First-Time Home Buyers and Low Down-Payment Options

Saving to buy a house, real estate or home savings, piggy bank i
Image courtesy McEnearney Associates

If joining the 65 percent of Americans homeowners in the U.S. is important to you, but funds are lacking, fear not! We are fortunate in the DMV region that there are many First-Time Home Buyer programs that will accommodate reduced availability of funds. And, in addition to negotiated seller credits an experienced Realtor can negotiate on your behalf, a first-time home buyer could potential come to the table with ZERO out of pocket costs. This is the biggest hurdle I have seen for those considering the purchase of a first home. But it does not have to be, as the programs reviewed below are meant just for YOU!

Let’s review!

FHA — Of course, the FHA program is the most visible loan available to those with the need for a lower down payment. This is ultimately insured by HUD against losses and, with the government “backstop,” can offer greater flexibility than many conventional loans.

The primary benefits of the FHA loan are the low down payment requirement of 3.5% and a higher debt-to-income (the ratio of a borrowers overall monthly debt payments to the gross income) approval through automated underwriting systems. Additionally, FHA allows for lower credit scores with no impact on the required mortgage insurance premium and very little effect on rates. There is no requirement that a borrower be a first-time homebuyer, but they cannot have two FHA loans on the books at the same time.

Obviously, there are downsides.

  1. Primarily, these are related to the required mortgage insurance. There is an up-front mortgage insurance premium equal to 1.75% of the base loan amount that can be, and generally is, included in the final loan amount.
  2. Also, there is an annual mortgage insurance premium (paid monthly with the mortgage payment) that will stay with the loan until it is paid off if less than a 10% down payment is used.
  3. Lastly, not all condominiums are FHA approved.

Speak with your agent as purchasing a condo using FHA requires this approval.

Conforming 97% — A product recently re-introduced by Fannie Mae is the 97% loan program.  There are two options available – Standard and HomeReadyTM (97% Programs). The Standard option requires the buyer to be a first-time purchaser, but has no home ownership education requirements, no income limitations and must include standard mortgage insurance premiums. The mortgage insurance premiums can be paid monthly or by a single payment to cover the policy for the life of the loan. Additionally, both the Standard and the HomeReadyTM allow a gift from an allowable source to be used for the down payment and reserve requirements (if required).

The HomeReadyTM loan does not require that the buyer be first-time ,but does a pre-purchase online education course (go figure?!) on a specific site. This program has reduced MI coverage but also has income restrictions if the home is not in a low-income census tract.

VHDA (Virginia Housing Development Authority) — The Virginia Housing Development Authority has always recognized a need for those citizens of the State who need additional help with lower down payment options. Just recently, the VHDA has broadened the spectrum of programs available. Their website goes into detail about the restrictions that a borrower needs to meet in order to qualify.

The programs offered include a 97% no MI, and an FHA Plus program that has a first and second mortgage equaling or exceeding 100% finance. The big additions recently are the MCC and a DPA Grant.

  • The MCC (Mortgage Credit Certificate) allows those that qualify to receive up to a $2000 credit against federal taxes for the life of the loan. This credit is allowed on most of the VHDA loan products, but is also offered to those that take loans outside of VHDA. This is an incredible deal for those that qualify.
  • The Down Payment Assistance Grant offers up to 3% for conventional and 3.5% for FHA loans towards the borrowers down payments. These grants do not have to be repaid!

DC HPAP (Home Purchase Assistance Program) — One of the well-know local programs is offered for those homebuyers that have not owned a home for at least three years is known as HPAP.  This program aides borrowers in two ways.  First, for any home purchaser with household income of less than $127,600, a maximum $4,000 loan is available to cover the closing costs incurred at settlement for the purchase. Additionally, a loan amount that can be used for a down payment between $10,000 (for household income between $76,300 and $127,600) and $50,000 (households with income between $38,250 and $72,100) are available. This assistance table will identify eligibility based on income.

The great thing about these loans is that the payments are deferred for five years.  After payments begin, the loan will be amortized over 40 years further lowering the payment for the assistance loan.

Maryland CDA (Community Development Administration) — The CDA, similar to Virginia’s VHDA, offer multiple programs to meet a variety of needs. Their Maryland Mortgage Program offers multiple financing options including a 97% conforming mortgage,  government loan programs such as FHA, VA and RHS, down payment assistance, a mortgage tax credit, and great homebuyer education selections.  Additionally, through the Maryland Homefront initiative, military veterans and active duty military are given special rate discounts.

Another interesting program is the “You’ve Earned It!” initiative.  This potentially gives those with at least $25,000 in student loan debt an additional 0.25% discount on the standard MMP mortgage rate. As with other options that the CDA offers, there are income and max loan amount limitations. The “You’ve Earned It!” loan also requires that a buyer make the purchase in one of Maryland’s Sustainable Communities.

In summary, if owning a home is a desire, but available funds are hard to come by, these programs offer a wide variety of options. So get out there and find a home!

Don Frutchey, Senior Loan Officer at Atlantic Coast Mortgage, LLC

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