First-Time Home Buyer Program

First-time homebuyers are navigating one of the toughest real estate markets in modern history. Inventory is especially tight in many areas of the country as speculators buy these homes to flip for a quick profit, and escalating costs are prompting builders to focus more on higher-end homes that are more profitable for them.

With more than 40 percent of first-time homebuyers carrying student loan debt, and the average first-time homebuyer age rising to an all-time high of 32 years old, the real estate market can be a daunting place. Luckily, there are many first-time homebuyers programs, including loans and grants, available.

A first-time homebuyer loan is designed to help people become homeowners, usually in specific geographic areas. These programs vary depending on where you live and what’s available to you, but the general idea is to provide financial assistance to qualified buyers who have a strong enough credit score and fall within income restrictions. Benefits come in several forms:

  • Down payment: The ability for buyers to make a very small down payment (or no down payment at all).
  • Interest cost: Organizations subsidize (or help to pay) interest charges, and they can also help borrowers qualify for a loan with a lower interest rate. The result is an easier monthly payment.
  • Grants: “Free money” that can be put toward closing costs, a down payment, and improvements to the home after purchase.
  • Loan forgiveness: Cancellation of the mortgage debt (or at least some portion of the debt). This typically happens over a long period of time to encourage buyers to stay in the home long-term.
  • Help with fees: Limits on how much lenders are allowed to charge for closing a loan.
  • Deferred payments: Loans that don’t need to be repaid (and don’t charge interest) until you pay off the house, usually by selling the home and moving. These loans sometimes serve as your down payment.

Note that the programs available to you might offer any or none of those benefits; it depends on your financial circumstances, and where you live, so you’ll have to research what’s available in your area.

Where to Find Loan Programs

Finding good loan programs requires some legwork. A good place to start is the U.S. Department of Housing and Urban Development website on homebuying programs. You can also search the web, being sure to include your state or city of residence. You can also include any special characteristics in your search. For example, if you’re a veteran, teacher, or disabled, you might find additional programs.

Who Qualifies?

Most programs target individuals who have never owned a home. However, some organizations will offer “first-time” buyer assistance to people who have owned before, as long as they have not owned within the last several years. Again, check to see what’s available to you.

You may have to meet certain financial restrictions as well. For the most part, first-time buyer programs reserve benefits for people with low and moderate incomes. If you earn too much, you won’t qualify for the program. Having substantial assets, like cash in the bank or investment accounts, can also reduce your chances.

Loan Restrictions

Most programs put a dollar limit on the property you’re buying, so don’t expect to buy the most expensive properties in your area. Instead, you’ll be limited to less expensive property that is probably more affordable for people who meet the income restrictions. Again, the idea is to benefit people who have the most need.

Generally, you must live in the home as your primary residence. If you’re going to rent the place out, you’ll need to use a different type of loan; these programs are not for investors.

The home you buy most likely must meet some physical requirements. It should be in good condition and free from any safety hazards (for example, lead-based paint). If you have a home in mind that you can’t buy because it’s in bad shape, try using an FHA 203k rehabilitation loan instead. 203k loans allow you to purchase a property and fund improvements with just one loan.

Drawbacks of First-Time Homebuyer Loans

For some first-time homebuyers, these programs are perfect. They open the door to home ownership where a family would otherwise have been unable to buy a home. Communities also benefit—homeowners take care of their property, get involved, and contribute to the economy. Nevertheless, first-time homebuyer loans can be the wrong choice in some cases.

With a specialized loan, some potential challenges include:

  • Price restrictions might not allow you to buy the home you want.
  • Sell too soon and you might lose some benefits or pay recapture tax.
  • Loan options may be limited (say, only 30-year fixed-rate mortgages).
  • Gains from home value increases may have to be shared with the lender.