What Is a First-Time Home Buyer?

A first-time homebuyer is an individual who is purchasing a principal residence for the first time. A principal residence is the primary location that a person inhabits, also referred to as primary residence or main residence. A principal residence is not always a home. For example, it could be a boat that someone resides on full-time.

Key Takeaways

  • A first-time home buyer is an individual who is purchasing a principal residence for the first time.
  • A principal residence is the primary location that a person inhabits; a principal residence is not necessarily always a home: it could be a boat, for example.
  • First-time homebuyers may be granted special privileges for this purchase, such as exemption from the early-distribution penalty that applies to individual retirement accounts (IRAs).
  • Many first-time homebuyers qualify for financial help when making a first-time home purchase; the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA) offer grants and special loan programs for first-time homebuyers that qualify for their programs.
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Understanding a First-Time Home Buyer

First-time home buyers are more commonly recognized according to several criteria with regard to an individual retirement account (IRA). If the potential home buyer meets these criteria, they can be granted special privileges, such as exemption from the early-distribution penalty.

The purchase does not need to be a traditional home in order for the individual to qualify as a first-time home buyer, but it must be the principal residence. For example, it could be a houseboat that will be lived in. 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 penalty applies to IRA distributions that occur before the IRA owner reaches a specific age, such as 59.5 years old.

Special Considerations

Financial Assistance for First-Time Home Buyers

Many first-time homebuyers don’t realize there are several programs available to them that can offer financial help.

Federal Housing Administration (FHA) Loans

One such program is a loan through the Federal Housing Administration (FHA). The FHA insures this type of mortgage (they are not the lender: FHA-approved lenders offer these mortgages). The FHA’s backing offers lenders a layer of protection.

In other words, the lender won’t experience a loss if the borrower defaults on the mortgage. FHA loans also have competitive interest rates, smaller down payments, and lower closing costs than conventional loans.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

The U.S. Department of Agriculture (USDA) Home Buyer Assistance Program

The U.S. Department of Agriculture (USDA) also has a homebuyer assistance program. While the program focuses on homes in certain rural areas, first-time homebuyers don’t need to buy or run a farm to be eligible. With this program, the USDA guarantees the home loan, and there may be no down payment required. In addition, the loan payments are fixed. This program includes income limitations, which can vary by region.

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

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

Additionally, if the borrower ever struggles to make payments on the mortgage, the VA can negotiate with the lender on their behalf.