First-Time Homebuyer Programs in Kentucky

When you’re working towards buying your first home, it’s natural to have questions. You might wonder how to purchase a property with a smaller down payment or get a tax credit on your mortgage interest. Browse through MoneyGeek’s guide on different first-time homebuyer programs in Kentucky to learn what options are available to you.

Looking into the upfront and hidden costs of buying a home is a crucial step in the process of homeownership. Among the expenses you need to anticipate is your mortgage down payment.

A mortgage down payment is a portion of the home’s total value you need to pay upfront. Typically, a higher down payment can lower your monthly mortgage payment and vice versa. For example, putting down 20% can help you avoid purchasing private mortgage insurance (PMI), but saving that amount can be a hurdle for strapped homebuyers.

Luckily, financial assistance is available to first-time homebuyers. These include government-sponsored and state-specific homebuyer programs. Some can help you purchase a home with no money down, while others allow you to have as little as a 3% down payment.

The bottom line is that the best first-time homebuyer program for you will depend on your particular needs and situation. Taking the time to evaluate your current circumstances can help you make a wise decision.

A zero-down-payment loan program allows first-time homebuyers to finance a property with no money down. Two common types are USDA and VA loans.

USDA loans help low-income borrowers purchase a home in an eligible rural area. They are issued by the U.S. Department of Agriculture’s (USDA) Rural Development Guaranteed Housing Loan program. USDA loans don’t require down payments.

The USDA offers direct loans with fixed interest rates as low as 1% and payment periods of 33–38 years. It also provides loans up to $40,000 for home repairs, improvements and modernization. The USDA also offers loans through approved mortgage lenders.

Kentucky homebuyers cannot exceed income limits to qualify for this mortgage option. Furthermore, the property you want to purchase must be 2,000 square feet or smaller and located in a USDA-approved rural area with a population below 35,000.

VA home loans are ideal for military members, veterans and eligible surviving spouses looking to purchase a home. They are guaranteed by the U.S. Department of Veterans Affairs, enabling lenders to offer homebuyers more favorable terms.

Typically, VA home loans have no loan limits, down payment requirements or minimum credit score requirements. You also won’t need to purchase private mortgage insurance. Furthermore, VA loans have competitively low interest rates and limited closing costs.

First-time homebuyers in Kentucky who meet eligibility requirements must submit a valid Certificate of Eligibility (COE). Those eligible for VA loans can use them to purchase a single-family home, townhouse or multi-family dwelling of up to four units. They can also use the funds to buy a condo in a VA-approved project. Additionally, you can use VA-backed loans to build a new home or add features to make the property more energy-efficient.

Kentucky homebuyers can also choose among conventional, FHA, or FHA 203(k) loans. These loan programs allow borrowers to finance a property with less than a 20% down payment.

Conventional loans are not guaranteed by federal agencies, which means qualifying for them can be tougher. They often require a higher minimum credit score and lower debt-to-income ratio. Thus, this mortgage option is ideal for those with good credit scores.

Although your down payment can be as little as 3%, you will be required to purchase private mortgage insurance (PMI). PMI protects your lender if you default on your loan. You only need to carry PMI until you accumulate 20% equity in your home.

Conforming loans are conventional loans that adhere to guidelines set by Freddie Mac or Fannie Mae. In 2022, the conforming loan limit in Kentucky is $647,200.

On the other hand, conventional loans that exceed conforming limits are called non-conforming or jumbo loans. They are usually more expensive and harder to get. Jumbo loan limits may vary from lender to lender.

Those with low credit scores may consider FHA loans. These are issued by private lenders but insured by the Federal Housing Administration (FHA). First-time homebuyers in Kentucky can choose between 15- and 30-year terms with fixed rates.

FHA loans have more lenient requirements than conventional loans. Borrowers with a credit score of at least 580 can put down as little as 3.5%. Those with a credit score between 500 and 579 must put at least 10% down.

Maximum FHA loan amounts may vary depending on the state and county where you live. For instance, Kentucky homebuyers have a mortgage limit of $420,680 for a single-family home.

Note that FHA loans have drawbacks, like high mortgage insurance premiums (MIP) and more paperwork. Also, some condominiums can’t be financed with an FHA loan.

FHA 203(k) loans finance both the purchase and rehabilitation of a home under a single mortgage. These loans are insured by the FHA and can be fixed- or adjustable-rate mortgages (ARM).

There are two types of FHA 203(k) loans:

• Standard 203(k): For major repairs and improvements costing more than $35,000.
• Limited 203(k): Provide up to $35,000 for repairs, improvements and renovations.

You can use your FHA 203(k) loan for various improvements, such as eliminating health and safety hazards, making structural alterations, modernizing, reconditioning plumbing and more. In addition, your loan can finance major landscape work, replacement of roofing and floor, accessibility improvements and energy conservation improvements.

FHA 203(k) loans have similar requirements as FHA loans, so you need a minimum credit score of 580 for a 3.5% down payment.

In addition to federal loan programs, Kentucky offers residents several first-time homebuyer programs.

The Kentucky Housing Corporation’s (KHC) Regular Down Payment Assistance Program (DAP) provides loans of up to $7,500 to be repaid in 10 years at an interest rate of 3.75%. While the home’s purchase price can’t exceed $349,525, there’s no limit on borrower reserves, and your liquid assets won’t be reviewed.

The city of Louisville offers down payment help to low- and moderate-income homebuyers in the form of partially forgivable loans with 0% interest. You should have at least $1,500 in savings to be eligible, and your household income must be at or below 80% of the area median income.

First-time homebuyers in Kentucky may qualify for KHC's Home Buyer Tax Credit, equal to 20% of your annual mortgage interest. Eligibility requirements include a purchase price limit of $349,525 and income limits based on county and household size.

Explore more options for financial assistance by reviewing the HUD’s list of statewide and city- and county-specific programs unique to Kentucky. These include Community Ventures Corporation Kentucky Home Financing, Habitat for Humanity and more.

MoneyGeek's answers to frequently asked questions can help you better understand Kentucky's different first-time homebuyer programs.