The scheme is only available on newly-built flats and houses up to a maximum value of £500,000 in England only.
Properties must also not be linked with any other scheme such as shared equity or shared ownership.
Three lenders, Barclays, NatWest and Nationwide, have launched NewBuy products with Santander also saying it will participate in the scheme.
Under the scheme the builder pays 3.5% of the sale price into an account held by the lending bank for seven years.
The government will provide additional guarantees of 5.5% which will only be called upon in the event of a major property crash.
Prime Minister, David Cameron said: “Strong families and stable communities are built from good homes. That’s why I want us to build more homes and I want more people to have the chance to own their home.”
Housing minister, Grant Shapps added: “This government inherited a housing market in disarray, with millions of hard working people blocked from taking their first step on the housing ladder - their desire to buy a home no longer a dream, but a distant fantasy.
“We want to help everyone achieve their aspirations and feel the pride of home ownership. So I'm delighted that from today the NewBuy Guarantee will give thousands of prospective buyers the chance to buy a home with a fraction of the deposit normally required.”
Andy Gray, head of mortgages for Barclays, said: “We believe this will boost housing market confidence and support the flow of new housing providing positive consequences for jobs and the economy as a whole.”
Andrew Baddeley-Chappell, head of mortgage strategy and Policy at Nationwide, said: “The widening gap in housing provision is undisputed. Nationwide is supportive of this initiative that enables a return to lower deposit mortgages within the new-build sector.
“NewBuy will boost the supply of properties, increase employment, and provide affordable mortgages to those with more modest deposits, including first time buyers.
Moray McDonald, mortgages director, added: “We welcome the builders and Government sharing the risk to make this initiative possible. We hope the increased demand it will create will help lift the economy via the construction of additional homes.”
Santander’s mortgage director, Phil Cliff added: “Santander UK is in the final stages of agreeing partnerships with selected developers and will start to offer its first NewBuy mortgages via intermediaries with established ties to these house builders by the middle of the year.”
NewBuy is currently backed by the Council of Mortgage Lenders and the Home Builders’ Federation and seven construction firms.
Paul Smee, director general of the CML, said: “We are delighted that three lenders are today launching mortgages under NewBuy, and that more are set to follow.
“These mortgages will help creditworthy borrowers who simply haven't yet managed to build up a large enough deposit to gain access to finance to buy a newly built home.
“NewBuy is good news for home-buyers, and potentially good news for jobs and the wider economy too.”
Stewart Baseley, executive chairman of the HBF, added: “NewBuy will help thousands of people to meet their aspirations to buy a new home, freeing up the housing market and helping first-time buyers and those unable to take the next step on the ladder.
“The scheme will also provide a vital kick-start for house builders large and small who will be able to build the homes and create the jobs that the country desperately needs.”
Critics
The shadow housing minister Jack Dromey however asked: “Why has the number of major lenders participating in the scheme fallen from seven to three and the number of builders from 25 to seven compared with when this scheme was originally announced?
“Reports have also suggested that few, if any, mortgage products will be available straight away and that the interest rates might not be attractive to would-be buyers.
“It would be absolutely wrong for the government to raise the expectations of families and young couples only for them to find little choice and that they’re unaffordable.”
NewBuy critics have also claimed that the scheme was just a ruse to help construction industry and that the government was artificially meddling in the housing market and postponing a future fall in house prices.
Campbell Robb, chief executive of Shelter, added: “This strategy also does almost nothing to help the growing number of families living in insecure private rented housing with hardly any protection from rogue landlords or unexpected rises in rent.”
