If you’re a first-generation homebuyer, you might feel like homeownership is too difficult to attain and not worth the trouble.
But while it’s true that having parents who are homeowners can make it easier to buy a home yourself, the American dream is probably closer than you think.
There are more ways than ever before to become a homeowner, even if no one else in your family’s done it and you don’t have access to family assistance.
Importantly, homeownership plays a key role in creating generational wealth. By purchasing a home, you can establish a financial foundation for your own family and for future generations.
What's in this Article?
What is generational wealth and what does homeownership have to do with it?
Generational wealth is the accumulation of assets that are passed from one family generation to the next. This can include any number of asset types, such as stocks, bonds, business holdings, precious metals, real estate, collectibles, and other items of value.
For example, someone inherits a stock portfolio that produces a dividend income of, say, $50,000 per year. They benefit from the income but still retain ownership of the underlying asset They can pass the portfolio on to the next heir, and the cycle repeats.
As the stock portfolio grows in value, the next generation has even more wealth, which they can invest into other stocks or into other assets.
Homeownership works similarly.
Let’s say a couple purchases a home that triples in value over the next 30 years. When their children go to college or purchase their first home, the couple can borrow against the home to pay for their children’s college education or help them purchase their own house.
Those children can buy a home in their early 20s. They have a leg up financially, and so will their children.
The earlier that you buy a house and start building equity, the more will be available to you in the future to finance your own child’s education or real estate.
Of course, buying a home benefits you as well. The equity in your home can be tapped down the road to pay for renovations, medical expenses, higher education, and debt consolidation. Homeownership can provide a financial platform from which to grow your individual and family wealth.
Challenges for first-generation homebuyers
Becoming the first person in your family to own a home is not without its challenges. Without down payment help or homebuying guidance, the idea of getting started may seem overwhelming.
According to a study by the Urban Institute, the main barriers to homeownership include a variety of challenges:
- Down payment (misconceptions, misunderstandings, lack of funds, etc.)
- Access to down payment assistance
Another report by the Urban Institute’s on intergeneration homeownership reveals that:
“The children of homeowners are 7 to 8 percentage points more likely to be homeowners than the children of renters, all else being equal.”
Without a family framework for homeownership, first-generation homebuyers may not be familiar with the benefits of buying a home and may choose not to pursue it as fervently as someone who has seen those benefits firsthand.
If your family did not regularly discuss money, including setting and achieving financial goals or establishing financial literacy, you may feel like you’re starting from very far behind. Perhaps your credit score is low, or you’ve never worked with a budget, or your savings account seems non-existent.
Here’s the thing, though: all of those issues can be remedied. And there are resources available to help you.
Learn more: How To Buy a House in 11 Steps
As a first-generation homeowner, perhaps the most difficult challenge you’ll face is reorienting your mentality. You’ll have to let go of preconceived notions about how hard it is to buy a house, and see yourself as a potential homeowner.
First-time homebuyer Shonn Herring was an ideal candidate to buy a house. He had been working the same job for years, a great sign of income and employment stability from a lender’s perspective. But as the first person in his family to buy a home, he didn’t know where to begin.
He also heard common myths from people he knew about the homebuying process, including that you need a certain amount of money saved or that your credit score had to be above 700. But having spent years saving and building his financial foundation, Herring decided to go for it.
“The process was really fairly easy and it wasn’t as hard as what people made it seem at all,” Herring said.
Herring said that the idea of renting indefinitely didn’t sit well with him. He wanted a place of his own.
“I always hear success stories of people that actually own a home, how good it made them feel,” he said. “That was something I wanted to do.”
Herring had another compelling reason to buy: setting a new standard for the next generation.
“I wanted my daughter to see me, a single man, actually do it on his own,” he said.
Eduardo Perez is also a first-generation homeowner, born and raised in the Bronx. With no history of homeownership in his family, he bought his first home in August 2020 in Connecticut.
His top tip for fellow first-generation buyers is letting people know that their most significant barrier to homeownership may not be as big as they think.
“Be aware that the down payment doesn’t have to be 15%. You can put a down payment as low as 3.5% and be able to get into your dream single-family home,” Perez said. “Many have the misconception that they need at least 15% down, but this is not the case!”
Even if your family doesn’t have a history of homeownership, they may have instilled other values that can help you through the homebuying process.
“My family taught me good values of working hard, actually getting up early in the morning,” Herring said. That family work ethic drove him to build a career in the trucking industry and lay the financial foundation for buying his home. Now he owns a house, and he’s looking to the future.
“I’m always thinking about the next plan or what I want to do,” he said. “In the future, just purchasing another home, a bigger home. This was a good stepping stone for me to get this. Hard work definitely pays off, regardless of where you work.”
Regular folks with no homebuying experience and no family heritage of homeownership are figuring things out and purchasing homes all the time. You can do it, too. Just focus on one step at a time, and you’ll get there before you know it.
The first step toward becoming a homeowner and creating generational wealth yourself starts with taking a simple accounting of your finances.
Check your credit score, and learn how to improve it
A low credit score doesn’t automatically disqualify you from buying a home. The minimum credit score for a 3.5% down FHA loan is 580, and you may qualify with a score as low as 500 if you put down 10%. But a good to excellent credit score can help you qualify for a broader range of loan products. Good credit also helps you get a lower interest rate, which can translate to tens of thousands of dollars saved over the life of the loan.
If you have a low credit score, focus on improving it by making all of your bill payments on time, paying down debt, and keeping your credit card balances low.
Organize your savings
If you don’t have much money saved, there’s no time like the present to start. Experts recommend having three to six months in an emergency fund, but start by setting aside whatever you can. Consistently saving even $20 or $50 a month can help you build a buffer.
You’ll also want to save toward a down payment on your home. Fortunately, there are a number of no and low down payment mortgage options out there, and some programs allow you to use gift funds or down payment assistance. You likely need less money upfront for a house than you think, but savings will help.
Besides your down payment and closing costs, you’ll need money for movers, moving boxes, truck rentals, new furniture, repairs…the list goes on. Prepare for those costs now so they don’t surprise you after you close on your home.
Pay down your debts
Carrying high debts can hurt your credit score and your debt-to-income ratio (DTI). Your DTI reflects your monthly bills as a percentage of your gross monthly income (your income before taxes and deductions). DTI limits vary based on the type of loan product you use, but generally speaking, you’ll need a DTI of 50% or less to qualify for a mortgage.
If you read this list and feel overwhelmed, don’t worry. You don’t have to do everything at once. You can complete these steps at your own pace. If that means you are not ready to buy a home now or even this year, that’s OK.
If you decide that you’re not quite ready to buy, it’s still wise to work on your finances. It can take several months for your credit score to reflect on-time payments and reduced debts, and you definitely want to be saving for your home purchase.
You can also begin to build your budget around a future home payment. Use this mortgage affordability calculator to run the numbers and see what a comfortable mortgage payment might look like for you.
Then “practice” by making sure your budget can handle that payment month to month. This is a good way to see what’s really workable based on your income, and it can be a great motivator for trimming non-essential expenses to prioritize being able to afford a home.
Research down payment assistance programs
Down payment assistance is available from nearly every city, county, and state in the U.S. But programs are not standardized across the country. It takes some research to see if you qualify for your local programs. See the section below for more about assistance programs.
When you’re ready to buy a home, the first step is to get preapproved with a mortgage lender. A preapproval provides an estimate of how much you can afford to borrow, and it shows sellers and real estate agents that you’re a qualified buyer.
Making an offer on a home with a preapproval that’s already been through underwriting can really strengthen your chances of getting the home you want.
Find a real estate agent
You’ll also want to find a good buyer’s real estate agent before you start looking at homes. When you see home listings online, there’s often an agent’s name and contact number included. That person is the seller’s agent — which means they represent the seller’s interests. Although you’re not required to have a buyer’s agent to buy a home, you are going to want one.
The buyer’s agent is your advocate during the negotiation stage and the due diligence process, which is when appraisals and inspections are being done and your lender is processing the loan.
Your agent is legally obligated to protect and represent your interests — and they give you the inside scoop on the market. Best of all, you don’t pay for their services. The seller pays the real estate agent’s commission as part of their closing costs.
Now that you’ve found a lender and a real estate agent, you’re almost ready to start looking at houses. Before you start booking showings, however, consider the following questions:
- How much do you want to spend on a home?
- What neighborhoods are you interested in?
- Which amenities do you need in the surrounding community?
- What type of house do you want to be?
Answering these questions before you start looking at homes will help you focus your search on properties that suit your needs and preferences. In the current market, houses sell fast, so you want to be focused on seeing homes that are strong candidates for you. That way, when you find the one you want to buy, you can feel confident about putting in an offer.
Once you have your home criteria list, you can start seeing properties. Your real estate agent can recommend homes based on what you’re looking for, and they can book showings at properties you find online.
Don’t be discouraged if you don’t find your dream house right away — or at all. It’s difficult to find a “perfect” house, especially if you’re on a tight budget. Decide on a few priorities, and keep looking until you find one that meets your needs and that you’re excited to buy.
Eric Powers, a first-generation homeowner and an online entrepreneur admits that it’s worth it to take your time in this process, especially when it comes to finding the right home.
“Find something that either fits your budget or has upgrades,” Power said. “Finding something that fits both will probably be difficult, but finding one could make for smoother negotiations later on.”
Opting for a slightly older house that needs cosmetic upgrades can help you stay within your budget. On the other hand, a recently renovated house may have more energy-efficient appliances and might need fewer repairs in the first few years you’re in the home.
But if you choose a fixer-upper, you may be able to negotiate a lower price with the seller or get them to make some repairs before you close. Sellers are less likely to do that in markets where the demand for houses is high, but if the property has been listed for a while or you live in a less populated area, it may be worth asking.
When you find a house you want to buy, your agent will help you put in an offer and negotiate if necessary. The seller will either accept or reject your offer (preferably the former!). Once your offer is accepted, you go under contract.
Going under contract means that the seller will stop showing the home to other prospective buyers. Your agent will submit the sale contract to your lender, who will then process your loan application.
Here’s what will happen during this time:
- Your lender will schedule an appraisal
- You can (and should) schedule a home inspection
- Your agent will help you negotiate the sale terms if the appraisal or inspection reveal major issues with the property or the appraised value is lower than the sale price
- Your lender’s underwriting team will review your financial documents, including updated bank statements, pay stubs, tax returns, and employment verification
- You will choose a homeowners insurance policy and submit the information to your lender
- Your lender will request a title search and property tax information from your attorney or settlement agent (the person who will oversee your closing)
Close on the home
If the appraisal, title search, and your financial documents check out, you’ll get your clear to close from your lender. That means the loan has been approved and you’ve been cleared to move forward on the purchase.
Three days before your closing date, your lender will send you a closing disclosure. This includes all the details of your loan, including your costs to close (which include your down payment and closing costs), your interest rate, loan amount, and how much interest you will pay over the life of the loan.
If you have questions about your closing disclosure, ask your lender ASAP. You should fully understand the terms of your loan before you sign the promissory note and take ownership of the home.
You can receive the keys to your home once your loan funds and the new deed is recorded with your local municipality. Ask your lender what your funding date will be, because it’s not always the same as your closing date.
Recording typically takes a few hours, so if you close late in the day on a Friday and the purchase can’t be registered until Monday, you may have to wait to receive your keys.
Your lender and settlement agent can tell you when funding and recording will happen and when you will receive your keys.
Like being a first-generation college graduate, being the first homeowner is a brave new world but it’s entirely possible. In fact, you might be surprised to find out how many options exist to help support your homeownership aspirations.
The following loans aren’t uniquely available to first-generation homebuyers. But they each have features that are particularly attractive to first-time homebuyers, including those making family history with their purchase.
Conventional conforming mortgages are the most common type of home purchase loans. They are overseen by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which set the borrower criteria for these loans.
Both Fannie Mae and Freddie Mac offer 3% conventional loan options, including programs for first-time homebuyers and for low- to moderate-income borrowers.
But you can also put more down if you’d like, and it could lower your monthly payment, too. Putting just 5-10% down will lower your monthly mortgage insurance cost as well as your principal and interest payment.
FHA loans are backed by the Federal Housing Administration (FHA) but offered by private lenders. The government insurance enables lenders to approve borrowers with credit scores as low as 580 and DTIs as high as 50% (in some cases higher) for home loans with 3.5% down.
FHA guidelines allow borrowers to use gift funds or down payment assistance toward their down payments and closing costs. The interest rates on FHA loans tend to be fairly competitive, thanks to the government backing.
USDA loans are 0% down mortgages backed by the U.S. Department of Agriculture. You must buy a home in a USDA-designated rural or suburban area and meet certain income limits, as these loans are designed to spur homeownership among very low- to moderate-income homebuyers.
VA loans, which are backed by the U.S. Department of Veterans Affairs, are available to veterans and active-duty military servicemembers and eligible surviving spouses.
Borrowers who have full entitlement benefit available can get a 0% down VA loan with no loan limits and no annual mortgage insurance. Those who have partial benefit available may also qualify for a 0% down loan, depending how much entitlement they have.
Servicemembers who have some benefit available but not enough for a zero-down loan can make a down payment to use the VA loan, which has many other advantages as well.
Assistance programs for first-generation homebuyers
In addition to no and low down payment mortgage options, there are a number of homebuyer assistance programs that can lower the barrier to entry as well.
The Freddie Mac BorrowSmart℠ Program offers up to $2,500 in closing cost assistance for eligible homebuyers. The program may be used in conjunction with a Freddie Mac Home Possible® or Freddie Mac HomeOneSM mortgage, and it is available to very low- to moderate-income homebuyers.
The amount of down payment assistance you may receive depends on your income:
- Above 80% area median income (AMI) and at or below 100% AMI
- Purchase property must be in high needs tract
- HomeOne program only
- Down payment assistance: $1,000
- Above 50% AMI and at or below 80% AMI
- Home Possible program only
- Down payment assistance: $1,000
- At or below 50% AMI
- Home Possible program only
- Down payment assistance: $2,500
Your mortgage lender can help you determine whether you’re eligible for this program.
In 2021, the Department of Housing and Urban Development (HUD) affirmed that Deferred Action for Childhood Arrivals (DACA) recipients are eligible for FHA loans.
Importantly, FHA guidelines allow lenders to use alternative forms of credit to qualify borrowers for these mortgages. That means that if you have limited traditional credit because you don’t have credit cards or personal loans, your lender may use rental payment history, utility bills, and other verification to determine your creditworthiness.
According to the Urban Institute’s 2018, “Barriers to Accessing Homeownership” report, there are more than 2,500 down payment assistance programs in the U.S.
Unfortunately, there’s no complete centralized database on these programs so you’ll have to do a little digging to find them.
You can find some state programs listed through the Department of Housing and Urban Development’s (HUD) website.
But be sure to do a Google search as well. Type in “down payment assistance programs in [enter your city, state, and county here],” and you’ll get an idea of what’s available in your city or county.
Ask your real estate agent and lender for recommendations, too. They may know of assistance offered through a local housing authority or non-profit.
Down payment and closing cost assistance can take a few different forms:
- Forgivable 0% interest loans if you stay in the home for a certain period of time
- Down payment and closing cost assistance grants
- Rent-to-buy programs
Some programs may require or offer housing counseling as well. If you’re a first-generation homebuyer, a counselor can help you understand not just the requirements for getting a mortgage but the financial realities of homeownership as well.
They can offer guidance on planning for your monthly mortgage payments, budgeting for taxes and repairs, and establishing financial success habits that will help you more generally.
If you can afford to meet with a financial advisor, that is a great option for seeing where a home purchase fits into your longer-term goals and money strategy. But if you’re not quite there yet, a local housing counselor can be a valuable resource as well.
The Biden administration has taken several steps toward improving homeownership access and affordability and closing the racial wealth gap through homeownership.
The Making FHA Work for Borrowers with Student Debt Act of 2021 eased the way toward FHA approval for borrowers with student loan debt. FHA lenders can now consider a borrower’s actual monthly payment toward their student loans, rather than using 1% of the outstanding loan balance, when calculating their DTI. That can be a game-changer for those who are ready to own a home but are still grappling with student debt.
The administration also proposed the Downpayment Toward Equity Act of 2021 to help homebuyers — especially disadvantaged ones — start building wealth by offering up to $25,000 in assistance toward a home purchase.
Then there’s the First-time Homebuyer Act of 2021, which could provide a $15,000 tax credit – or up to 10% of the home’s price – to eligible first-time homebuyers. Because it’s a tax credit, anyone who purchases a home in 2021 would be able claim the credit when filing taxes for 2022, if the legislation passes.
There are existing tax advantages to homeownership, however. You may be able to deduct interest paid on your mortgage as well as property taxes, potentially lowering your annual tax bill.
If you’ve exhausted all of the above-mentioned resources, or you don’t qualify for assistance programs, don’t give up. There are many ways to get the funds together to become a homeowner.
Consider these creative ways to get into your own home:
- Set up a crowdfunding campaign that people can contribute to
- If you’re getting married soon, create a house fund as part of your registry so people can contribute there if they don’t want to buy traditional wedding gifts
- Take on a side-hustle to build your savings
- Purchase a multifamily property and live in one unit while using the others as income-generating rental properties. You can use the funds to help cover your monthly mortgage payment and potentially earn additional income
Nicholas Fernandes, a real estate expert in the Boston area, is an immigrant and the son of a single mother who will be purchasing a home for the first time. He recommended researching and considering the multifamily approach.
“There were so many options that I didn’t know before I started researching. For example, low-income and bad credit buyers can get an FHA loan to buy their first house with very little down payment,” he said. He went on to explain, “You can even buy a house based on rental income if you don’t have a steady source of income for a traditional mortgage. Find out all your options and then make your decision based on what is best for your situation.”
Although homeownership is perhaps one of the most straightforward paths to building generational wealth, there are other paths, too. One of the lowest-hanging fruit can be investing through your employer. As a salaried employee, you may be able to participate in an employer-sponsored retirement plan like a 401(k) or 403(b) account, if your company offers them.
There are other ways to explore stock market investments as well, such as low-cost mobile apps that make it easy for novice investors to get started. If you’re new to the market, however, you will want to consult with an advisor or tax planner to ensure that you’re choosing smart investments and you’re not taking on too much risk.
Other options include investing through a regular brokerage account (not a retirement account), starting a small business, or putting money into savings bonds or certificate of deposit accounts (CDs).
As you explore tangible ways to increase your — and your family’s — net worth, don’t forget about personal finance basics. Building an emergency fund can help prevent you from taking on high-interest debt to cover urgent home repairs or other expenses.
High-interest debt can rapidly eat away at your wealth, so being able to pay for most of your costs outright will keep more money in your savings and investments.
Consider taking out life insurance as well. A life insurance policy provides for your family if you pass away, and it can help them stay in the home you worked so hard to buy for them. You can also take out mortgage protection insurance (MPI), which pays off your home loan if you die.
The combination of life insurance and MPI can give your loved ones peace of mind knowing they can stay in the home without worrying about a mortgage payment, and they can use the life insurance funds toward living expenses, education, and other costs that allow them to maintain and grow their financial stability.
You’ll also want to have an estate plan that outlines who will inherit your house and other assets and how they should be used if you pass away. An ironclad will and documentation of your intentions provides clarity and protection for your family.
Finally, one of the best ways to build generational wealth is to “invest” in teaching your kids about responsible money management.
You can give them an allowance, read books about investing together, or help them start a business. There are many resources in the form of books, eCourses, workshops and more online to help you with these efforts.
Teaching younger generations to save money, budget, and determine needs vs wants from an early age creates a strong foundation they can build on as they mature. By seeing your good example and being included in the family’s financial planning discussions, they’ll be better-equipped to make good decisions and honor the opportunities you’ve created for them.
First-generation homebuyer FAQs
A first-generation homebuyer is someone whose parents never owned a home. By contrast, a first-time homebuyer is someone who has never purchased a home or who hasn’t owned a home in at least three years.
The Downpayment Toward Equity Act of 2021 has not been signed into law. If it is ultimately approved, it would apply to:
-First-time home buyers
-Average or low-income buyers
Borrowers who have historically been disadvantaged due to their race, ethnicity, or other reasons, may be eligible for up to $25,000 in homebuyer assistance.
The Biden administration proposed legislation that would provide up to $25,000 to first-time, first-generation homebuyers who have been economically disadvantaged. The legislation has not passed as of September 2021. But if it passes, your lender will be able to advise you on your eligibility.
Being a first-generation homebuyer can feel like you’re starting behind other homebuyers. But there are many loan products and assistance programs that are paving the way to homeownership, regardless of your family’s history.
By forging ahead with your homeownership journey, you are breaking fertile ground for your family’s financial future to flourish.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.