When lenders initially review a loan application from a first-time home buyer, one of the more important items to check off is making sure there are enough funds for a down payment and closing costs. As loan limits rise in 2023 so too will the amount of down payment needed because the down payment is expressed as a percentage of the sales price.
First-time buyers may have heard a prevailing myth that someone needs a 20 percent down payment in order to qualify. Yet there are loan programs that do not require a hefty down payment and even some loan programs that do not require a down payment at all.
For instance, consider the VA home loan program. This loan is available for veterans, active duty with more than 180 days of service, National Guard and Armed Forces Reserve members with at least six years of service and un-remarried surviving spouses of those who died while serving or as a direct result of a service-related injury.
The VA loan requires no down payment at all which goes a long way to saving first-time buyers a significant amount of cash to close. The VA loan also prohibits buyers from paying certain types of closing costs, further reducing the amount of cash needed to close a purchase transaction.
USDA loans are another breed of no down payment loans. Offered as a 30 year fixed rate program, the USDA loan is designed to finance those who want to buy a property in a rural area, away from the city. The USDA establishes where the property can be located in order to be eligible for this zero down loan and all the buyers need to do is find a property and then check with their loan officer to see if it is located in an eligible zone. But again, there are closing costs to consider.
FHA loans are extremely popular with first time buyers because of the minimum low down payment requirement of 3.5 percent. Plus, there are no restrictions placed on eligible borrowers or eligible locations.
Yet all three of these low and no-money down loans still need a little help with cash to close. But there is an oft-overlooked source for needed funds- bonds and grants. Throughout the country, local and state governments can establish a Down Payment Assistance program designed specifically to help first time buyers purchase a home by providing cash to close, both for a down payment where needed and to help cover part or all of the associated closing costs. There are two basic types of down payment assistance.
Bond money usually comes in the form of cash provided at the settlement table and the entity providing the assistance then places a lien on the property. Such programs are subordinate to the existing first lien whether it’s a VA, USDA or FHA loan. Further, there are no payments that need to be paid while the borrowers occupy the property. For most bond programs, as long as the borrowers occupy the home for at least three years, repayment is waived.
There are other bond programs that finance the entire transaction and are designed for low to moderate-income borrowers. These programs also ask the borrowers to be first time buyers or otherwise have not owned a home within the previous three years.
Government agencies issue bonds to investors who are guaranteed a specific rate of return at a given point. These funds are then used to finance properties for first-time buyers and often place limits as to how much income applicants can make each month. A common threshold asks that household income not exceed 115 percent of the local median income for the area, but different programs can have different requirements.
Also, it’s not the government that issues the mortgage but works with local lenders, a housing finance authority or other non-profit agencies designed to assist first time homebuyers. With this type of bond loan, monthly payments are required.
Grants are another source of funds to close. Again, terms for housing grants will vary based upon the agency issuing the funds but the important thing to note with a housing grant is there is no repayment. Grants are issued specifically to first-time buyers and used to assist with a down payment and closing costs.
For example, consider a couple who wants to buy their first home, but they must first come up with the 3.5 percent down payment and closing costs needed for an FHA loan. For a $100,000 purchase, that’s $3,500 for the down payment and perhaps another $3,000 for closing costs for a total of $6,500.
A grant can be issued to provide the $6,500 and then obtain a mortgage that accepts grants as a source for 100 percent of the needed funds. Note, conventional mortgages and other may ask for a minimum investment from the borrowers, even though a grant is available to cover all the needed cash to close.
Down payment assistance of all types can vary based on location, even from county to county and state to state. There are no universal guidelines, so you’ll need to do some homework on your end and specifically request from your loan officer that you’d like to apply for down payment assistance.
For example, in California, there is the California Housing Finance Agency that oversees the CalHFA program and preapproves specific lenders to market the product. In Florida, there is a program sponsored by the Florida Housing Agency and in Illinois, there is the Illinois Housing Development Authority. Almost every state has some sort of down payment and closing cost assistance program.
If you or someone you know is thinking about buying a home but are not sure about how to come up with the cash needed to close, downpayment assistance in the form of bond money or grants can often take care of most if not all of the necessary cash to close. Getting prepared upfront for these programs means the application and approval process will be a smooth one.
Call Coast to Coast at the number above to learn more about any of the programs mentioned.