First-Time Homebuyer: Definition and Assistance Programs

What Is a First-Time Homebuyer?

The term first-time homebuyer generally refers to an individual who purchases a principal residence for the very first time. First-time homebuyers often qualify for special benefits such as low down payments, special grants, and assistance with paying closing costs that are sponsored by state and federal governments. Many lenders also offer first-time homebuyers incentives and special loans.

Understanding First-Time Homebuyers

As mentioned above, a first-time homebuyer is generally an individual who purchases a home for the very first time. This home is deemed the homebuyer's principal residence—the primary location that a person inhabits.

It may also be referred to as their primary residence or main residence. Keep in mind, though, that a principal residence may not always be an actual home. For instance, it could be a boat that someone resides on full-time.

The U.S. Department of Housing and Urban Development (HUD) expands that definition even further. According to the agency, a first-time homebuyer is:

• Someone who hasn't owned a principal residence for the three-year period ending on the date of purchase of the new home.
• An individual who has never owned a principal residence even if their spouse was a homeowner.
• Anyone who is a single parent who owned a home with their ex-spouse.
• A displaced homemaker who only owned property with their spouse.

A person who only owned property that wasn't in compliance with and cannot be brought into compliance with local or state building codes without constructing a new permanent structure.

First-Time Homebuyer Assistance

First-time homebuyers who fall into any of the above categories may be eligible for certain government-sponsored programs that can offer financial assistance.

Federal Housing Administration (FHA) Loans

The Federal Housing Administration insures this type of mortgage is offered by FHA-approved lenders. The agency's backing offers lenders a layer of protection, so they won't experience a loss if the borrower defaults. FHA loans have competitive interest rates, smaller down payments, and lower closing costs than conventional loans.

U.S. Department of Agriculture (USDA)

The U.S. Department of Agriculture's homebuyer assistance program focuses on homes in certain rural areas. The agency guarantees the home loan, and there may be no down payment required. In addition, the loan payments are fixed.

U.S. Department of Veterans Affairs (VA)

The U.S. Department of Veterans Affairs helps first-time homebuyers who are active-duty military members, veterans, and surviving spouses. VA loans provide 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. And if the borrower ever struggles to make payments on the mortgage, the VA can negotiate with the lender on their behalf.

Lender-Offered Benefits

As noted above, certain lenders provide first-time homebuyers with certain perks such as special loans. For instance, first-time homebuyers with low- to moderate-income levels may qualify for grants or loans that don't require repayment as long as the borrower remains in the home for a certain period of time.

Closing cost assistance may also be available to certain individuals depending on their circumstances. All of these options are provided through government-sponsored programs. Eligibility varies based on homebuyers' credit scores, income levels, and local requirements.

Special Considerations

A first-time homebuyer may be able to withdraw from their individual retirement account (IRA) without incurring the early-distribution penalty, which applies to IRA distributions that occur before the IRA owner reaches 59.5 years old.

The purchase does not need to be a traditional home for the individual to qualify as a first-time homebuyer, but it must be the principal residence. For example, it could be a houseboat that you intend to use as your main residence.

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.