As you consider purchasing a home, you may have come across down payment assistance programs that aim to assist first-time homebuyers.
“How can I qualify?” you might have asked yourself.
It turns out, you don’t always have to be a first-time homebuyer to qualify, even though it might say otherwise in the name.
“Freddie Mac defines ‘first-time homebuyers’ for its Home Possible program as someone who had ‘no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the mortgage premises,’” says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at the Brooklyn Law School.
Freddie Mac, a government-sponsored home loan mortgage corporation, says that its Home Possible mortgages offer low down payments for low- to moderate-income homebuyers or buyers in high-cost or underserved communities.
Another federal mortgage association, Fannie Mae, also offers down payment assistance programs for first-time homebuyers.
“The Fannie Mae standard 97% LTV Options let first-time homebuyers put down 3 percent,” says Reiss. “The program defines a first-time homebuyer as someone who ‘had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of purchase of the security property.'”
Similarly, the U.S Department of Housing and Urban Development defines a first-time homebuyer as an individual who has had no ownership in a principal residence three years prior to the closing date of the property.
Not a first-time homebuyer under these definitions? There’s hope for you still.
“Given the overwhelming dominance that the FHA, Fannie and Freddie have on the mortgage market, homebuyers who have sat out of the housing market for a while may find that they qualify for first-time homebuyer programs even if they have owned a home before,” adds Reiss.
Additionally, there are also assistance programs available for “displaced homemakers.” A displaced homemaker generally meets the following qualifications:
- Provided unpaid services to family members in the home, such as a stay-at-home parent,
- Were given financial assistance from another family member, but are no longer supported by that income and
- Are unemployed/underemployed with difficulty gaining employment or upgraded pay.
“A displaced homemaker or single parent will also be considered a first-time homebuyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period,” Reiss says.
Once you’ve found the description that defines you, there are still a few steps to make sure you qualify as a first-time homebuyer or other down payment assistance programs:
1. Examine Your Debt-to-Income Ratio
Oftentimes, down payment assistance programs tend to have lower debt-to-income ratios than a typical lender, which helps prevent the homebuyer from becoming over-extended and prevents future foreclosure.
For instance, the typical down payment assistance program has a ratio of 32/41, says Roslyn Lash, an accredited financial counselor in Winston-Salem, N.C. In this case, the 32 indicates the housing-related debt (principal, interest, taxes, insurance, HOA, etc.), while 41 indicates the percent of all recurring debt (car payments, credit cards, etc.).
“A lender may have higher ratios, allowing a back-end ratio of 45 percent,” adds Lash.
2. Check Your Net Income
If you’re worried about qualifying as a first-time homebuyer, you can still qualify for other down payment assistance programs based on your income.
“Most programs are also income based and are specifically for low- or moderate-income families,” says Lash. “Generally, families must be no more than 80 percent of the area median income (AMI) as determined by family size and income.”
This amount will vary by state and county.
Although many lenders may qualify buyers based on their gross income (before taxes), Lash encourages buyers to prepare a budget based on their net income.
“Once gross income is reduced by FICA (the Federal Insurance Contributions Act), taxes, insurances and other deductions, the income is drastically reduced,” she adds. “Since no one actually receives their gross income, it’s best to base your mortgage payment on net income.”
3. Obtain Your Credit Score
An acceptable credit score is another key factor in earning down payment assistance. So, if you have a history of paying your bills on time and have a minimized debt, you should be in the clear.
“In order to get a favorable interest rate, credit scores should be at least 620, although some lenders will accept a score as low as 580,” Lash suggests.
4. Seek Professional Advice
When in doubt, we always suggest seeking out professional and trusted advice from financial experts.
Government-recognized housing counselors can be found across the nation, many of which will offer classes to educate shoppers on all aspects of the homebuying process. To find a list of HUD-recommended counseling agencies by state, visit hud.gov.