You know first-time home-buyer programs are out there.
But how do you find the right one?
Start by talking to a local mortgage broker. They’ll be familiar with the programs that are most likely to benefit you -- including local home-buyers programs that might not be as well publicized.
These programs have provided an average of $11,000 in assistance to individual home buyers, according to Down Payment Resource, a nationwide database of roughly 2,500 home ownership programs that helps match buyers and properties. That assistance can vary greatly between disparate cost-of-living markets like Southern California and Iowa, according to Down Payment Resource. Some 87% of properties are eligible for some kind of assistance.
Of the programs tracked by Down Payment Resource, for example, 69% offer down payment assistance.
“Paying 20% down is, quite frankly, a myth," says Karen Hoskins, vice president at NeighborWalks and bearer-of-great-news. "Most buyers pay only 5% to 10% down — some even pay zero."
The key to finding a no-money-down home loan is finding the right assistance program. And there's no shortage of them if you qualify.
Because they're at the national level, they're often the ones people turn to first:
FHA. Helps first-time buyers — especially those with lower credit scores — buy with down payments as low as 3.5% (low-down).
USDA Rural Development Loans. For low-to-middle income families buying homes in towns with populations of 10,000 or fewer people or that are “rural in character." That means some areas with bigger populations have been grandfathered into the program (zero down).
VA Home Loans. Helps service members, veterans, and eligible surviving spouses (zero down).
Government-sponsored enterprises. Fannie Mae and Freddie Mac, which set the rules for mortgages nationwide, both offer programs allowing eligible buyers to put down as little as 3% of the purchase price. That's even lower than FHA (low-down).
But those aren't the only options. Too often, buyers neglect to look for help locally, which may offer even better assistance.
What is the first time home buyer program that is right for you? Municipalities and states offer numerous options — even if you don’t have the down payment.
Qualifications vary based on the agency or the community requirements, but assistance programs generally:
Have income limits
Have purchase price limits
Require participants to take home buyer counseling
Other requirements — like whether you're a first-time buyer, how good your credit is, where you have to buy, whether you have to rehab the home, or if you need to be part of a group, such as active military, veterans, or teachers — depend on the program.
Assistance comes in these forms (Note: Specific programs named as examples below may change or close over time.):
Forgivable loans and grants. These are literal gifts for some or all of the down payment and closing costs, which means there's no recorded lien or mortgage on that money. Eligibility and terms will vary and funds are limited. Example: The National Home Buyers Fund, Inc. offers down payment and closing cost assistance up to 5% of the mortgage loan amount as a gift or zero-interest second mortgage that's forgiven after three years.
Second mortgages. As the name suggests, these loans are in addition to your primary home mortgage. They can help with items such as down payments and closing costs on your primary mortgage. They take a variety of forms, and the differences can be confusing. The most important thing isn’t the terminology, though; it’s knowing they exist, because they can offer substantial down payment assistance (DPA) and favorable terms.
Soft mortgages. These DPA loans are deferred for some period of time based on a particular program's requirements. Occasionally, they're forgivable. Example: The Home Purchase Assistance Program in Washington, D.C., defers payments for five years for moderate-income borrowers.
Silent seconds. DPA repayment is deferred until you sell or refinance. The city of Napa, Calif., for instance, offers eligible first-time buyers up to $58,000 or 30% of the purchase price, whichever is less, at 1% interest. The loan can be deferred for the 30-year term if you stay in the home.
Hard seconds. You start paying off the DPA loan as soon as you close. Programs offer a variety of loan amounts and interest rates (some below-market) depending on your eligibility.
First mortgages at below market interest rates. Local and state agencies subsidize a mortgage to make it more affordable for the buyer by reducing the interest rate, or offering 100% financing (which means no down payment), and sometimes waiving mortgage insurance, too.
Mortgage credit certificates (MCCs). Issued by some state or local governments, MCCs allow taxpayers to claim a tax credit (Form 8396) for some portion of the mortgage interest paid during a given tax year. A credit, unlike a deduction, is a dollar-for-dollar savings on your tax liability.
You don't have to itemize to use this credit, according to Greg Zagorski, senior legislative and policy associate at the National Council of State Housing Agencies. It's capped at $2,000 per year, and you can claim it throughout the life of the loan.
A cool tax benefit of MCCs is that if your tax liability one year is lower than the credit, you can roll over the amount you can't claim to the next year. If you make more the next year (and therefore have more tax liability), you can claim what you couldn't before.
Housing counselors, who are free (!) and can discuss what mortgage options are best for you, are available through housing finance agencies and organizations like NeighborWorks. Find HUD-approved housing counselors by state here. Or contact your state's housing finance agency.
Check your eligibility for a host of DPA programs at Down Payment Resource.
Find a good mortgage broker, who should have information about down payment programs in your area and can help you determine your eligibility.
Talk to your real estate agent.
A final note: When you put down less than 20%, you pay private mortgage insurance (PMI) each month to protect the lender’s interest. On the other hand, not having to save up for a 20% down payment can get you into a home a lot faster. And you can cancel PMI (except for FHA loans) once you reach 20% equity.
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