Lenders Can Unlock a ‘Treasure Chest’ of Available Programs
If you’ve been longing to buy your first home, it might be the right time to make a move as mortgage rates are among the lowest ever.
Yet you might think you can’t afford the down payment or closing costs. After all, many people believe you need 20 percent to buy a house. While that amount is preferable, there are many programs offering financial assistance to first-time buyers and mortgages requiring as little as 3 percent down.
“The biggest obstacle is the down payment,” says Malcolm Hollensteiner, head of mortgage production at Sandy Spring Bank, headquartered in Olney, Md. When buyers believe they’ll need to put down 20 percent they might feel shut out of opportunities. “If you’re nowhere close you may think you’ll never be able to do it,” he says. Yet mortgage lenders “can unlock the treasure chest of all these programs designed to make home loans affordable.”
From July 2019 to June 2020, 31 percent of the people in the market for a primary home were first-time buyers, according to the 2021 National Association of REALTORS® (NAR) Home Buyers and Sellers Generational Trends Report. The same percentage of first-time buyers were in the market during that period the year before.
Here’s what you need to know before going shopping for a loan:
Get prequalified
Buying your first home can be exciting but requires planning and a precise understanding of your entire financial situation: What is your monthly debt-to-income ratio — that is what are your monthly expenses compared to monthly income? What does your credit report look like? Credit scores are based on data in your credit reports from the three credit reporting agencies: Experian, Equifax and TransUnion. Lenders will want to know all of this to determine how much you can afford to borrow and the likelihood that you will pay back the loan.
The median down payment for all buyers in 2020 was 12 percent, according to the NAR 2021 report. Among buyers ages 20 to 30 the median down payment was 6 percent. Yet it’s possible to put down less.
A credit score of 580 or higher is required for an FHA loan with a minimum down payment of 3.5 percent, according to HUD. With a credit score between 500 and 579, the borrower would be limited to a maximum loan-to-value ratio of 90 percent, and a 10 percent down payment would be required. Loan-to-value ratio compares the amount of your mortgage with the appraised value of the home.
FHA loans require an upfront mortgage insurance premium of 1.75 percent of the loan balance as well as a 0.45 percent to 1.05 percent of loan amount each year, based on amount borrowed, loan-to-value ratio and loan term.
Mortgage insurance is required on loans for which the down payment is less than 20 percent of the home’s appraised value. “It adds a cost on top of the regular mortgage payment,” says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association.
The buyer “has to work harder to get equity” in their home, he adds. An option, he says, is to wait longer to buy and save more for the down payment. In addition, he points out there are maintenance costs that come with homeownership. “It’s the biggest financial decision that most people will make.”
Government-sponsored enterprise loans
If you have good credit — 680 or higher — government-sponsored enterprise loans offered by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.) are an option. “These are conventional loans for people with good credit, are W-2 employed and don’t have a lot of debt,” says Goldstein. “The difference between FHA and these loans is the credit score threshold.”
An example is the FannieMae97, which requires just a 3 percent down payment. Another type is the Freddie Mac Home Possible, which also requires at least 3 percent down.
Fannie Mae HomeReady and Freddie Mac Home Possible loans’ eligibility requirements are based on your income and where you live.
For more information on income guidelines for Fannie Mae’s Home Ready program, click here.
For more information on the Freddie Mac Home Possible income guidelines, click here.
Down payment assistance
Some buyers still may feel that a 3 percent down payment is out of their reach, and may need assistance raising it. For instance, buying a $300,000 home through the Fannie Mae HomeReady and the Freddie Mac Home Possible programs would require a $9,000 down payment. (The Fannie Mae97 standard product does not allow for down payment assistance.)
In addition, you might be able to get the seller to pay some or all of the closing costs or obtain lender credits to cover some or all of the closing costs, he says.
State down payment assistance programs
In addition to bank and non-bank down payment assistance, there are state down payment assistance programs to consider. Some are grants that don’t have to be paid back ever or as long as you own or occupy your home for a required period of time. The most common are second mortgage loans from state and local governments, and have low or zero interest rates. The payments can be deferred or the loan is even forgiven over time.
Down payment assistance programs are available in every state at the HUD website.
To find a HUD-approved housing counseling agency in your area, call 1-800-569-4287 or visit a list of agencies at the HUD website.