Like many firsts, the process of buying your first home can seem daunting – but like so many things in life, with some planning and organization, first time homebuyers can overcome the jitters and simplify the process. The good news is that a host of great programs tailored just for first-time home shoppers can ease the way toward your goal.
The first step is to determine if this is the right time for you to buy. The allure of owning your own home is powerful, but make sure the time is right. Start by setting a firm household budget and tracking your monthly expenses down to the last dollar. Setting a budget is the best way to take the next big step in the process -- saving money for a down payment on your first home.
It’s also a good idea to take into consideration all of the new costs associated with a home. The mortgage payment, which includes principal and interest and private mortgage insurance, is going to be the biggest and most important payment, but you’ll also need to factor in:
- Property taxes
- Homeowners insurance
All this adds up, and should give you a better sense of whether now is the right time to buy. If your budget stands ready, then it’s time to start exploring programs designed especially for first-time homebuyers.
Programs for First-Time Homebuyers
Special programs designed for first-time buyers are offered through government agencies and some private mortgage lenders.
Start your search with the Department of Housing and Urban Development, and by checking with your state’s housing agency.
Qualification criteria for programs vary widely from state to state, so check with your state's housing authority to find out if you are eligible for its program. The same goes for programs offered by private mortgage lenders, so you’ll want to check with each potential lender about first-time buyer programs.
FHA Loan Program
The largest program for first-time homebuyers by far is the Federal Housing Administration’s guaranteed loan program. In this program, the FHA acts as the guarantor for loans tailor-made by traditional mortgage lenders for first-time home buyers.
The most popular FHA home loan, known as the 203(b), is a fixed-rate loan that works well for first-time homebuyers because it allows them to finance up to 97 percent of their home loan. The 203(b) home loan is also the only loan in which 100 percent of the closing costs can come in the form of a gift from a relative, non-profit, or government agency.
Insurance on FHA mortgages typically is rolled into the total monthly payment at 0.5 percent of the total loan amount, roughly half of the price of mortgage insurance on a conventional loan. After five years or when the loan balance reaches 78 percent, the additional mortgage insurance is typically met and therefore drops off the total monthly payment.
The FHA program does give homebuyers greater flexibility with regard to qualifying finances. While the standard debt-to-income ratio in the mortgage industry is 28% debt to 36% income, the FHA has a more lenient standard of 29% debt to 41% income. This means that first-time buyers with less than perfect credit may still be able to qualify for an FHA loan.
While many first-time homebuyers find it easier to qualify for an FHA loan even if a commercial lender has turned them down, the program contains requirements you may or may not meet. First, there are strict income limits, so if your job is particularly lucrative, you may not qualify for an FHA loan. You must also obtain FHA approval for the particular house you wish them to finance, and FHA requirements can be quite strict when it comes to home inspections and qualifying prices.
If you qualify, the FHA program is a great way to finance your first home.
If you find a FHA-approved property in need of some renovation, it can also be financed through FHA loans. A 10% to 20% reserve fund is made available to the buyer and can also be used to cover any additional costs for the remodeling. These loans are officially known as FHA 203(k) loans.
If you are looking for a home in the country, the United States Department of Agriculture’s Single Family Housing Guaranteed Loan Program, also known as its Section 502 program, could be perfect for you, provided you’re buying in a qualified rural area. The USDA program is designed for low-income homebuyers buying a rural home and features no down payment, no monthly mortgage insurance premiums, and subsidized interest rates. USDA-guaranteed loans are made by private lenders, but insured by the government.
USDA loans can be used to purchase, refinance, renovate or repair a home. These guaranteed loans offer 100 percent financing to income-qualified individuals, with a safe, low fixed interest rate. You should be aware, however, that the USDA only guarantees 90 percent of the loan, meaning that 10 percent of your home loan would have to be secured by other means. Income eligibility is capped at 115 percent of your median area income, so check to see if your income meets the requirement using the USDA’s income eligibility calculator.
If you think you qualify, your local USDA office (which you can find at usda.gov under the “Programs and Services” menu) will need to verify your income and debt payments to ensure that your monthly payments are affordable, and you’ll have to complete a homebuyer education course. The program’s maximum debt-to-income ratio is set at 29/41. It’s a fairly straightforward process: to determine your ratio, add the loan principle, taxes, insurance and interest and divide the sum by your gross monthly income. If this calculates to 29 percent or lower, you qualify. Additionally, your total debt before the new loan divided by your gross monthly income must be equal to or less than 41 percent.
If you are a military veteran, you should also take a look at the Veteran’s Administration loan program. The federal government secures VA loans, so many lenders are willing to finance you if you have VA approval. Like FHA, VA loans do have strict approval requirements for the house you wish to purchase, and require stringent inspections.
The VA loan is ideal for first time buyers. The VA offers first-time homebuyers loans for 0% down, and its credit standards are much more flexible than even private lenders, making it much easier for many first-time buyers to qualify. Best of all, VA interest rates are backed by the federal government, and its interest rates are typically .5% to 1% lower than the most competitive private rates. That federal guarantee also means that private mortgage insurance (PMI) is not required, shaving even more money off of your monthly payment.
For all your eligibility questions as well as the forms you’ll need to start the process, head to the VA’s helpful information FAQ.
Down Payment Assistance Programs
There also are programs designed to help you with that first down payment. The FHA program for first-time buyers allows you to finance 97% of the value of a house, so you only need a 3% down payment to qualify for a mortgage. That means that you’ll need to come up with $3000 in down payment cash for a $100,000 home, and so on.
Prior to the passage of the Housing and Economic Recovery Act, the federal government administered a number of programs that offered down payment assistance to FHA borrowers, including the Ameridream, Nehemiah and American Family Funds programs. All were ended by the Act, but the FHA still offers low down payment mortgage loans to qualified borrowers to help make the goal of buying a home more obtainable.
For example, HUD's American Dream Downpayment Initiative
(ADDI) program offers financial assistance for first-time buyers. Those who qualify can use these funds not only to help with the down payment, but also to pay for closing costs. ADDI grants are for first-time buyers with an income of 80 percent or less of their local median income, and are capped at 6 percent of the home purchase price or $10,000, whichever is greater.
State and local housing development authorities and community development agencies often have a number of different down payment assistance grants. Make sure you check with state and local agencies to find out if funding is available and to find out whether you qualify. Even if state and local funding is unavailable, state or local agencies may be able to help you obtain a low-interest or no-interest loan to use toward the down payment, so make sure you explore all options with your housing officials.
Finally, keep in mind that even if you minimize or eliminate the down payment, there are still some out-of-pocket expenses when buying a home such as your home inspection and moving costs. Make sure you have enough money saved to cover these upfront costs.