Funding Options for First-Time Home Buyers in the US

April 14, 2022

Buying your first home is an exciting step in life, but it can also be nerve-wracking. The level of anxiety gets higher if you don’t have the funds to cover the downpayment and other fees and expenses that come with the key to your dream house.

Luckily, the US government supports its citizens and there are several programs that help first-time buyers plant roots and get a house in the neighborhood they like.

So if you’re currently looking for funding options as a first-time buyer, let’s have a look at the best programs out there and their requests.

But First - What is a First-Time Homebuyer?

Wait, isn’t a first-time homebuyer someone who never owned a home before?

Not exactly. In fact, even if you’ve owned property before, you can still be considered a first-time homebuyer. The definition of a first-time homebuyer is broad, as you have to meet several requirements that may differ depending on the type of loan you want.

Here are some of the most common definitions of a first-time homebuyer when it comes to applying for loan programs funded by the government or the states:

  • someone who has not owned a principal residence for three years
  • a single person who has only owned with a spouse
  • an individual who has only owned a residence not permanently affixed to a foundation
  • an individual who has only owned a property that was not in compliance with building codes

You’ll also be requested to provide proof of income going two years back (at least). This step shows the lender you have the capacity to pay the mortgage and other costs that come with the purchase of a house. Lenders also check your credit score (at least 620 is needed).

As a side note, it’s important to know that not all programs will ask for a downpayment. There are a few funding options for low-income buyers where you don’t have to pay as much upfront.

State-Funded Programs

Some states create funding lines that are more advantageous to certain people. For example, eligible borrowers of Ohio first-time home buyer programs include: educators, active-duty military and veterans, or first responders.

There’s also the chance you’ll find state-funded programs that cover only one area in the state (in an effort to repopulate various geographic regions).

So, if you browse through state-funded programs, check to see if you can get any advantage based on your profession or other criteria.

Conventional Loans

These are your standard bank loans with mortgages that are not guaranteed by the federal government. Conventional loans can be of several types, but what’s important to keep in mind is that they are more inclusive than other lines of funding.

Of course, it’s quite difficult to get approved for such a loan since the requirements are stricter. For instance, the downpayment is bigger, the debt-to-income (DTI) ratio is lower, and the requested credit score is higher. Still, in the long term, conventional loans are less costly than loans guaranteed by the government.

FHA Loans

The Federal Housing Administration (FHA) provides several lines of funding for Americans looking to buy a home. A loan from this organization is advantageous for buyers on a tight budget because it has lower down payment requirements (the lower limit is 3.5%) and the qualification conditions are milder.

According to the FHA regulations, even borrowers with a credit score in the 500s can qualify for a loan. Still, approved loans are for borrowers with higher scores (this is good to know). Also, a lower credit score may mean a higher up-front cost.

For instance, 73% of borrowers pay less than 10% with loans from the FHA, but borrowers with a credit score lower than 580 are usually asked to put 10% down first.

However, you will have to pay a mortgage insurance premium (bundled up into your mortgage payments). This is a measure to protect the lender or titleholder in the situation that something happens and the borrower cannot continue with payments.

Wrap Up

Whether you choose to go with a state-funded program, the FHA, a conventional loan, or other options (there are several others out there), it’s also important to know how to choose your new home.

After all, it would be a pity to go through all the hurdles of getting a loan and not enjoy the house, right? In summary, when buying a home, you need lots of patience, good advice, and plenty of time to research and think about your decision.



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