is, the less of a down payment you will need to make to get your mortgage through the FHA. Now keep in mind, these lenders are willing to work with individuals who have less than great credit, but you do need to have at least a decent score to even be considered.

For example, if your score is around 580 or higher (still considered to be in the “Poor” range), your down payment will be 3.5%. Scores that are lower, in the 500 to 579 range, will be expected to make a down payment of around 10%. There is a cut off, as anyone with a score below 500 will not qualify for an FHA loan, with some exceptions.

If your credit is too low because it is deemed insufficient, in other words you don’t have any type of established credit history yet, then the FHA may be willing to work with you. The money you put up for that down payment can come from your own savings or it can be gifted to you in the form of cash from a family member or other individual or from a government down payment assistance program. Building your credit score is always a smart idea, so working towards improving it before you begin this process will make it easier to take advantage of the maximum benefits under the FHA program.

toy house help signDown Payment Assistance Programs

So you’ve found a house you really love, you’ve determined that it’s affordable, and you can qualify for an FHA loan. Now all you need is to come up with that down payment. There are assistance programs available in all fifty states that are dedicated to helping you come up with that money for your down payment. Every state has some kind of program in place and many of them focus on different areas of financial assistance.

For first time buyers in particular, these programs can vary in their requirements and the loans they offer. In most cases however, to qualify for a program you have to demonstrate a certain income level and there may be limits on the cost of the home you’re interested in buying. These programs aren’t solely aimed at very low to low income applicants either, as some states offer assistance to income levels that are above the regional median. The average amount you could receive for down payment assistance falls between $5,000 to $20,000 depending on where you apply within the U.S. In some extreme instances, assistance amounts can reach six figures, but to access any of this money you will need to demonstrate a steady income that is commensurate with the house you’re looking to buy and, of course, your credit score plays a significant role in whether or not you are approved.

Similar to with FHA qualifications, your scores don’t need to be perfect in order to get assistance, but the better they are, the easier it will be on your wallet with respect to fees and rates. Each state has programs and lenders who are ready to discuss your current financial situation and many online resources can help put you in touch with these programs in your area.

For example, the state of California offers eight loan programs that cater to individuals looking for conventional loans, FHA-approved loans, and down payment and closing cost assistance programs. The MyHome Assistance Program is an example of the latter, as it offers a deferred-payment junior loan equaling 5% on the lesser amount of the appraised value of the home or the purchase price. That money can be applied to the down payment or the closing costs, it’s up to you, but this loan is only issued in conjunction with an FHA-approved loan through another state program in California.

This is usually the case in most states as assistance programs tend to work with one another to make sure you have all of the money you need in order to close the deal on your first home in that region. The benefits and incentives may vary from state to state, as some parts of the country have “target areas” that have been identified to incentivize home buyer growth. If your ideal home falls within one of these regions, you could benefit to an even greater extent.

There are other incentives in the form of grants and other various initiatives available in all fifty states that offer loans at fixed rates and payment schedules that remain the same for the term of the loan.

The American Dream Downpayment Initiative (ADDI)

This is a program that was signed into law in December of 2003 by President George W. Bush and remains in place today to help families with incomes at 80% below the average area median purchase their first home. The ADDI is part of HUD’s HOME Investment Partnerships Program, currently the largest federal grant program available to consumers.

The ADDI was established with an eye towards an increase in home ownership rates and to revitalize communities that have fallen by the wayside. First time buyers who qualify for the ADDI may use their money towards upfront costs and other reasonable expenses related to their purchase, including lender origination fees, attorney fees, credit report fees, appraisal fees and other closing costs, even property rehabilitation in some cases. The Initiative provides funding in all fifty states to Participating Jurisdictions with a population that falls below 150,000 people.

The Good Neighbor Next Door Initiative

This is another HUD sponsored program that offers homes to qualifying buyers that are located in “revitalization areas”. These regions are earmarked as HUD-designated geographic areas that are identified by overall household income, the number of FHA-insured mortgage foreclosures in that location, and home ownership rates. In other words, these may be areas that one might consider downtrodden and in need of recovery.

Therefore, HUD offers single-family homes for sale to certain qualifying individuals at 50% less than the current list price. In order to qualify, you must be a police officer, fireman, teacher, or an emergency medical technician. There are terms and restrictions, the first of which being that you must commit to living in that home for no less than three years and only home buyers who hold these occupations are eligible to qualify.

If you fit within these parameters, you could save a large amount of money on the purchase price of your first home. These HUD-owned homes are usually available for about seven days through the Good Neighbor Next Door program. The agency will also require that you sign a second mortgage and note on the discounted amount but there is no interest and no payments required on this mortgage, so as long as you remain within the home for the full three year commitment.

low down payment stampFannie and Freddie

The Federal National Mortgage Association, better known as Fannie Mae and the Federal Home Loan Mortgage Corporation, aka Freddie Mac, are two more useful resources that first time home buyers should investigate to help them get that first mortgage on a home. These are both government sponsored entities who don’t offer mortgage loans directly but instead provide monetary incentive in the form of purchasing existing mortgages from traditional finance lenders so that those institutions may continue to loaning to consumers at reasonable rates.

But in order for these mortgages to become eligible for purchase by Fannie Mae and Freddie Mac, you must meet certain criteria that the bank sets in place to comply with Fannie and Freddie guidelines. You guessed it, that means your credit score needs to fall within their set parameters and a Fannie or Freddie-backed loan currently requires a minimum score of 620 to qualify. The higher your score, the faster you can be approved. The lower you score, the more likely your application will get leapfrogged by other applicants with better credit.

You will also need to demonstrate a debt to income ratio of 45%. How do you determine your debt to income ratio? Use your total debt payment per month and divide that by your total monthly income. If the percentage you reach is 45% or better, then you may easily qualify for this type of mortgage program. Even more encouraging, the minimum down payment for eligible borrowers is currently at 3% of the purchase price of the home.

In addition, there are no home buyer counseling requirements as there are with HUD sponsored programs, you won’t face any income limits, down payment monies may be gifted to you, and a first time home buyer must be involved in the transaction in some capacity.

Consider the Money You Have

For some first time buyers, getting the money needed for mortgage payments and closing costs may be as close as their traditional or Roth IRA. If you own one of these instruments, then you are eligible to withdraw up to $10,000 from your account without the standard 10% penalty. But the penalty is waived only if you are a first-time home buyer.

Just keep in mind which fees you will be required to pay should you decide to take that money out. For a traditional IRA, income tax will be assessed on those funds, but this isn’t the case with a Roth IRA as that money has already been taxed. Couples who decide to go this route may withdraw $10,000 each for a total of $20,000 that can be applied to mortgage down payment or closing costs.

There is one catch, however, as the money must be used within 120 days from withdrawal otherwise that 10% penalty does kick in.

Tax Credits and Deductions

Unfortunately, the federal first time home buyer tax credit is no more, as that program ended in July of 2010. But there are still plenty of tax deductions and credits available to first time buyers. The benefits you could reap from these incentives can really add up and help to make a serious dent in your down payment and closing costs.

Start by claiming the money paid on your home mortgage interest as this is one of the largest deductions you could get back. You may also claim your home origination fees, also known as “points”.  These are the fees you paid to get a mortgage in the first place and the amount you may deduct varies based on a first purchase or a refinance of an existing mortgage. Another deduction to explore is on monies paid for state and local property taxes. This deduction incorporates the amount paid by the homeowner along with any closing or settlement payments that were made through escrow.

Tax credits are also offered to homeowners who want to go green. The installation of solar panels, geothermal heating systems, energy efficient windows, and/or energy efficient heating and AC systems can make you eligible for tax credits of up to 30% of their costs. The more energy conservative your home becomes, the more credits you could be eligible to claim on your taxes.

Keep in mind, there is a difference between a deduction and a credit. The first lowers your taxable income commensurate with your particular tax bracket, while the second is an actual reduction based upon the dollar amount of what the credit is worth.

Our Final Thoughts

These are just some of the avenues available to first time buyers who are eager to own a home. Make sure you seek out every state-run initiative that currently exists in your part of the country, as each one has something to offer first time buyers. Be sure not to rush this process, either.  Although it may be time-consuming and occasionally frustrating, it’s important to take each step slowly and carefully.  This way you can identify every benefit and assistance component that you are eligible to receive and you can also remain alert against falling victim to any mortgage scams.  Unfortunately, criminals target first time home buyers and run scams that claim they are FHA-approved or backed by federal grants when, in reality, they’re just looking to take your money and offer nothing of value in return.

Stay diligent as you search for the best options to help with your situation. In addition, credit scores are important as they do affect your eligibility, timing, and fees for many programs, but a low score should not preclude you from applying for lending opportunities that are backed by certain grants or funding. You may not qualify for all of them, but there are plenty of lenders out there who are willing to work with you.

Finally, determining where you want to live and how much it will cost should be done realistically. This is going to be your home. You don’t want to have it threatened by moving into someplace you ultimately won’t be able to afford. Be pragmatic and honest with yourself and your lenders.

One Comment

  1. Heather Gratia says:

    I want to buy a house but my credit score is low and don’t have thousands of dollars to put down. I was wondering if you can help or assist me, anything will help.
    Thank you

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