First Time Home Buyer
Buying your first home can be an intimidating or confusing process. With so much mixed information online and in the general public, it can be difficult to know whom to talk to, what steps to take, and what options you have.
Let’s quickly look at the options that are available and review the most common loan programs for first-time homebuyers. First-time home buyers have access to many grants, loans, and financial help that can make buying a home easier. First-time buying assistance can include help with down payments and closing costs, tax credits or education.
You might be able to get help from your local, state, or federal government if you meet income standards. For buyers in California as an example, buyers sometimes use the CALHFA program that provides down payment and/or closing assistance for new buyers.
FHA, Fannie Mae and Freddie Mac
The two programs we see the most for first-time homebuyers are the loan programs offered through the Federal Housing Authority (FHA) along with the two government-sponsored agencies, Fannie Mae and Freddie Mac. All three agencies offer programs that allow for lower down payments with competitive interest rates and no income restrictions. These programs are generally available on residential properties with 1- 4 units and specifically for properties that will be a primary residence.
One of the key benefits of the FHA loan program is that it allows for lower credit scores and a higher ratio of debt relative to income that can make the loan easier to qualify for. Most low down-payment loans including FHA loans do require mortgage insurance to protect the lender in the event that you can no longer make your mortgage payments. However, the cost of the insurance can be rolled into the new home loan
For low down payment home loans programs, buyers need to have roughly 3-5% of the purchase price as a down payment along with associated closing costs. Typical closing costs are 1-3% of the price of the home.
For assistance with your down payment, Down-payment assistance programs can be used in conjunction with FHA and conventional loans.
Another common down payment option is a gift from a family member. A gift can be used in place of a borrower’s own funds to complete a home purchase. To utilize a gift, buyers typically ask for assistance from family members for money to buy a home. The family member, also referred to as the donor, typically would send the buyer funds prior to the purchase of a home or send the money directly to the settlement company at the time of closing. Lenders would require proof that the funds are available prior to the gift being transferred. The process is overall very simple and can be an excellent way to obtain funds for a home purchase.
Your Unique Situation
Every buyer’s situation is a bit different, like a fingerprint. So, it’s important to identify not only what options may be available to you, but also what options are best for your unique circumstances. As an example, just because you can put more money down on a property, it doesn’t mean you should. There may be some down payment assistance programs available to you, but they may result in a higher interest rate or make it more difficult to get your offer accepted on a home. The McLellan team can help you make the best choice.
It's important to realize that when you talk to family or friends about their loan or how they bought a home, that many loan programs have specific guidelines, meaning they have rules and restrictions. By going through a preapproval process with an experienced mortgage advisor, you can learn about which loan options are the most advantageous for your circumstances.