The short answer
Help with a first home comes in four forms: loans that need little or no down payment, down payment and closing cost assistance, homebuyer education and counseling, and tax benefits. USDA offers 100 percent financing without a down payment for eligible buyers in eligible rural areas, through direct loans for low-income households and guaranteed loans made by approved lenders. FHA-insured loans need as little as 3.5 percent down. State and local housing finance agencies run down payment assistance programs as grants, forgivable loans or deferred loans, usually with income and price limits and a homebuyer course. Many programs define a first-time buyer as someone who has not owned a home in the past three years. HUD-approved housing counselors give free or low-cost advice. Before you accept any assistance, find out whether it must be repaid, when, and what happens if you sell or refinance.
Start with a checklist
- Know what you can afford each month, counting taxes, insurance and repairs as well as the payment.
- Take a homebuyer course and talk to a counselor. Many programs require one, and it is where you learn what is available.
- Find your state housing finance agency and read its down payment assistance and first-time buyer programs.
- Compare loan types against your income, credit and location.
- Choose a lender who knows the programs, since not every lender takes part in assistance programs.
- Ask what the assistance costs later, whether it is a grant, a loan or a lien.
Doing the steps in this order protects you from the common problem of falling in love with a house and then finding that the program you counted on does not fit it.
Loan programs with little or no down payment
Swipe sideways to see the whole table.
| Program | Down payment | Who it fits |
|---|---|---|
| USDA direct loan | None for most buyers, with 100% financing | Very low and low income households buying a modest home in an eligible rural area |
| USDA guaranteed loan | None, through an approved lender | Low and moderate income buyers in eligible areas, with no price cap |
| FHA-insured loan | As little as 3.5% with a qualifying credit score | Buyers with a smaller down payment or a lower score. See our guide to [FHA loans](a:article-fha-loans) |
| VA loan | Often none for eligible veterans and service members | Veterans and service members, through the VA |
The USDA programs are not just for farms. Eligible areas include many small towns and the edges of some metro areas, and the department has a map and an eligibility tool. The direct loan is made by the government to households with limited income and has a long repayment term. The guaranteed loan comes from a lender, backed by a USDA guarantee of up to 90 percent, and is not limited to first-time buyers. First-time buyers in the direct program must complete an approved homeownership course, and income limits for both programs vary by county.
Down payment and closing cost assistance
State housing finance agencies, cities, counties and nonprofits run programs that put money toward your down payment and closing costs. They usually take one of three forms:
- A grant, which you do not have to repay.
- A forgivable loan, which is wiped out after you live in the home for a set period, often five to ten years, and repaid in part if you sell or refinance earlier.
- A deferred or low-interest loan, which is paid when you sell, refinance or pay off the first mortgage.
Most programs have income limits, price limits and a homebuyer course, and many require the use of a participating lender. A first-time buyer is often defined as someone who has not owned a home in the past three years, which means a former owner can qualify. Programs open and close as money is used, so check your state agency's website and ask a counselor what is available now.
Read the terms. The most common surprise is a second mortgage you did not think of as a loan, with a lien that has to be paid or forgiven when you sell. Ask for the amount, the interest rate, whether payments are due and what triggers repayment, in writing, before you accept.
What the cash at closing includes
The down payment is only part of it. Plan for closing costs, which are fees for the loan, the appraisal, title work and prepaid taxes and insurance, along with a home inspection, moving costs and some savings kept in reserve after you buy. Closing costs are often a few percent of the price, so ask the lender for a written estimate early. Some assistance programs cover closing costs as well as the down payment, and sellers sometimes agree to pay part of them, which a lender can explain.
What lenders ask for
Have documents ready before you meet a lender: recent pay stubs, two years of tax returns and W-2s, several months of bank statements, and ID. Check your credit reports for errors well before you apply, because fixing one can take weeks. A lender will also look at your debts compared with your income, so paying down a credit card can help more than saving a little extra. Ask whether pre-approval, a course or a counselor's sign-off is required before you make an offer on a house, since many assistance programs need those first.
A realistic order of events
Most buyers move through the same sequence: a course and a counselor first, then pre-approval from a lender who takes part in the assistance program, then the house hunt, and then a contract. Many programs reserve assistance funds only after you have a signed contract on an eligible home, and then give a limited time to close, often a month or two. Ask each program for its deadlines in writing so that an inspection or a delay does not cost you the money.
Tax help for new owners
Some state agencies issue mortgage credit certificates, which can give a qualifying buyer a federal tax credit for part of the mortgage interest each year. They are limited and have income and price limits, and you apply before closing, so ask your agency early. Our guide to the standard deduction and itemizing explains how mortgage interest works when you do not claim a credit.
Counseling and what to avoid
HUD-approved housing counseling agencies offer free or low-cost advice to buyers. Call 1-800-569-4287 or search at hud.gov/findacounselor. A counselor can review your budget, explain assistance programs and tell you what a lender will want to see.
Be careful with anyone who promises free money for a fee. Legitimate assistance does not charge you to apply, and it comes from a state or local agency or a nonprofit that you can verify. Our guide to benefit scams lists the signs.
A common path for a family of four with a moderate income who want a modest home in a small town runs through three conversations: with a counselor, who explains that USDA guaranteed loans need no down payment in an eligible area, with the state agency, whose forgivable second loan requires a course and a participating lender, and with a lender who handles both programs. The family's own cash then goes mostly to closing costs and moving, and the second loan is forgiven if they stay for the required period.
Questions from first-time buyers
Do I have to be a first-time buyer for these programs?
It depends. USDA guaranteed loans are not limited to first-time buyers, and many state programs define a first-time buyer as someone who has not owned a home in the past three years.
Do I have to repay down payment assistance?
Sometimes. Grants are not repaid, forgivable loans are forgiven after a period of living in the home, and deferred loans are repaid when you sell or refinance. Read the terms before you accept.
How much do I still need to save?
It depends on the program and the home. Plan for closing costs, an inspection, moving and some reserves, even if the down payment is covered. A lender or counselor can give a written estimate for a specific price.
Can I combine a USDA or FHA loan with down payment assistance?
Often yes, but not always. Ask the lender and the agency whether the two programs can be used together on the home you want.
What to confirm
Programs, income limits and funding change often, and lenders and agencies decide each application. This is general information and not financial advice. A HUD-approved counselor and your state housing finance agency can give the current rules.
Official sources
This month
Find your state housing finance agency's website, book a homebuyer course and a call with a HUD-approved counselor and check whether your target area is eligible for a USDA loan. Bring pay stubs and bank statements to the first call.
