Buying your first home does not necessarily require a 20% down payment.
In fact, qualified first-time home buyers may have access to conventional mortgage programs that allow as little as 3% down, along with potential state, county, city, and other local programs that may help with down payment and closing costs.
The important thing is understanding that there is no single "first-time home buyer mortgage."
There are several different mortgage options, and the best program depends on your income, credit, available funds, property location, purchase price, and other factors.
At Capital Funding Mortgage, we can help review the available options and determine which programs may make the most sense for your particular situation.
You may be surprised to learn that you do not necessarily have to be buying your very first home.
Under the general Fannie Mae and Freddie Mac definitions, a first-time home buyer generally includes a borrower who has not had an ownership interest in residential property during the preceding three years. Certain exceptions and additional provisions can apply.
That means someone who owned a home many years ago but has been renting for the past several years may potentially qualify as a first-time buyer again.
Fannie Mae offers a conventional mortgage option that can permit financing up to 97% of the home's value, meaning an eligible first-time buyer may be able to purchase with just 3% down.
For Fannie Mae's standard 97% purchase option, at least one borrower must generally qualify as a first-time home buyer. Unlike HomeReady, the standard 97% option does not impose an income limit. The program generally applies to eligible one-unit principal residences and is subject to Fannie Mae underwriting requirements.
This can be an excellent option for buyers who have sufficient income to qualify for the mortgage but have not accumulated a large down payment.
On a $400,000 home:
3% down = $12,000
That is substantially different from the $80,000 that would be required for a traditional 20% down payment.
Closing costs and prepaid expenses would still need to be considered, but there may be additional ways to address those expenses through seller credits, gift funds, lender credits, or eligible assistance programs.
HomeReady® is another Fannie Mae conventional mortgage program that can allow a down payment as low as 3%.
HomeReady is designed for borrowers meeting certain income requirements. Currently, borrower income generally cannot exceed 80% of the Area Median Income (AMI) applicable to the property location. HomeReady also provides flexible sources for down payment and closing funds and reduced mortgage-insurance requirements for certain loans.
Importantly, you do not have to be a first-time home buyer to qualify for HomeReady. However, it can be particularly useful for qualified first-time buyers.
Depending on the transaction, eligible funds may include:
For eligible one-unit purchases, HomeReady can permit the down payment and closing funds to come from acceptable sources without requiring a minimum contribution from the borrower's personal funds.
Freddie Mac offers another attractive conventional option called HomeOne®.
HomeOne allows qualified first-time home buyers to purchase an eligible primary residence with as little as 3% down.
One particularly important feature of HomeOne is that Freddie Mac does not impose borrower income or geographic limits for this program. HomeOne allows up to 97% financing on eligible one-unit primary residences, subject to Freddie Mac's complete underwriting and property requirements.
This means HomeOne may be worth considering when a borrower's income exceeds the limits for programs such as HomeReady or Home Possible.
Home Possible® is Freddie Mac's affordable conventional mortgage program.
It can also provide financing with as little as 3% down and permits flexible sources for down payment and closing costs.
Borrower qualifying income is generally limited to 80% of the Area Median Income for the applicable property location. Freddie Mac provides an address-based eligibility tool because the applicable income threshold varies geographically.
Home Possible permits eligible sources such as gifts, grants and certain approved assistance programs, and no minimum contribution from the borrower's own personal funds is required for an eligible one-unit purchase transaction.
Like HomeReady, Home Possible is not exclusively a first-time buyer program, but it can be an excellent option for qualifying first-time purchasers.
There is no one answer.
A borrower might qualify for several different conventional programs, including:
The lowest down payment does not automatically mean the lowest overall cost.
We compare factors such as:
The objective should be to find the mortgage structure that makes the most sense for the buyer — not simply the program with the smallest advertised down payment.
A conventional mortgage with less than 20% down will generally require private mortgage insurance, commonly called PMI.
PMI allows lenders to provide higher loan-to-value financing and is one of the reasons qualified buyers may be able to purchase with 3%, 5%, 10%, or 15% down rather than waiting until they have accumulated 20%.
The cost of mortgage insurance can vary significantly depending upon factors such as:
Some affordable conventional programs may also offer reduced mortgage insurance requirements compared with standard conventional financing.
One of the most important things first-time buyers should understand is that there may be several acceptable sources for the money needed to purchase a home.
Depending upon the mortgage program, these can potentially include:
Fannie Mae and Freddie Mac both recognize eligible forms of down payment and closing-cost assistance within their respective guidelines.
This is why buyers should speak with a mortgage professional before assuming they need to save a certain dollar amount before they can buy.
In addition to Fannie Mae and Freddie Mac financing, there are numerous state, county, city, municipal, housing-finance-agency, employer, and nonprofit assistance programs throughout the country.
Some programs provide true grants.
Others provide:
These distinctions are important. A program described casually as "free money" may actually require repayment if the home is sold or refinanced within a certain period.
Program availability also changes, and funding may be limited.
Pennsylvania buyers may have access to programs administered through the Pennsylvania Housing Finance Agency (PHFA).
PHFA currently offers several home-purchase and purchase-assistance programs, including programs that can help qualified buyers with down payment and closing costs. Options include programs such as Keystone Flex with K-FIT and other PHFA assistance structures, depending upon eligibility.
Income limits, purchase-price limits, credit requirements, property requirements, funding availability and other restrictions can apply.
Buyers purchasing in Bucks County may have additional opportunities.
Bucks County operates a First Time Homebuyers Program that can provide eligible households with up to $10,000 toward down payment and/or closing costs.
The assistance is structured as a no-interest deferred mortgage rather than simply an unrestricted cash grant. Repayment can be triggered by events such as sale, transfer, certain refinances, or when the property is no longer the borrower's principal residence. Income and other program requirements apply.
This is a good example of why the location of the property can matter when evaluating a first-time buyer's financing options.
First-time buyers purchasing within the City of Pittsburgh may also have access to assistance through the Urban Redevelopment Authority of Pittsburgh.
The URA's Down Payment and Closing Cost Assistance Program currently provides eligible first-time buyers with assistance based partly upon household income.
Qualified buyers below 80% of Area Median Income may receive up to $7,500, while eligible buyers between 80% and 115% of AMI may receive up to $5,000 under the program's current structure. The assistance is provided as a 0% deferred loan subject to program requirements.
Philadelphia has its own program as well.
The Philly First Home program can provide eligible first-time home buyers with up to $10,000 or 6% of the purchase price, whichever is less, toward eligible down payment and closing costs.
Income requirements, homebuyer counseling and other conditions apply, and repayment may be required if certain occupancy or refinancing conditions are not satisfied. Program funding is also subject to availability.
New Jersey buyers may have access to significant assistance through the New Jersey Housing and Mortgage Finance Agency (NJHMFA).
NJHMFA currently provides eligible buyers purchasing in New Jersey with down payment assistance of up to $10,000 or $15,000 depending upon the county.
Qualified first-generation home buyers may be eligible for an additional $7,000, bringing total potential assistance to between $17,000 and $22,000, depending upon the county and program eligibility.
The assistance is generally structured as an interest-free, five-year forgivable second loan with no monthly payment, subject to the applicable program rules.
This is one of the most overlooked aspects of first-time buyer financing.
Two borrowers with identical income, credit scores and down payments could potentially have different financing options simply because they are buying homes in different locations.
Programs may be based on:
This means the best mortgage analysis should not stop with the question:
"How much do you have for a down payment?"
It should also ask:
"Where are you planning to buy?"
That allows us to investigate whether the property's location creates additional financing or assistance opportunities.
Some low-down-payment and assistance programs require homeownership education or counseling.
For example, Fannie Mae and Freddie Mac have homebuyer-education requirements for certain transactions involving first-time buyers, and many state and local assistance programs have their own counseling requirements.
Do not view this as an obstacle.
A good first-time home buyer course can help explain budgeting, credit, mortgage payments, closing costs, home maintenance and the responsibilities that come with owning a home.
Another misconception is that first-time buyer programs are only available to very low-income borrowers.
Some programs do have income limits.
Others do not.
For example:
This is why it is worth reviewing the available options even if you believe your income is too high for a "first-time buyer program."
Waiting until you accumulate a 20% down payment can sometimes take years.
During that time:
That does not mean everyone should buy a home with 3% down.
It means you should understand your options before deciding how much you need to save.
For one buyer, putting 20% down may make perfect sense.
For another, putting 5% down and keeping substantial emergency savings may be the better financial decision.
First-time home buyer financing is not simply about finding a mortgage with the smallest down payment.
A proper analysis should consider:
Fannie Mae vs. Freddie Mac
Standard conventional vs. affordable conventional programs
3% vs. 5% vs. 10% or greater down payments
Mortgage insurance costs
Gift funds
Seller credits
State assistance
County assistance
City and municipal programs
Property-specific eligibility
Income limits
Long-term monthly payment and total cost
At Capital Funding Mortgage, we can review your individual situation and help identify the mortgage programs and potential assistance opportunities that may be available based upon both your financial qualifications and where you intend to purchase your home.
Even if you are several months away from buying, starting the conversation early can be valuable. It gives you time to understand your credit, determine an appropriate budget, evaluate available programs and develop a plan before you begin making offers.
Contact Capital Funding Mortgage before you begin shopping.
We can review your income, credit, available funds and intended purchase area and help you determine which first-time home buyer financing options may be worth considering.
John Madden
Owner, Capital Funding Mortgage
Newtown, Pennsylvania
NMLS #960139
Cell 215 601 6724
You may be closer to buying your first home than you think.
Mortgage programs, underwriting requirements, income limits, assistance amounts and program availability are subject to change. Not all borrowers or properties will qualify. Down payment and closing-cost assistance programs may be grants, forgivable loans, deferred loans or other forms of subordinate financing and may contain repayment,
