FHA loans are government-backed and offer more relaxed credit and saving requirements than conventional mortgage loan options. They can make homeownership easier for first-time buyers and those with lower incomes.
However, there are still some unique features that buyers should be aware of such as upfront and annual mortgage insurance premiums and property eligibility restrictions.
Down Payment Assistance
Down payment assistance programs provide funds to help low-income households buy homes with little or no cash saved for a down payment. These funds may come in the form of grants or low-interest loans that don’t need to be repaid. Getting preapproved for a mortgage is a good first step to determine if you might qualify for these types of programs.
Local and state governments often run down payment assistance programs that supplement federal housing initiatives. These programs can cover a wider range of homebuyer purchase costs and serve families at a higher income level than allowed under federal guidelines.
For example, a grant program available in Cortland County provides funds that buyers can use to reduce their closing costs and fix up their new home after purchasing it. This assistance comes in the form of a deferred loan with 0% interest, and requires that buyers agree to occupy the property as their primary residence for at least 10 years.
First-Time Homebuyer Programs
Typically, first-time homebuyer programs help low-income households accumulate enough money for a down payment and closing costs. They may also help with mortgage interest, mortgage insurance and other housing-related expenses. Down payment assistance is often provided by local and state governments as cash grants that can be applied toward the purchase price of a home or closing costs. Some are targeted at specific populations or geographic areas. Other programs, such as SONYMA's Achieving the Dream program, combine a mortgage loan with down payment assistance to aid in buying a single-family residence or two- to four-family cooperative, townhome, condominium, manufactured home or multi-unit dwelling.
Other mortgage programs offer flexible DTI requirements that make it easier for students or recent graduates with student loan debt to buy a home. And there are tax credits and deductions that can reduce your taxable income to further ease the burden of purchasing a home. These programs can be found at the federal, state and local levels, though most of them come with restrictions.
Tax Credits
The federal Low-Income Housing Tax Credit (LIHTC) is the most important source of financing for new or rehabilitated rental homes for lower-income households. LIHTC provides developers with a dollar-for-dollar reduction of their tax liability for investing in projects that would not otherwise occur without this incentive, and is the principal means by which the nation supports its housing finance system.
The non-profit group Newsong operated this grant program, which helped home buyers pay for closing costs. It only applied to homebuyers using an FHA loan and who could demonstrate financial need.
This grant program helps buyers cover their down payment and closing costs with funds that are offered as a deferred loan, but which must be repaid if the property is sold, transferred or no longer occupied within 10 years. Applicants must meet general eligibility requirements and be buying a single-family home. This is one of the few programs that require a minimum contribution of \$500 from buyers.
FHA Loans
FHA loans are a path to homeownership for households who might have trouble getting conventional mortgages because of lower credit scores or insufficient cash for a down payment. The government doesn’t lend money directly to buyers through the FHA loan program, but it does insure the loans so that banks feel more comfortable lending to them. FHA loans require a smaller down payment than conventional mortgages and often have lower interest rates. Borrowers also pay an annual mortgage insurance premium based on their loan-to-value ratio and the size of their down payment.
Before applying, gather all of your documents, including pay stubs and tax returns from the last two years. Lenders will want to see your entire financial picture, including a full list of assets, and will verify your employment history. If you’re getting help with your down payment, the giver will need to provide documentation that the gift is truly from them without an expectation of repayment.
