Traditionally, first-time buyers turned to the FHA for help in getting a loan. Loan insurance from PHA, the 203(b) program allows borrowers to buy with a down payment of as little as 3 percent of the cost of the home. The program is not restricted to first-time homebuyers, but several features of the program make it especially applicable to them. First, the amount of the loan is limited to encourage and allow the purchase of modestly priced starter homes. Second, the insurance premium paid at closing is priced to favor first-time buyers. If you have not owned a home in the past three years, you receive a quarter-percentage-point discount on the premium. If you attend special pre-purchase counseling sessions, you can get another quarter-point discount. Thus, first-timers can pay only 1 .75 percent in upfront insurance premiums compared to the standard 2.25 percent premium.
The big secondary purchasers of mortgage loans (that is, buyers of existing first mortgages), Fannie Mae and Freddie Mac, each offer programs intended to help first-time buyers. Like FHA, they are not restricted to first-time buyers but they contain features that are especially helpful to first-timers. The loans have names like “Affordable Gold” or “Fannie 97.” The essential features of these loans include:
A low down payment with provisions for help from relatives or government and nonprofit agencies.
Required pre-purchase educational session.
Relaxed qualifying guidelines that recognize non-traditional sources of income and wealth and use a history of rent-paying to establish credit rating.
Those who originate mortgages will provide homeowners with loans that conform to the guidelines of secondary purchasers.
The regional Federal Home Loan Banks are mandated to devote a certain portion of their funds to affordable housing programs. To do this, the banks award grants to local lenders who devise special lending programs tailored to the needs in their market area. These programs may offer special low interest rates, low down payment requirements or cash assistance, or relaxed qualifying guidelines. In most cases, eligibility is restricted to first-time buyers with incomes below a specified amount.
Local and state governments offer special mortgage loan programs for first-time homebuyers. These loans carry below-market interest rates. Borrowers must not have owned a home in the last three years nor have an income above a specified amount (which varies according to the local median income). The government funds these loans by issuing municipal bonds that sell at low yields because interest is exempt from federal income tax.
All of these loans are originated by regular mortgage lenders: banks, thrifts, mortgage bankers, and brokers. The agency or company sponsoring the loan either provides insurance or buys the loan once it is originated. Therefore, you can obtain information about what is available in your area by asking local lenders. Alternatively, you may want to contact the housing department of your city or county to find out what help they can offer. In addition, you may be able to get a list of approved lenders from the FHA, Fannie Mae, Freddie Mac, or your local housing office.
If you plan to buy a house sometime in the future, but not within the next five years, a good way to save up a down payment is to put money in a Roth Individual Retirement Account (Roth IRA). You can invest up to $3,000* per year in the account. Although you must pay tax on the money invested, all earnings and appreciation are tax-free. So when you take fit money out, you will pay no taxes on it. Ordinarily, you cannot touch the money until you are 59 1/2 years old, but with a Roth, you can withdraw the money to make a down payment on a first home purchase without penalty as long as the account is at least five years old. Check with your tax advisor for more details. |
