Buying your first home can be nerve wracking. It’s a huge financial commitment, probably one of the biggest you will ever make. Whether you’ve been saving for years and have great credit or are struggling to come up with enough for a down payment and have so-so credit, there are mortgage options for you. Here are 10 homebuyer grants and programs possibilities for first time buyers in a wide range of financial and credit situations.

1. Fannie Mae and Freddie Mac Conventional Loans

Who Benefits?

  • Buyers without much cash for a down payment

  • Buyers with a high debt to income ratio

  • Buyers looking for a variety of choices in loan terms

What are the drawbacks?

  • FICO score must be 620 or higher

  • Adheres to government’s strict loan limits

  • Private mortgage insurance required without a 20% down payment

More than 50% of buyers opt for conventional loans. Conventional loans conform to the standards set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac). Both Fannie Mae and Freddie Mac are government sponsored entities.

They have loans available that allow buyers to put down as little as 3%. In order to qualify for the 3% down payment you must have a FICO score of at least 620. You will also have to pay private mortgage insurance. This insurance is a protection for the lender in the event you default on your loan. The insurance can be cancelled as soon as your loan to value ratio is less than 80%. Fannie Mae has programs that allow a debt to income ratio as high as 50%.

For buyers with the cash to put 20% down private mortgage insurance can usually be avoided, which is a significant savings. To get a conventional loan your financial and credit history must be fairly unblemished. You can select the terms that suit your situation best from a variety of fixed and adjustable rate mortgage packages. 

2. FHA Loans

Who benefits?

  • Buyers who have limited cash for a down payment

  • Buyers who have less than perfect credit

  • Buyers who don’t qualify for conventional loans

What are the drawbacks?

  • Borrowing costs are generally higher

  • Requires premium mortgage insurance with upfront premium at closing

The Federal Housing Administration (FHA) insures these loans that have low down payments and allow buyers to qualify with low credit scores. To be approved for a 3.5% down payment your FICO score must be at least 580. If your score is between 500 and 579 you will have to pay 10% down.

One of the advantages of an FHA loan is that the borrower is allowed to use a gift as a down payment. That means your parents, a friend, a credit union, a charity, or even a boss can give you the money you need as long as that person or entity meets FHA’s guidelines and has an invested interest in you, the borrower. You effectively get 100% financing with no out of pocket expenses for a down payment.

Mortgage insurance is required. As of July 3, 2013 borrowers pay it annually for the life of the loan unless they made a down payment of 10% or more. You will pay an upfront premium of 1.75% at closing. This is a one time charge. The annual premium is paid monthly as part of your mortgage payment. 

The mortgage insurance is the big drawback because it drives up your monthly payments. One option is to refinance out of your FHA loan at some point into a conventional loan. Then you can cancel the mortgage insurance once you have 20% equity in your home.

3. VA Loans

Who benefits?

  • Buyers who are members of the military, veterans, and their families

  • Buyers without much cash

What are the drawbacks?

  • Lender can set minimum FICO score requirements

Loans backed by the U.S. Department of Veterans Affairs (VA) are great options for active duty military, veterans, family members, and the National Guard and Reserve. They offer low interest rates, no down payment, no minimum credit score, and no private mortgage insurance. There is a funding fee, but that can be rolled into your loan. Some service members are exempt from paying the funding fee at all. The VA may step in and help you with the lender if you have trouble making the loan payments.

You can qualify for one of these loans once you have served 90 consecutive days on active duty in wartime or 181 days in peacetime. National Guard and Reserve members are eligible after 6 years of service. Spouses of military service members who died in the line of duty or died as a result of a service related disability can also qualify for this financing.

There is no specific income threshold required to qualify for a VA loan. Instead borrowers must show they have stable incomes that cover the costs of their monthly expenses including a mortgage. In addition they must show they have enough residual income left after paying their major monthly obligations to cover their family’s basic needs.

4. USDA Loans

Who benefits?

  • Buyers in rural areas

  • Buyers with low to moderate incomes

  • Buyers with low FICO scores

What are the drawbacks?

  • Income can’t be more than 115% of area’s median income

  • Not available for residents in urban areas

Don’t assume you have to live in the boondocks or buy a farm to qualify for one of these loans. 97% of the United States is designated by the USDA as rural. Only the largest cities are ineligible. Working farms are not eligible.

You can get a 100% loan, but your income can’t be over 115% of the local median income. The income limits include everyone in your household. You need a minimum credit score of 640. If your score is less, you’ll need to provide payment history documentation to the lender for approval. Your debt to income ratio can be as high as 50%, and you may still qualify for financing. Guarantee fees can be less than FHA mortgage insurance.

5. HomePath ReadyBuyer Program

Who benefits?

  • First time buyers who need closing cost assistance

  • Buyers with low to moderate incomes

What are the drawbacks?

  • Homes are limited in quantity

  • Buyers must complete a first time buyer education course

If you are open to considering foreclosures, this is a program that is often overlooked. You can make an offer on a Fannie Mae foreclosure property after completing the education course. The course can be taken online. It costs $75 and is given in English and Spanish.

The HomeReady mortgage has a 3% down payment option. This program also has expanded eligibility guidelines. It allows co-borrowers who aren’t going to be living in the home like parents and grandparents. No minimum personal funds are required. 

Fannie Mae also accepts a range of income sources. You can use rental income from a garage apartment for example. Unlike FHA loans you can cancel the mortgage insurance once your home equity reaches 20%. One of the biggest drawbacks to this option is finding a property in your area. There are a lot less foreclosures on the market today than there were several years ago.

6. Good Neighbor Next Door Program

Who benefits?

  • Buyers who are teachers and first responders

  • Buyers looking for deep discounts on home prices

  • Buyers who want to resell for a profit

What are the drawbacks?

  • Home selection is limited

  • Properties sold as is with no warranties

  • Buyers must live in the property for 3 years

This program is sponsored by the U.S. Department of Housing and Urban Affairs (HUD). It is specifically geared toward providing affordable housing to pre-K through 12th grade teachers, firefighters, law enforcement, and emergency medical technicians. These professionals can get single family homes for 50% of the listed price. Buyers must work through a real estate agent.

The eligible homes are in what HUD refers to as revitalization areas. You are required to live in the house for at least 3 years, but after that you are free to sell at a profit. If you don’t honor this 3 year requirement HUD can demand repayment of the discounted amount.

There is no negotiating with HUD on the price of the home. You must offer the full list price. You will get a 50% discount when the offer is accepted. You can check HUD's website for properties near you.

7. Native American Direct Loan

Who benefits?

  • Native Americans who want to live on federal trust land

  • Buyers with limited funds for down payment

What are the drawbacks?

  • Limited home selection

  • Maximum loan limits apply

This program is designed specifically for eligible Native Americans. There is no down payment requirement and no private mortgage insurance required. Closing costs are low. There is a 1.25% funding fee. The VA is the lender. 

Buyers are allowed to purchase, build, or improve the property as long as it is on federal trust land. Properties must be purchased as primary residences not investments. These are 30 year fixed rate mortgages with a current interest rate of 4.75, which can change based on market fluctuation. Borrowers must have a minimum credit score of 640 and a steady income.

8. Energy Efficient Mortgage

Who benefits?

  • Buyers who want to add energy efficient improvements to a home purchase

What are the drawbacks?

  • Loan caps on some of the upgrades

Making homes more energy efficient is good for the environment and good for your pocketbook. You can add upgrades like cost effective HVAC systems, double paned windows, and new insulation to your loan without having to make a bigger down payment. You can even install solar technology. 

These loans are insured through the FHA and VA. You can purchase a detached home, a townhouse, or a condominium. Certain restrictions apply to condominiums though. Loan applications can be made at any HUD approved bank, mortgage company, or credit union.

9. FHA 203(k) Loan

Who benefits?

  • Buyers who are purchasing a fixer upper

  • Buyers without a lot of cash on hand

What are the drawbacks?

  • Rolling rehab costs into loan may increase interest rate

  • Improvements must exceed $5000

If you have fallen in love with a great house that needs renovation, this could be an option for you. The required down payment is 3.5%. These are FHA loans. The home’s value is based on what it will be worth after the renovations are completed. The money necessary to make the renovations is rolled into your primary loan. You have to borrow at least $5000 for the repairs in order to make this work.

10. Local First-Time-Homebuyer Assistance Grants and Programs

Who benefits?

  • First time home buyers with limited cash for a down payment

What are the drawbacks?

  • There may be income limits

  • Selling the property may require repayment of loan
    A lot of cities and states are trying to attract newcomers by offering first-time-homebuyer assistance grants and programs that include low interest loans to help cover the costs of down payments and closing. Some of the homebuyer grants are free. Programs may have income limits. You need to check with a Realtor or contact your local housing authority for more information.

    Millennials now represent the largest segment of the home buying population in America. Many of them aren’t willing to wait years to amass a 20% down payment before they buy. The lending industry has realized this and is developing some creative solutions to make home ownership opportunities more flexible and affordable for a larger segment of the population.