Lots of folks are staying out of the real estate market because of misconceptions. Some believe they need at least 20 percent down, which they don’t have, while others are thinking their credit scores in the mid-600 range are too low.
Actually, FICO scores can be as low as 580 for an FHA loan, which requires 3.5 percent down, and a 620 score for a conventional loan, which can offer down payments as little as 5 percent.
Still others haven’t a clue about down payment assistance programs that will help them close the gap and make home ownership possible. That’s why the first step in buying a home is to talk with a lender; either a bank, mortgage bank, credit union, mortgage broker or other provider. We live in a world where credit is necessary to buy just about anything, although cash buyers are a breath of fresh air.
These issues lead to perceived barriers to owning a home that drive people to rent instead of buying. Research shows the willingness to buy a home increases 40 percent when the required down payment drops from 20 percent to 5 percent, according to the Federal Reserve Bank of New York. Thus, more homes are sold when the down payment is 5 percent or below.
I help my new clients out, who aren’t paying cash, by having a lender call them before we ever start looking at homes and pre-qualify them over the phone. It’s quick, it’s easy, and it’s the fastest way to get started.
Then, armed with that knowledge, we know in which price range we should be looking, or if we should wait and for how long. Making that initial contact can also lead to some very good news to many first-time buyers about down payment assistance programs and grants that could shortcut the path to buying a home.
These are often thought of as being the purview of first-time buyers, but the legal description of a first-time buyer is someone who hasn’t owned a home in the past three years, not just folks who have never owned a home. So that broadens the field of those who can qualify to become a first-time buyer for purposes of getting a grant or other assistance from a city or county.
The cash that funds these assistance and grant programs comes from mortgage revenue bonds that are periodically re-issued after they run out of money. They come from tax-free municipal bonds that are sold as investments.
The homes and the buyers must meet certain cap and financial qualifications based on the median income and home prices in the area. Each grant is different based on the rules of the city or county. The most common types of programs include those that provide a percentage of the purchase price or specific amounts of money toward the purchase of a home, or offer cash for down payments, closing costs, repairs or reduction of the principle.
Assistance can come in the form of grants, loans that are forgiven under certain conditions, deferred payment loans, interest-free loans or second or third liens. Some require the borrower to pay back, while others do not. Most can be used as a down payment on an FHA loan.
There may be income restriction, and debt-to-income ratios are usually below 45 percent. The formula for that ratio is your monthly debt payment divided by your gross monthly income.
If you don’t qualify now you may qualify for a no-money-down program, such as those offered by Utah Housing and through the U.S. Department of Agriculture’s rural housing program. A Fannie Mae program, called My Community Mortgage, offers 3 percent down conventional loans to first-time buyers.
In Utah County, the Provo Redevelopment Agency runs three programs, all with a $10,000 benefit that must be repaid once the home is sold. Applicants must have at least a 650 FICO credit score with income of 80 percent of the annual median income of the area based on family size, ranging from $43,300 for a family of two up to $71,40 for a family of eight, said Cheryl Joiner, who runs the programs for the city with money from the federal Department of Housing and Urban Development.
The three programs include a citywide redevelopment effort, the Own in Provo program, which differs with a requirement of more than 80 percent of the median income to qualify, and the Utah County program for areas outside of Provo.
Statewide programs include about half a dozen assistance programs, while the federal government also has several programs to help would-be homeowners.