Every state offers first time home buyer programs
So you’re planning to buy your first home. Congratulations! It’s a big step; one of the most important milestones in your life.
And you might be pleasantly surprised by the wide array of first time home buyer programs designed to help you.
From low- or zero-down loans, to down payment assistance and closing cost grants, there are tons of programs for first time home buyers.
The only question is, which one is right for you?
Low-down-payment loans for first time home buyers
Many mortgages come with low down payments: as little as 3% or 3.5% of a home’s purchase price.
Sometimes, this is possible because a loan is guaranteed by the federal government.
That includes mortgages backed by the Federal Housing Administration (FHA loans), Department of Veterans Affairs (VA loans), or U.S. Department of Agriculture (USDA loans).
Or, a mortgage may come with a low down payment because it is eligible for purchase by the mortgage giants Fannie Mae and Freddie Mac. These are called conventional loans.
The smallest down payment you can make with an FHA loan is 3.5%. But it’s easier to qualify for an FHA-backed mortgage than a Fannie or Freddie one.
Your application may be considered even if your credit score is as low as 580 (with a 3.5% down payment) or 500 (with a 10% down payment).
And your lender may not be as bothered if your existing debt burden (your “debt-to-income ratio” or DTI) is big.
For many types of loans, lenders want to see your debt-to-income ratio at 40% or below. FHA loans can allow yours to be as high as 50%.
So it’s easier to qualify for an FHA loan if you currently have a lot of monthly debt you’re paying off.
The downside? FHA loans do have a higher down payment (3.5%) than a conventional loan from Fannie or Freddie (3%).
Plus, your mortgage insurance costs are likely to be higher, at least over the long term. So you may end up wanting to refinance sooner.
The FHA offers a specialist loan for those who want to buy “fixer-upper” homes, called the FHA 203(k) mortgage. This might be especially appealing to first time home buyers on a budget.
The problem with buying a fixer-upper is that you typically need a mortgage to buy the property and a separate loan to do the rehab work. Once the project’s finished you then refinance the two loans into one new mortgage. But that’s costly and cumbersome.
The FHA 203(k) lets you borrow the purchase and rehab costs in a single loan. You get the latter in stage payments or installments (“draws”) as the work reaches pre-set milestones.
Fannie and Freddie (conventional) loans
“Conventional” loans have two clear advantages over FHA ones.
The first is that your down payment can be as low as 3%.
And the second is that you can ask to stop paying for mortgage insurance as soon as your loan balance drops below 80% of the appraised value of your home.
A conventional loan is one that is not backed by the federal government, unlike FHA, VA or USDA.
Fannie Mae brands its 3%-down conventional loans as HomeReady™, while Freddie Mac calls its Home Possible®.
So why doesn’t everyone go for a Fannie or Freddie mortgage? Because you’ll need more robust finances and a higher credit score than with an FHA loan.
Expect your lender to require a score of 620 or higher and for your debt burden to be lighter than the FHA’s threshold allows.
Zero-down-payment loans for first time buyers
There are two prominent mortgage loans that don’t require any down payment at all: the VA loan and USDA loan.
But they both have special eligibility requirements, so not all first time home buyers will qualify.
VA loans are backed by the US Department of Veterans Affairs. And you can get one only if you’re a veteran with an honorable discharge, a current service member or a member of a very small number of other, closely related groups.
VA loans are arguably the best mortgages out there. If you’re eligible, you’ll need zero down payment, and there’s no minimum credit score (though individual lenders can set their own).
And — after an affordable initial payment that can be added to your loan balance — you won’t have any mortgage insurance costs.
Better yet, VA loans typically come with lower rates than other mortgages.
USDA loans are backed by the US Department of Agriculture (USDA) and promote rural development. So you cannot get one in metropolitan areas, though a surprising number of suburbs are eligible.
You can look up whether a home you want is in an eligible area using a tool on the USDA’s website.
But you, as well as the home, have to be eligible. That means you’ll need a low or median income compared to your area’s averages. You’ll also need OK credit (a 640+ score) and easily manageable existing debts (a DTI of 41% or lower).
In exchange, you could get a zero down payment, a below-average mortgage rate, and reduced mortgage insurance premiums.
Down payment assistance programs
There are more than 2,000 down payment assistance programs operating across the nation. And many of them put first time buyers at the head of the line.
Many are run by state or local governments or by nonprofits. And a lot of mortgage lenders are happy for you to access them for help.
Each of these first time home buyer programs has its own rules:
- Some provide outright grants that never have to be repaid
- Some offer low-interest loans that are progressively forgiven the longer you live in the home until you owe nothing
- Others just provide low-interest loans that you repay in parallel with your mortgage
Which you get will depend on what’s available where you live.
>> Related: Down payment assistance programs in all 50 states
Closing cost assistance programs
Closing costs typically cost between 2% and 5% of a home’s appraised value. That’s $4,000-$10,000 on a $200,000 home loan.
As a result, closing costs may be a significant burden for first time home buyers with limited savings.
Luckily, some first time home buyer programs offer help with closing costs as well as down payments. And, if you hunt around, you may find other sources that will give you grants or loans.
For example, motivated sellers and even some lenders will occasionally help with closing costs, though the latter may require a slightly higher mortgage rate in return.
Getting home buying help from family
Typically, your lender won’t mind if you accept “gift money” toward your down payment from a family member or even sometimes a friend.
But you’ll have to prove that you really are accepting a gift, rather than a loan disguised as a present.
So your benefactor has to sign a document to that effect, and may need to show where the money came from.
>> Related: How to give and receive a cash down payment gift for a home
First time home buyer programs in California
CalHFA — MyHome Assistance Program — Up to $10,000 in down payment assistance
First Home Mortgage Program — Grant for down payment and closing costs assistance, for borrowers in L.A. and Orange counties
HUD resources CA — More California first time home buyer programs
Article from: https://themortgagereports.com/64872/first-time-home-buyer-programs-50-states#CA