The SCOOP! Blog by ChangeMyRate.com®

If you’re looking for financial support to buy your first home, here’s a guide to help you navigate your options.

Financial Support vs. Marketing

It’s important to understand that many first-time buyer programs are marketing messages more than they are actually a specific form of financial support for first-time buyers.

For example, you might see an advertisement from a mortgage lender saying something like: “Ask Us About Our Special First-Time Home Buyer Programs”

Typically. this doesn’t mean this lender is promoting programs with financial support for first-time buyers.

In a case like this, ask if the program being advertised offers specific financial support for first-time buyers, or if they are promoting loan programs available to all home buyers.

Financial Support vs. Loan Programs

Two examples of loan programs available to all home buyers that are particularly well-suited to first-time home buyers include:

• FHA loans. These loans allow you to buy a home with as little as 3.5 percent down, don’t require you to have reserves left over after you close, and allow co-signers as well as gift funds to be used for down payment. So they’re good for first-time buyers who don’t have a lot saved. Here’s an FAQ on FHA loans.
• Fannie Mae and Freddie Mac 3 percent down programs. These loans allow you to put just 3 percent down, and the mortgage insurance you pay for the low down payment is often cheaper than FHA loans. Read more about how these compare to FHA loans.

These two examples illustrate how federal government support is inherent in the U.S. housing finance system. Private lenders make these FHA, Fannie Mae and Freddie Mac loans to you, but the government backs these loans, which means it’s less risky for lenders to allow lower down payments and other features often sought by first-time home buyers.

Without this federal government support, these loans would not exist in the private market.

However, these loans build in low-down, low-reserve features first-time buyers want, rather than offering explicit financial support.

Types of First-Time Home Buyer Financial Support

So what does explicit financial support for first-time buyers look like?

In response to the 2008 global financial crisis, the federal government offered tax incentives for first-time home buyers, but there are no such programs available at this time (as of October 2015), and these federal support programs are rare.

Overwhelmingly, financial support programs are sourced through local governments and nonprofit organizations. They can come in the following forms:

• Down payment assistance
• Tax credits
• Special housing units allocated to be sold below cost norms for a certain area (often called Below Market Rate housing)
• Special programs for critical community infrastructure jobs like teachers and firefighters

For example, the city of Seattle offers up to $45,000 per household in down payment assistance to first-time home buyers.

Like most other cities offering this kind of down payment assistance, they have income thresholds you must meet to be eligible. In Seattle’s case — which is representative of how these programs work in many cities — you must be at or below 80 percent of area median income to be eligible. Each city will post an income table on their websites to make it easy for you to determine your eligibility.

And each city will post full terms on their programs — including whether the down payment assistance has to be paid back like a loan or paid back after you sell, and whether the city shares in your home’s appreciation.

In another example, the city of San Francisco offers a tax credit program which significantly increases your tax benefit as a first-time home buyer.

Normally, a homeowner gets to claim mortgage interest as a tax deduction. This means they subtract mortgage interest paid in a given year from their gross income to arrive at a new, lower taxable income. Paying tax on this lower income is how homeowners save money at tax time.

A mortgage tax credit program is different and more beneficial than a mortgage tax deduction program.

Under San Francisco’s mortgage tax credit program — which, again, is representative of how these programs work in many cities — 15 percent of the mortgage interest you pay each year is deducted directly from your annual tax obligation, and the remaining 85 percent of your mortgage interest is taken as a deduction from your gross income in the usual manner. The end result:  you significantly reduce your overall cost of homeownership.

How to Find First-Time Home Buyer Financial Support

There are two ways to find these types of financial support programs in your area:

• Most cities have a mayor’s office of housing, so you can search for housing programs on the mayor’s website. You can also search for “affordable housing” or “down payment assistance” along with your city’s name. This will usually lead to a local government website outlining options in your city, and the local government resources usually also include links to nonprofit support resources. The San Francisco and Seattle links above provide good examples of what to look for.
• Ask your lender. It’s critical to understand that not all lenders are willing to lend to first-time home buyers who are also receiving other forms of financial support. So you must make sure your lender will agree to the terms of any financial support program you might want to use. Therefore, you can often start with your lender, because if they do support these programs, they will already be well-versed and can point you in the right direction of what kind of support is available in your area.

To view the original article click here