So you want to buy a house, you go online and research the home buying process and all the nuts and bolts involved. Use our free home buying guide. At the end the day, there are many different first time buyer programs available, each with unique characteristics. So how you determine which one makes the most sense?
This depends on several factors such as:
- Location– where areas do you like? For example you’re looking in Santa Rosa, Rohnert Park, Cotati or the town of Petaluma, you’ll most likely be looking at conventional financing, or a low a down payment FHA Loan program. If a rural area is more akin to your preferences, consider the rural housing program requiring no down payment.
- Credit Score-the magic middle credit score needed is 640. Do you have a 640 credit or better? If yes, you score will make you eligible for financing. If have high revolving monthly debt, that can artificially bring your credit score down as well as reduce your purchasing power. If your credit score is sub 640, you can get a conventional loan with 20% down or talk or a mortgage lender about getting a recommendation for credit repair.
- Income-is your income stable, decreasing or increasing? Put another way, will you income support a new house payment on the first time home buyer program you are looking at? This is important, because a home loan is make against your ability to repay. Additionally, if you are going with a government loan program, such as an FHA Loan, you will need more income or less monthly revolving debt to offset the mortgage insurance payments.
- Down Payment– do you have a down payment saved? If no, then your location might need to change, and you can potentially looking at the USDA Rural Housing Program. If you do have a down payment, an FHA Loan, a conventional loan or a Home Path Loan might be better for your scenario. A gift from family or a friend is another wonderful opportunity to help you pursue home ownership. All first time buyer programs allow for the use of gift funds. Down Payment Assistance Programs are no longer offered.
- Property Condition– the Sonoma County Real Estate Market has its share of Reo/bank owned properties. Many of these properties need work, some even need to be rehabilitated. The FHA 203K Rehab Program works for renovating severely distressed properties. Depending on the scope of work required, conventional, standard FHA financing or even USDA financing might be more streamlined approach.
- Closing Costs Funds– whenever you buy, refinance or transfer real estate, you have closing costs. These are predominantly fees associated with the transaction assessed by a title/escrow company, and there are some lender fees as well. In most cases these fees can be safely estimated using a factor of 3% of the purchase price. Every first time home buyer program allows for seller credit (seller concessions-same thing) to reduce the cash need to close escrow, making your home buying process easier and more affordable.
- Affordability– this was saved for last because none of the other characteristics are important if you cannot handle the house payment. As a first time home buyer, you’re mortgage payment will consist of the principal and interest, mortgage insurance (if applicable), fire/hazard insurance and monthly property taxes. There would be a homeowners association fee if you buy a home in a planned unit developed or condo project. Affordability for our purposes, means having a payment reasonable enough to have a quality of life while being home owner. By buying a home, you’re effectively freeze your house payment for the next 30 years, it needs to be payment you can live with, hence why securing a competitive mortgage rate is critical.
Here is a synopsis of every first time home buyer program available.
Mortgage Tip: in many cases you might qualify for more than one loan program. This allows you to be diversified in your qualifying ability allowing you to have the strongest position from a negotiating standpoint, as a first time home buyer.
Conventional Loans-represent your standard vanilla 30 year fixed rate mortgage loan program. It’s considered to be the standard that all other first time buyer programs follow.
→Middle Credit Score of 620 is required
→Loan program can be used virtually anywhere
→Relaxed property condition appraisal standards
→Minimum down payment required a 5%
→If gift funds are being used, 5% of the down payment funds must be the primary borrower’s own funds meaning the other 15% down can be gifted.
→Mortgage insurance on this program applies if putting less than 20% down
Home Path Loans– borrowers are eligible to use this product for Fannie Mae owned properties only. You can search Fannie Mae owned properties by visiting www.homepath.com.
→No monthly mortgage insurance
→No appraisal is required on this transaction, the purchase contract determines the value
→Home Path offers an automatic 3% credit for borrowers closing costs
→Minimum credit score is 640, program costs tend to be on the high side due to no mortgage insurance or appraisal required. As the credit score improves the loan costs drop.
Federal Government first time home buyer programs-these include FHA/VA Loans and USDA loans. All three programs are controlled by the US Department of Housing and Urban Development, otherwise known as HUD. Most mortgage lenders offering HUD programs, have a mid-640 credit score requirement to be eligible for government financing.
FHA Loans-a very popular low down payment program with expanded credit qualifying guidelines. This program allows for the “makes sense” loan scenario.
→Minimum down payment required of 3.5% of the purchase price
→Seller credits for closing costs up to 6% of the purchase price
→Entire down payment can come in the form of a gift
→Co-signors are permitted on this program including non-occupant co-borrowers. For example mom and dad cosign for their daughter to help her purchase her first home even though they don’t occupy the home
→Credit challenges are permitted. Program allows for expanded loan qualifying with less restrictive credit guidelines.
→FHA 203K program allows for financing costs to repair a distressed property.
-program is for military veteranl only.
→Must have California certificate of eligibility from the Department of Veterans Affairs
→100% financing is permitted
→Property must clear a full test report
→Seller credits permitted for up to 6% of the purchase price to cover closing costs
USDA Loans-first time home buyer program for eligible borrowers purchasing in rural areas. Additionally, there are certain income and household dependent requirements as well. See which areas of Sonoma County are eligible.
→ Zero down payment is required.
→ Zero earnest money is required. If earnest money is used in the transaction it will be refunded to you at the close of escrow or it will be applied towards your closing costs.
→Mortgage insurance premiums quite low compared to FHA loans.
→Expanded purchasing power with this program due to this program being considered a “low cost mortgage”.
Which first time home buyer program makes the most sense?
To determine that, start by getting pre-qualified with a mortgage lender who can run a free cost benefit analysis, so you can choose which program makes the most sense for your unique situation.
All first time home buyer programs offered today, are fixed rate mortgage loans, usually offered for 30 years. So at the end of 30 years your loan is paid off in full. The other added benefit of a 30 year fixed-rate mortgage is that you free to make extra principal repayments to pay off your loan sooner.
Initially, during the first several years of your mortgage loan the majority of your payment will go to interest, then over time, as your loan balance continues to be paid down, the inverse happens. The majority of your payment starts going to principal with less going to interest and remains that way throughout the duration of your loan term. Browse through the first time home buyer programs today.
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