October 12th, 2019 9:53 AM by Jackie A. Graves, President
Buying a home for the first time can be exciting, a little
scary, and very expensive. First-time homebuyers won’t always qualify for the best mortgage
rates, but given that
homeownership in the United States has dropped over the last few years, many
lenders are eager to provide mortgages to new borrowers, even when their credit
scores are less than stellar. To make that possible, many lenders now offer
“first-time home buyer programs” that allow individuals to purchase homes they
otherwise wouldn’t be able to afford.
Using favorable interest rates, tax breaks, low-to-no down
payments, and grants, first-time home buyer programs can increase a buyer’s
chance at owning a home. Depending on the lender, these loans might be offered
in particular geographic areas, or to individuals who work in certain
industries. There are also specific programs for active-duty military,
veterans, and other high-risk or low-paying careers. Since the programs vary by
state, you’ll need to research what’s available in your area and calculate how
much you can afford — from monthly payments to a down payment — to help narrow
down your search.
A conventional loan follows guidelines set by Fannie Mac and
Freddie Mae and are not backed by government agencies. These loans are a great
option for first-time borrowers with good credit who can afford some sort of
down payment. They’re also a good option if you aren’t planning to stay in your
home very long and want a shorter-term, adjustable-rate mortgage. While many
other loans require an upfront “funding fee,” with a conventional loan, there
are no upfront mortgage insurance fees.
A Conventional 97 program is meant for borrowers who qualify for
a conventional loan but can’t afford a large down payment. Similar to a
conventional loan in many ways, the minimum down payment on a Conventional 97
is 3%, the property must cost less than $484,350, and buyers must pay for
loan is designed to help military service members, veterans,
and surviving spouses buy a home. Funds are provided by private lenders like
banks and mortgage companies. The VA guarantees a portion of the loan, which
allows the lender to offer better terms. A VA loan does not require a down
payment or private mortgage insurance. Qualified recipients can also use
cash-out refinance loans to take cash out of their home’s equity to fund
school, pay off debt or make home improvements.
loan is designed for moderate-to-low income home-buyers in
eligible rural and suburban areas. These loans are 100% financed which means
there is no money down, and no up-front closing costs. There are strict
geographic restrictions and income limits for borrowers, so check your
eligibility at USDA.gov.
Fannie Mae and Freddie Mac now offer loans for certain
individuals that require just a 3% down payment for either a home purchase or a
refinance. These loans are meant for people with low-to-moderate income levels
and credit scores as low as 620. Despite the credit score leniency, certain
loans are subject to income limits unless one buyer is a first-time home-buyer.
An FHA Energy
Efficient Mortgage isn’t necessarily geared toward first-time
buyers but toward people who want to make extensive energy-saving adjustments
to a home. Still, first-time home buyers could use an FHA EEM loan to lower
their costs, though any home-buying savings might be outweighed by up-front
energy-saving costs in the short term. This program helps lower utility bills
by offering financing for energy-efficient improvements. To qualify, the buyer
must get a home energy assessment to identify opportunities for improving
If you’re interested in learning more about the home-buying
process, the Fannie
Mae HomePath ReadyBuyer Program offers incentives for
education. First-time buyers can receive up to 3% of the purchase price in
closing cost assistance on particular HomePath properties by taking and
completing an online homebuyer education course. Buyers must prove they’ve
completed the course and must reside in certain, qualified properties.
Neighbor Next Door program is designed for law enforcement
officers, teachers and first responders. The program is offered through HUD and
offers 50% off the list price of eligible homes. Buyers must commit to living
in the property for 36 months, and only certain homes are available through the
Before jumping into buying a home through certain programs, it’s
important to consider interest rates and how much of a down payment you can
afford. Even small changes in interest rates can have a significant impact on
your mortgage rate and you need to be sure you can afford that payment. For
instance, on a $100,000 mortgage on a 30-year term, a 5% interest rate means a
$476/month payment. Add just 1% to that and the payment $533.
Down payments can also make an impact on your total cost, though
usually not as dramatically as your interest rate. On a $100,000 mortgage with
4% interest, providing a $1,000 down payment makes your monthly payment $464.
Adding $1,000 to that payment only brings your monthly payment down to $455.
You won’t begin to see a significant decrease in monthly payments unless you
can provide a substantial down payment.
The impact also depends on your
lender’s mortgage insurance requirements. Homebuyers who can’t afford a 20%
down payment are a higher risk for financial institutions, so lenders will
require borrowers to pay private
mortgage insurance (PMI) premiums when they can’t make a 20%
down payment. A PMI premium is usually between 0.5% and 1%.
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