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First-Time Home Buyer Loan

There are many programs to assist the first-time home buyer.

First-time home buyers should research loan options before looking for a home. [©Jupiter Images, 2009
©Jupiter Images, 2009
First-time home buyers should research loan options before looking for a home.

First-Time Home Buyer Loan

For a first-time home buyer, loan options may be scarce, particularly during a slump in the economy. Many first-time home buyers lack the credit history and the 10 to 20 percent down payment needed for a home loan. Fortunately, several assistance programs are available to help first-time home buyers finance their purchase. These programs are available at the federal, state and local level.

Federal Programs

The Federal Housing Authority (FHA) provides mortgage insurance to lenders, which reduces their risk. Because the government will make sure the lender is paid if the homeowner defaults on the loan, the lender is able to offer financing to home buyers who might not otherwise qualify. An FHA loan is ideal for first-time home buyers because the credit requirements are more relaxed, only a 3.5 percent down payment is needed and the closing costs are low. Most FHA loans are fixed-rate and repaid over a 30-year period.

First-time home buyers may also want to consider the U.S Department of Housing and Urban Development's (HUD) 203(k) program. The program requirements are similar to a traditional FHA-insured loan, but the loan also covers the expense of remodeling a fixer-upper. The home is appraised for the value following the renovation, and after the seller is paid, the remaining money is put into an escrow account to be used for home improvements. A first-time home buyer benefits from the flexibility of an FHA-insured loan and a potential cost savings of buying a home at significantly below-market value.

State Programs

States are allocated grant money from the federal government, which they use to provide down payment assistance to first-time home buyers and other groups. The HOME Investment Partnerships Program was formed by HUD to provide affordable housing for low-income households. Each state decides how to allocate its grant money, which may include grants or affordable loan options for first-time home buyers. To be eligible for HUD assistance, the household income cannot exceed 80 percent of the area's median income.

In addition to allocating federal funding, many states offer homeownership assistance to first-time home buyers. State-funded program income limits may be more flexible than the federal income limits. For example, the Georgia Dream Homeownership Program offers first-time home buyers with moderate incomes 30-year, fixed-interest-rate mortgages that are typically lower than current market rates. The program also provides free homeownership counseling, which is a requirement for purchasing a home through the program. Not every state provides down payment assistance, but many offer first-time home buyers with loan options similar to the Georgia Dream Homeownership Program. Home buyers can find a listing of states that offer down payment assistance at the Consumer Credit and Budget Counseling website.

Municipality Programs

Cities and counties may offer assistance to first-time home buyers. A municipality program may meet a home buyer's needs better than a state or federal program, and home buyers should consider all options. An example of a municipality program is the Arapahoe County HomeBuyer Program in Colorado. Arapahoe County offers eligible home buyers a low-interest second mortgage that will cover the down payment on the home, closing costs and other fees up to $10,000. The payments on the 30-year, fixed-rate loan are deferred for five years with no interest. Once the five years are up, the homeowner begins making monthly payments at a low rate. As with many other similar programs, home buyers who purchase their home using the Arapahoe County HomeBuyer Program loan must attend a free course on homeownership. First-time home buyers can find information on local assistance programs at the HUD website.

Best Loan Options for First-Time Home Buyers

Because of their affordability and low-interest rate, FHA-insured loans are the best option for first-time home buyers, according to SmartMoney, and more than 10,000 lenders nationwide offer them. If the home buyer does not qualify for government assistance, a piggyback loan is an option for financing the down payment. With a piggyback loan, the home buyer finances two mortgages -- one to cover the cost of the home and the second to cover the down payment and additional costs. A piggyback loan allows the home buyer to avoid paying personal mortgage insurance, which lenders require when the buyer does not have a sufficient down payment.

Typically, interest-only mortgages or adjustable-rate mortgages are not ideal for first-time home buyers. According to the Federal Deposit Insurance Corporation, these types of loans are risky because the payments will be temporarily low and then potentially double or triple after the interest-only period is up or when the interest rate increases.

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