December 15th, 2019 10:25 AM by Jackie A. Graves
These programs can help make the
American dream of homeownership a reality.
BUYING A HOME IS A costly milestone.
Before spending money on monthly mortgage payments, homeowners insurance and routine
maintenance, you'll need to save for a down payment and closing costs.
The average price of a new home in September 2019 was $362,700,
according to the U.S. Census
If you're putting down the traditional 20%, you'll need to save $72,540.
In addition to this daunting savings goal, home prices are
outpacing millennials' income, according to a 2019
homeownership study from HireAHelper, a mover matching service. It's no wonder that saving nearly
$90,000 in preparation for a home purchase can feel out of reach. But first-time
homebuyer programs and grants can help.
Government agencies and some lenders offer special programs or
grants to make homeownership more accessible for low- to moderate-income
homebuyers who can't make a 20% down payment.
These programs may only require a down payment of as low as 3%
of the property price, opening doors for first-time homebuyers. First-time homebuyer
grants that help fund the gap on a down payment or closing costs also are
"There's still a misconception that homebuyers must have a
20% down payment, and this demotivates many buyers from speaking with a lender
or learning about loan programs," says Rick Bechtel, executive vice
president, head of U.S. residential lending at TD Bank and a former U.S. News
& World Report contributor.
Indeed, not all consumers know that there are programs designed
to make it easier to buy a home. In a 2019 survey
from TD Bank, 42% of homeowners were not aware of these types of affordability
If you're in the market for your first home but plan to make a
lower down payment or if you are
seeking a first-time homebuyer grant, these programs can help.
Federal Housing Administration loans have been around since
1934. The program is offered by lenders and backed by the U.S. Department of
Housing and Urban Development. FHA loans may require a lower down payment and
credit score from homebuyers and have fewer closing costs.
For homebuyers with a FICO credit score of at least
580, down payments can be as low as 3.5%. If you're interested in making your
future home more eco-friendly, HUD has an FHA Energy Efficient Mortgage program
that allows you to roll the costs of energy efficient home improvements into your
Although FHA loans can reduce how much of a down payment you
need and may have lower credit score requirements, there's a caveat: All FHA
loans require you to purchase mortgage insurance, which protects the
lender if you miss a payment. You might pay an upfront mortgage insurance fee,
monthly mortgage insurance premiums or both, depending on the type of FHA loan.
To learn more about whether an FHA loan is right for you, find a
local FHA lender in your area using the HUD lender
list search tool.
The U.S. Department of Veterans Affairs offers VA loans to
eligible service members who are buying a primary residence or refinancing an
existing home loan.
A VA-guaranteed loan doesn't require a down payment, though the
lender might, and it doesn't require you to pay for mortgage insurance. There's
also no loan limit, but the VA limits its guarantee beyond a certain point.
Eligible veterans receive a basic entitlement, or maximum
guarantee, of $36,000, and typically, lenders offer mortgages of up to four
times this amount without requiring a down payment. However, you will need to
provide proof of sufficient income and qualified credit.
You'll also pay a one-time VA funding fee, which can be added to
the loan total. If you're under VA disability, you're exempt from this fee.
Eligibility includes service and discharge requirements, in addition to
demonstrating that your credit history and income meet program requirements.
Visit the VA benefits
learn more about applying for a VA home loan.
Native American Direct Loan
Another VA-supported loan assistance program is the Native
American Direct Loan. A NADL is a loan that's available to Native American
veterans and can be used toward the purchase, construction or improvement of a
future home. The home must be on federal trust land, such as lands in tribal
trusts or Alaska Native corporate villages. NADLs also can be used to refinance
an existing NADL.
Benefits of this program include no down payment or mortgage
insurance, a low interest rate and closing costs, and a loan limit of up to
$417,000 in most locations.
For more information and to see if you qualify for a NADL, call
Loan Center of jurisdiction at 877-827-3702 between 8 a.m. and 6
If you're interested in purchasing a home in a rural area, the
USDA loan program might be an option. The U.S. Department of Agriculture
provides a 90% guarantee of USDA loans that are borrowed through an approved
Some lenders require no down payment for USDA loans.
To qualify for a USDA loan, the property must
be in an eligible location. Use the USDA's property eligibility tool to
determine if your desired home is in a qualified area. The loan can be used to
refinance an eligible loan, make improvements to an existing property or
purchase a home.
Reach out to your state's Guaranteed
Loan Coordinator to find a participating lender near you.
Good Neighbor Next Door
HUD offers the Good Neighbor Next Door program to firefighters,
police officers, teachers and emergency medical technicians. In return for a
50% discount on the price of select single-family homes, homebuyers must agree
to live in the property as their only place of residence for 36 months.
The homes available through this program are located in
revitalization areas and are listed for sale exclusively for Good Neighbor Next
Door applicants. You're also required to sign a second mortgage and note, which
is released after you've fulfilled your 36-month residence in the property. The
note confirms that you're required to make payments on the loan.
To find a home under the program, browse the HUD Homes
Fannie Mae and Freddie Mac Programs
Government-sponsored enterprises Fannie Mae and Freddie Mac each
offer programs for homebuyers who plan to make a lower down payment. These
programs, called HomeReady and Home Possible, are available through
participating lenders. Both require a 3% down payment and private mortgage
insurance. They offer the ability to cancel private mortgage insurance upon
reaching loan-to-value requirements,
which is generally 20%.
These programs require you to have a minimum credit score of
620. This might be an option for prospective homebuyers who have strong credit
and low- to moderate-income but who don't have a sizeable down payment saved up
State-Based Grants and Programs
Your state or city may offer first-time homebuyer grants and
"They are called down payment assistance program
loans," says Ron Humes, owner and principal broker at HomeSelect Realty in
central Kentucky. Some don't require repayment of the down payment, while
others do, and some require homebuyers to take classes, he says.
The city of Los Angeles, for example, offers the Low Income
Purchase Assistance program, which requires applicants to take an in-person
eight-hour homebuyer education course from a city-approved provider.
Before moving forward with a loan, make sure you compare
multiple programs and loan options available to you locally. Mortgage resource
HSH offers detailed information on state
homebuyer programs, as does the HUD website.
Buying your first home can be a rewarding experience. But like
with any other consumer loan, you'll want to explore the requirements and
limitations of each assistance program.
When shopping for a loan, whether you decide to apply for a
first-time homebuyer program or a conventional mortgage, calculate the
total cost of the loan. Ask your broker clarifying questions about payments,
fees, interest and any other potential costs. Addressing these critical details
early can reduce the number of surprises along your homebuying journey.
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