About Programs for First Time Home Buyers
Government, at both the state and federal level, actively encourage home ownership, and have established a number of programs to assist buyers to purchase their first home. These programs essentially “guarantee” the loans of first time home buyers, or in some cases provide lower cost money to lenders. This enables lenders to offer mortgage loans to first time home buyers at lower interest rates or with lower down payment requirements. Down payment requirements can be as little as 3% (1% for some programs targeted to very low income buyers), and some closing costs can also be incorporated into the loan amount. While programs differ in their specifics, they may include:
- Household income limits
- Maximum purchase price
- Requirement that the home be used as a primary residence (No vacation or investment properties)
- Requirement that the buyer not have owned a home in the past 3 years
The household income and purchase price ceilings can be fairly generous. In Sullivan County, SONYMA, the State of New York Mortgage Agency, has an income limit for 2015 for a 1 or 2 person household of $69,500 for a buyer purchasing a home in a “non-target” area, and $83,400 in a “target: area (designated by the Federal Dept. of Housing and Urban Development as economically distressed.) Income limits for 3+ person households are somewhat higher. The purchase price maximum in Sullivan County for a single family home are $265,150 in a non-target area and $324,080 in a target area.
FHA loans (loans made by private lenders and guaranteed by the Federal Housing Administration), aren’t limited just to first time home buyers and there are no income ceilings. Down payments can be as little as 3.5% and some closing costs can be rolled into the loan, so they can be a good option for homebuyers with limited cash but steady income. Also, credit score requirements to qualify for a loan can be somewhat lower than for a conventional mortgage.
However, there are some downsides to FHA loans. Buyers are required to pay an upfront mortgage insurance premium as well as an annual premium for the life of the loan that can be as high as 1.35%. That can make an FHA loan more expensive than a conventional loan, even with PMI (Private mortgage insurance). But for a homebuyer with less than 10% of the purchase price for a down payment who doesn’t qualify for a SONYMA loan, it may be the only option.
FHA loans, like SONYMA loans, must be used for the purchase of a primary residence. The maximum mortgage amount (not purchase price) in Sullivan County for a single family home is $271,050.
One important factor to keep in mind with FHA loans is that the house itself must meet certain condition requirements. For example, there can be no peeling paint, and for houses with wells and septics, a minimum distance between wells and septics is required (even if the current setup is ‘grandfathered in’ under the town building code.) If you’re planning to finance with an FHA loan, be sure to tell the agent you’re working with so they can eliminate properties that won’t qualify.
USDA Mortgage Loans
I haven’t personally worked with a buyer using a USDA loan, so am not as familiar with this program. Sullivan County qualifies as a rural area under USDA guidelines, so USDA loans are available for single family home purchases here. Buyers often don’t explore these loans, because they assume they’re for farms or agricultural property, but they’re actually designed more for regular single family home purchases used as a primary residence.
USDA loans have income limits (115% of the area median income), but no purchase price limits. It’s also one of the only options that permit 100% financing. Gifts from family members towards the down payment and closing costs are permitted. There is an upfront mortgage insurance premium (2% of the loan amount), but unlike FHA loans there are no ongoing mortgage insurance premiums.
While most lenders offer FHA loans, fewer handle USDA guaranteed loans. Ulster Savings (below) is one of the local lenders that offers USDA loans.
Qualifying for a Mortgage
Your first step, before even starting to look for a home, is to talk to a few lenders. Note that SONYMA and FHA do not make loans directly to buyers, but guarantee or underwrite loans made by banks and other mortgage lenders. So you need to talk with a lender,who can discuss these programs with you, as well as other options that you may qualify for.
There are lots of mortgage websites online, where you can calculate payments, check what you can afford, and even apply for a mortgage. I’d strongly recommend, however, that first time home buyers pick up the phone or go into your local bank and talk to an experienced mortgage consultant. Also, ask your bank if they have mortgage consultants that work specifically with first time home buyers. Many do.
If you’d like to speak with someone is this area, I’d suggest:
Ulster Savings Bank
Ulster Savings Bank
SONYMA also has a list of particpating lenders in the mid-Hudson region on their website. Any lender offering SONYMA mortgages will also likely offer FHA loans.
When you talk to lenders, tell them you’re a first-time home buyer and just starting out to look. You want to understand what programs are available to you and what it will take to qualify for them. Be upfront with the mortgage consultant about the amount of cash you have available for a down payment and closing costs, as well as your income. They’ll make a few calculations and discuss the options with you. They may also pull a quick credit report and credit score (known in the business as your FICO score). Don’t be alarmed if your credit report has some blemishes or your FICO score is low. An experienced mortgage consultant can make some suggestions to help you clean up your credit report or improve your FICO score which may help you qualify for better mortgage terms. Its not uncommon for potential home buyers with less-than-perfect credit to spend 3 or 6 months improving their credit picture. Think of it as training for a marathon. If you’re not in great shape, you wouldn’t go out and run a marathon without months of preparation. Getting your credit into shape could take the same amount of effort and persistence.
Getting Your Down Payment Together
In most purchases, money, is well, money. But when it comes to down payments, not all money is the same. Many home buyers are surprised to learn that lenders don’t look as favorably on down payment money that’s given to you (or lent to you) by your parents or other family members. They prefer down payment money you’ve earned and saved yourself. Your lender will most likely ask you to include your 2 or 3 most recent bank statements with your application. Why? They’re looking to see if there’s been any recent large deposit, e.g. money from your parents for your down payment. If you’re planning to get down payment assistance from your family, mention that at the outset with your lender so they can guide you to a loan that will permit that.
How Much Home Can I Afford?
This is a crucial question to ask — and answer — before you start home shopping. The best place to get that answer is from your bank or a mortgage consultant. You can get a rough idea using one of the online mortgage calculators. A good source of reliable mortgage rate information to plug into the calculators is Wells Fargo Mortgage Rates. You’ll find plenty of sites and web banners advertising lower rates, but they can be come-ons or loaded with extra fees or points (a percentage of the loan amount you pay upfront to bring the interest rate down.)
In general, the best rates you’ll find on line are for conventional 30 year loans with a 20% down payment for borrowers with excellent credit. If you’re putting down less than 20%, add .5% to 1% to the rate for PMI (private Mortgage Insurance). And if you have just “very good” rather than “excellent” credit, your rate could be ,5% to .075% higher as well. (Chase has a great calculator to test out assumptions about credit history and down payment at https://apply.chase.com/mortgage/crq/customratequote.aspx.) With higher rates, your monthly payment will be higher. So if your credit score is low, and as a result the bank wants to charge you a higher rate, that means you won’t be able to borrow as much for the same monthly payment — and so won’t be able to afford quite as much house.
But your credit score and history aren’t the only thing that lenders are looking at. They also want to make sure that you can afford to repay the loan. That’s where “ratios” come in. Lenders will calculate the ratio of your housing expenses. In the business, this is referred to as P-I-T-I, for principal, interest, taxes and insurance. Principal and interest are what comprise your mortgage payment. On top of that you add property taxes and homeowners insurance, plus any homeowners association dues if you’re in a condominium or development with fees. Lenders want to see a ratio of your housing expense to your gross income no greater than 28% to 33%. They’ll also look at your total consumer debt (credit cards, car loans and student loans), and add the monthly payments for that to your housing expense to arrive at total housing and debt ratio, that they don’t want to see above 35% to 38% of your gross income. These are very general guidelines, and ratios and underwriting requirements often change. But they should give you some idea of what lenders are looking for.
What about foreclosure properties?
Houses that have been foreclosed on by lenders and put on the market for sale can be great deals. Foreclosure houses, however, while often very well priced, generally won’t qualify for these special financing programs like SONYMA and FHA. SONYMA and FHA generally only guarantee loans on properties that are in good condition with working systems (although both offer rehab loan programs for properties needing substantial repairs, see below.) The lender-owners of these foreclosed properties sell them “As Is”, and in a cold climate like Sullivan County, they’ve had the pipes drained and the systems turned off to prevent freeze damage. They’re often unwilling to turn those systems back on for an inspection or appraisal, to determine that they are in working order. This results in a bizarre Catch-22, where SONYMA or FHA can’t determine that a house is in working order because the systems aren’t on, so they won’t guarantee the loan. The lender-owner won’t turn the systems, so the buyer can’t get the loan — and the lender-owner doesn’t make a sale and get the property off their books.
Both SONYMA and FHA offer rehab or renovation loan programs that don’t necessarily require the house to be in good working order at the time of purchase. These loans include money to repair and renovate the house. On the face of it, these would seem a perfect match for a foreclosure property. But there’s another Catch-22. Those lender-owners have very tight closing deadlines — typically 30 days between signing the contract and closing. SONYMA and FHA rehab loans involve a number of extra steps, including contractor estimates, two step appraisals (the value before and after the repairs) and additional underwriting review, which are impossible to complete within the 30 day deadline.
I’m not saying that its impossible to buy a foreclosure property using a SONYMA or FHA mortgage. But buyers planning to use one of these loan programs should probably focus on foreclosure properties in better condition, rather than those in need of substantial repair.
Veterans have the option of obtaining a VA-guaranteed home loan. A VA loan permits a veteran to essentially purchase a home with no down payment. The VA program also permits sellers to pay buyer closing costs up to 6% of the loan, although the house has to appraise for the sales price plus the closing cost concession. To be honest, I haven’t handled a VA purchase and am not as familiar with the program. If you’re a veteran looking to purchase a home with a low down payment, mention your veteran status to the lender. SONYMA also offers more generous terms for its loan programs to veterans.