From Spotlight: The Low-Credit, No-Money-Down Home-Buying Guide

First-Time Home Buyer Programs

They can slash your down payment, offer lower interest rates, or help with low credit scores.

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Coming up with a down payment for your first house can be tough.

You’ve probably heard the standard down payment is 20%. So, you'd have to come up with almost $70,000 to put down on a house that sells for the median home price in the U.S., around $346,900 in 2021. That’s a heart-stopping sum for those of us without C-suite jobs or trust funds.  

There's good news. A lot of loan programs can help with a down payment. Plus, you can buy a home with far less than 20% down. “Paying 20% down is quite frankly a myth," says Karen Hoskins, principal at KH Professional Solutions. "Most buyers pay only 5% to 10% down. Some even pay zero." 

Down Payment Resource is a nationwide database of about 2,200 home ownership programs that match buyers and properties. Of those programs, 73% offer down payment assistance. The amount varies by ZIP code. For example, in Seattle, you can get up to $55,000 in down payment assistance. But a similar program in Iowa maxes out at $2,500. Location, location, location is always the real estate maxim. 

Are You Eligible for First-Time Home Buyer Programs?

Qualifications vary based on the agency and community requirements. But assistance programs generally have income and purchase price limits. In addition, they require you to take an online home buyer class. Depending on the program, your eligibility may depend on how good your credit is, where you buy, and whether you have to rehab the home. Special home buyer programs target active military, veterans, teachers, police officers, healthcare workers, and firefighters.  

First-time home buyer programs can help you get into a home for far less cash.

How to Find a First-Time Home Buyer Program You Qualify For

Start by talking to a local mortgage broker. They’re familiar with the programs most likely to benefit you, including less-publicized ones. Here are other sources of information. 

What Are Some Housing Finance Agencies and Organizations?

Housing counselors, whose services are free(!), can discuss which mortgage options are best for you. The counselors and other resources are available through:

What Are the Most Common First-Time Home Buyer Programs?

People often turn first to national first-time home buyer programs. Here are some well-known options:  

  • FHA. Helps first-time buyers — especially those with lower credit scores — buy with down payments as low as 3.5%. 
  • USDA Rural Development Loans. For low- to middle-income families buying homes in towns with populations of 10,000 or fewer people or that are “rural in character." Some areas with bigger populations have been grandfathered into the program (zero down payment). 
  • VA Home Loans. Helps service members, veterans, and eligible surviving spouses (zero down payment). 
  • Fannie Mae and Freddie Mac are federal entities that set the rules for mortgages nationwide. They offer programs allowing eligible buyers to put down as little as 3% of the purchase price (low down payment). 

Be sure to check out local help, which may offer even better assistance. Here’s a state-by-state list of local home buyer assistance programs. 

What Type of Home Buyer Assistance Is Available?

Home buyer assistance comes in forms ranging from loans and grants to tax credits. The following is a sampling. 

What Are Options for Loans and Grants?

  • Forgivable loans and grants. These are literal gifts for some or all of the down payment and closing costs. That means there's no recorded lien or mortgage on that money. Eligibility and terms will vary, and funds are limited. For example, the National Homebuyers Fund offers down payment and closing cost assistance up to 5% of the mortgage loan amount as a gift. They also offer a zero-interest second mortgage that's forgiven after three years.
  • Second mortgages. These loans are in addition to your primary home mortgage. They can help with expenses like down payments and closing costs on your primary mortgage. Second mortgages take various forms, and the differences can be confusing. The most important thing isn’t the terminology, though. It’s knowing these loans exist, because they can offer substantial down payment assistance and favorable terms.
  • Soft mortgages. These down payment assistance loans are deferred for some period of time based on a program's requirements. They're occasionally forgivable. For example, the Home Purchase Assistance Program in Washington, D.C., defers payments for five years for moderate-income borrowers in the district. 
  • Silent seconds. Repayment of down payment assistance is deferred until you sell or refinance. For instance, the city of Napa, Calif., offers eligible first-time buyers up to $150,000 or 30% of the purchase price, whichever is less, at 1% interest. The loan can be deferred for the 30-year term if you stay in the home. 
  • Hard seconds. You start paying off the down payment assistance loan as soon as you close. Programs offer various loan amounts and interest rates (some below market), depending on your eligibility.
  • First mortgages at below-market interest rates. Local and state agencies subsidize a mortgage to make it more affordable for the buyer. They reduce the interest rate or offer 100% financing (no down payment), and sometimes waive mortgage insurance. 

How Do Tax Credits Work?

Some state and local governments offer mortgage credit certificates. These MCCs allow taxpayers to claim a tax credit (Form 8396) for some portion of the mortgage interest paid during a given tax year. Unlike a deduction, a credit is a dollar-for-dollar savings on your tax liability.

You don't have to itemize to use this credit, says Greg Zagorski, senior home ownership policy specialist at the National Council of State Housing Agencies. The credit is capped at $2,000 per year, and you can claim it throughout the life of the loan.

A cool tax benefit of MCCs is that if your tax liability is lower than the credit one year, you can roll over the amount you can't claim to the next year. If you make more the next year (and therefore have more tax liability), you can claim what you couldn't before. 

Charitable or Nonprofit First-Time Home Buyer Programs

 A range of nonprofits and charities offer home buyer programs. HUD maintains a searchable database of legit nonprofits that assist homeowners. Some big names live in this space. Habitat for Humanity, for example, offers affordable mortgages across the nation. It even lets eligible home buyers pay for a home by helping to build it. Yep, good old-fashioned sweat equity.

Smaller players are there, too. Take Piedmont Housing Alliance, which offers affordable home-lending programs in metro Charlottesville, Va. Other notable organizations include NeighborWorks America and Neighborhood Assistance Corp. 

What Are the Benefits of First-Time Home Buyer Programs?

First-time home buyer programs can help you get into a home for far less cash. That way, you can purchase a home sooner and begin building equity. Down payment assistance programs can help offset the fees and mortgage insurance that come with FHA loans. So, you can lower your total costs and in some cases your monthly payments. If you don’t have to wipe out your savings for the down payment, you’ll have a cash cushion. That'll come in handy for inevitable maintenance and repair expenses.  

As mentioned earlier, many home buyer assistance programs require you to take an online home ownership education course. This is a gift. You’ll get a crash course in home buyer logistics, financing basics, home ownership responsibilities, and contract obligations.  

20% Down Payment vs. PMI

When you put down less than 20%, you pay private mortgage insurance monthly to protect the lender’s interest. On the other hand, not having to save for a 20% down payment can get you into a home a lot faster. And you can cancel PMI (except for FHA loans) once you reach 20% equity. 

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First-Time Buyer by NAR

Related: 5 Surprising Ways to Save for a Down Payment

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Kelley Walters

Kelley Walters is a Southern writer and editor. She focuses on interior design and home improvement at outlets from HGTV to Paintzen. She lives in Italy a month every year, drinking Negronis and writing in internet cafes.