First Time Homebuyer Loans

You don’t have to be a first-time homebuyer to qualify for a loan that’s tagged as “first-time buyer” most of the time.

Most loans advertised as “first-time homebuyer” are loans that are popular because they require minimal to no down payment. Let’s look closer at these loans.

But first, let’s be clear about one thing: being a first-time homebuyer does not mean you get a free house. The only person giving away free houses is Santa Clause, and I haven’t seen a real Santa for a very long time. Ha!

3% Down payment Conventional Loan

For this loan, you cannot have owned a home in the past three years, but you don’t have to be a first-timer.

Fannie Mae’s program is called HomeReady, and Freddie Mac’s program is called HomePossible. With these programs, you get the same low interest rate that buyers putting 20% down get, so that’s what makes them so special. In addition, the monthly mortgage insurance (MI) fee is lower.

This generous loan is designed to help more people become homeowners. I love these loan programs! I prefer HomePossible, because it requires slightly less documentation from the borrower.

The debt-to-income ratio is lower and stricter than for other conventional or for the FHA loan, so you can’t push your buying power.

If you qualify, there is no downside.

(If you aren’t familiar, Fannie Mae and Freddie Mac are nicknames for government-sponsored enterprises (GSEs) that provide money to banks and mortgage lenders for home loans. You don’t go to them directly, but to a mortgage lender or mortgage broker.)

3.5% Down payment FHA Loan

For this loan, you do not have to be a first-time buyer, and it’s okay if you own other property–recently or currently. There’s nothing “first-time” about it except that it’s easy to qualify for and makes for good advertising.

FHA is only for a primary residence where you will live in the home for at least the first 12 months. You cannot use it for a second home or an investment property.

Generous credit score and debt ratio guidelines make it popular.

The downside is the Upfront Mortgage Insurance Premium of 1.75%; but it’s not a stopper, because it is rolled into the loan itself and not a closing cost requiring cash. Also, the monthly MI fee does not get waived on the 3.5% down 30-year fixed rate loan, so you have to refinance to get the MI eliminated.

Down Payment Assistance (DPA) Loans, Truly for First-time Buyers

Getting help with the down payment is a concept that all 50 states have embraced for first-time buyers. These are the true first-timer programs. Each state has its own unique programs, which I’ve spent a good deal of time researching recently. In my upcoming book, Get the Mortgage You Want, Like the Pros, I included links for all 50 states and Guam. I will post when it’s available with more information about what’s included in the pages.

In the meantime, if you have at least 3% saved for a down payment and your credit has been on track for the past 12 months, reach out to a local mortgage broker to see if you qualify to become a homeowner. The down payment may be gift from family or you might qualify for a DPA. There are closing costs in addition to the down payment, which can be paid by you, the seller, or a combination. Or, your lender might give you a credit for part of the closing costs, in exchange for a higher interest rate. (There is no free money from the lender.)

Be prepared with your W2, current paystubs, and two months of recent bank statements for the preapproval.

3% Down Home Loan with No MI

3%Just in time for the spring home buying season: 3% down loans.

Recently, one of the Big Banks announced it is rolling out a new program: 3% down with no monthly mortgage insurance fee.

At first glance, it sounds amazing– or does it? My first thought was, this sounds like lender paid MI, which has been around for a long time, rolled out with a new name. I’ll explain.

When you put less than 20 percent down (conventional loan), it is riskier for the lender. Typically, the lender uses a mortgage insurance company (such as MGIC, Radian, Genworth) to protect them in case you default on the loan. You, the borrower, pay for this, and you have choices.

  1. Pay a monthly fee (fee amount depends on your credit score and how much down).
  2. Pay it as an upfront fee in the closing costs.
  3. Ask the seller to pay it as an upfront fee, one of the seller-paid closing costs.
  4. Pay a percentage upfront and the rest as a lower monthly fee (called split MI)
  5. Have the lender pay MI.

But hold on! Will your lender, out of their kind and generous heart, pay your MI fee for you?

Sure, if you take a higher interest rate to cover it. Which essentially amounts to the same thing as option #1 above. But it sounds good, right? Lender-paid MI.

Having no MI sounds good, too. But if the loan program carries a higher interest rate, what’s the difference? Good marketing, plan, Bank of America. Put a new label on an existing program and then make a media splash.

Are 3% Down Loans Risky?

Some folks are asking if this is subprime lending all over again. As a loan officer who worked in both retail and wholesale lending (inside closed doors of an institution that provided money to mortgage lenders), and who wrote Mortgage Rip-Offs and Money Savers to warn the public about the scams and lies, I will say this is not subprime lending all over again, but it is moving the pendulum from the super-strict end of the spectrum to more leniency.

Right after the mortgage meltdown, 3% down conventional loans were discontinued. You had to put down at least 5%, and the credit score requirement became stricter. Or, you could take a 3.5% FHA loan.  (FHA promptly raised its Upfront Mortgage Insurance Fee. It was 1% and today it is 1.75%. In addition, the monthly MI fee increased.)

Nothing New?

In reality, the 3% down conventional loan has been available again in 2014. Many lenders require a credit score of 720.

This “new” 3% down with no MI program that is rolling out by Bank of America (and backed by Freddie Mac) requires a credit score of 660. But all full-service lenders (such as Envoy Mortgage where I work) already have a 3% down loan with a credit score requirement of 620; it is called HomeReady, and it is backed by Fannie Mae. You get the five choices for covering MI that are listed above.

This gives me an idea. Maybe I should announce that there is a new loan program available, only from me, myself, and I. It’s called The Spring Homebuyer’s Special. It is 3% down and you get five choices for MI. Woo-hoo everybody!!! Call for a press release and help get my name out there, right next to Mr. Big Bank.

Many thanks to Jared, who suggested I blog on this topic.