Congratulations on taking steps toward homeownership! If you’re just getting started with your search, you might be wondering about first-time homebuyer programs. Are these paths to homeownership for you?
What are the best options out there? First-time buyer programs are certainly worth looking into, especially if you have limited knowledge of the real estate market and homebuying process.
Real estate professionals know that first-time homebuyers are big business. According to the National Association of Realtors (NAR)’s Profile of Home Buyers and Sellers, first-time buyers make up 31% of the market. Your agent, your loan officer, and all parties involved want to see you move into the home of your dreams. First-time homebuyer programs are designed to make the dream of homeownership a reality for buyers. The programs discussed here could help make an otherwise difficult path to homeownership run smoothly. Even if you do encounter a few twists and turns, purchasing a home is a good start to building wealth. According to multiple sources, including investment clearinghouse The Motley Fool, the majority of a household’s net worth in America is found in home equity.
Thousands of down payment assistance and other first-time homebuyer programs exist. Some are available to a national audience, but many are supported by local not-for-profits and municipalities. The easiest way to start looking for programs near you is an internet search…but beware of bad actors! Legitimate homebuyer assistance programs will be able to provide reviews from existing home buyers and established lending institutions. Are you already working with a lender? Your loan officer is a great resource for first-time homebuyer programs. You might also contact your local housing authority (an organization that deals primarily with rental housing opportunities) for information on state and local programs for buyers.
Following are some national programs helpful to first time home buyers:
MCC – The Mortgage Tax Credit Certificate Program (MCC) has been around since 1984. (source: www.fdic.gov/resources/docs/mortgage-tax-credit.pdf) It allows homeowners to claim a tax credit for a substantial portion of the real estate taxes paid in the previous year. MCC’s are great for first-time home buyers because the underwriter can treat the tax deduction as a reduction in expenses when determining whether a buyer qualifies for a home loan. Buyers who are approved for the MCC program can even request lower withholding from their paychecks.
If you think you might qualify for an MCC, discuss it with your loan officer right away. The government allocates a predetermined amount of money to the program each year, and when it runs out and buyers purchasing in the current year would no longer be eligible. Also, it is worth noting that while the federal government markets this program to first-time homebuyers only, their definition of first-time homebuyers includes “borrowers who have not had an ownership interest in a principal residence in three years.” Thus, if you are getting back into the housing market after a hiatus you may still qualify.
American Dream Grant - The United States Department of Housing and Urban Development (HUD) provides funding for homebuyers who qualify for downpayment and closing cost assistance. The official name of the program is The American Dream Downpayment Initiative. To qualify, the borrower(s) must be first-time home buyer(s) with a household income below 80% of the median income in their area. For more information on this program, see the HUD pamphlet at https://www.hud.gov/sites/documents/20604_BROCHURE.PDF.
Other FHA-Compatible Programs – HUD lists and endorses many other programs that help first time homebuyers. You can search by state on their website for opportunities in your area: https://www.hud.gov/states. One example of a state-based downpayment assistance program is the Individual Development Assistance program from the Indiana Housing and Community Development Authority (IHCDA). Through this program, qualified home buyers commit to financial education and saving their own money. The program matches the approved applicant’s savings 3-to-1, giving up to $4,500 to be used toward the purchase of a primary residence.
Why Do These Programs Exist?
First-time homebuyer programs exist for a variety of reasons. Depending on the granting organization’s mission and background, downpayment or other assistance is sometimes offered to help stabilize communities. Homebuyer assistance programs also exist to make homeownership a possibility for families at various income levels, thereby increasing the overall homeownership rate in America. Some programs work to create opportunities for minority applicants and underserved households.
MCC tax credits are designed to benefit both low- and moderate-income households. An MCC can sometimes be combined with other programs and is compatible with various loan types. The MCC program eases the financial burden of mortgage interest on recipient households and may also increase the likelihood that a first-time home buyer can qualify for a home loan.
What is Required to Qualify?
Each program has different guidelines. Most have income limitations and some require a minimum credit score. Many of the downpayment assistance programs require that the applicant(s) take classes to learn more about finance and the home buying process.
Also, applicants must use the grant/assistance funds for the intended purpose. These programs are intended for the purchase of a primary residence, not a vacation home or investment property. Funds can generally be used as a downpayment on the subject property and for closing costs. Typical closing costs include the origination fee, underwriting fee, appraisal, recording fees, and other costs associated with the acquisition of a home. Some first-time homebuyer programs allow a portion of the funds to be used for the rehabilitation of the subject property.
Are first-time homebuyer programs worth the extra steps it takes to apply? Consider the pros and cons of programs available in your area and decide what’s right for you. Pros include more money for the downpayment and closing costs. For some borrowers, this means the difference between a qualification or denial of their home loan. Many downpayment assistance programs also include buyer education classes. Cons are additional paperwork and sometimes the additional time between application and closing. Some downpayment assistance programs put an upper limit on the loan amount that a lender can offer and may also involve higher mortgage insurance payments. For more guidance on the topic, contact a home loan expert at Ruoff.com.