You know home prices have jumped and buying your first home can be a stretch. “First Time Home Buyer Federal Grants” is a common search term today. In fact, you’ll see ads all over the internet promising them, so now seems like a good time to review all the federal grants available that first-time home buyers can tap into. Here we go:
There are none.
An exhaustive search chasing down click bait yielded a grand total of zero federal grants that will help you with the down payment or closing costs. But don’t despair. There are quite a few ways in which the federal government or other agencies can help you afford a home, and state and local governments offer far more programs than we have room to recite. Let’s take a look.
What Is MCC?
The only direct help you’ll get from Uncle Sam comes in the form of a tax credit. It’s called the Mortgage Credit Certificate Program (MCC). With this program you receive a tax credit of 35 percent of the total annual interest you pay. The rest of the interest is still deductible.
The “real” grants are all local. Search for “First Time Home Buyer Assistance (Your County)” and you’ll probably find a local government agency or non-profit that offers a grant or loan to help you with your down payment or closing costs.
This can make quite a difference. A deduction means the government gives back a portion of your interest based on your highest tax rate, while a credit means you get 100 percent back. Let’s say your annual interest is $10,000 and your tax bracket is 22 percent. At the end of the year, your tax deduction is worth $2,200 – your tax bill is reduced by that much.
With the MCC program, the first 35 percent of your interest cost is reimbursed, and the rest is deductible. So, your tax credit is $3,500, and your deduction is 22 percent of the remaining $6,500, or another $1,430, for a total benefit of $4,930.
There are income limitations and other criteria, and this program is run locally, so your county must participate for you to use it. Nevertheless, it’s a pretty substantial benefit. Search for “MCC Certificate Program (Your County)” to find your local organization.
Government Home Loans
We’ve written about them before, but VA, FHA and USDA loans offer low or no-down payment options with no or low mortgage insurance, and lower interest rates than conventional loans. By insuring lenders against losses, the government (via HUD) encourages lenders to make loans at favorable rates and terms.
Better yet, almost every lender (whether bank, credit union, mortgage lender or mortgage broker) can offer these loans, so you can shop aggressively to get the best interest rate and terms.
Targeted Home Buyer Programs
Some people have steady income and serve important roles in society but can’t qualify to buy homes. Teachers, law enforcement officers and fire fighters are folks we all want in our communities but are often priced out of the market if they are just starting out.
HUD’s Good Neighbor Next Door program steps in by selling discounted homes in targeted revitalization areas. The discount can be as much as 50 percent off of market value! You must sign a note for the amount of the discount and commit to live in it for at least 36 months, but you pay no interest nor make payments and the note is forgiven at the end of three years. (Technically, this could be considered a federal grant, although it is really a grant of equity rather than cash.)
Fannie Mae and Freddie Mac Foreclosure Offers
Fannie and Freddie are not government agencies, but they do offer help.
Fannie Mae offers the HomePath program to help qualified buyers purchase Fannie Mae foreclosures. You must meet certain income requirements and otherwise be qualified for the loan. You must be a first-time home buyer and take a homeownership class, which qualifies you for closing cost assistance of up to 3 percent of the purchase price of the home. This cannot be applied to the down payment, but it can be used to buy down the interest rate for a lower payment.
You can then search for current listings of foreclosed homes on the HomePath home page and start making offers!
Freddie Mac offers its own version of this. The HomeSteps program sells Freddie foreclosures. Rather than offer a closing cost incentive, HomeSteps allows owner-occupant buyers a 20-day right to make offers without having to compete with investors. You don’t have to be a first-time home buyer, but you do need to live in the property.
Local Home Buyer Grants
The “real” grants are all local. Search for “First Time Home Buyer Assistance (Your County)” and you’ll probably find a local government agency or non-profit that offers a grant or loan to help you with your down payment or closing costs. These programs range from pretty good to extraordinary and are worth the effort if you need one to get your first home.