First-time home buyers: loan programs, down payment help and the rules that protect you

You have never had a mortgage, so every disclosure is new and every fee looks normal. The programs below were built for you — the rules below are what keep the process honest.

A first-time home buyer, in the eyes of lenders and housing agencies, is anyone who has not owned a principal residence in the last three years. That definition is broader than it sounds, and it opens doors: low-down-payment loans, state assistance, a federal tax credit in some areas, and a set of consumer rules written with an inexperienced borrower in mind.

Who counts as a first-time buyer

HUD, Fannie Mae, Freddie Mac and the IRS all use a version of the same test: no ownership interest in a principal residence during the three years before closing. Someone who owned a home eight years ago, sold it, and has rented since then qualifies again. So does a displaced homemaker or a single parent who only owned a home jointly with a former spouse. Owning a rental property or a piece of land does not always disqualify you either, since the test looks at your principal residence. Each program spells out its own exceptions, so confirm the precise wording with the lender or the state housing finance agency (HFA) before assuming you are in or out.

The loan programs built for this profile

FHA loans allow 3.5% down with a credit score of 580 or higher (10% down between 500 and 579, though many lenders set their own floor around 620). The trade-off is mortgage insurance: an upfront premium of 1.75% of the loan, usually financed, plus an annual premium that, with less than 10% down, stays for the life of the loan. FHA appraisals also check minimum property standards, which matters when buying an older house.

Conventional 97 and the 3%-down programs — Fannie Mae’s HomeReady and Freddie Mac’s Home Possible — ask for 3% down. HomeReady and Home Possible cap household income at 80% of the area median, but in exchange they reduce the private mortgage insurance coverage required and price better for modest credit scores. Standard Conventional 97 has no income cap but requires at least one borrower to be a first-time buyer. PMI on any of these can be cancelled later under the Homeowners Protection Act, which is the main long-term advantage over FHA. Compare the two paths in our FHA vs conventional guide.

State HFA first mortgages are usually FHA, VA, USDA or conventional loans sold through the state agency, often with a slightly below-market rate and, above all, access to the agency’s down payment assistance (DPA). DPA comes in three shapes: grants that are never repaid; forgivable second liens that disappear after you occupy the home for a set period, typically five to ten years; and deferred seconds at 0% that are repaid only when you sell or refinance. Some programs instead use repayable seconds with a small monthly payment. Income and purchase-price limits apply, usually by county, and most require a homebuyer education course. Our DPA guide and the state-by-state pages list what each agency offers.

Mortgage Credit Certificates (MCCs), where a state or local agency issues them, convert a share of your annual mortgage interest — typically 20% to 40% — into a federal tax credit, capped at $2,000 a year when the rate exceeds 20%. Many lenders may count the expected credit as qualifying income. An MCC must be applied for before closing and generally carries a recapture tax if you sell within nine years with a gain and a rising income.

How underwriting treats a first-time buyer

Income. Underwriters want two years of stable employment history, but not necessarily at the same job; recent graduates may document school as part of that history. Part-time, overtime, bonus and second-job income usually need a two-year track record. Child support and alimony count if you choose to disclose them and they are likely to continue.

Assets. Two months of bank statements are standard, and every large deposit that is not payroll will be questioned. Gift funds from relatives are allowed on FHA and conventional loans, and on a one-unit primary residence the entire down payment may be a gift; FHA also accepts gifts from employers, unions, close friends with a documented relationship, charities and government agencies. Expect a gift letter stating no repayment is expected and, for FHA, a paper trail of the donor’s funds. See gift funds for a down payment.

Credit. A thin file is a common first-time-buyer problem. FHA and both GSE programs accept non-traditional credit — rent, utilities, insurance paid on time — under specific rules, and Fannie Mae and Freddie Mac now let automated underwriting consider 12 months of positive rent payments pulled from your bank account with your consent.

Occupancy. Every program here is for a primary residence: you generally must move in within 60 days and stay at least a year. Buying “as a first-timer” and renting the house out is occupancy fraud, not a loophole.

Typical pitfalls

Shopping for a house with a pre-qualification rather than a pre-approval — sellers know the difference. Read pre-approval vs pre-qualification.
Spending the emergency fund on the down payment, then facing a $3,000 furnace in month two.
Opening a furniture or car loan between approval and closing; the lender re-checks credit before funding.
Taking the builder’s or agent’s “preferred lender” without collecting a second Loan Estimate.
Ignoring the second-year escrow jump when property taxes are reassessed after the sale.

What to ask a lender

Which programs am I eligible for, and why do you recommend this one? Are you approved with my state HFA, and can this loan be paired with its DPA? What is the total monthly payment including taxes, insurance, mortgage insurance and HOA dues? Which fees in Section A of the Loan Estimate are yours, and is the rate quoted locked? Is there a non-occupant co-borrower option if my ratios are tight? A good loan officer answers in writing; an evasive one is telling you something.

What matters most

The federal three-year rule means many former owners qualify as first-time buyers again — check before assuming you are excluded.
FHA takes 3.5% down from a 580 score but its mortgage insurance usually lasts the life of the loan; conventional 3%-down PMI can be cancelled.
HomeReady and Home Possible cap income at 80% of area median but cut PMI cost; standard Conventional 97 has no income cap.
State HFA loans unlock down payment grants, forgivable or deferred seconds and sometimes an MCC tax credit — usually with a required education course.
On a one-unit primary residence the whole down payment may be a documented gift; undocumented cash is the most common reason files stall.
Collect at least three Loan Estimates on the same day and compare Section A and the rate, not the lender’s reputation.
Keep a reserve after closing: lenders count it as a compensating factor, and the first year of ownership always costs more than planned.

Federal rules, read for first-time home buyers

First-time buyer programs by state

Alabama · Alaska · Arizona · Arkansas · California · Colorado · Connecticut · Delaware · Florida · Georgia · Hawaii · Idaho · Illinois · Indiana · Iowa · Kansas · Kentucky · Louisiana · Maine · Maryland · Massachusetts · Michigan · Minnesota · Mississippi · Missouri · Montana · Nebraska · Nevada · New Hampshire · New Jersey · New Mexico · New York · North Carolina · North Dakota · Ohio · Oklahoma · Oregon · Pennsylvania · Rhode Island · South Carolina · South Dakota · Tennessee · Texas · Utah · Vermont · Virginia · Washington · West Virginia · Wisconsin · Wyoming

Frequently asked questions

Do I lose first-time buyer status if I owned a home years ago?

Usually not. Most federal and state programs define a first-time buyer as someone with no ownership interest in a principal residence during the prior three years. If you sold your last home more than three years before closing, you generally qualify again. Some state agencies apply stricter tests for specific grants, so confirm with the HFA or the lender before counting on a program.

Is the FHA loan always the best choice for a first-time buyer?

No. FHA is often the better fit below roughly a 680 credit score or with a higher debt-to-income ratio, because its mortgage insurance does not rise much with a lower score. Above about 700 with 3% to 5% down, a conventional loan with cancellable PMI and no upfront premium frequently costs less over time. Run both quotes side by side from the same lender.

Can my parents pay my entire down payment?

On a one-unit primary residence financed with an FHA or conventional loan, the whole down payment may come from an acceptable gift donor. You will need a signed gift letter stating that no repayment is expected, evidence of the transfer, and for FHA loans proof that the donor had the funds. Reserves, if required, sometimes need to be your own money — ask the lender.

How much money do I need beyond the down payment?

Closing costs typically run 2% to 5% of the purchase price, though seller credits, lender credits and DPA can cover part of them. Add prepaid items — the first year of homeowners insurance, a tax escrow deposit and prepaid interest — and an inspection and appraisal paid before closing. Many lenders also like to see one to two months of payments left in the bank afterward.