First-Time Homebuyer Programs in Minnesota

Minnesotans looking for their first home may feel anxious and overwhelmed. So, it’s best first to research first-time homebuyer programs.

MoneyGeek analyzed crucial details about low- or no-down (“zero-down”) payment programs and Minnesota-specific homebuyer loan programs. This guide will help you identify the best option that fits your budget.

Evaluating your budget and expenses is ideal for Minnesotans looking to buy a home. Not only will it help you manage your expectations, but it’s also one of the crucial factors when considering a down payment for your mortgage and subsequent monthly mortgage payments.

Your mortgage down payment influences your monthly expenses. Therefore, a more significant down payment may be a better way to lower your monthly amortization and interest rates.

Down payments usually cost 20% of the total cost of your chosen property or home. It may also help if you look around for homebuyer assistance programs to help you finance your future home.

Zero-down-payment loans consist of USDA and VA loans. Low-down-payment programs include FHA, FHA 203(k) and conventional loans. Minnesota provides different statewide loan programs to help first-time homebuyers finance their ideal home.

Although there may be various options, your best homebuyer program relies on your preferences and needs. For instance, a government-backed loan doesn’t require a down payment.

First-time homebuyers can choose from two government-backed loans if zero-down payments are preferred:

1. USDA loans
2. VA loans.

Minnesotans living in rural areas can apply for USDA loan by sending their application through the U.S. Department of Agriculture and its Rural Development Guaranteed Housing Loan program.

There are three home loan programs under the USDA:

• The Section 502 Direct Loan Program offers direct loans to low- and very-low-income applicants.
• The Section 502 Guaranteed Rural Housing Loan assists approved private lenders in providing loans to low- and moderate-income applicants.
• The Section 504 Home Repair program helps homeowners to finance home repairs, improvements and modernizations.

Generally, USDA loans are more affordable than conventional or FHA loans. They can be used to renovate homes not exceeding $40,000.

Homebuyers are eligible for USDA loans as long as they reside at their property as their primary residence, meet the minimum income requirement and their property meets the specified property limits.

Individuals must meet the minimum income requirement and not be suspended from participating in federal programs.

USDA loans have property requirements. It must be 2,000 square feet or less, have a market value less than the applicable area loan limit, and be in a rural area with less than 35,000 residents.

VA home loans are accessible for current and former military personnel and their families. They are highly beneficial for home buying as their requirements are more lenient than other loan types.

The VA provides various home loans, which include:

• Home purchase loan
• Cash-out refinance loan
• Interest Rate Reduction Refinance Loan (IRRRL)
• Native American Direct Loan (NADL)

Some of the benefits of VA home loans include:

• Competitive rates
• 0% down payment
• No private mortgage insurance (PMI) needed
• Average debt-to-income (DTI) ratio of 41% with closing costs from 3% to 5%

VA home loans can be used for primary residences only and cannot be used for investment properties or secondary residences. VA loans can also be used for renovations, buying a single-family home, modular housing or condominium units.

However, there may be limitations on condominiums since not all are VA-approved. Plus, in most instances, your future home will need a termite inspection before finalizing everything.

First-time homebuyers in Minnesota can check low-down-payment loan programs. It lets you purchase a home with roughly a 20% down payment based on your preferred home's total cost.

Interested buyers can choose from Fannie and Freddie (conventional) and FHA loans.

Conventional loans, or Fannie and Freddie loans, are private mortgages and are a more popular option for first-time homebuyers, even those with pending federal obligations like taxes or student loans. Requirements depend on the lender.

Conventional loans fall into two main categories:

• Conforming loans adhere to guidelines set by Freddie Mac or Fannie Mae.
• Non-conforming loans exceed conforming loan limits.

Generally, homebuyers who commit a down payment of less than 20% are required to buy private mortgage insurance (PMI), which protects the lender if the borrower defaults on the loan.

Although this type of loan is generally more affordable than government-backed mortgages, it may require lower debt-to-income (DTI) ratios and higher minimum credit scores.

An FHA loan is a type of mortgage that first-time homebuyers can consider as it is insured by the Federal Housing Administration (FHA). Compared to conventional loans, the requirements are more lenient. They include a down payment of 3.5%, a maximum debt-to-income ratio of 56.9% and a minimum credit score of 500.

Generally, FHA loans are provided by private lenders and regulated by the FHA to ensure that they adhere to the agency’s rules and regulations.

Borrowers can choose between a 15- and 30-year term with fixed interest rates. The maximum loan amount depends on the state and county you live in.

On the downside, this type of loan may be challenging for those looking into buying condominiums, as most of them are not approved by the FHA. An upfront fee of 1.75% of the loan amount is required and can be paid annually or added to the monthly amortization.

An FHA 203(k) loan is a government-backed loan helping homebuyers purchase and renovate a property. It combines two types, standard and streamlined loans. Although both types are dual-purpose, eligibility requirements differ regarding loan amounts, allowed properties and terms.

Homebuyers who prefer to remodel and restructure their homes may fare better with standard 203(k) loans. They can be used to buy a one- to four-unit property, relocate an existing house to a new foundation or convert larger units into smaller units.

On the other hand, streamlined 203(k) loans best suit homebuyers conducting minimal cosmetic renovations such as flooring or minor room remodeling.

First-time homebuyers in Minnesota can qualify for FHA 203(k) loans if they have a minimum credit score of 500. But, other lenders prefer a minimum credit score of 620. Another factor affecting your application is the debt-to-income (DTI) ratio. Borrowers who qualify have a front-end DTI of 31% and a back-end DTI of 43%.

For reference:

• Front-end DTI - The amount of a borrower’s income that’s dedicated to housing expenses, including the mortgage.
• Back-end DTI - The amount of a borrower's income that’s dedicated to other debts (e.g., credit card payments, car loans).

FHA 203(k) loans require a down payment of 3.5% for a minimum credit score of 580. But if your credit score is lower than 580, you’ll be required to put a down payment of 10% of the total cost of the property.

Different federal loan programs are accessible to first-time homebuyers in Minnesota. But there are state-exclusive loan programs that you might want to check out.

The Deferred Payment Loan is a good option for first-time homebuyers. It is a zero-interest, deferred down payment and closing cost loan accessible to all qualified Start Up borrowers.

Depending on eligibility, there are two loan types under the Deferred Payment Loan program:

• Deferred Payment Loan
• Deferred Payment Loan Plus (DPL Plus)

The former lets homebuyers borrow up to $8,000 and is available in $100 increments. The DPL Plus offers a maximum of $10,000 in $100 increments.

For both programs, there’s an income limit of $134,800. Acquisition costs for properties in 11-County Metro should not exceed $372,600, and for the other counties, $349,500.

Single Family Housing Direct Home Loans help Minnesota first-time homebuyers who have low- and very low-incomes purchase homes in qualified rural areas. This loan assists the borrower with repayment. The amount of payment assistance depends on the family’s adjusted income.

Generally, a down payment is not required, but borrowers with more assets that surpass the limits may be required to provide a down payment.

Borrowers can be eligible if they reside at their property as their primary residence, are legally capable of managing a loan obligation and their property does not exceed 2,000 square feet.

Purchasing a home for the first time can be daunting. MoneyGeek answered some of the most commonly asked questions to assist you in your homebuying journey.