If you’re considering purchasing a home, you’re likely to be aware that this can be a very costly process. In addition to financing costs, moving costs and other expenses, you will need to put a down payment on your new home, which means that you need to be prepared to save thousands of dollars. In fact, a Redfin study found that first time buyers need to earn a minimum of $76,000 to purchase an average starter home. Fortunately, if you are struggling to save or boost your earnings, there are a number of housing grants and programs that could assist you to buy your first home.
The Types of First Time Buyer Housing Assistance
There are currently countless different housing grants and assistance programs that are designed to assist first time buyers or those in need of more affordable housing. Here we’ll focus solely on home buyer grants, but if you’re not ready to purchase a home, there are other programs available.
Even by limiting our discussion to home buyer grant programs, there are still different types of available programs.
Down Payment Assistance
When you are considering purchasing a home, the largest expense is likely to be the down payment needed for your type of mortgage. While many mortgage products require a 20% or higher down payment, there are down payment assistance products that allow first time buyers to buy with a down payment as low as 3%.
You may be able to access down payment assistance via a grant, which is not necessarily repaid. However, the program requirements can vary, so it is a good idea to speak to your local or state government for further details on the programs available in your area.
On the other hand, you may be eligible for a down payment assistance loan. There are various loans that you could qualify for including deferred payment loans or second mortgages. With a second mortgage, you would be required to make payments alongside your primary mortgage, but deferred loans can be paid off after you have paid your primary mortgage or after retirement.
There are also government sponsored loans that are guaranteed by the federal government. Qualified first time home buyers are then able to purchase a home without needing to provide a down payment.
Assistance with Closing Costs
In addition to down payment assistance, you could qualify for help with your closing costs. Closing costs are paid when the mortgage process has been concluded and your property sale is completed. Generally, closing costs are 3 to 6 percent of the total amount of your home loan. This means that it can add up to thousands of dollars, depending on the size of your home loan and the cost of your new property.
Forgivable Loans
This is similar to a grant, but there is the potential to need to repay the loan if you don’t live in the property for a certain period of time. If you move home before the agreed upon number of years is up, you could need to repay all or part of the loan.
For example, you may borrow $5,000 to help with your buying costs and you would have your debt reduced each month for a period of ten years. If you stay in that property for the full ten years, the loan will be completely forgiven. If you move before the ten years is up, you may need to pay the equivalent of the remaining term of the loan.
FHA Loans
The Federal Housing Administration or FHA offers various homebuyer loans. For first time buyers, you could enjoy reduced interest, low down payment, minimal fees and the potential to defer payments.
There are qualification criteria for these loans in most states, but you’ll need to have not owned a house for at least three years to be defined as a first time buyer. Technically, this means that you could qualify even if it is your second or third purchase over your lifetime, but this does include displaced or single parents who may have previously owned a home with a spouse.
Grant Programs
Grants do not require repayment, and there are various programs available to help with down payment and closing costs. In most cases, first home buyer programs assist you to buy a home now, but you do need to watch out for strings that are attached to the future.
Grant Programs that May Work for You
National Homebuyer Fund
The National Homebuyers Fund Inc is a non profit that provides first time buyers with down payment and closing cost assistance with a grant of up to 5% of the home’s purchase price. You do need to be a first time buyer to qualify and you will need a lender that is a participant in the program. You can explore the list of participating lenders in your area on the HHFs website or by calling the organization’s helpline.
Bank of America
The Bank of America offers two grant programs that can assist first time buyers. The Down Payment Grant offers up to $10,000, while the Home Grant program offers up to $7,500 in lender credits to cover closing costs.
Chase
If you are purchasing a home in a US government certified “low to moderate income census tract” you could qualify for up to $2,500 in Chase grant money. Generally, these funds are spent on closing costs, but you could use them towards your down payment. The grant is considered taxable income, so you will need to determine if it would be a good fit for your circumstances.
Fannie Mae: HomePath Ready Buyer Program
The HomePath Ready Buyer Program is a Fannie Mae initiative, which is a government sponsored enterprise designed to support the mortgage market.
You could qualify for up to 3% of the purchase price to assist with your closing costs. However, there are a number of restrictions which could impact the property you purchase. It must be a HomePath property, which is a Fannie Mae owned foreclosed home and you need to complete a homebuyer education course.
Good Neighbor Next Door
While technically a forgivable loan rather than a grant, the Good Neighbor Next Door Program is a government initiative that could provide a massive discount on your first home. Properties in a designated revitalization area can be eligible for up to a 50% discount for firefighters, police, emergency medical technicians and teachers.
If you are in the home for at least three years, you can sell for almost 70% profit and you will not need to return the discount, provided that it has been your primary residence for three years or more.
Common Terms You May Encounter
To fully understand the assistance available, there are some unfamiliar terms that you may encounter.
| Term | Definition |
|---|---|
| Loan | Money that you need to repay with interest, unless specified otherwise. |
| Grant | Funds that do not require repayment unless you don’t adhere to the terms. |
| Primary Mortgage | The home loan used to purchase a house. |
| Second Mortgage | A second loan applied towards the down payment or closing costs as part of a homebuying program. |
| Forgivable Loans | Loans partially or completely forgiven if you meet all criteria. |
| Deferred Loans | Loans where payments are deferred until a certain time, typically when you sell the home. |
| Partial Grant | Part of a second mortgage where some funds are forgiven or considered a grant after a set period. |
| Tax Credit | A credit to reduce federal taxes by lowering your mortgage interest. |
| Subsidy | Helps to reduce your mortgage payments to make them more affordable. |
| Matching Grant | Matches what you save on a dollar-for-dollar basis, typically with a cap on the amount received. |
Advantages of Housing Grants and Assistance Programs
Of course, the main advantage of housing grants and assistance is that they can make it more affordable to own a home quickly. But, there are some more specific advantages.
- You May Not Need to Repay the Funds: Depending on the specific assistance program, many housing grants don’t need to be repaid. Essentially, you’re getting free money towards buying a home, so you can use your savings for other costs and expenses.
- Quicker Home Ownership: Most lender mortgage deals require that you have a minimum down payment, which can add up to thousands of dollars. However, with a grant or assistance program, you can meet the minimum more quickly or enjoy a reduced minimum, so you can buy a home sooner.
- Access Lower Interest Rates: Some housing grants and assistance programs allow you to access a lower interest rate. This could be through down payment assistance, so you’re putting down a larger down payment to reduce lender’s risk or you could qualify for a first time buyer loan product with a more attractive rate. Even just a small interest rate difference has the potential to save you thousands of dollars over the lifetime of your loan.
- Funds for Other Expenses: Some programs allow you to use the funds for your down payment, closing costs or other home purchase expenses, which could make the buying process less of a financial burden.
- Avoid PMI: Private mortgage insurance or PMI is a requirement if you are using a conventional home loan and have a down payment of less than 20%. This is essentially an insurance policy that protects the lender in the case of a default. You will need to pay for PMI until you have 20% home equity. However, if your housing grant helps you to make up your down payment to at least 20% you could avoid the monthly cost of PMI.
Potential Drawbacks
While housing grants can be very appealing if you are keen to buy your first home, there are some potential drawbacks that you should consider.
- Lender Compatibility: You need to bear in mind that not all lenders will accept assistance programs. If your lender is not completely convinced about approving your application, the fact that you need outside help is not likely to reassure them about whether you can afford the home loan.
- Qualification Requirements: These programs do not offer guaranteed acceptance and not everyone can qualify. Most programs only apply to first time buyers, but how a first time buyer is defined can vary.
- Paying More Over Time: Some programs essentially allow you to defer payment, which means that you may end up paying more over time. For example, if you take out a deferred payment loan, you will need to pay it back after a certain amount of time or when you move. Even if the assistance takes the form of a low interest loan, the monthly payments could make your monthly budget a little tighter than you find comfortable.
- Potential for Overextending Yourself: This follows on from the previous point, but a grant or assistance program may encourage you to purchase a more expensive home. With more funds available for your down payment, you may find yourself looking at higher priced homes, with a larger mortgage. If you’re already having difficulties saving for down payments and other home buying expenses, you won’t want to commit to higher monthly expenses.
- Occupancy Requirements: Some programs are only available if you plan on living in the home for a certain period of time. If you move or sell the home, or even refinance before this period ends, you may have to repay the funds.
- Longer Closing: The average closing period for a home sale is 50 days, but some assistance programs can add complications to the process. You may need to wait for assistance approval, underwriting or other administration, which could delay closing.
Can You Qualify for Housing Grants?
Knowing there are grants available is just the first step in the first time buyer process. You will need to know which grants are applicable to your circumstances and how you can qualify. While the specifics of each program can vary, there are some common benchmarks to meet.
Your Contributions
While you may be able to get assistance with your home purchase, many programs demand that buyers pay something. A frequent request is that the buyer pays $1,000 or one percent of the house price, whichever is greater.
Your Income Limitations
Numerous social programs identify applicants as a low income household as one who makes 80% or less than the AMI or area median income. Some programs limit assistance to people within this range. However, the income restrictions may change according to the number of people in your household.
Home Limits
You may also find there are limits on the value and location of the home you’re looking to purchase. These restrictions can vary widely, but they could impact where you can buy a property.
Residence Status
Generally, you will only be able to obtain housing grants if you are planning to purchase a home for your primary residence. This means that if the property will be a second home or you plan to rent it out, you may not qualify.
Additional Education
Some programs require applicants to complete a homebuyer education course before they will disperse funds. Even if this is not a mandatory requirement, you may find it a helpful resource for your home buying journey.
Comparison of First-Time Home Buyer Grants vs. Other Home Buying Options
| Feature | First-Time Home Buyer Grants | Other Home Buying Options |
|---|---|---|
| Financial Assistance | Provides free funds that don’t need to be repaid | Loans or programs may require repayment or interest |
| Eligibility | Income limits, first-time buyer status, credit requirements | Varies by program (loans, tax credits, savings plans) |
| Use of Funds | Down payment, closing costs, home improvements | Typically for home purchase only |
| Application Process | May involve paperwork and strict guidelines | Standard loan applications or program enrollment |
| Availability | Limited to specific states, cities, or organizations | Widely available through banks and lenders |
| Repayment Requirement | None (in most cases) | Required for loans and some assistance programs |
| Examples | FHA Grants, USDA Assistance, State Housing Programs | FHA Loans, VA Loans, Conventional Mortgages |
Buying a House for the First Time Can Be Financially Easier
Buying a home can be a complicated and stressful process, particularly if you’re a first time buyer and everything is new to you. Housing grants and programs can relieve some of the financial pressure and make it more affordable for you to get into your new home sooner, but there are some potential drawbacks that you should consider before you commit to a deal.
Of course, it is always worth investigating if you qualify for grants or other assistance that could help you to save money on your home buying costs. You will need to go into the process well informed about your future plans for your new home, your current budget and financial situation to avoid a costly mistake. However, many of these programs have been created with people like you in mind, to help you to get into your first home. So, it is well worth asking questions about local, state and federal programs that may be available to you.
Your new home will be a long term financial commitment and even a few thousand dollars of assistance now has the potential to save you far more in the long term if you can reduce your interest rate or obtain more advantageous home loan terms. But, be sure to check the terms and conditions of any program to ensure that you understand your requirements and possible liabilities, so you can start house hunting with confidence.