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First-time home buyer grants: Everything you need to know

Yahoo Personal Finance· Getty Images
5 min read

Are you a first-time home buyer wondering how you can afford a down payment or closing costs when you buy a home? You’re not alone. Many potential first-time home buyers struggle with the considerable upfront costs of buying a home. That’s where first-time home buyer grants can help.

Let’s dive into how a first-time home buyer grant can help you achieve your dream of homeownership.

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First-time home buyer grants are assistance programs designed to help first-time home buyers pay for the upfront costs of buying a home, such as the down payment and closing costs. Many first-time home buyer programs offer helpful ways to save money on your first home, but the unique benefit of first-time home buyer grants is that you do not have to repay them.

Whether you have to repay the grant money is a key factor to look out for while researching first-time home buyer grants. Some programs will be identified as grants but are really no- or low-interest loans that you must repay eventually. This article will focus on first-time home buyer grants that you don’t have to repay.

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The most common sources for first-time home buyer grants at the state level are Housing Finance Agencies (HFAs). These state-chartered authorities operate in every state of the union to bring residents affordable housing opportunities. HFA grants typically focus on low- and middle-income residents as well as special groups like first-time home buyers, veterans, those with disabilities, and people experiencing homelessness.

HFAs also provide several different types of first-time home buyer programs, such as low-interest home loans. Many HFAs require first-time home buyer grants to be used in combination with these other programs.

HFAs are not the only source for first-time home buyer grants. County and municipal government agencies may also assist directly through their own programs. For more information on local agencies in every state, visit the Department of Housing and Urban Development's (HUD) website covering local home buying grants and other programs.

Learn more: First-time home buyer grants in Florida

First-time home buyer grants can come in many forms, from direct cash assistance with no strings attached to forgivable loans that are only forgiven under certain circumstances. Below are some typical forms of first-time home buyer grants.

One of the biggest hurdles to owning a home for first-time home buyers is the down payment. While you may have the consistent income to afford monthly mortgage payments, you may not have the savings built up for a down payment. Down payment assistance grants can give you this much-needed cash to cover the down payment.

Read more: How to get a mortgage with just 3% down

Another upfront barrier to homeownership for first-time home buyers is closing costs. State HFAs also offer cash assistance to cover closing costs. Closing costs include title insurance and search fees, lender fees, real estate agent fees, escrow fees, and several other payments that can mount up to 3% to 6% of the loan amount.

Not all first-time home buyer grants come in the form of direct cash assistance. Many HFAs offer interest-free loans that they forgive after a certain number of years. It’s easy to confuse these programs with non-forgivable loan programs, so it’s important to research the details of the first-time home buyer grant before applying.

HFAs typically provide interest-free forgivable loans in the form of a second mortgage to cover costs such as the down payment and closing costs. However, unlike a traditional second mortgage, you do not need to make payments on this loan and it does not grow over time from accruing interest. Once you remain in the home for the required period of years, the loan is forgiven. This means you essentially received the cash for free.

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Some HFAs give first-time home buyer grants that match the amount of money that you can put toward a down payment or closing costs. So if you have $1,500 for a down payment, a matching grant will give you an additional $1,500 grant to go toward your down payment. Many HFAs offer matching grants through Individual Development Accounts (IDA).

Learn more: First-time home buyer grants in Texas

It is important to remember that while each first-time home buyer grant will have specific eligibility requirements, there are some general requirements for first-time home buyer grants:

  • First-time home buyer definition: Many first-time home buyer grants define "first-time home buyer" as someone who has never owned a home before or has not owned a home within the last three years.

  • Occupancy: Most first-time home buyer grants are designed for primary residences. You will likely be required to live in the home after purchasing it and not use it for other purposes, such as a vacation or rental property. You may also have to live in the property for a certain number of years to avoid repaying your grant.

  • Income: First-time home buyer grants are typically designed for low- to moderate-income buyers, so your household will have to adhere to income limits to qualify. The limit often depends on the local median income and your household size.

  • Sales price: The grant may set a maximum sales price for the home you'd like to buy based on the area's median sales price.

  • Educational courses: HFAs may require you to complete an educational course to qualify for a first-time home buyer grant. These helpful lessons can teach you the details of the home buying process, the importance of saving, and much more.

  • Credit score: You typically need a credit score of at least 620. This aligns with the minimum score lenders usually set to receive a conventional mortgage loan.