First-time homebuyers have reason for optimism. Though buying a home can be exciting, it can also create a lot of stress and worry. How much of a down payment is needed? Will previous credit problems create any issues? Thankfully, many home buyers assistance programs help make the process more simple and transparent.
Many programs are geared toward reducing or eliminating down payments. Others provide options for borrowers with poor credit histories. Most are designed to help low- to middle-income borrowers. Some help homebuyers in urban and suburban settings, while others are designed to help purchases in small towns and rural areas.
Getting a pre-approval before house hunting is always smart. This allows the borrower to know exactly what he or she can purchase, eliminating the frustration of searching through lists of properties that are unrealistic. Having the pre-approval in hand also provides negotiation leverage. Sellers are more willing to discount the price when they know the buyer has financing in hand.
Before choosing a pre-approval route, first-time buyers should always consider the type of property they want. For example, some assistance programs are better suited for single-family homes, while others are better suited for condominiums. Choosing the best program for the property type, as well as the borrower's individual situation, can make the home-buying process a cinch.
1. FHA Loan Program
The Federal Housing Administration (FHA) provides government-guaranteed mortgages through the FHA loan program. The government uses the program to promote and increase the level of homeownership across America. By guaranteeing the mortgages, the government provides incentive for lenders to provide more loans to consumers, especially those who otherwise fall short of qualifying standards. Because the FHA loan program is open to a broad spectrum of the population, it is one of the most popular homebuyer assistance programs.
Down-payment requirements are the most common reason that potential first-time homebuyers remain out of the residential real estate market. Saving 10 or 20 percent for a down payment is especially difficult in today's paycheck-to-paycheck economy. While current homeowners may have enough equity to cover a down payment on a new house, the story is different for first-time homebuyers. For example, saving 15 to 30 thousand dollars in cash for a down payment on a $150,000 home is out of reach for most people.
An FHA loan requires just 3.5 percent down for borrowers with credit scores over 580. With a higher down payment, borrowers with lower credit scores may also qualify. FHA loans do require mortgage insurance. They are also restricted to homes priced 115 percent or less than a county's median home value. FHA loans are granted by a wide variety of lenders. The lenders provide loans within program parameters in exchange for the FHA loan guarantee.
2. VA Loans
The Veterans Administration (VA) provides assistance to first-time homebuyers who are on active duty, veterans, and surviving spouses. Similar to the FHA program, VA loans are government-backed loans provided by private lenders. Lenders are willing to accept riskier borrowers because the VA backs the loans.
VA loans are a great deal for those who qualify. They offer zero down payment options with no mortgage insurance. Qualification standards are very relaxed, even compared to FHA loans. A sufficient source of income stands as the primary qualification, rather than credit. Unlike FHA loans, the VA does not enforce a maximum loan value.
VA lenders have the discretion to impose their own standards, however, so selecting the right lender becomes very important to the borrower. Some lenders may have maximum loan amounts or credit qualifications of their own. Some VA lenders also offer assistance and grant programs to borrowers. VA borrowers should also use a lender that suits their credit profile. Some lenders have better programs for borrowers with weaker credit scores. Other VA lenders have programs that are designed specifically for borrowers with little or no money down.
3. Fannie Mae and Freddie Mac Programs
Congress created the Federal National Mortgage Association as well as the Federal Home Loan Mortgage Corporation (These are commonly called Fannie Mae or Freddie Mac) to create mortgages for low- and middle-income Americans. These behemoth companies purchase mortgages from lenders in the secondary market. Their purpose is to create liquidity, which makes it easier for homebuyers to obtain loans. It also reduces risk for the lenders.
What does this mean for the first time homebuyer? Fannie and Freddie work with local lenders to establish attractive mortgage options, many of which provide big benefits to first-time homebuyers. The biggest benefit is often the low down payment options that Fannie and Freddie facilitate.
The catch is that the terms depend on the lender. Because Fannie and Freddie merely guarantee that they will buy the loans under certain conditions, lenders have a great deal of flexibility in the terms, both for down payments and credit score requirements. Because of this, it is important for borrowers to shop around with a number of lenders that offer loans through these programs.
4. USDA Loans
The United States Department of Agriculture (USDA) has a very flexible loan program for first-time homebuyers in rural areas. The property does not have to be a farm or have an agricultural purpose, though agricultural properties can be obtained through this program. Buyers can use this program to purchase single-family homes located in small towns or unincorporated rural areas. For those who like country living, USDA loans provide a path.
USDA loans are amongst the few no-down-payment loan options available, outside of VA loans. This program also provides relatively easy credit qualification terms. The USDA also provides special programs for low-income borrowers, which are funded through the USDA directly. USDA programs for larger incomes are provided by private lenders and backed by the USDA.
Interest rates vary based on credit profile. They also vary by the market rate and lender. As with Fannie and Freddie loans, USDA lenders have broad discretion over loan programs, so shopping around for the right lender is crucial. Some lenders provide more options for borrowers with poor credit histories. Usually, interest rates are affected by credit score and credit history. Most borrowers with previous bankruptcy or foreclosure can qualify within a few years of those events.