Buying a home for the first time can be exciting, a little scary, and very expensive. First-time homebuyers won’t always qualify for the best mortgage rates, but given that homeownership in the United States has dropped over the last few years, many lenders are eager to provide mortgages to new borrowers, even when their credit scores are less than stellar. To make that possible, many lenders now offer “first-time home buyer programs” that allow individuals to purchase homes they otherwise wouldn’t be able to afford.

What Are First Time Home Buyer Programs?

Using favorable interest rates, tax breaks, low-to-no down payments, and grants, first-time home buyer programs can increase a buyer’s chance at owning a home. Depending on the lender, these loans might be offered in particular geographic areas, or to individuals who work in certain industries. There are also specific programs for active-duty military, veterans, and other high-risk or low-paying careers. Since the programs vary by state, you’ll need to research what’s available in your area and calculate how much you can afford — from monthly payments to a down payment — to help narrow down your search.

First Time Home Buyer Programs

Conventional Loans

A conventional loan follows guidelines set by Fannie Mac and Freddie Mae and are not backed by government agencies. These loans are a great option for first-time borrowers with good credit who can afford some sort of down payment. They’re also a good option if you aren’t planning to stay in your home very long and want a shorter-term, adjustable-rate mortgage. While many other loans require an upfront “funding fee,” with a conventional loan, there are no upfront mortgage insurance fees.

Conventional 97 Loan

A Conventional 97 program is meant for borrowers who qualify for a conventional loan but can’t afford a large down payment. Similar to a conventional loan in many ways, the minimum down payment on a Conventional 97 is 3%, the property must cost less than $484,350, and buyers must pay for mortgage insurance.

VA Loan

A VA loan is designed to help military service members, veterans, and surviving spouses buy a home. Funds are provided by private lenders like banks and mortgage companies. The VA guarantees a portion of the loan, which allows the lender to offer better terms. A VA loan does not require a down payment or private mortgage insurance. Qualified recipients can also use cash-out refinance loans to take cash out of their home’s equity to fund school, pay off debt or make home improvements.

USDA Loan

A USDA loan is designed for moderate-to-low income home-buyers in eligible rural and suburban areas. These loans are 100% financed which means there is no money down, and no up-front closing costs. There are strict geographic restrictions and income limits for borrowers, so check your eligibility at USDA.gov.

Fannie and Freddie 3% Down Loan

Fannie Mae and Freddie Mac now offer loans for certain individuals that require just a 3% down payment for either a home purchase or a refinance. These loans are meant for people with low-to-moderate income levels and credit scores as low as 620. Despite the credit score leniency, certain loans are subject to income limits unless one buyer is a first-time home-buyer.

FHA Energy Efficient Mortgage (EEM)

An FHA Energy Efficient Mortgage isn’t necessarily geared toward first-time buyers but toward people who want to make extensive energy-saving adjustments to a home. Still, first-time home buyers could use an FHA EEM loan to lower their costs, though any home-buying savings might be outweighed by up-front energy-saving costs in the short term. This program helps lower utility bills by offering financing for energy-efficient improvements. To qualify, the buyer must get a home energy assessment to identify opportunities for improving energy efficiency.

Fannie Mae’s HomePath ReadyBuyer Program

If you’re interested in learning more about the home-buying process, the Fannie Mae HomePath ReadyBuyer Program offers incentives for education. First-time buyers can receive up to 3% of the purchase price in closing cost assistance on particular HomePath properties by taking and completing an online homebuyer education course. Buyers must prove they’ve completed the course and must reside in certain, qualified properties.

Good Neighbor Next Door

The Good Neighbor Next Door program is designed for law enforcement officers, teachers and first responders. The program is offered through HUD and offers 50% off the list price of eligible homes. Buyers must commit to living in the property for 36 months, and only certain homes are available through the program.

Interest Rates and Down Payments

Before jumping into buying a home through certain programs, it’s important to consider interest rates and how much of a down payment you can afford. Even small changes in interest rates can have a significant impact on your mortgage rate and you need to be sure you can afford that payment. For instance, on a $100,000 mortgage on a 30-year term, a 5% interest rate means a $476/month payment. Add just 1% to that and the payment $533.

Down payments can also make an impact on your total cost, though usually not as dramatically as your interest rate. On a $100,000 mortgage with 4% interest, providing a $1,000 down payment makes your monthly payment $464. Adding $1,000 to that payment only brings your monthly payment down to $455. You won’t begin to see a significant decrease in monthly payments unless you can provide a substantial down payment. The impact also depends on your lender’s mortgage insurance requirements. Homebuyers who can’t afford a 20% down payment are a higher risk for financial institutions, so lenders will require borrowers to pay private mortgage insurance (PMI) premiums when they can’t make a 20% down payment. A PMI premium is usually between 0.5% and 1%.