First-time homebuyers may qualify for more government loans and additional savings programs to help them finance their first house. The U.S. Department of Housing and Urban Development (HUD) also defines the following prospective borrowers as first-time buyers:
- Previous homeowners who have not owned a home in the previous three years
- A divorced parent who only owned a home with a former spouse
- A separated homemaker who is displaced from a home they owned with a spouse
- An owner of property that is not legally compliant and can only become compliant at great cost
- An owner of property without an affixed permanent foundation and principal residence
FHA loans help first-time buyers qualify for mortgages and afford initial closing costs. FHA-insured loans are popular with younger homeowners since the credit score and down payment requirements are lower than conventional loans.
Conventional home loans typically require a minimum 20% down payment of the home’s purchase price. An FHA mortgage can reduce this requirement to as little as 3.5%. However, a poor credit score (500 to 579) usually requires a 10% down payment.
Fannie Mae, a government-sponsored organization that backs government loans, created HomeReady mortgages for first-time buyers. The program provides up to 3% financial assistance toward closing costs on foreclosed purchases.
The minimum credit score for HomeReady mortgages is 620. Borrowers with scores of 680 or higher can typically access better loan terms.
Unlike other government loans, HomeReady underwriters consider rental income when calculating the debt-to-income (DTI) ratio. These mortgages are ideal for buyers who want to purchase properties with one or more rental units. Likewise, borrowers with roommates can use the lease agreement’s rental price toward income requirements.
First-time homebuyers in need of more savings opportunities may consider looking for local down payment assistance (DPA) programs. There are thousands of programs around the country, but availability varies by location.
There are a few different types of DPA programs out there:
- Grants – These do not need to be repaid
- Loans – These must be repaid. Borrowers can usually agree to a monthly repayment plan
- Deferred loans – These only need to be repaid when the property is sold or refinanced
- Forgivable loans – These do not need to be repaid as long as the borrower remains at the property for a certain number of years
For example, the State of New York Mortgage Association (SONYMA) offers forgivable loans up to $15,000 or 3% of the purchase price for first-time buyers who also finance the mortgage with SONYMA. The borrower does not have to repay the loan (or interest) as long as they live in the home for at least 10 years.
Regardless of whether you meet the criteria for a government-backed loan, you may be able to ease into homeownership with a rent-to-own opportunity. Continue reading about rent-to-own homes to learn how your rent payments can double as funds toward the purchase of your new home.