First-Time Home Buyer Loans, Grants, and Other Incentives
The American dream of home ownership may be closer than you think. A multitude of first-time home buyer programs can help minimize the costs of financing and make buying a house more than just a dream. Loans, grants and a variety of other incentives can help lower the initial cost of buying a home to something that is affordable for most people.
What Are First-Time Home Buyer Loans?
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First-time home buyer may have several definitions, depending on the lender's policies, but if you have never had your name on the deed of a piece of real estate, you qualify. Lenders, working with the Federal Housing Administration (FHA), offer mortgage loans specifically tailored to first-time buyers. The loans typically have lower interest rates, no points, less restrictive credit score requirements and may accept a very minimal down payment. In return for these benefits, new home owners must agree to make the property their primary residence for a set period of time. Refinancing may not be possible, and there may be penalties if you sell the property early.
Another factor to keep in mind is that FHA loans often impose more price limitations than conventional mortgages. You may have to settle for a little less house when making your first purchase, and you will need to carry personal mortgage insurance for the life of the loan. There are also private first-time buyer mortgage products that offer many of the same benefits, but only require mortgage insurance until you reach 20 percent equity in your home. Even with the limitations, first-time buyer home loans offer a lot of incentive and flexibility for those new to home ownership, particularly when paired with grants to help lower costs even more.
Government Grant Programs for First-Time Home Buyers
The federal government funds a variety of state-run programs that offer grants to first-time buyers. Each state manages these funds individually, creating a variety of programs, each with their own requirements and restrictions. Maryland, for example, offers more than a dozen different grant options, depending on your location and financial situation. Typically, grant funding is available to first-time buyers who choose a property in an identified revitalization zone. This is an area that the local government has targeted as in need of assistance. These may not be the best neighborhoods, but free money can go a long way toward helping them improve. Most grants offer either help with closing costs or down payment assistance. The U.S. Department of Housing and Urban Development (HUD) manages funding to states. This makes HUD a great place to get more information about the different programs available in your area.
Explore Incentive Programs for First-Time Home Ownership
HUD does not offer any grants directly, but they do have some other programs that can dramatically affect the final cost of your first home. The Good Neighbor Next Door Program is one example. This program offers a 50 percent discount on the list price of a home, if the first-time buyer is a police officer, pre-K through 12th grade teacher, firefighter or other emergency personnel.
Tax incentives may also assist with the purchase of a first home. The federal first-time home buyers credit has expired, but the MCC program still exists and offers an annal tax credit based on a percentage of the annual interest paid on your mortgage. Some lenders may even consider the money you save using the MCC program as income, allowing you to borrow more and afford more house.
The Bottom Line for the First-Time Buyer
Explore all of the options before you make any decisions about your first home. Where the money comes from will impact where you can buy and how much you can afford to pay. If you are financing more than 80 percent of the value of the property, the penalties can be fairly steep in the form of insurance payments. Grants and tax credits may offset some of the expense of personal mortgage insurance or simply help you qualify for a different loan program by helping you meet a higher percentage for your down payment. Buying a home is not a sprint, it is a marathon. Be prepared to settle in, do the research and shop around before deciding on each piece of the home buying equation.