The biggest barrier for most first-time buyers is the down payment. The good news is that multiple federal and state programs exist to help -- some requiring as little as zero down.
FHA Loans: The 3.5% Down Option
FHA loans are insured by the Federal Housing Administration and are one of the most popular options for first-time buyers. The minimum down payment is 3.5% with a credit score of 580 or higher. If your score is between 500 and 579, you can still qualify but will need 10% down.
FHA loans are more forgiving on credit history and allow higher debt-to-income ratios than conventional loans -- up to 50% in some cases with strong compensating factors. They also allow the entire down payment to come from gift funds, which is more restrictive with conventional loans.
The trade-off is mortgage insurance. FHA loans require an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which is typically rolled into the loan, plus an annual mortgage insurance premium (MIP) of 0.55% for most borrowers. If you put less than 10% down, MIP lasts for the life of the loan. If you put 10% or more down, it drops off after 11 years. This ongoing cost is why many buyers refinance into a conventional loan once they have 20% equity.
VA Loans: Zero Down for Those Who Served
VA loans are available to eligible active-duty military, veterans, National Guard members, reservists, and surviving spouses. They are backed by the Department of Veterans Affairs and offer some of the most favorable terms available anywhere in mortgage lending.
The headline benefit is zero down payment required, with no private mortgage insurance. VA loans also tend to have the lowest interest rates of any loan type and more flexible credit requirements. There is no official minimum credit score set by the VA, though most lenders require at least 620.
VA loans do charge a funding fee, which ranges from 1.25% to 3.3% of the loan amount depending on your down payment, service type, and whether it is your first VA loan. This fee can be rolled into the loan. Disabled veterans and surviving spouses of veterans who died in service are exempt from the funding fee. To get started, you will need a Certificate of Eligibility (COE) from the VA, which your lender can help you obtain.
USDA Loans: Rural and Suburban Homebuying
USDA loans are backed by the U.S. Department of Agriculture and are designed for low-to-moderate income buyers in eligible rural and suburban areas. Like VA loans, they require zero down payment. The definition of "rural" is broader than you might expect -- many suburban communities and small towns qualify.
To qualify, your household income must not exceed 115% of the area median income. USDA loans require a credit score of at least 640 for automatic underwriting approval (lower scores may be considered with manual underwriting). There are two forms of mortgage insurance: an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%, both lower than FHA equivalents.
You can check whether a specific address is in a USDA-eligible area using the eligibility map on the USDA website. Many buyers are surprised to find that areas just outside major metropolitan centers often qualify. If you are open to living slightly outside the city, USDA loans can be an excellent option.
State and Local Down Payment Assistance Programs
Every state offers some form of down payment assistance (DPA) for first-time homebuyers, and many cities and counties have their own programs as well. These programs come in several forms:
- Grants: Free money that does not need to be repaid. Some state housing finance agencies offer grants of $5,000-$15,000 or more toward your down payment and closing costs.
- Forgivable loans: Second mortgages that are forgiven after you live in the home for a specified period, typically 5-10 years. If you sell or refinance before the forgiveness period ends, you must repay all or part of the loan.
- Deferred-payment loans: Second mortgages with no monthly payments required. The balance comes due when you sell, refinance, or pay off the first mortgage. Some are interest-free.
- Matched savings programs: Also called Individual Development Accounts (IDAs), these match your savings at a ratio of 2:1 or 3:1 toward a down payment, typically with income limits and financial education requirements.
Most DPA programs have income limits (often 80-120% of area median income) and purchase price limits. Some require homebuyer education courses, which are available online or in person and usually take 4-8 hours. Your lender or a local HUD-approved housing counseling agency can help you identify programs available in your area.
How to Apply and Next Steps
Start by getting pre-approved with a lender who is experienced with the loan program you are interested in. Not all lenders offer every program -- some specialize in FHA, others in VA or USDA. Ask specifically about DPA programs they work with, as many state programs must be paired with specific loan products.
Gather your financial documents before applying: two years of tax returns, recent pay stubs, two months of bank statements, and documentation for any gift funds. If you are using a VA loan, request your Certificate of Eligibility. For USDA loans, have proof of household income for everyone living in the home, not just the borrowers on the loan.
Consider completing a homebuyer education course early in the process, even if your loan program does not require it. These courses cover budgeting, the mortgage process, home inspections, and maintaining your home after purchase. Many are free or low cost, and completing one may qualify you for lower rates or additional DPA benefits.