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.