How do you go from dreaming of owning a home to holding your first set of keys? If you’re like most first-time buyers, the down payment is your biggest hurdle. But, it could pay off big time to know your down payment options.
There are more than 2,750 home buyer programs available across the country–they can be as unique as the home buyers and communities they serve. Let’s break down the basics of today’s home buyer programs.
What are home ownership programs?
Programs can include loans, grants, tax credits and other programs for eligible homebuyers that can help them achieve the down payment faster, cover closing costs and get into a home sooner than they would have otherwise.
Who offers these programs?
- State Housing Finance Agencies (HFA) often offer the broadest array of opportunities.
- Cities and Counties offer programs with criteria adjusted for local median income and home prices.
- Housing Authorities
How do you qualify?
Both you and the home you are purchasing must be eligible. Home ownership programs are for owner-occupant buyers only, no investment properties. You must make a minimum investment, qualify for a first mortgage and complete homebuyer education. Common eligibility factors include the home’s sales price, homebuyer income and homeownership history.
Do you have to be a first-time home buyer?
First, it’s important to know that a first-time home buyer is defined as someone who hasn’t owned a home in three (3) years. So, if you’ve owned in the past, but are renting now, you may be a first-timer again! As many of these programs change, currently more than 50 percent do not require you to be a first-time home buyer.
MOST COMMON TYPES OF ASSISTANCE PROGRAMS:
Down Payment Assistance:
These programs are normally soft second or third mortgages or grants, providing benefits such as 0% to 8% interest rates, deferred payments and forgivable loans. The assistance amounts will range from a few to tens of thousands of dollars and can be used towards the down payment, closing costs, pre-paids, principal reductions and/or repairs.
Don’t count out high cost markets. Program benefits and eligibility requirements are adjusted based on a percentage range of the area’s median income and home prices.
If you’re purchasing a home in a target area designated by the housing finance agency, you may receive special benefits such as higher assistance amounts, more lenient income requirements and if there’s a first-time home buyer requirement, it may be waived.
Affordable First Mortgages:
Many larger housing finance agencies, particularly at the state level, offer first mortgages to accompany their down payment assistance programs.
The USDA also has two first mortgage programs: the Rural Direct Loan and the Rural Guaranteed Loan. Both loans are primarily used to help low- and moderate-income individuals or households purchase homes in rural areas. Funds can be used to acquire, build (including purchase and prepare sites and provide water and sewage facilities), repair, renovate or relocate a home.
Mortgage Credit Certificates (MCC):
This annual federal income tax credit is designed to help first-time home buyers offset a portion of their mortgage interest on a new mortgage as a way to help qualify for a loan. As a tax credit, not a tax deduction, the MCC helps you reduce your annual taxes dollar for dollar. The mortgage credit allowed varies depending on the state or local government that issues the certificates, but is capped at a maximum of $2,000 per year by the IRS. MCCs can often be used alongside another down payment program.
As an example, if you were to receive an MCC for a $200,000 loan for 30 years with a rate of 5% and your MCC rate is 20% you would multiply 200,000 x .05 = $10,000. Second, you would multiple $10,000 X .2 = $2,000 would be your potential allowable tax credit for the first year.
Potential Pitfalls of using Down Payment Assistance Programs:
For the most part every state has their own DPA program and while there are a few national programs they all basically work the same. Borrower(s) is restricted to a tight debt-to-income ratio of 45 percent. If your primary housing ratio plus all of your other debt as reported on your credit report is over 45 percent of your gross monthly income you will not qualify for most DPA programs. The second thing to be aware of is you may be paying a slightly higher interest rate than what the going standard interest rate is on a “straight” loan or one that does not have DPA.
Finally, most DPA’s also have “recapture” rules. Where if you are to refinance or sell within a 3 to 5 year period after closing you may be required to pay back most of the assistance you have used. IMPORTANT HINT TO READER: You need to do your homework when it comes to down payment assistance programs. If you are in need of them and you do qualify they can be a great program for you, but if you truly don’t need them and just looking for “free” money – well “free” isn’t always “free”. You need to do a detailed cost analysis and amortization schedule between a DPA loan, the interest rate you are bring given and what you would qualify for without a DPA loan as well as to ask yourself if you are looking to move within the important “recapture” period as your assistance money will be tremendously reduced by this “recapture” amount.