How to finance your first home

Owning a home is great for building wealth and putting down roots for yourself and your family. But for first-time buyers, the process of purchasing a home, including getting home financing, can be intimidating.

You’ll typically need to pay cash up-front for your down payment and closing costs, but you can finance most of the purchase with a mortgage. Additionally, many programs and grants are available specifically for first-time homebuyers.

• Types of homes
• Loans to help with home financing
• Homebuyer programs and grants
• Understand your finances
• Frequently asked questions

Types of homes

When searching for a home, you’ll generally encounter three types of properties: existing homes, new builds and pre-construction homes.

Existing homes

These properties are already built and have been occupied prior to sale. The advantage is that the house is here now, and you can see exactly what you’re getting. Existing structures account for more than 90% of all home purchases, according to the National Association of Realtors.

Depending on their age, existing homes might need repairs before they’re move-in ready. For example, replacing the roof or the heating and cooling systems are expensive projects that need to be done sometime between 10 and 30 years after installation.

New builds

These are brand new homes that have never been lived in. One of the biggest advantages of buying a new build is that they rarely need repairs. This is because newly-built homes are constructed to current code requirements with new systems and appliances. Additionally, new builds often feature modern design trends and floor plans.

While new builds have many benefits, they also come with a hefty price tag. The average sales price of newly built homes was $474,400 in January 2023, according to the U.S. Census Bureau. These homes also tend to be in new-construction communities that may come with higher property taxes. This is because these communities often lack the established infrastructure, like roads and electrical grids, that exist in pre-existing neighborhoods.

Pre-construction

These are homes that aren’t yet built. The advantage is you can often customize aspects of the home. You might be able to select finishes such as flooring, countertops and cabinets. Like new builds, you’d be the first to live in the house and it shouldn’t need immediate repairs.

With a pre-construction home, you’ll need to find a reputable developer and decide on a location to build. You’ll also need to wait some time before you can move in, as it generally takes three to six months to build a home. Keep in mind, though, that this timeline can be extended if you run into supply chain or labor shortages.

Loans to help with home financing

If you’re thinking of buying a home, it's wise to know the various loan options available. Different types of loans come with varying eligibility and down-payment requirements.

FHA loans

An FHA (Federal Housing Administration) loan is a mortgage provided by a government-approved lender. The FHA insures the loan, which lowers the risk for the lender in case a borrower defaults on the loan.

Because these loans are insured by the FHA, they tend to be easier to qualify for than standard conventional loans and come with low down payment requirements. You can get an FHA loan with poor or fair credit (a FICO score below 670), and you’ll only be required to pay 3.5% to 10% of your loan amount for your down payment.

USDA loans

The U.S. Department of Agriculture (USDA) offers home loans to homebuyers in rural areas. These loans offer a zero down payment option with a minimum credit score requirement of just 640. But to qualify, you’ll have to meet strict eligibility requirements.

The home you're buying must be in a designated rural area. You can use the USDA's address look-up tool to see what areas near you qualify. Additionally, your annual income must meet a certain limit based on your location and family size.

VA loans

A VA loan is a government-backed loan specifically intended for servicemembers, veterans and eligible surviving spouses. VA loans require no down payment and have no minimum credit requirement to qualify.

To get a VA loan, you'll need to provide a Certificate of Eligibility that shows you or your spouse have met certain service requirements.

Conventional loans

A conventional mortgage is any home loan that isn’t backed by the government. These loans are offered by banks and mortgage lenders. Eligibility requirements are generally more stringent than those for government-insured loans. For instance, you’ll typically need a credit score of at least 620 and provide at least a 20% down payment to avoid having to buy private mortgage insurance (PMI).

Homebuyer programs and grants

There are some homeownership assistance programs for first-time home buyers you might qualify for.

First-time homebuyer tax credits

State Housing Finance Agencies (HFAs) offer assistance to low- and moderate-income first-time homebuyers through mortgage credit certificates (MCC). These certificates offset a portion of your mortgage by allowing you to deduct up to $2,000 of your mortgage interest payments.

Down payment assistance (DPA) programs

While you can find low- and no-down payment mortgages through the FHA, USDA or VA, most home loans do require a minimum down payment. However, down payment assistance (DPA) programs can help cover some or all of your down payment.

DPA programs usually come in the form of grants, zero-interest deferred-payment loans, and full-interest second loans. Most DPA programs are technically second mortgages with low interest rates. While some DPA programs are reserved for specific communities or occupations — like teachers, veterans and first-time homebuyers — other programs offer assistance for any homebuyer that meets certain income and purchase price limits.

Nonprofit first-time homebuyer programs

Several charitable and not-for-profit organizations offer assistance to low- and moderate-income first-time homebuyers.

For example, Habitat for Humanity is a not-for-profit that aims to "build strength, stability and self-reliance through shelter" by providing housing for low-income families. Mortgage payments for Habitat homes are limited to 30% of the homeowner’s gross monthly income, and payments go toward building additional houses. Additionally, homeowners will only have to repay the cost of building the home.

You might also want to consider the Neighborhood Assistance Corporation Of America (NACA) homeownership program, which provides mortgages to NACA members who might struggle to qualify for a home loan. NACA loans have no credit score, down payment or closing cost requirements. Additionally, they work with prospective buyers to determine if they’re ready for homeownership and how much they can afford.

State-sponsored programs

Many states offer programs to help lower-income borrowers become homeowners. You can check what your state might offer through the Department of Housing and Urban Development (HUD).

Understand your finances

Buying a home is a major investment, so it’s crucial to know where you stand financially before committing to a purchase. Consider the following factors:

Your budget

Consider getting pre-approved before submitting an application for a mortgage. With pre-approval, a lender will perform a hard credit check to determine how much you’re eligible to borrow and what interest rate you’ll likely qualify for.

You can use a mortgage calculator to determine what your monthly mortgage payments are likely to be depending on your interest rate and the size of your loan.

Maintenance

Houses need to be taken care of to maintain function and increase value as much as possible. Keeping up with regular home maintenance, like appliance or structural repairs, can reduce potential dangers and save you money in the long run.

Tax deductions

Contact a tax expert to see which tax deductions you qualify for as a homeowner. You might be able to deduct mortgage interest, PMI, points paid on a mortgage, and property taxes.

Renovations

If the house needs work before you can move in, factor that cost into the price of the home before you buy. Alternatively, if you can live in the house as is but still want to make changes, you might want to budget to make renovations in the near future.

Frequently asked questions

Here are some of the most commonly asked questions about financing your first home.

How do I qualify for a loan?

Keep in mind the four "C’s" to determine whether you qualify for a loan:

• Capacity: Capacity refers to the ability to make your mortgage payment. This is where your income and debt come into play.
• Capital: This is how much money you have in savings, investments and gifts from family members. Having money saved shows lenders that you’ll be able to afford your mortgage.
• Collateral: Mortgages are secured with the home as collateral. This means if you default on your loan, the lender can foreclose on your property.
• Credit: When you apply for a home loan, lenders will assess your credit score and history to determine if you can responsibly manage debt. Many mortgages also have additional credit score requirements, which will influence your interest rate and down payment amount.

What are mortgage points?

Also called discount points, mortgage points let you lower your interest rate by paying a fee upfront at closing. A point equals 1.00% of the loan amount. For example, a point on a $200,000 loan would cost $2,000. How much this lowers your interest rate varies by lender. Keep in mind that paying points is optional.

How much are closing costs?

Closing costs usually range from 2% and 5% of the home’s purchase price. This money pays for things such as the appraisal fee, application fee, home inspection, mortgage origination fee, escrow, title insurance and any homeowner’s association transfer fees.