First-Time Homebuyer Guide: Programs, Grants, and What to Know

Bottom line: First-time homebuyers have access to programs that reduce or eliminate down payments, lower mortgage rates by 0.5–1%, and provide outright grants of $5,000–25,000 in many states. Most buyers never apply for these programs because they do not know they exist. The definition of "first-time buyer" is broader than most people assume: you may qualify even if you have owned before.

Quick answer

First-time buyers do not need 20% down. FHA allows 3.5% down with a 580+ credit score, HomeReady and Home Possible allow 3% down, and VA and USDA loans allow zero down for eligible buyers. On top of the loan, every state runs a Housing Finance Agency offering rates 0.5 to 1% below market (against a current 30-year average around 7.40% APR) plus down payment assistance from $5,000 to $25,000, sometimes as outright grants. You count as first-time under most programs if you have not owned a primary residence in the past three years. The playbook: check your state HFA first, complete the homebuyer education course early, and stack programs rather than walking into a retail lender unassisted. This first time homebuyer guide outlines the key steps to maximize available assistance and avoid leaving money on the table.

The biggest barrier to homeownership for most first-time buyers is the down payment. A 20% down payment on a $350,000 home is $70,000, a meaningful amount that takes years to accumulate. But 20% is not required. Several loan programs allow buyers to purchase with 0–3.5% down, and down payment assistance programs in most states can cover that amount or provide grants on top. Check current mortgage rates and run the numbers with our mortgage calculator before you set a target price.

What "First-Time Buyer" Actually Means

You are considered a first-time buyer for most federal and state programs if you have not owned a primary residence in the past three years. This means:

• You may have owned a home previously and still qualify (if it has been 3+ years)
• You may have owned investment property and still qualify
• If you are buying with a partner, only one of you needs to meet the definition for some programs

Always check the specific program; the three-year rule is common but not universal. HUD's homebuying overview is a good starting reference.

Federal Loan Programs

FHA Loans

Backed by the Federal Housing Administration. Minimum credit score: 580 (with 3.5% down) or 500 (with 10% down). Minimum down payment: 3.5%. Available nationwide through any FHA-approved lender.

FHA loans require mortgage insurance premiums (MIP): an upfront premium of 1.75% of the loan amount and an annual premium of 0.55–1.05%. MIP remains for the life of the loan if you put down less than 10%, unlike PMI on conventional loans, which drops off at 20% equity. This is the main trade-off.

Conventional Loans with 3% Down

Fannie Mae's HomeReady and Freddie Mac's Home Possible programs allow 3% down payments with lower PMI rates than standard conventional loans. These have income limits (typically 80% of area median income) and require homebuyer education courses.

USDA Loans

Zero down payment for eligible rural and suburban properties. Income limits apply (typically 115% of area median income). No minimum credit score set by USDA, but most lenders require 640+. No PMI, but a guarantee fee applies (1% upfront, 0.35% annually).

VA Loans

Zero down payment for eligible veterans, active-duty service members, and surviving spouses. No PMI. Competitive rates. The VA funding fee (1.25–3.3% of the loan amount) can be rolled into the loan. Generally the best mortgage program available for those who qualify.

Using an IRA for first-home costs: a narrow penalty exception

The “first-time homebuyer IRA exception” is often oversold as a tax-free down-payment account. Internal Revenue Code section 72(t)(2)(F) permits an IRA owner to avoid the 10% additional tax on up to $10,000 lifetime of qualifying distributions used for first-home acquisition costs. It is not a separate account or contribution limit, and it does not generally make a traditional IRA distribution tax-free. A taxable traditional IRA withdrawal remains ordinary income; the exception removes only the additional tax. If you have nondeductible IRA basis, Form 8606 determines the taxable share.

The distribution must pay costs before the close of the 120th day after receipt. Qualified costs include buying, building, or rebuilding the home and usual or reasonable settlement, financing, and other closing costs. The home must be the main home of an eligible person: you, your spouse, your child or grandchild, or your parent or other ancestor. Generally, the buyer must have had no present ownership interest in a principal residence during the two years ending on the acquisition date; if married, the spouse must also meet that test. The acquisition date is generally the binding purchase-contract date or when construction/rebuilding begins. Earlier first-home distributions count toward the individual’s lifetime cap. If both spouses independently qualify, each may have a separate lifetime limit subject to prior use and the law.

This is an IRA exception. It does not let you withdraw $10,000 from an employer 401(k) and call it penalty-free. A plan may permit hardship distribution for certain home costs, but that is a separate plan provision and does not itself waive the 10% additional tax. Rolling 401(k) money to an IRA is not an instant workaround; rollover and distribution rules still apply.

Roth IRA has two tests

Roth distributions follow ordering rules: regular contributions generally come out first, then conversion/rollover amounts, then earnings. Contribution basis is generally accessible without income tax or penalty, but earnings have separate qualification rules. A qualified Roth distribution generally requires the five-tax-year period and a qualifying event, which can include a first-home distribution within the statutory limit. If the five-year test is not met, earnings may remain taxable even when the first-home rule waives the 10% additional tax. Conversion amounts can carry separate five-year penalty rules. Have your custodian and preparer identify which dollars the withdrawal reaches before scheduling it.

Example with dates and a previously used limit

Jordan, age 34, signs a binding purchase contract for a $360,000 principal residence on March 2, 2026. Jordan had no present interest in a principal residence during the two prior years and already used $6,000 of qualifying first-home IRA distributions. On March 20, Jordan withdraws $8,000 from a traditional IRA and pays $7,500 of ordinary, documented settlement costs on April 15. The $7,500 was used within 120 days, but only $4,000 of Jordan’s remaining lifetime capacity can use this particular exception. The other $3,500 of otherwise qualifying use may still owe the 10% additional tax absent a different exception. The unused $500 does not qualify under this rule. Any pre-tax amount can still be ordinary taxable income.

This example separates the 120-day deadline from the lifetime cap: meeting one does not make the full withdrawal eligible under the other. The result also depends on whether costs qualify, prior distributions, Roth ordering, traditional IRA basis, and any other penalty exception.

Before you withdraw

1. Test the two-year ownership rule for you and, if married, your spouse; review actual ownership interests, not just occupancy.
2. Confirm the home and cost qualify. It must be a main home for an eligible person, and the expense must be acquisition, construction/rebuilding, or usual/reasonable closing-related cost.
3. Add prior use across IRAs. Reconcile custodian records, Forms 1099-R, and earlier Forms 5329; the cap is lifetime, not per account.
4. Coordinate dates. Spend the distribution by the close of day 120 after receipt; do not assume a delayed closing extends the deadline.
5. Model tax separately. For traditional IRA funds, estimate ordinary income and Form 8606 basis. For Roth funds, document contributions, conversions, earnings ordering, and the five-year clock.
6. Save evidence. Keep the signed contract, settlement statement, receipts, withdrawal confirmation, prior forms, and exception calculation.
7. If the purchase is canceled or delayed, act quickly. IRS Publication 590-B generally allows the distribution to be returned to an IRA within 120 days of the original withdrawal in qualifying cases. Ask the custodian/preparer to process it correctly.
8. Report the exception. Follow current Form 5329 instructions (exception code 09) and Form 8606 when applicable. A Form 1099-R reports a distribution; it does not decide your exception.

Treat this as a last-resort funding source, not free assistance. A withdrawal can reduce retirement savings and increase income used in other tax calculations. Compare state assistance, seller credits, a lower price, or delaying the purchase before tapping retirement assets. See IRS Publication 590-B, Form 5329 instructions, and Form 8606 instructions.

State and Local Programs

Every state has a Housing Finance Agency (HFA) that offers below-market mortgage rates and down payment assistance for first-time buyers. These programs are often the most valuable available: rates can be 0.5–1% below market, and down payment assistance ranges from loans to outright grants.

Common structures:

• Forgivable second mortgage: A second loan for down payment assistance that is forgiven after you live in the home for 5–10 years
• Deferred payment second mortgage: No payments required until you sell, refinance, or pay off the first mortgage
• Outright grant: Money that does not need to be repaid

Find your state's HFA through the National Council of State Housing Agencies (ncsha.org). Apply through a participating lender in the program.

Local and Employer Programs

Many cities and counties offer additional assistance, sometimes $10,000–50,000 in grants or interest-free loans, in targeted neighborhoods or for public employees (teachers, firefighters, nurses). Search "[your city] first-time homebuyer assistance" and check your employer's HR resources.

The Homebuyer Education Requirement

Most first-time buyer programs require completion of a HUD-approved homebuyer education course before closing. These are available online for $75–125 and take 6–8 hours. Fannie Mae's HomeReady, Freddie Mac's Home Possible, and most state HFA programs require it. Complete it early in your process, since it also prepares you for every stage of the home purchase. Find a HUD-approved counseling agency to confirm which course satisfies your program.

Stack the Programs

Programs can be combined. A typical stack:

1. State HFA mortgage rate (0.5% below market)
2. State down payment assistance grant ($10,000)
3. FHA or conventional loan (3–3.5% down)
4. Seller concessions for closing costs (negotiated in offer)

A buyer who researches and applies for available programs can reduce their out-of-pocket cash requirement significantly compared to a buyer who goes directly to a retail lender.

Which Program Fits You?

Work out what the payment looks like at your target price with the mortgage calculator and the home affordability calculator, then get the ground truth on current mortgage rates. For state-by-state grant details, see first-time homebuyer grants by state. If buying competes with other goals, Money Map shows the trade-offs.

Quick answers

Who counts as a first-time homebuyer? Under most programs, anyone who has not owned a primary residence in the past three years, even if they owned a home before that or own investment property now.

How much down payment assistance can I get? State programs typically range from $5,000 to $25,000, structured as grants, forgivable second mortgages, or deferred loans. Some city and employer programs add $10,000 to $50,000 more.

Do I have to repay first-time buyer assistance? Grants, no. Forgivable seconds are erased after 5 to 10 years of living in the home. Deferred seconds are repaid when you sell or refinance.

What credit score do I need? 580 for FHA at 3.5% down, 620 is the floor most lenders use for conventional programs, and most USDA lenders want 640+. Higher scores unlock better rates in every program.

Sources

• HUD homebuying overview for federal program descriptions and buyer resources.
• HUD-approved housing counselor directory for education courses that satisfy program requirements.
• National Council of State Housing Agencies for finding your state HFA and its current programs.
• For the IRA first-home penalty exception, see Internal Revenue Code §72(t)(2)(F) and (8), IRS Publication 590-B, and the Form 5329 and Form 8606 instructions for penalty reporting, basis, and Roth ordering.
• SwitchWize mortgage rate tracking, reviewed against lender and market data on the date below.

Rates referenced on this page were verified on July 9, 2026. Program availability, income limits, and grant amounts change annually and vary by state and locality; verify current programs with your state HFA or a HUD-approved housing counselor. This article is educational information, not individualized financial advice.