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According to a National Association of Realtors Confidence Index survey, only 28% of first-time homebuyers bet 20% or more in 2021. While that number may seem low, it makes more sense if the Americans are considered to face crippling inflation and high levels of personal debt.
Additionally, many buyers take advantage of programs that help home buyers move into a home, often with a down payment of less than 20%. These programs are particularly useful when the market is competitive.
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What are homeownership programs?
Homeownership programs are generally government-sponsored programs that help people buy their first home. The federal government runs several programs, but state and local governments also oversee first-time homeownership assistance programs.
Although program features vary by state, they generally offer low interest rates, down payment assistanceand more flexible qualification requirements.
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Who is eligible for homeownership programs?
Specific qualification criteria may vary by program, but eligibility requirements generally include the following:
- First-time home buyer — The programs generally require you to be a first-time home buyer, which also includes buyers who have not owned a home in the past three years.
- A fair credit rating — Homeownership programs generally do not require impeccable credit scores. You may qualify for some programs with a credit score below 600. In contrast, you generally need a minimum credit score of at least 620 to qualify for a conventional loan.
- Income within limits — Some local programs may limit their assistance to homebuyers below a specific household income cap, which may be derived from the local median income. This number can vary greatly depending on where you live. For example, California, Hawaii, and New York may have higher income limits than states with lower costs of living.
- House within purchase limits — As with income limits, some homebuyer assistance programs will only cover homes below a specified purchase price or a set percentage of the list price.
- Lower debt-to-income ratio (DTI) — Some programs may examine your debt to income ratio, which measures how much of your total monthly income goes to paying off your debts. Most lenders are looking for a ratio of around 36%, but some may accept borrowers with a DTI ratio as high as 50%.
Types of Homeownership Programs
Different programs help buyers with different aspects of the home buying process. To find homebuyer assistance programs in your area, check out these helpful resources:
Government guaranteed loans
One of the most common ways to get help buying your first home is to apply for a government-backed mortgage from the Federal Housing Administration (FHA), US Department of Agriculture (USDA), or Department of Veterans Affairs (VA).
These agencies do not create loans; Approved mortgage lenders offer these specialty loans and the government insures them to reduce lender risk. This is how lenders can finance mortgages with low interest rates, reduced closing costsand other benefits that help buyers buy a home.
Here is a brief overview of what each program offers first-time home buyers:
- FHA Loans — FHA Loans allow you to qualify for a mortgage with a minimum credit score of 580 and as little as 3.5% down. You can qualify with a credit score as low as 500, but you’ll need to put down 10%.
- VA Loans — AV loans have lower interest rates than other types of home loans, and qualified military and veterans can get a loan with no down payment. The Veterans Administration offers these loans, and the VA has no minimum credit score requirement. But lenders can set their own minimums.
- USDA loans — USDA Loans may also be financed without down payment for certain rural homes in designated USDA areas through the Department’s Rural Development Single-Family Housing Guaranteed Loan Program. The USDA does not set a minimum credit score requirement for these loans, but lenders may have minimums.
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Down payment assistance programs
One option to help with your down payment is a down payment assistance loan, which is a second mortgage that you take out with the first mortgage to buy your home.
These second mortgages come with low interest rates and are designed to help pay your down payment and closing costs. Down payment loans generally come in one of two forms:
- Deferred repayment loans — You don’t have to repay these interest-free loans until you sell or refinance your first mortgage.
- Reimbursable loans — As the name suggests, these loans are forgiven if you stay current on your mortgage payments and stay in the home for a set period of time, which varies by program.
With Credible, you can easily check mortgage rates from multiple lenders without affecting your credit.
You may be eligible for a grant to help cover your down payment. Requirements vary by provider, but this assistance is often given to low- or moderate-income buyers who do not earn at least 80% of the median income in their area.
For example, you might consider applying for a down payment assistance grant through the National Home Ownership Fund. You may be eligible for down payment assistance of up to 5% of the mortgage amount for the down payment and closing costs.
The good news is that you can apply for more than one grant, so it’s wise to apply for any grant you may be eligible for. Check with your local or state government for information on down payment assistance programs for first-time buyers.
Most first-time buyer programs offer a helping hand to cover your closing costs in addition to a lower down payment.
For instance, Fannie Mae’s HomePath Ready Buyer Program offers up to 3% closing cost assistance. You may receive assistance in the form of a grant, forgivable loan, or low-interest loan, but the program only covers foreclosed Fannie Mae properties.
While many buyer assistance programs are available from national sources, other programs are offered state by state. You can find a wide range of programs with different features depending on your condition. See a long list of HUD state home buying resources.
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The Challenges of Getting a Mortgage as a First-Time Home Buyer
The main goal of these homeownership programs is to give first-time buyers an edge, as they face many challenges as first-time buyers, such as:
- May have poor credit history — Conventional mortgages generally require a minimum credit score ranging from 620 to 650, which can be difficult if you have little or no credit history. In contrast, government-backed loans can get you into a home with a credit score as low as 500.
- May have other debts — Generally, the higher your debt-to-equity ratio, the harder it will be to qualify for a mortgage. Homeownership programs often have looser eligibility criteria to help buyers.
- May have a lower income if you are just starting out — Lenders generally require your monthly mortgage and housing expenses to be 28% or less of your gross monthly income. Many loan programs, including USDA loans and HomeReady, can help low-income buyers become homeowners.
- May not have a large down payment spared – Many existing homeowners have built up equity in their home that they can tap into for a down payment on their next real estate purchase. First-time home buyers don’t have that luxury, and saving for a down payment is one of the toughest hurdles first-time home buyers face.
- May lack knowledge about buying a home — Many home ownership programs and the loans may require you to complete a homebuyer education course. This can benefit you if you’re unfamiliar with the home buying process, and many include additional information on working with real estate agents, choosing an affordable mortgage, and budgeting for property expenses.
To explore your mortgage options, visit Credible for compare rates and lenders.