Government Real Estate Loan Programs for First Homebuyers

First-time homebuyers face several challenges when looking for a new home. They may not have an established credit history or may not have enough money to make the down payment that would qualify them for a traditional mortgage loan or the debt-to-income ratio may be too high to qualify for a traditional mortgage loan.

What many early homebuyers don’t know is that there are alternatives to traditional mortgage loans. Government grants and loan programs and even some financing options have helped millions of avid buyers become first-time homeowners.

Here’s a look at some of the biggest programs and how you can take advantage of them.

Government-Supported Mortgage Loan Programs

FHA (Federal Housing Administration-FHA) loans

The Department of Housing and Urban Development (HUD) oversees several programs that help people become homeowners. The largest program is the Federal Housing Administration (FHA) loan program. This program works just like a traditional mortgage loan or home loan program. You should still get the mortgage loan from a bank or lender of your choice. However, you will still need to make a down payment, even if it is less than the 20% usually required by traditional mortgage loans. The difference is that the loan is backed, or guaranteed, by the federal government. This means that if you default on the loan, the government is responsible for it. This guarantee reduces the risk of lenders, allowing them to give loans to people who would not otherwise qualify.

In addition to lower required down payments, FHA loans have several advantages for buyers such as competitive interest rates, lower credit rating requirements, higher debt-to-income ratio, and lower transfer costs. Click here to learn more about FHA loans.

“For a borrower with a history of bankruptcy, foreclosure or other credit issues, the FHA loan presents less of a hurdle to obtaining it,” says Stephen Moye, Senior Loan Officer for Citywide Home Loans.

USDA Loans

A lesser-known cousin of the FHA loan is the USDA loan. Managed by the U.S. Department of Agriculture (USDA), the program is aimed at encouraging single-family home ownership in rural areas. The property does not have to be a farm to qualify.

There are two options in the program:

  • The first is similar to the FHA program except that the loans are guaranteed by the USDA.
  • The second program offers low-interest, fixed-rate real estate loans through USDA’s Rural Development Program for low-income buyers.
  • None of these options require a down payment and payments are fixed but certain requirements must be met in terms of income and geographic location.

VA Loans

Active duty military members, U.S. military veterans and surviving spouses of military members can benefit from the VA loan program, which is administered by the U.S. Department of Veterans Affairs. As in the FHA loan program, loans are obtained through private lenders but, in this case, the loans are guaranteed by the Veterans Administration. These “purchase loans,” as they are called, offer access to lower interest rates, waive down payment and private mortgage insurance requirements, cap transfer costs, and do not require a minimum debt-to-income ratio. The VA loan program is an excellent benefit for veterans and military families.

Native American Loan Programs

Direct Loan to Native Americans

The Native American Direct Farm program helps veteran Native Americans and their spouses purchase housing on protected federal lands. Loans are available through the VA (Veterans Administration). They do not require a down payment, there is no requirement for private mortgage insurance, they have fixed mortgage rates at low interest and transfer costs also low. This program is helpful if you want to buy a home on federally trust land, foreclosed land, Alaska Native corporations, or Pacific Island territories.

Section 184 – Guarantee Program for Real Estate Loans to Indians

This program is available only to American Indians and Alaska Native families, Alaska villages, Tribes, or Tribally Designated Real Estate Entities. Like the FHA, VA, and USDA loan programs, Section 184 facilitates government-backed mortgage collateral, reducing risk for lenders and making homeownership accessible to qualifying buyers. The most notable parts of the program include the requirements of a low down payment and flexible terms in reinsurance contracting. Section 184 loans can be used anywhere, not just on native lands, but they must be used to finance single-family homes with a 30-year fixed-rate mortgage loan.

Down Payment Assistance Programs

HomeReady HomePath Mortgage Credit

The HomeReady HomePath program is exclusive to first-time homebuyers under the federal Fannie Mae program. The HomeReady HomePath program requires participants to complete a buyer education course after which they can receive a 3% discount applicable to transfer costs. They can also take advantage of a 5% discount on their down payment and are not required to pay private mortgage insurance (PMI).

Traditional 97% LTV Program of Fannie Mae

Fannie Mae offers a 97% Home Finance option to early adopters who have a good credit history but can’t afford a high down payment. The program allows down payments of up to 3% of the purchase price, which is an even lower requirement than the FHA loan program. Borrowers must have a credit score of 620 or higher to qualify and will need to pay a slightly higher interest rate than a traditional home loan, but this is offset by lower upfront costs.

Home Acquisition Programs

The Good Neighbor

Also sponsored by HUD, the Good Neighbor Program helps local teachers, firefighters, police officers, emergency medical technicians (EMTs) purchase homes in revitalized areas. Discounts of up to 50% of the sale price of the home are possible but buyers must choose from a list of homes that are in certain geographic areas. They must also commit to living in the house for 36 months. Buyers should act quickly to insure homes in this program since available homes are listed in the program for only seven days.

Subsidies and Bonuses

National Home Buyers Fund

The National Home Buyers Fund is a true subsidy program that offers first buyers, in all 50 states, up to 5% of the loan amount. The funds are offered either as a gift or as a second mortgage with a zero interest rate that is forgiven after three years. Income requirements are similar to those for FHA, VA, and USDA loan programs.

Home Purchase Bonds

Low-income buyers and social housing residents can participate in HUD’s Homeownership Bond Program. This program offers subsidies to qualified buyers to help them pay off their mortgage and other housing expenses. The qualification is based on requirements set by HUD and your local agency or social housing authority (PHA), but generally must be your first home, meet minimum income and work declaration requirements, and complete a home purchase counseling program.

State and Local Programs

State and local programs offer significant opportunities for first buyers but vary greatly by area. State housing finance agencies, state HUD offices, mortgage lenders, and local real estate agents are the best resources to learn more about opportunities and programs in place.

“Most counties in each state have their own first-mover programs and set the requirements for each,” explains Hillary Legrain, Esq., Vice President of First Savings Mortgage Corporation.

Start Your Search with a Mortgage Lender

There are many programs available to help first homebuyers purchase a new home, but learning about the programs and determining if you are eligible can be challenging. The best way to proceed is to visit a local mortgage lender. Local lenders will be familiar with state and federal mortgage assistance programs as well as local resources that can help you get your dream home. Since most mortgage loan programs are accessible only through a mortgage lender, you’ll eventually need to meet with one of them anyway.

Lenders can guide you to the programs you qualify for, determine how much money you can invest, review your credit history, calculate your debt-to-income ratio, and advise you on any problems in your credit history that may affect the loan. When you’re ready to buy, the lender can prequalify you for a mortgage loan, which will help you get your new home even faster!

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By Catharine Bwana