Some government programs define a first-time homebuyer as someone who hasn't owned a home in the past three years, but this can vary and there are other qualifying rules as well. You might be surprised to learn that you're considered a first-time homebuyer despite having previous experience with property ownership.
The federal government and state and local governments and organizations promote buying your first house as a way to put you and your family on a path to greater financial stability. Programs that either offer attainable home loan products or assist with the upfront costs of homeownership can lower barriers and help people begin building home equity rather than pay rent.
- The goal of distinguishing first-time homebuyers from other homebuyers is generally to offer additional education and incentives to help a person or household’s first experience with homeownership be more successful.
- Some programs allow people who have technically owned property before to qualify as first-timers because they're still part of a target group that would benefit from homeownership incentives.
- It doesn't mean that an incentive or benefit is right for you just because it's available and you qualify. Consider each program in light of your own context and goals, and seek additional details from lenders before opting immediately into a program targeting first-time homebuyers.
Definition and Example of a First-Time Homebuyer
The definition of "first-time homeowner" is often taken at face value: someone who hasn’t owned a home before. But the Department of Housing and Urban Development’s definition of “first-time homebuyer” is pretty broad. It includes:
- An individual and their spouse who haven’t owned a home in a three-year period prior to their purchase
- Single parents
- Displaced homemakers, even if they recently owned a home with a spouse
- Those who live in a non-permanent home such as an RV
The importance of these definitions comes into play when someone is applying for down payment assistance, such as the American Dream Downpayment Initiative grant. There are income requirements to apply for this type of incentive, but you must also be a first-time homebuyer as defined by HUD.
Be sure to verify whether other assistance programs use HUD’s definition or another definition of “first-time homebuyer.”
How First-Time Homebuying Works
Plenty of people purchase a home for the first time using a conventional loan or another home loan product that's available to all buyers, not just first-timers. Your first-time homebuying process might be identical to what others experience as a result.
But the process can be intimidating if this is the first time you’ve ever bought a home. There’s the expectation of having to save up a fairly large down payment, often at least 5% of the purchase price of the home and as much as 20% in some cases. You'll face in-depth credit checks, tons of paperwork, the appraisal, a home inspection, and all the corresponding stress.
The distinction of being a first-time homebuyer allows you access to other tiers of incentives as well, such as down-payment assistance or government-insured loan products. Low-down-payment loans such as FHA loans aren’t specifically for first-time homebuyers, but they often appeal to first-timers who wouldn’t qualify for other types of loans.
You may have to meet some conditions that go above and beyond a typical home purchase process if you choose a federally insured loan, such as an FHA loan, or if you receive some form of grant or assistance for a down payment or closing costs. For example, Alabama’s FHA Step Up program provides down payment assistance for homebuyers who earn $130,600 or less, and who have credit scores of at least 640 or 680, depending on the type of mortgage.
Types of First-Time Homebuyer Programs
Look into any programs available for first-time homebuyers, but be aware that other incentives also exist. This is particularly the case if you're moving into an area where local or state governments want to promote people moving there. Factors such as your job or your income level can also qualify you for incentive programs. It's worth exploring the HUD website for all its programs.
State and Local Closing Costs Assistance
States and many municipalities also offer a variety of forgivable loans that incentivize home purchases in particular areas. First-time homebuyer programs often include interest-free loans for closing costs or your down payment. You'll have to immediately pay back part or all of the loan if you move before the period of time that's stated by the loan documents. But the loan can be forgiven if you stay as a resident for the correct amount of time. You won't have to repay it at all.
You can research your state’s offerings through its housing finance agency.
A down-payment-assistance program may use premium pricing to fund your assistance loan in some cases. This means that you may have to pay a higher interest rate on your mortgage to make up for the cost of the money that's put toward your down payment.
Fannie Mae Mortgages, FHA Loans, and Other Government-Insured Loans
A variety of government-insured loan products are available to both first-time homebuyers and people who already own a home, but FHA and Fannie Mae mortgages can sometimes be more attractive to first-time homebuyers. These loans focus on borrowers who may struggle to afford the larger down payment and higher credit score requirements of conventional loans.
Ask whether you’d qualify for any low-down-payment loans in addition to conventional loans when you're shopping for a lender. You can also get valuable homeownership education resources if you opt for certain government-backed loans and if all borrowers involved are first-time homebuyers. These resources can help contextualize some of the more complicated choices you'll face in the homebuying process.
Learn as much as you can about the exceptions, requirements, and rules of any program that focuses on first-time homebuyers. The programs are designed to incentivize certain actions, and you may be better off choosing a different loan product, grant, or path to homeownership if your homebuying goals don't quite align.
Other First-Time Homebuyer Benefits
You may also see a tax break that's associated with being officially recognized as a first-time homebuyer. The IRS lets certain first-timers avoid a tax penalty if they withdraw money from an IRA to help pay for their home.
The IRS has its own definition of first-time homebuyer. Again, don’t assume that each organization or government entity uses HUD’s definition. This is a great example of a benefit that works for some people, but not for others.
Let’s say Homebuyer A has enough cash in savings to pay their down payment without dipping into their IRA funds. Homebuyer B has found their perfect house but would need a little help from their IRA to make a down payment. Only Homebuyer B, who really needs that money to make the home purchase happen, should consider it.
Frequently Asked Questions (FAQs)
Can I qualify for an FHA loan if I've filed for bankruptcy?
You can become eligible for an FHA loan two years after a Chapter 7 discharge or a year of entering into a Chapter 13 repayment plan, provided that you've made all your Chapter 13 payments on time and that you've reestablished good credit and not taken out any new credit accounts since your Chapter 7 discharge. You'll also need written permission from the bankruptcy court judge in the case of a Chapter 13 bankruptcy. Exceptions exist if extenuating circumstances caused your bankruptcy.
What is a HUD home?
A HUD home is one where HUD pays off the mortgage to the lender after a lender has foreclosed due to nonpayment. It's not part of a special program for select buyers. But HUD wants to sell these homes as quickly as possible, so it's possible to get an excellent deal, particularly in combination with available first-time homebuyer programs.