First Time Home Buyer Programs
Buying Your First Home
Buying your first home can be both exciting and scary at the same time. Where do you start? Who do you talk to? Who can you trust to give you good advice?
As a first time home buyer, you hear a lot about first time home buyer programs that offer special deals or discounts to help you buy a home.
As a mortgage lender with 2o years experience working with first time home buyers, I can tell you that there is far more vague, overly generic, or just plain misinformation on the internet than you would ever expect.
If you haven’t found out already, the internet is a dangerous place to get answers! There are some really good marketers out there, and some really big companies investing a lot of money to get you to fill out forms on their website.
Yes, there are forms on FindMyWayHome.com, and there is the difference. Most of the time, when you fill out an online form, you are being sent to a call center somewhere, and your information is being sold off to the highest bidder.
This does not always guarantee that you are going to be matched with a loan officer that has the experience, or expertise to help you through what is going to be close to the biggest investment of your life.
I wanted to write this article to help give you some insight into the most common questions, concerns and challenges that I hear from first time home buyers, and how to get the right answer the first time.
State, City or County Buyer Assistance
Getting help paying all of the costs associated with buying is the biggest question that I see with first time home buyers.
Down payment assistance programs do exist, but they are not always what they seem. There is always a cost or a catch. The most common restrictions with down payment assistance programs include:
- Minimum credit score (640 is common)
- Income limits (can be based on number in family)
- Loan limits (based on program or County)
- Limited Debt to Income Ratios (max 45% DTI is common)
- Higher interest rates and fees (set by program lender)
- Origination Fees (normally 1% to 1.5% of purchase price)
- Occupancy restrictions (can never rent home)
- Equity Share (common with City programs)
- Recapture tax (common with bond programs)
- Limited or temporary funding (waiting lists are common)
- Minimum buyer contribution (not as common)
- Limited eligible homes (Statewide programs are more flexible)
None of these restrictions are bad things, they are just outside of what you would have to do when qualifying for a traditional Conventional, FHA, VA or USDA loan. There’s often a much easier, and inexpensive way to get the help you need.
Paying Closing Costs
Your closing costs will fall into one of two categories. Costs will be either Down Payment, or closing costs. Between the two, the average investment required to buy a home will typically calculate out to between 5% to 7% of the purchase price at the high end for the average first time home buyer.
The minimum DOWN PAYMENT requirements for traditional purchase loan programs are as follows:
- Conventional Loans – Between 3% and 5% of the Purchase Price
- FHA financing – 3.5% of the Purchase Price
- USDA financing – No down payment required
- VA financing – No down payment required
Your down payment can come from any of these sources:
- Your savings
- A 401k or retirement account
- The sale of stocks, bonds or CD’s
- The sale of personal property
- An settlement from a lawsuit or insurance claim
- A gift from a relative
- An employer contribution plan
First time home buyer programs do not have to have restrictions. When you are informed, and educate yourself on different strategies for covering closing costs and getting the lowest rates and fees, there are great programs that can assist in your home buying goals.
If you are buying your first home using one of the above sources for the down payment, you have much more flexibility, and you are able to make more competitive offers, afford more home, and pay less closing costs.
The CLOSING COSTS associated with buying your home include (in order of expense):
- Loan Costs – Taxes and insurance impounds / interim interest
- Discount Points – If you are buying down the interest rate
- Lender fees – May include origination, underwriting, processing, appraisal
- Title insurance
- Escrow Fees
- Notary Fees
- Gift Funds
Closing costs can be paid for using any of the above mentioned methods that you used for your down payment, or you can get assistance from your lender, your Realtor, or the seller of the home.
Using a Lender Credit to Pay Closing Costs
First time home buyer programs from the City, County or State have higher interest rates that you could otherwise get if you were not using one of those programs. The challenge with first time home buyer programs from one of these sources is that if the assistance does not cover 100% of your closing costs, you do not have the ability to receive a lender credit on top of that.
A lender credit is created when you agree to take slightly higher interest rate, in exchange for a credit that can be applied toward closing costs. My experience has been that you can increase the rate enough to pay for 100% of your closing costs, and still have a lower rate and payment than if you use a first time home buyer program.
Using a Realtor Credit to Pay Closing Costs
A Realtor credit is available when your Realtor agrees to give you part of their commissions that they will earn when you buy the home. The seller of the home pays the commission to their Realtor, and the seller’s Realtor then shares that commission with your Realtor in exchange for bringing you to the transaction.
The average Realtor commission on a home purchase is usually between 2% and 3% of the sales price. Some real estate brokerages will offer a “rebate” back to the buyer as part of their business model. If you have a good relationship with your Realtor, this may be a conversation you want to have if you find yourself short on funds to cover closing costs.
Using a Seller Credit to Pay Closing Costs
A seller credit must be negotiated at the time that you present your offer to the seller of the home. Asking the seller to cover closings costs is something that you have to carefully consider, and may work against you if your agent does not know how to properly advice you on this strategy.
When you ask the seller to pay closing costs, you are actually offering them the purchase price, minus the closing costs. So, if they are asking $300,000 for their home, and you offer $300,000 and ask for $5,000 in closing costs, you are actually offering them $295,000.
This reduction in asking price may make your offer less competitive than a buyer making a full price offer and not asking for closing cost assistance. You should rely on the experience and advice of your Realtor to determine if this is a good strategy for you.
First Time Home Buyer Programs
At the end of the day, buying your home is the goal. Consider all of your options, and make informed decisions about the best way to do this. Understand that programs offering money for home buyer assistance are not offering you free money. There’s always a catch.
The long term cost of short term assistance can be expensive, and put you in a challenging position later. When using City, County, or State assistance programs, if you ever try to refinance or sell your home, you may have to pay back that assistance, sometimes with interest, and sometimes with a percentage of the equity you’ve earned in your home.
You can always avoid catches by being creative. Just make sure you explore all of your options, and consider both your long term, and short term options. Buying your first home does not have to be difficult.
Being a new home buyer is going to be a new experience, with a lot of new things to learn about for the very first time, and an experienced home buying team is the your greatest weapon against surprises when buying your first home.