Buying the first home is a special event for everybody. The house you purchase now could be the home you spend your life in, or, if not your whole life, a few years for sure. The process can be challenging and stressful for first-timers. You need to familiarize yourself with all the legal requirements, mortgage, and loan details and figure out what’s best for you. There are many things to consider as a first-time homebuyer, but it usually starts with the mortgage.
First-time homebuyers can enjoy some advantages when purchasing a home. There’s also a risk of ending up in disadvantageous situations if you don’t plan ahead.
Who qualifies as a first-time homebuyer? What kind of loans are available for first-time homebuyers? Is owner financing a good idea for first-timers?
This article will cover some of the things first-time homebuyers should consider before making a move.
Being a first-time homebuyer comes with benefits. Before we go into that in more detail, let’s see the conditions you must meet to be considered a first-time homebuyer and enjoy those advantages. According to the US Department of Housing and Urban Development, you can’t have owned property in the past three years to qualify as a first-time homebuyer. If you did own a home, you could still purchase a home together with your spouse as first-time homebuyers, if he/she hasn’t owned one yet. You also qualify if you have only owned property together with a former spouse. The definitions are broader than you would expect, extending even to cases like:“An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations” and “An individual who has only owned a property that was not in compliance with state, local, or model building codes—and that cannot be brought into compliance for less than the cost of constructing a permanent structure.” - according to the US Department of Housing and Urban Development.
You can take advantage of different kinds of financing aids as a first-time homebuyer. Those differ depending on the state where you want to purchase a home, but there are generally quite a few categories you could fit as a first-time homebuyer.
You can choose from: Federal first-time homebuyer programs, state and local first-time homebuyer programs, Charitable or nonprofit programs, and even employer-sponsored first-time homebuyer programs are possible. Yes, your employer can contribute to your purchase by helping to cover your costs with a grant or forgivable loan for helping to cover down payment and closing costs.
If you are a student and you don’t want to fill someone else’s pocket with rent money, you can get a first-time homebuyer grant or loan for students, which can reduce mortgage rates, provide down payment assistance, or offer other particular loans. The same first-time homebuyer benefits apply to students, but note that student loans could make getting a loan slightly more interesting.
Several first-time homebuyer programs make it easier to commit to the responsibility of owning a house. These usually go with lower down payments, electronic mortgages, and no income limitations.
You can get down payment assistance (DPA), which regularly takes the form of a grant with low-to-no-interest loans, helping you to cover the more considerable expenses at the beginning of acquiring a new home. Many of those loans exist exclusively for first-time homebuyers.
There are also DPA loans, functioning as a second mortgage, with a few options, including deferred payment loans and forgiven loans. Forgiven loans and deferred payment loans must be repaid if you move, sell, refinance, or pay off your primary mortgage. But you can get a few nice DPA loan-friendly years before that.
The cherry on top is that you might even be eligible to get a DPA grant, which doesn’t have to be repaid at all. There are many kinds of loans and grants available. Check your state’s laws and possibilities for more accurate information.
There are tax deductions available for first-time homeowners; some of them include lower interest and property tax payments. This eases the burden of taxpaying, and you have the opportunity to save.
But there’s even more: if your mortgage doesn’t exceed $750,000 or $375,000 for married couples separately, you can deduct the total amount of your mortgage insurance costs for a primary and one vacation home from your federal taxes.
If you have a fixed-rate mortgage, you know what to expect every month, allowing you to calculate your budget better. The good thing is that the mortgage payments stay the same; they don’t increase over time as rent could, for example.
If you are looking day and night for your future home, you have probably heard the term owner financing. It also goes by names like seller financing, owner will carry (OWC), or seller will carry (SWC). All those names mean the same thing: a financial agreement between seller and buyer. This is a loan like any other, and at the same time, there are many crucial differences.
Owner financing, to put it very simply, replaces a traditional mortgage with a loan agreement that involves only the buyer and the seller directly. No third-party banks and loaning institutions. Still, the owner financing agreement works just like any other bank loan. The difference is, that the seller finances the purchase, and the buyer pays the seller back according to the terms they decided upon in their agreement. There usually is a substantial down payment at the beginning, which is about 10-15%. After that, monthly loan repayments plus interest are due. Usually, after 5-10 years, there’s a balloon payment to take care of, which is a single large payment of the remaining amount completing the purchase.
Owner financing can be an option for those who can’t secure a traditional mortgage on a property. The reason behind this could be the buyer’s bad credit history or the terrible condition of the building to be purchased.
The buyer’s benefit is that they get to purchase a home even without having the option of a loan. They might qualify later and get a second, traditional loan to pay for the home. There’s no standard minimum down payment, and closing costs are significantly cheaper.Property purchased through owner financing can be an investment option, too.
However, owner financing can be more expensive than a traditional loan, with bigger interest rates and usually less time before the balloon payment is due. It’s also risky for both owner and buyer because if the buyer can’t secure a second mortgage or financing in any other way to pay the balloon, that's a problem for everyone. If the house already has a mortgage on it, and the buyer fails to pay it, the bank can foreclose. Another significant risk for the buyer in the case of incompletion of the balloon payment is losing the money they already paid for the house (downpayment and all) and losing the property itself, too.
While there are many advantages of owner financing, like looser rules to play by, there are serious risks too. If you don’t have any solid reasons to take this path, there are many other options for financing your first home.
Suppose you qualify as a first-time homebuyer (and you can very easily qualify as one). In that case, a wide variety of first-time homebuyer programs can help you with advantageous rates and significant down payment assistance loans. First-time homeowner programs also come with deductible taxes you can enjoy and concentrate your savings on your life goals. So, if you qualify, don’t miss the opportunity!