How First-Time Homebuyer (FTHB) Loans Work

The Cost of Low Payments and Free Money

Young couple receiving house key from real estate agent
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Getting a good loan is always important, and it’s an especially big deal for first-time homebuyers. First-time buyers are often just getting on their feet financially, so they benefit from borrower-friendly loan features like easier approval and down payment assistance.

While loans specifically designed for your first home purchase may sound appealing, they are not always a perfect fit. They often come with strings attached and these might or might not be dealbreakers.

What Is a First-Time Homebuyer Loan?

A first-time homebuyer loan is designed to help people become homeowners, usually in specific geographic areas. These programs vary depending on where you live and what's available to you, but the general idea is to provide financial assistance to qualified buyers who have a strong enough credit score and fall within income restrictions. Benefits come in several forms:

  • Down payment: The ability for buyers to make a very small down payment (or no down payment at all).
  • Interest cost: Organizations subsidize (or help to pay) interest charges, and they can also help borrowers qualify for a loan with a lower interest rate. The result is an easier monthly payment.
  • Grants: “Free money” that can be put toward closing costs, a down payment, and improvements to the home after purchase.
  • Loan forgiveness: Cancellation of the mortgage debt (or at least some portion of the debt). This typically happens over a long period of time to encourage buyers to stay in the home long-term.
  • Help with fees: Limits on how much lenders are allowed to charge for closing a loan.
  • Deferred payments: Loans that don’t need to be repaid (and don’t charge interest) until you pay off the house, usually by selling the home and moving. These loans sometimes serve as your down payment.

Note that the programs available to you might offer any or none of those benefits; it depends on your financial circumstances, and where you live, so you'll have to research what's available in your area.

Where to Find Loan Programs

Finding good loan programs requires some legwork. A good place to start is the U.S. Department of Housing and Urban Development website on homebuying programs. You can also search the web, being sure to include your state or city of residence. You can also include any special characteristics in your search. For example, if you're a veteran, teacher, or disabled, you might find additional programs.

Who Qualifies?

Most programs target individuals who have never owned a home. However, some organizations will offer "first-time" buyer assistance to people who have owned before, as long as they have not owned within the last several years. Again, check to see what’s available to you.

You may have to meet certain financial restrictions as well. For the most part, first-time buyer programs reserve benefits for people with low and moderate incomes. If you earn too much, you won’t qualify for the program. Having substantial assets, like cash in the bank or investment accounts, can also reduce your chances.

Loan Restrictions

Most programs put a dollar limit on the property you’re buying, so don't expect to buy the most expensive properties in your area. Instead, you’ll be limited to less expensive property that is probably more affordable for people who meet the income restrictions. Again, the idea is to benefit people who have the most need.

Generally, you must live in the home as your primary residence. If you're going to rent the place out, you'll need to use a different type of loan; these programs are not for investors.

The home you buy most likely must meet some physical requirements. It should be in good condition and free from any safety hazards (for example, lead-based paint). If you have a home in mind that you can't buy because it's in bad shape, try using an FHA 203k rehabilitation loan instead. 203k loans allow you to purchase a property and fund improvements with just one loan.

Drawbacks of First-Time Homebuyer Loans

For some first-time homebuyers, these programs are perfect. They open the door to home ownership where a family would otherwise have been unable to buy a home. Communities also benefit—homeowners take care of their property, get involved, and contribute to the economy. Nevertheless, first-time homebuyer loans can be the wrong choice in some cases.

With a specialized loan, some potential challenges include:

  • Price restrictions might not allow you to buy the home you want.
  • Sell too soon and you might lose some benefits or pay recapture tax.
  • Loan options may be limited (say, only 30-year fixed-rate mortgages).
  • Gains from home value increases may have to be shared with the lender.

Other Options

Given these restrictions, you may be better off avoiding subsidized first-time homebuyer loans. If you've got decent credit, you’ll probably come out ahead using a plain-vanilla mortgage. With a FICO credit score above 720, you might not receive any advantage with a subsidized first-time homebuyer loan. Once your score drops below 680, the subsidized programs will start to look better.

FHA loans are not restricted to "first-time" buyers and allow you to buy with as little as 3.5% down. You don’t need great credit, so they suit people who are just starting to borrow or who are recovering from financial hardship.

Conventional loans also allow for small down payments. However, you’ll most likely need to pay private mortgage insurance (PMI) until you get to at least an 80% loan-to-value ratio.

PACE loans allow you to upgrade a property you own, which might expand the universe of homes for which you'll consider borrowing. When a house would be perfect if it just had energy-efficient appliances, you might be able to receive funding for those upgrades.

The best approach is to explore all your options. Take a look at what your traditional mortgage broker is offering, check out online loans, and compare those offers to subsidized loans. Once you look at the numbers, factor in the value of flexibility.