Obtaining all the purchase requirements, including the down payment, can be challenging for first-time homebuyers. For this reason, first-time homebuyers may need to consider obtaining a loan.
MoneyGeek reviewed various first-time homebuyer programs offered in Connecticut, including zero-down-payment, low-down-payment and Connecticut-specific homebuyer loans.
What Is a First-Time Homebuyer Program & How Can It Help?
Purchasing a new home involves several expenses, one of which is the down payment on your mortgage — the cash you pay upfront for the property before receiving a loan.
A mortgage down payment is a key factor that impacts your monthly payments. Making a higher down payment upfront reduces the amount you’ll pay in interest, subsequently lowering your monthly payments.
In most cases, your down payment is calculated as a percentage of your home's purchase price. First-time home buyers who cannot afford the down payment can benefit from a first-time home buyer program.
There are a number of first-time homebuyer assistance programs in Connecticut, including programs that require no down payment, conventional loans and state-specific programs such as CHFA loans.
The best first-time buyer program will depend on your unique situation and needs, so taking the time to review them can help you make the right decision.
Zero-Down-Payment Loan Programs
First-time homebuyers can finance their purchases with zero-down-payment loans. The USDA and VA loan programs are the two most common types of these loans.
First-time homebuyers looking for a low-down payment option should consider USDA loans. With USDA loans, you'll pay less than you would with conventional or FHA loans.
The USDA loan is a good choice for home buyers living in rural areas or those with limited incomes. Since mortgage insurance is not required, it is an affordable option.
There are three types of USDA loans available to eligible borrowers:
- Section 502 Single-Family Housing Direct Home Loans: Rural home buyers with low or very low incomes are eligible for these loans.
- Section 502 Guaranteed Rural Housing Loan: This loan provides first-time homebuyers with 100% financing at a 30-year fixed rate.
- Section 504 Home Repair Program: This loan can be used to fund home improvements and repairs for eligible borrowers. To qualify, the borrower must earn less than 50% of the state's average income and will be subject to a repayment term of 20 years.
Unlike a conventional loan, a VA loan requires no down payment. However, not everyone is eligible for this type of loan. If you are military personnel, a veteran or a family member of one, you may qualify for this type of loan.
You can use a VA loan to buy a single-family home or condominium, build a new one or improve your existing home. For homebuyers to qualify for a mortgage, they must meet certain requirements regarding their property, credit score and income.
A VA loan offers several benefits, including lower closing costs, reasonable interest rates and no prepayment penalties or private mortgage insurance. There is, however, a one-time funding fee associated with VA loans.
Low-Down-Payment Loan Programs
Purchasing a home without putting down more than 20% may also be possible with low-down-payment loans. Low-down-payment home loans come in two forms: conventional and FHA.
Fannie and Freddie (Conventional) Loans
Homebuyers purchasing their first home often choose conventional mortgages as their preferred financing method. Generally, private mortgage lenders provide funding at relatively low-interest rates. However, the requirements for these loans are frequently stricter than government-backed loans.
Conventional loans can be classified into two groups: conforming loans that meet the guidelines set by Freddie Mac and Fannie Mae and non-conforming loans that exceed the standard loan limits.
With conventional loans, only a 3% down payment is required, but lenders typically mandate private mortgage insurance to protect themselves from a loan default. Conforming and non-conforming conventional loans require minimum credit scores of 620 and 700, respectively, and a debt-to-income ratio below 45%.
FHA loans are ideal for individuals with damaged or incomplete credit histories. The Federal Housing Administration's guidelines enable private lenders to offer low-down-payment mortgages that comply with its regulations.
It is easier to qualify for an FHA loan than for almost any other type of loan. The minimum credit score for a 3.5% down payment is 580 and the minimum score for a 10% down payment is 500. A maximum debt-to-income ratio of 43% is also needed to qualify. FHA loans carry fixed interest rates and repayment terms of 15 or 30 years.
Although these are the standard requirements, they may vary by county. For instance, Bridgeport has a maximum FHA loan amount of approximately $695,000 for a single-family house, whereas Torrington has a maximum limit of $420,000. Through the HUD (Department of Housing and Urban Development) you can check the maximum loan amount available to you in your area.
FHA 203(k) loans cover the purchase price of a home as well as the cost of renovations. As a result, FHA 203(k) loans are sometimes referred to as renovation loans, mortgage rehabilitation loans or Section 203(k) loans.
With this loan, homeowners do not have to apply for separate loans for their mortgage and home repairs. It is also easier for people to qualify for FHA 203(k) loans due to their lower credit requirements.
As a prerequisite for an FHA 203(k) loan, you must own a home that is at least one year old with a purchase price that is within your county's mortgage limits. Furthermore, the planned renovations should cost more than $5,000.
USDA loans: This program offers low-interest rates and no down payment requirements for buyers in rural areas.
VA loans: VA loans are available to veterans, active-duty military personnel and spouses of military officers.
Fannie & Freddie loans: These loans don't require a large down payment, but you'll need PMI if your down payment is less than 20%.
FHA loans: Available to low-credit score homebuyers, but mortgage insurance is required.
FHA 203(k) loans: This program finances home renovations for homebuyers.
Connecticut Homebuyer Programs
In addition to federal homebuyer programs, you may qualify for one of the many Connecticut first-time homebuyer programs.
The Connecticut Housing Finance Authority (CHFA) provides a 30-year fixed-rate mortgage to low- and moderate-income individuals and families. It also features a Down Payment Assistance Program of up to $20,000 to help you cover closing costs and down payments.
First-time homebuyers can borrow $5,000 at 0% interest to cover closing costs with this loan program.
HUD Resources CT
Homebuyers in Connecticut have access to a number of homeownership assistance programs administered by the HUD. These include the CHFA/USDA Rural Services Homeownership Program, Housing Development Fund, Inc. and Habitat for Humanity.
FAQs for First-Time Homebuyers in Connecticut
Purchasing your first home can feel overwhelming. To streamline the process for you, MoneyGeek answered some of the most frequently asked questions about first-time homebuyer programs in Connecticut.
- CFPB. "Conventional Loans." Accessed September 2, 2022.
- Connecticut Housing Finance Authority. "CHFA First-Time Homebuyer Guide." Accessed September 2, 2022.
- Connecticut Housing Finance Authority. "Down Payment Assistance Program (DAP) Loan." Accessed September 2, 2022.
- U.S. Department of Housing and Urban Development. "FHA Mortgage Limits List - FHA Forward." Accessed September 27, 2022.
- U.S. Department of Veterans Affairs. "VA Home Loans." Accessed September 27, 2022.