Down Payments – First Time Buyers

28 October 2020

According to the National Association of Realtors, 87% of first-time buyers think they need 10% or more down to buy a home. The fact is the average down payment for first time buyers is about 6% (many put down less). And a number of programs require no down payment at all.

First Steps for First Time Buyers

Fortunately, there are many down payment assistance programs that can help first time buyers. If you are a first time buyer and are having trouble raising the down payment, the next most important thing you can do is keep your credit score in good shape or repair it if it’s damaged. The other important ingredient is having a work history demonstrating reliability.

Something else that people need to be aware of is that being a “first time buyer” doesn’t mean you’ve never owned a home before. HUD officially defines a first time buyer as:

  • An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
  • A single parent who has only owned with a former spouse while married.
  • An individual who is a displaced homemaker and has only owned with a spouse.
  • An individual who has only owned a principal residence that is not permanently affixed to a permanent foundation in accordance with applicable regulations.
  • An individual who has only owned a property that was not in compliance with state, local, or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

First Time Buyer Programs Range From Basic to Truly Unique

There are more than 2,500 homebuyer programs available across the country. These can be as unique as the homebuyers and communities served. If you are working with a good real estate agent, she/he should be able to share information about local programs. You also want to check for employee programs and nonprofits. Besides low or no down payment requirements, be sure to ask about below-market interest rates, reduced closing costs/fees, and no mortgage insurance requirements.

Widely available down payment assistance programs at the national level include:

FHA home loans. This is one of the most popular options due to its lenient requirements. The down payment required is 3.5%. Additionally, 100% of the down payment can be a financial gift from a relative or approved non-profit. You need a credit score of 580 or higher. If your credit score is lower than 580, you still might qualify for an FHA mortgage but the down payment needs to be at least 10 percent of the purchase amount. You do not have to be a first time home buyer to qualify.

VA home loans require a 0% down payment and are available to current or former military service members. The service requirement is typically 90 days if currently serving or two years on active duty if separated from service. Those in the Reserves or National Guard are eligible after six years of service. Required credit scores are usually 620 and above, although some lenders will allow lower credit scores. VA does not officially publish a minimum score for the program.

U.S. Department of Agriculture (USDA) has attractive loans available that many people are not aware of and the requirements are less stringent than people perceive. These do focus on certain rural areas but you don’t need to buy or run a farm to be eligible. There may be no down payment required and the loan payments are fixed. Applicants with a credit score of 640 or above often receive streamlined processing. Those below 640 can still qualify but the lender will ask for extra documentation about your payment history. There are also regional income limitations. 

Good Neighbor Next Door Program by HUD. This is for law enforcement officers, pre-kindergarten through 12th-grade teachers, firefighters, and EMTs wanting to contribute to community revitalization by becoming homeowners. These are for specific properties that HUD offers a discount of 50% off the list price of the home. In return, you must commit to live in the property for 36 months as your sole residence. HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this “silent second” provided that you fulfill the three-year occupancy requirement. The number of properties available is limited and the list of available properties changes weekly.

FHA Section 203(k) loans take into consideration the value of the residence after improvements have been made. This may be a good fit if you’ve determined a fixer-upper is best for your budget. It lets you borrow the funds you’ll need to carry out the improvement projects and rolls the costs into your primary mortgage. The down payment for a 203(k) loan can be as low as 3%.

Bottom Line … Don’t hesitate to contact The Cal Yoder Team to learn more about programs that might best apply to your situation.