First-Time Homebuyer: Definition and Assistance Programs

What Is a First-Time Homebuyer?

First-time homebuyers often qualify for special benefits such as lower minimum down payments, special grants, and assistance with paying closing costs that are sponsored by state and federal governments. Many lenders offer first-time homebuyers incentives and special loans.

The term first-time homebuyer generally refers to a person who is buying a principal residence for the very first time. However, the definition is sometimes more generous. The term is not age-specific, so a first-time buyer can be in their 20s, 30s, 40, or of any age.

There are many programs that help people get into their own homes. The government has programs that assist some first-time homebuyers. Also, the IRS allows early withdrawals from retirement savings accounts to these first-time buyers. There are even some programs that are not strictly for first-time buyers.

Understanding First-Time Homebuyers

Strictly speaking, a first-time homebuyer is an individual who is purchasing a primary residence for the first time. This home is deemed the homebuyer's principal residence, or the primary location that the person inhabits.

It may also be referred to as their primary residence or main residence. Keep in mind, though, that a principal residence may not always be a conventional house. For instance, it could be a boat that someone resides on full-time.

The U.S. Department of Housing and Urban Development (HUD) expands that definition even further. According to the agency, a first-time homebuyer is:

• Someone who hasn't owned a principal residence for the three-year period ending on the date of purchase of the new home.
• An individual who has never owned a principal residence even if the person's spouse was a homeowner.
• Any single parent who previously owned a home with an ex-spouse.
• A displaced homemaker who only owned property with a spouse.
• A person who owns property that is not in compliance with local or state building codes and can't be brought into compliance.

First-time homebuyers who fall into any of the above categories may be eligible for certain government-sponsored programs that can offer financial assistance.

Fannie Mae's Definition of First-Time Homebuyer

Like HUD, Fannie Mae defines a first-time homebuyer as a person who has not owned a residential property in the last three years.

The Federal National Mortgage Association, generally known as Fannie Mae, works to extend home ownership to more Americans through a number of programs. Its HomeReady program assists homebuyers with unconventional income sources and as little as three percent to put down on a mortgage.

Its consumer website has the details on its programs to assist homebuyers in buying or upgrading a home.

Fannie Mae does not originate mortgages. It buys mortgages that banks originate, guarantees their repayment, then packages them for resale on the secondary market. This encourages lenders to grant more mortgages to buyers with less-than-ideal financial circumstances.

Federal Housing Administration (FHA) Loans

The Federal Housing Administration (FHA) has been working since 1934 to help homebuyers with modest means to buy homes. Their programs aren't restricted to first-time homebuyers, although they can be particularly relevant to first-time buyers struggling to qualify for a loan.

Qualified applicants can put down as little as 3.5% as a down payment, and the FHA's credit qualifications are less strict than a bank's.

The FHA also offers reduced closing costs, helps seniors stay in their own homes, and helps homeowners finance energy-efficient updates.

They don't do this by issuing mortgages but by backing mortgages issued by private lenders like banks. They guarantee the mortgage so that the bank doesn't turn down a less-than-ideal applicant.

Any bank that is "FHA-approved" has these loans available.

U.S. Department of Agriculture (USDA) Benefits

The U.S. Department of Agriculture's homebuyer assistance program is targeted to people who want to buy or upgrade homes in rural areas that are currently in poor condition.

Called the SFH Guaranteed Loan Program, it offers up to 100% financing for people who want to buy and upgrade a home or upgrade a home they already own.

Like the FHA program, this is a loan guarantee to a bank, not a loan from the government.

The loan applicants need not be low-income. They can have incomes up to 115% of the national average.

U.S. Department of Veterans Affairs (VA) Benefits

The U.S. Department of Veterans Affairs (VA) helps first-time homebuyers who are active-duty military members, veterans, and surviving spouses. VA loans provide competitive interest rates and require no down payment. The VA guarantees part of the loan.

With a VA loan, first-time homebuyers aren’t required to pay for private mortgage interest (PMI), and they do not need to maintain a minimum credit score for eligibility.

If the borrower later struggles to make payments on the mortgage, the VA can negotiate with the lender on the person's behalf.

Lender-Offered Benefits

Certain lenders provide first-time homebuyers with perks that are sponsored by the government. For instance, first-time homebuyers with low- to moderate-income levels may qualify for grants or loans that don't require repayment as long as the borrower remains in the home for a certain period of time.

Closing cost assistance may also be available depending on individual circumstances.

All of these options are provided through government-sponsored programs. Eligibility varies based on homebuyers' credit scores, income levels, and local requirements.

If you want to research your options, HUD's site on FHA Loans is a good place to start.

IRS Benefits

A first-time homebuyer may be able to withdraw funds from an individual retirement account (IRA) without incurring the 10% early-distribution penalty that is ordinarily applied to IRA distributions that occur before the IRA owner reaches 59.5 years old.

The purchase does not need to be a traditional home for the individual to qualify as a first-time homebuyer, but it must be the person's principal residence. For example, it could be a houseboat that will be used as a residence.

The maximum amount that may be distributed from the IRA on a penalty-free basis for this purpose is $10,000. This is a lifetime limit.

For married couples, the limit applies separately to each spouse. This means that the combined limit for a married couple is $20,000.

The Bottom Line

A first home purchase is a major hurdle for all but the wealthiest Americans. A number of federal government programs are targeted at first-time homebuyers. Mostly, they are in the business of underwriting mortgages so that qualified applicants can get into a house with a smaller down payment, an imperfect credit score, and a decent but not lavish income.