A First Time Homebuyer Must-Know Guide

The American Dream of owning a home is still alive and going strong in 2020 despite the chaotic world we are currently living in. It’s always a bit intimidating whenever you buy a home, but even more so when it’s the very first time you are planning to do it. So here’s what a first time homebuyer needs to know.

If you're looking to buy a home for the first time, you'll definitely want to know about these programs to help educate you and save you money!

There’s a lot to think about when you are thinking about buying your first home and it’s normal to have a lot of questions. The idea of making the single largest purchase that you will ever make in your life is pretty scary. You might be wondering about the process from the beginning to closing and what it all means to your personal finances.

With all the talk we hear and see about killing off your debts, you may be now thinking about taking on a new one that may even last another 30 years after you sign all the paperwork! Well, the good news is that there are some ways to get real help and understanding about advantageous programs you need with this first time homebuyer guide.

The Different Types of First Time Homebuyer Programs

First of all, to buy any house you generally will need some cash. Your first thoughts may be about getting information to get down payment assistance or help with your closing costs. There are several programs that can help you with your down payment and closing costs, including charitable and government-sponsored programs. There are also local and federal tax credits that can lessen the bite, in addition to educational programs that can offer help at every step of the way for you.

Down Payment Assistance

A down payment—the large initial payment that you make when you buy a home—needs cash. You may hear about “no money down” loans, but down payments are required for almost every type of mortgage. Many first time homebuyers believe that they need 20% down to get a mortgage, but many lenders will issue loans to first time homebuyers with as little as 3% down.

There are ways to manage the daunting prospects of getting and paying a mortgage and you need to know the terms and to ask the right questions so you can take advantage of all the options. They include:

DPA Loans

You may be able to get down payment assistance (DPA) through a few specific types of loans to reduce the amount you have to put down. A few options include second mortgages, deferred payment loans, and forgiven loans.

Loans structured as a second mortgage must be paid off at the same time as your main mortgage. Deferred payment loans must be paid in full when you move, sell, refinance, or pay off your main mortgage.

Loans can also be forgiven over a set number of years, but will need to be repaid when you move, sell, refinance, or pay off your main mortgage if you move before that set number of years expires or you otherwise violate the terms of forgiveness.

DPA Grants

You may be able to get DPA through grants, which don’t have to be repaid at all. Program requirements for loans and grants may vary, so it’s best to check with your local or state government for details on any first time homebuyer down payment assistance programs. You can go online and check on your state website or find a toll free number to call there to get and talk about it on the phone.

Government Backed Loans

A loan backed by the federal government can also help qualified first time homebuyers purchase a home with no down payment. These types of loans are:

Tax Credits

Unfortunately, the Housing and Economic Recovery Act’s $7,500 credit for first time homebuyers ended in 2010. However, you can still save money on your taxes through various other deductions. Federal and state deductions can lower your taxable income and your income taxes and make home ownership more affordable.

For example, you can deduct your mortgage insurance costs from your federal taxes if your mortgage is worth less than $750,000. This includes private mortgage insurance (PMI) and mortgage insurance premiums (MIP) associated with FHA loans, as well as the guarantee fees for USDA loans. Additional deductions and credits may be available through your state or local government.

Closing Assistance

Like down payment assistance, there are government-sponsored and private programs that can help you pay closing costs. Closing costs are additional fees you pay at the end of the mortgage process. Closing costs are typically 3%-6% of the total cost of your home loan and can be thousands of dollars you will need.

Like down payment assistance, closing cost assistance can come through a grant or loan.

You can also look to the seller for help with closing costs. This is called seller concessions. The seller may be able to help with attorney fees, real estate tax services, and title insurance. They can also help pay for points paid up front to lower your interest rate and contribute to property taxes. All this is negotiated by you with them and if you ignore this possibility and don’t ask about it, you may lose an opportunity to save and make home ownership a reality!

Remember that a seller is usually “highly motivated” and needs to sell just as much as you want to buy, so ask!

Home Buyer Education

Take advantage of online educational programs and resources if you aren’t sure how to start your home search. Good home buying courses can be free or low-priced and can teach you about loan options, the buying process, and how to apply for a mortgage. Look for ones aimed at first time homebuyers.

One place you can check that I have reviewed is Zing University, a free online course from Quicken Loans/Rocket Mortgage. Zing University takes you through the steps to buy a home, teaches you about mortgage types, and can even help you get in contact with a local agent to help you become a more confident buyer.

What are “First Time Homebuyer Programs”?

You can take advantage of federal, state, and local government programs when you buy a home. Federal programs are open to anyone who’s a citizen or legal resident of the U.S. Though not everyone qualifies for every program, you don’t need to live in a specific state to get federal assistance. Here are some of the most popular federal programs for first time homebuyers.

Government-Backed Loans

Government-backed loans can allow you to get a home with a low down payment or poor credit. The government insures government-backed loans, meaning that they pose less of a risk to a lender. This also means that lenders can offer you a lower interest rate. There are currently three government-backed loan options: FHA loans, USDA loans, and VA loans. Each program has its own list of qualifications.

Good Neighbor Next Door

Are you a pre-K-12 teacher, emergency medical technician, firefighter, or law enforcement officer? You can take advantage of the Good Neighbor Next Door program sponsored by the Department of Housing and Urban Development (HUD).

The Good Neighbor Next Door program offers a generous 50% off select HUD properties. The properties available are foreclosures and are very affordable, even without the discount. You can view a list of available properties on the HUD program website.

HomePath Ready Buyer Program

Fannie Mae offers first time homebuyers the chance to buy a foreclosed property for as little as 3% down through the HomePath Ready Buyer program. You can even apply for up to 3% of your closing costs back through the program, as well. Fannie Mae homes sell in as-is condition, so you may have to repair a few things before your new place is live-in ready. However, closing cost assistance can help make it more possible to cover all of these expenses.

The HomePath Ready Buyer program is only available to first time buyers who want to live full-time in a house that they’re looking to purchase. You’ll need to take and pass Fannie’s Framework Homeownership course before you close. To learn more, visit HomePath’s website.

State and Local First Time Homebuyer Programs

Most government home buying assistance comes through state and local programs.

Individual programs vary depending on location. You can view a complete list of state-specific buying resources on the HUD website.

Charitable or Nonprofit First Time Homebuyer Programs

You might qualify for charitable or nonprofit assistance if you have low to moderate income. Charities and nonprofits are non-government organizations that can offer you educational and financial resources when you buy a home. Nonprofits usually have income qualifications that dictate whether you can get help.

Habitat For Humanity

One of the most well-known housing nonprofits is Habitat for Humanity, an international nonprofit that offers “simple, decent, and affordable” housing for low-income families. Volunteers build homes for families in need and Habitat for Humanity makes no profit on the home after you close. This makes their homes much more affordable than local options. Habitat for Humanity is the largest nonprofit builder in the world, with over 800,000 homes built.

Neighborhood Assistance Corporation of America (NACA)

The Neighborhood Assistance Corporation of America (NACA) is another nationwide nonprofit that can help you buy a home. NACA offers “financially unstable” households mortgage counseling and education. NACA’s team members also help low-income families find lenders willing to work with them. NACA loans have no down payment requirement or closing costs and no minimum credit score and can give you a more personalized look at potential paths to homeownership. To learn more about their program, check out NACA’s website.

Employer-Sponsored First Time Homebuyer Programs

Did you know that your employer can help contribute to your home purchase? Some employers are now adopting housing incentives to help employees cover down payments and closing costs. Your employer may give you a grant or a loan that’s forgivable over time and your labor union might also offer closing assistance.

Not every employer offers housing or closing assistance, and employer-assisted housing programs are usually joint efforts between state governments and employers. Set up a meeting with your manager or HR representative and ask if your workplace offers any kind of down payment or closing cost assistance.

Who Qualifies For First Time Homebuyer Programs?

Most government and nonprofit programs have a strict definition of a first time buyer. If you haven’t had any form of ownership in any home in the last three years, you’re considered a first time buyer, but you can’t get first time homeowner benefits if you own a rental or investment property, even if you don’t live in it.

If you opt for a government-backed loan like a USDA loan or an FHA loan, your home also has to meet certain standards before you qualify. Remember, local and state government programs also tend to have income restrictions.

Final Thoughts

First time homebuyers have access to many grants, loans, and financial help that can make buying a home easier. If you are thinking about buying a home, don’t be intimidated.

Besides all of these programs I have highlighted, you may have the ability to ask a family member about their first time buying experiences and what they can tell you about the do’s and don’ts.

With mortgage rates at all-time historic low levels and homeownership being a real key to your financial long term security and growth, take advantage of the American Dream while the opportunity is at its very best!

Are you in the market for your first home purchase? Will you take advantage of any of these programs, and what questions do you have about the first time home buying process not covered here?

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