Tennessee First-Time Home Buying Assistance Programs & Grants for 2022

Tennessee First-Time Home Buying Guide

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    By Walecia Konrad

    (Last Updated – 06/2022)

    It’s a long journey through the 440-mile length of Tennessee. That’s why the Volunteer State is divided into three Grand Divisions — East Tennessee, Middle Tennessee, and West Tennessee — each with a unique personality and real estate market.

    East Tennessee is square in the Appalachian Mountains and is home to Knoxville and Chattanooga, the state’s third- and fourth-largest cities. The rolling hills of the middle area are anchored by Nashville, Tennessee’s largest city and the capital. The western division slides into the flatlands of the Mississippi River and is home to the inimitable Memphis.

    Housing prices have spiked. The median home sales price was up 23.8% in a year to $387,000 in April 2022, according to Redfin. That’s compared with the 15.3% rise in national home prices. Lakeland leads the pack with an eye-popping 86% increase in home prices, followed by Sevierville (60%).

    Meanwhile Tennessee hasn’t experienced as much of the post-COVID slowdown in home sales as other states. The number of homes for sale dropped by 3.1% year-over-year in April, compared with 9% for the country.

    That makes the hunt for available properties for first-time homebuyers slightly easier than it is in a lot of other states. Plus, Tennessee offers a robust first-time homeowner assistance program for mortgages and down payments.

    Who Is Considered a First-Time Homebuyer in Tennessee?

    Like many states, Tennessee follows the federal government’s definition of first-time buyer as someone who has not owned a home in the past three years.

    However, the Tennessee Housing Development Agency does not require active-duty military members and veterans to be first-time borrowers to take advantage of its Homeownership for the Brave program.

    In addition, in several designated counties and targeted areas of the state, Tennessee Housing program borrowers may be repeat homeowners.

    Recommended: First-Time Home Buyer Guide

    5 Tennessee Programs for First-Time Homebuyers

    First-time homebuyers can find help through the Tennessee Housing Development Agency’s Homeownership for the Brave Home Loan Program. Down payment assistance is also part of the agency’s menu. Here’s a closer look.

    1. Great Choice Home Loan Program

    This program offers conventional, FHA, VA, or USDA 30-year fixed-rate loans to first-time homebuyers. Interest rates vary based on the market and the mortgage lender. Down payment assistance is available for FHA or USDA loans.

    To qualify, borrowers need to make a 3% down payment for conventional loans and a 3.5% down payment for FHA or USDA loans. Income and purchase price limits apply, depending on the county and household size.

    The housing agency requires a minimum FICO® credit score of 640 for everyone on the loan application and completion of a home education course.

    2. Homeownership for the Brave

    Available to active military service members including the National Guard, reservists with at least 180 days of active-duty service, veterans, military spouses, and surviving spouses, the

    First-time homebuyers can find help through the Tennessee Housing Development Agency’s Homeownership for the Brave Home Loan Program. Down payment assistance is also part of the agency’s menu. Here’s a closer look.

    program offers the Great Choice loans but with an interest rate reduced by one-half of a percentage point.

    Applicants must have a minimum credit score of 640, meet the same income and purchase price limits as in the Great Choice program, and complete a homebuyer education course if using down payment assistance. They may, though, borrow up to 100% of a home’s purchase price with a loan backed by the Department of Veterans Affairs.

    Importantly, service members, veterans, and their spouses do not have to be first-time homebuyers to qualify.

    3. Great Choice Plus: Help With a Down Payment or Closing Costs

    This is Tennessee Housing’s down payment assistance program, to be used with the Great Choice mortgages. There are two options. The deferred option offers a forgivable second mortgage for $6,000 to be used for down payment or closing costs. The loan has a 0% interest rate, and payments are deferred until the end of the 30-year term, at which time the loan is forgiven. If you refinance or sell, the loan is due in full.

    The amortizing option provides 6% of the sales price to be used for down payment or closing costs. This second mortgage is repaid in monthly payments over 30 years at an interest rate that is the same as your first mortgage rate.

    Borrower requirements are the same as they are for the Great Choice Program.

    4. Tennessee Mortgage Credit Certificate

    Tennessee homebuyers with a mortgage credit certificate can claim a federal tax credit equal to 50% of their annual home loan interest (up to the federal limit of $2,000 per year). Homebuyers may still claim a tax deduction on the rest of their mortgage interest.

    5. Local First-Time Homebuyer Programs

    Local housing initiatives in urban areas such as Detroit and Grand Rapids offer help with down payments, closing costs, and other assistance for first-time buyers in certain areas.

    Recommended: Understanding the Different Types of Mortgage Loans

    How to Apply to Tennessee Programs for First-Time Homebuyers

    The Tennessee Housing Development Agency website contains clear descriptions and requirements for its mortgage and down payment assistance programs available to first-time homebuyers in the state. The agency does not lend directly, but you can find a list of approved lenders so you can find and compare interest rates, fees, and other costs. This is particularly important for newbie homebuyers, who may be unfamiliar with the process.

    First-time buyers can also find links to approved homebuyer education courses , which are required for participation in most of its programs.

    Homebuyer education classes can help buyers understand how much mortgage they can afford and what monthly payments they can expect.

    In addition, the THDA website provides a list of approved Realtors® who can help with the house hunt and approved credit counselors who may be able to help potential borrowers who fall below the required credit score of 640 to boost their rating.

    Federal Programs for First-Time Homebuyers

    Several federal government programs are designed for people who have low credit scores or limited cash for a down payment. Although most of these programs are available to repeat homeowners, like state programs, they can be especially helpful to people who are buying a first home or who haven’t owned a home in several years.

    The mortgages are generally for single-family homes, two- to four-unit properties that will be owner occupied, approved condos, townhomes, planned unit developments, and some manufactured homes.

    Federal Housing Administration (FHA) Loans

    The FHA, which is part of the U.S. Department of Housing and Urban Development (HUD), insures mortgages for borrowers with lower credit scores. Homebuyers choose from a list of approved lenders that participate in the program. Loans have competitive interest rates and require a down payment of 3.5% of the purchase price for borrowers with FICO credit scores of 580 or higher. Those with scores as low as 500 must put at least 10% down.

    Gift money for the down payment is allowed from certain donors and will be documented in a gift letter for the mortgage.

    FHA loans always require mortgage insurance: a 1.75% upfront fee and annual premiums for the life of the loan, unless you make a down payment of at least 10%, which allows the removal of mortgage insurance after 11 years. You can learn more about FHA loans in general and FHA lending limits by area.

    Freddie Mac Home Possible Mortgages

    Very low- and low-income borrowers may make a 3% down payment on a Home Possible® mortgage. These loans allow various sources for down payments, including co-borrowers, family gifts, employer assistance, secondary financing, and sweat equity.

    The Home Possible mortgage is for buyers who have a credit score of at least 660.

    Once you pay 20% of your loan, the Home Possible mortgage insurance will be canceled, which will lower your mortgage payments.

    Fannie Mae HomeReady Mortgages

    Fannie Mae HomeReady® Mortgages allow down payments as low as 3% for low-income borrowers. Applicants generally need a credit score of at least 620; pricing may be better for credit scores of 680 and above. Like the Freddie Mac program, HomeReady loans allow flexibility for down payment financing, such as gifts and grants.

    For income limits, a comparison to an FHA loan, and other information, go to this Fannie Mae site .

    Fannie Mae Standard 97 LTV Loan

    The conventional 97 LTV loan is for first-time homebuyers of any income level who have a credit score of at least 620 and meet debt-to-income criteria. The 97% loan-to-value mortgage requires 3% down. Borrowers can get down payment and closing cost assistance from third-party sources.

    Department of Veterans Affairs (VA) Loans

    Active-duty members of the military, veterans, and eligible surviving spouses may apply for loans backed by the Department of Veterans Affairs. VA loans , to buy, build, or improve homes, have lower interest rates than most other mortgages and don’t require a down payment. Most borrowers pay a one-time funding fee that can be rolled into the mortgage.

    Native American Veteran Direct Loans (NADLs)

    Eligible Native American veterans and their spouses may use these no-down-payment loans to buy, improve, or build a home on federal trust land. Unlike VA loans listed above, the Department of Veterans Affairs is the mortgage lender on NADLs. The VA requires no mortgage insurance, but it does charge a funding fee.

    U.S. Department of Agriculture (USDA) Loans

    No down payment is required on these loans to moderate-income borrowers that are guaranteed by the USDA in specified rural areas. Borrowers pay an upfront guarantee fee and an annual fee that serves as mortgage insurance.

    The USDA also directly issues loans to low- and very low-income people. For loan basics and income and property eligibility, head to this USDA site .

    HUD Good Neighbor Next Door Program

    This program helps police officers, firefighters, emergency medical technicians, and teachers qualify for mortgages in the areas they serve. Borrowers can receive 50% off a home in what HUD calls a “revitalization area.” They must live in the home for at least three years.

    Tennessee First-Time Homebuyer Stats for 2022

    Here’s a snapshot of the Tennessee experience.

    Median home sale price (in April 2022): $387,000 General minimum down payment (3%): $11,610 20% down payment: $77,400 Average credit score: 701 Median property tax bill: $1,220, about half the U.S. average Tennessee cost of living: among the 10 states in the country with the lowest cost of living

    Nashville, in particular, is hot. The median home price is up 31% in a year, to $465,000, but the average one-bedroom rental will set you back $1,730, up 36% year-over-year.

    Financing Tips for First-Time Homebuyers

    In addition to federal and state government-sponsored lending programs, there are other financial strategies that may help you become a homeowner. Some examples:

    •  Traditional IRA withdrawals. The IRS allows qualifying first-time homebuyers a one-time, penalty-free withdrawal of up to $10,000 from their IRA if the money is used to buy, build, or rebuild a home. The IRS considers anyone who has not owned a primary residence in the past three years a first-time homebuyer. You will still owe income tax on the IRA withdrawal. If you’re married and your spouse has an IRA, they may also make a penalty-free withdrawal of $10,000 to purchase a home. The downside, of course, is that large withdrawals may jeopardize your retirement savings.

    •  Roth IRA withdrawals. Because Roth IRA contributions are made with after-tax money, the IRS allows tax- and penalty-free withdrawals of contributions for any reason as long as you’ve held the account for five years. You may also withdraw up to $10,000 in earnings from your Roth IRA without paying taxes or penalties if you are a qualifying first-time homebuyer and you have had the account for five years. With accounts held for less than five years, homebuyers will pay income tax on earnings withdrawn.

    •  401(k) loans. If your employer allows borrowing from the 401(k) plan that it sponsors, you may consider taking a loan against the 401(k) account to help finance your home purchase. With most plans, you can borrow up to 50% of your 401(k) balance, up to $50,000, without incurring taxes or penalties. You pay interest on the loan, which is paid into your 401(k) account. You usually have to pay back the loan within five years, but if you’re using the money to buy a house, you may have up to 15 years to repay.

    •  State and local down payment assistance programs. Usually offered at the regional or county level, these programs provide flexible second mortgages for first-time buyers looking into how to afford a down payment.

    •  The mortgage credit certificate program. First-time homeowners and those who buy in targeted areas can claim a portion of their mortgage interest as a tax credit, up to $2,000. Any additional interest paid can still be used as an itemized deduction. To qualify for the credit, you must be a first-time homebuyer, live in the home, and meet income and purchase price requirements, which vary by state. If you refinance, the credit disappears, and if you sell the house before nine years, you may have to pay some of the tax credit back. There are fees associated with applying for and receiving the mortgage credit certificate that vary by state. Often the savings from the lifetime of the credit can outweigh these fees.

    •  Your employer. Your employer may offer access to lower-cost lenders and real estate agents in your area, as well as home buying education courses.

    •  Your lender. Always ask your lender about any first-time homebuyer grant or down payment assistance programs available from government, nonprofit, and community organizations in your area.

    The Takeaway

    Tennessee has a streamlined state program for first-time homebuyers who meet income limits and credit qualifications. Other first-time buyers may opt to look into federally insured or conventional mortgages on their own to unlock the door to homeownership.

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    Should I take first-time homebuyer classes?

    Yes! Good information is key to a successful home-buying experience for anyone, but especially for newcomers, who can easily be overwhelmed by the jargon, technicalities, and magnitude of applying for a mortgage and purchasing a home. First-time homebuyer classes can help. Indeed they are required for some government-sponsored loan programs.

    Do first-time homebuyers with bad credit qualify for homeownership assistance?

    Often they do. Many government and nonprofit homeowner assistance programs are available to people with low credit scores. And often, interest rates and other loan pricing are competitive with those of loans available to borrowers with higher credit scores. That said, almost any lending program has credit qualifications.

    Is there a first-time homebuyer tax credit in Tennessee?

    Yes. As explained above, homebuyers are allowed a credit for up to 50% of the mortgage interest they pay each year, up to $2,000 a year. Upfront fees apply, but the credit can be taken each year for the life of the loan.

    Is there a first-time veteran homebuyer assistance program in Tennessee?

    Yes. Tennessee has a particularly robust program for active military service members and veterans called Homeownership for the Brave. It offers an interest rate discount on a mortgage that can be paired with down payment assistance, if needed. In addition, Tennessee veterans may find options in the federal VA loan programs listed above.

    What credit score do I need for first-time homebuyer assistance in Tennessee?

    Programs administered by the Tennessee Housing Development Agency require a credit score of 640 or above. To help achieve this goal, the agency provides a list of credit counselors that can help first-time buyers improve their scores. In addition, there are other private, state, and federal loan programs that borrowers with lower scores may be able to access.

    What is the average age of first-time homebuyers in Tennessee?

    The Tennessee age is hard to pin down, but the average age nationally is 33, according to the National Association of Realtors.

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