Buying a home can be overwhelming, especially if it’s your first. The great news is that there are a variety of programs available to first-time home buyers that can help with costs associated with closing and even down payments.
Who qualifies as a first-time buyer?
The definition may seem simple, but the answer can vary from program to program. Many mortgage investors, including Freddie Mac and Fannie Mae, consider a first-time home buyer to be anyone who hasn’t had an interest in property within 3 years prior to the current purchase. For example, if you’ve been renting an apartment or living with relatives for 3 years, you may be considered a first-time buyer, even if a home was in your name in the past.
What types of first-time home buyer programs are available to me?
There are quite a few programs available.
In Memphis, there are multiple programs available, including Homebuyer Incentive Programs (HIPs) for Memphis citizens, firefighters, teachers, and police, as well as programs available to assist those with low to moderate incomes. Outside of the city, there are programs to assist in buying in more rural areas. Each program has different stipulations and benefits, so it’s a good idea to speak to a financial advisor or Realtor to help make sense of each one.
What are the requirements for these programs?
Each program has different requirements, from requiring classes on homeownership, to income limits, to purchasing a property within a specific area.
What else should I know about these programs?
Make sure you speak with your primary lender prior to accepting any assistance. Some lenders will not accept certain programs, so it’s important you know which ones will work with your home loan. It’s also helpful to speak with an experienced Realtor who can help navigate programs that are available in your area.
Types of first-time home buyer programs
1. Down Payment Assistance
Down Payment Loans
Like any other loan, a loan for a down payment typically needs to be repaid, although there are some that are forgivable. Frequently a down payment loan requires a second lien on your home. These liens are set in place in case a buyer defaults on the mortgage so that the lender is still paid when the home is sold. With forgivable loans, there are frequent stipulations in order to not have to repay the loan, such as living in the home for a set amount of time. The City of Memphis offers its own down payment assistance program.
Down Payment Grants
A down payment grant is similar to a forgivable down payment loan, although there are no stipulations in order to not repay the grant.
2. Loans For First-Time Buyers
Conventional Conforming Loans
A conventional conforming loan is one that meets requirements for Freddie Mac or Fannie Mae. First-time home buyers must have a 3% down payment as well as meeting the other qualifications, including having a 620 or above credit score. Other things to know are that there are conforming loan limits and that you’ll be required to pay for private mortgage insurance (PMI) if your down payment is lower than 20% (although these can be removed once you reach 20% home equity).
Conventional Nonconforming Loans
Conventional nonconforming loans do not meet the requirements for Freddie Mac or Fannie Mae, but are not sold to the government, meaning they are still conventional. The most common use of a conventional nonconforming loan is a jumbo loan, or one that exceeds the limits of conventional conforming loans.
Government-Backed Loans
One option that shouldn’t be overlooked is the availability of government-backed loans. The three major ones are:
- Department of Veteran Affairs (VA) loan: Available to eligible service members and veterans, as well as to qualifying surviving spouses. Frequently, VA loans require no down payment, although there may be a small funding fee.
- Federal Housing Administration (FHA) loan: A good option for home buyers with less than perfect credit, or who need a smaller down payment. A median credit score of about 580 is typically required for a down payment of 3.5%, although a lower credit score may be acceptable with some lenders, along with a higher down payment.
- U.S. Department of Agriculture (USDA) loan: These loans are created to home buyers looking for affordable housing in rural areas, so if you’re looking to live outside of the Memphis metro area, this may be an option. There is a 0% down payment option for buyers purchasing in eligible areas.
HomePath® Ready Buyer™ Program
An option that Fannie Mae offers first-time home buyers is the HomePath® Ready Buyer™ program. This allows buyers the opportunity to purchase a foreclosed property for as little as 3% down. However, these properties are sold in as-is condition, meaning there may be repairs or construction that must be done before the home is ready to live in. Buyers must also live full-time in the home and pass a homeowner course prior to closing. In addition to the low down payment, this program also allows potential buyers to apply for up to 3% of the closing costs back.
3. Closing Costs Assistance
Many first time buyers don’t factor the costs associated with closing when they’re first deciding to purchase a home, but the amount should figure into your savings plan. Closing costs are typically 3-6% of the sales price and assistance is available in the form of both loans and grants. A seller may also look to pay for closing costs, as well as other fees. However, don’t rely on a seller to assist you through this process; your dream home may come without seller concessions, and you don’t want it to pass you by because you did not plan!
4. Charitable & Non-Profit First-Time Home Buyer Programs
These programs are great if you have low to moderate income and offer both educational and financial resources. A couple of these programs available nationwide are:
- Habitat for Humanity: This international organization offers housing for low income buyers. These homes are built by volunteers, which Habitat for Humanity makes no profit on, helping to add to their affordability.
- Neighborhood Assistance Corporation Of America (NACA): NACA is a non-profit organization with the goal to build strong neighborhoods nationwide through affordable home ownership. If you qualify for a NACA mortgage, you will pay no down payment, closing costs, or fees, as well as receiving a below-market interest rate. Perfect credit is also not required. Priority buyers are considered those with low to moderate incomes or those who are purchasing in certain designated areas. Buyers outside of that criteria can still qualify for a low interest rate, albeit one point above what priority buyers will receive.