Help for first-time homebuyers
Here are 6 ways to finance your first home purchase, with the rules, wrinkles and benefits of each.
By Marilyn Lewis of MSN Real Estate
Even though the first-time homebuyer tax credit ended April 30, there are still many ways the government provides help and incentives to get first-timers into the housing market. MSN Real Estate turned to EJ Hawkins, housing counselor with the nonprofit ClearPoint Financial Solutions, for a snapshot of each option. With all mortgages, the interest rate you get will depend on your credit score and market rates at the time you buy.
1. FHA-insured loans
The Federal Housing Administration doesn’t make loans, it insures them. You buy the insurance and the government sets the rules and repays your lender’s investment in case you default.
The rules:
Down payments are as low as 3.5% (example, for a $230,000 home, you’d pay $8,050 in cash).
Your FICO credit score (read “Boost your credit score”) must be 580 or above. (Read “Think you're ready to buy a home?” to learn about scores and loans.)
Find more information at HUD.gov or read “FHA loans get dramatically costlier.”
The good:
The requirements are pretty easy, so newbies can qualify.
If you haven’t yet built a strong credit score – and don’t have a record of late payments, missed payments or a foreclosure – you can use "nontraditional" credit sources, such as cell phone or other utility bills, rent payments or medical bills, to qualify.
The FHA limits extra charges ("points" and fees) for things such as title insurance and settlement and escrow fees. These can add up, otherwise. (To see all possible closing costs, download a .PDF of the HUD1 settlement form that your lender uses to disclose all your costs when you close the sale.)
You can use gifts — from family, for example — or a local government loan or grant for your down payment. (With conventional loans, it has to be all your own money.) You could conceivably pay nothing for the down payment.
You don’t need the big bank reserves that conventional loans require.
The wrinkles:
You have to buy mortgage insurance. C’mon, you didn’t really expect all this for free, did you? And you’ll need a chunk o’ change upfront to close the purchase.
Funky properties are out. On this, the government can be fussy. The property has to be in "turn-key" shape with no major repairs needed so you can move right in. Even chipping paint can sour a deal, Hawkins says. But the times are with you: In markets where sellers far outnumber buyers – which is most markets these days – sellers may be happy to make the repairs in order to sell the place.
If the property has been expanded or has an addition, the FHA wants to see local government permits for the work.
2. FHA 203K loan
This type of FHA loan lets you purchase and repair a fixer-upper or foreclosure property. We’re not talking spa bathrooms and a haute-cuisine kitchen. The loan is for replacing or repairing basic home systems such as the roof, furnace, plumbing, wiring and floors.
The rules:
The buyer finds three licensed contractors who submit bids for repairs.
The lender examines the bids and rules out any that don’t meet program guidelines.
The buyer hires one of the approved contractors.
Repairs are done in phases. After each phase, a lender’s inspector examines and approves or rejects the work.
The benefits:
Uncle Sam insures your mortgage, and loans you money for authorized repairs. For example, a lender may offer you — based on the appraised value of the property you’re buying — a mortgage of $100,000 plus a $50,000 loan for repairs.
You repay both loans with a single monthly payment.
The wrinkles:
The rules are strict to protect buyers, Hawkins says.
Repairs must all be done before you can take possession.
3. City, county and state grants and loans
Every state has a housing finance agency (find yours here). These disperse federal, state and local money and oversee programs to help make housing affordable.
The benefits:
Many agencies have first-time-buyer assistance programs — grants or loans.
The amounts vary greatly from state to state, running from as little as $2,500 to as much as $150,000. They are mainly targeted at low- to moderate-income individuals and can sometimes have restrictions on where you purchase. These loans can be used to subsidize the loan you are obtaining from your lender and give you more purchasing power.
The wrinkles:
"You have to get in quick because these programs are not well-funded. It’s first-come, first-served, and when they run out of money they don’t have any more to lend," Hawkins says.
City, county and state programs may target certain low- to moderate-income neighborhoods for improvement, limiting your purchase to these areas.
Some programs are offered only to low-income buyers.
Other options
4. VA loans. If you’re a veteran, you might qualify for a VA Guaranteed Home Loan from the Department of Veterans Affairs, with no down payment — although you must buy mortgage insurance. Read more at Bankrate.com.
5. Navy Federal Credit Union. The Navy Federal Credit Union is offering no-down-payment mortgages of up to $650,000 for qualified members. Department of Defense military and civilian personnel and their families can join the credit union.
6. Conventional loans
Private lenders, including credit unions, banks and mortgage brokers, vary in their fees and services. It pays to shop around. Keep in mind:
If your down payment is less than 20% of the property’s cost, you’ll need to buy private mortgage insurance.
You won’t need to buy mortgage insurance if you put 20% or more down.
Need help deciding if you should get a conventional loan? Read: "Which mortgage is right for you?"
Don’t hesitate to ask for help
Hawkins "strongly suggests" that before you go home shopping, you get free housing counseling from a nonprofit agency approved by the Department of Housing and Urban Development (find one near you here or call 1-800-569-4287). "Studies show that a borrower who obtains housing counseling prior to purchasing is less likely to be foreclosed on," Hawkins says.
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