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Creditworthiness? First-Time Home Buyers Get Houses

How do you finance a house if you are one of the first-time home-buyers in the market? Let’s talk about creditworthiness and how you can get a house faster.

First, you may be intimidated about taking this significant step because you lack the financial resources. If that’s the case, there is good news: Today, there are more financial programs than ever to help you get the keys to a new house and to start building your personal wealth.

This is good news for first-time homebuyers because they can get loans from various federal agencies and private lenders.  These programs have been expanded by government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, and the Veterans Administration. 

Smiling President Joe Biden, dollars building up houses and creditworthiness.

Help From the Biden Administration

Plus, the new administration of President Joe Biden is considering a recent first-time homebuyer tax credit of up to $15,000.  This should make it easier for first-time homebuyers to enter the market.

“This proposed program was part of President Biden’s campaign proposal to boost the participation of first-time buyers in the housing market,” according to the Washington Post.  The Down Payment Toward Equity Act of 2021, is now in committee and is winding its way through the legislative process.

Similarly, in the private lending sector, more banks and credit unions offer special programs to help first-time homebuyers with fair creditworthiness obtain loans.

The focus on helping first-time homebuyers is important because home purchases are a significant part of the overall economy.  When more new people enter the housing market, they already own homes to move into larger homes.  An influx of new buyers also stimulates new home construction and home renovations.

Who Are the First-Time Buyers?

So, who are the buyers applying for first-time homebuyer loans?

According to a 2020 report from the National Association of Realtors, first-time buyers had the following characteristics:

*They made up 31% of all homebuyers in 2020. This was a slight decrease from the 33% who bought houses for the first time in 2019. 

*The average first-time buyer was 33-years-old in 2019, and the median household income for first-time buyers in 2019 was $96,500.

*First-time homebuyers bought their house immediately after living with a family member.

Obstacles to Overcome

First-time home buyers also have some obstacles to overcome. 

First, new home buyers do not have any equity from the house they just sold to roll over into the new purchase. In a market with rising home prices, this limits the purchasing power of new buyers.  In a rising real estate market, this can hurt first-time buyers.  Renters may also suffer because some credit-reporting firms do not include rental histories in their credit reports.

Yet despite these realities, the Consumer Finance Protection Bureau found that about 50% of all home purchase mortgages were made to first-time buyers every year since 2002.

Lenders for First-Time Home Buyers

If you are taking the plunge to become a first-time buyer, there is good news: You have plenty of resources to get financing and other home purchase information.

In an interview in the Washington Post, Darrin Q. English, senior community development loan officer at Quontic Bank in New York City, suggested the following institutions have strong first-time homebuyer programs:

The Federal Housing Administration (FHA) offers a home purchase loan with a reduced down payment requirements. This should be very attractive to first-time home buyers.

This type of FHA loan is more accessible to obtain than a conventional loan from a private lender. Since these loans have more relaxed financial requirements than loans offered by other institutions, they are very attractive to first-time buyers.

The FHA has smaller loan costs and allows smaller down payments as little as 3%. They work with borrowers who have lower credit scores but enough creditworthiness.

The U.S. Department of Housing and Urban Development (HUD) has an extensive list of resources for loans to first-time homebuyers. This list includes information for veterans, rural residents, foreclosures, and the Indian Home Loan Guarantee Program.

For those who served in the military, the Veterans Administration (VA) offers loans that finance 100% of the purchase price. These VA loans also eliminate the need to purchase additional mortgage insurance.

Federal loan programs offered by Freddie Mac’s Home Possible and Fannie Mae’s HomeReady allow borrowers to make a down payment as low as 3%, plus reduced premiums on private mortgage insurance.

Private Sector Loans

In the private sector, some credit unions and major banks also provide special programs for first-time buyers. 

Each state also has a designated housing department that offers assistance, either financial or educational, to match buyers with lenders. 

Here is a partial list of credit unions and bank with programs specifically designed for first-time homebuyers:

Credit Unions- Creditworthiness and Affordable Houses

Credit unions also offer special programs for first-time buyers.  These financial institutions are member-owned co-ops that offer many of the same services as national banks but at lower costs. 

Most credit unions are open to the public, and there are no union membership requirements needed to become a member. Credit unions also focus on local markets.  Check local credit unions to see if they offer first-time home buyer loan assistance for buyers with enough creditworthiness. 

For instance, the Navy Federal Credit Union offers a no-down payment, a fixed interest rate, and no private mortgage insurance. Borrowers still must meet the exact loan requirements as conventional loan borrowers. This includes a review of income, assets, and ­credit.

Bank Programs

The Bank of America offers a Community Homeownership Commitment program. This includes down-payment and closing-cost grants, low down-payment loans, and a site that helps buyers find homes that can have grants to subsidize the purchase.  The loans are made to first-time home buyers, and others, in designated neighborhoods and depend on the applicant’s income.

The Chase DreaMaker Mortgage Program offers first-time homebuyers with low-to-moderate incomes.  This program provides a low-down payment (about 3%) and has no restriction on if the money was a gift.  New buyers can finance up to $5,500 of closing costs or use it for the down payment. Borrowers still need to meet income requirements, have a credit score of 620, and complete a certain debt-to-equity ratio.

Citizens Bank offers a closing-cost assistance program that can be used with the bank’s community lending program.  The Destination Home Mortgage requires a 3% down payment with no mortgage insurance.  The bank’s home loans require an income and credit qualification and are available in 12 states, primarily in New England and the Mid-Atlantic.

Embrace Home Loans: The Affordable Housing Program offers reduced closing costs and lowers interest rates for eligible borrowers with enough creditworthiness. The program works with FHA, the Agriculture Department, the Veterans Affairs Department, Home Possible, and HomeReady loans. It allows down payments as low as 3% from sources, including eligible gifts, grants, and down payments.

To qualify, borrowers must be first-time buyers, have a credit score of 620 or above, and have an income of 80% or less of AMI for the property’s location.

30-year loans

Quontic Bank works with the State of New York Mortgage Agency (SONYMA) to offer a 30-year fixed-rate loan with a 3% down payment requirement. Grants and subsidies can be applied to the down payment. There is also a low-interest rate program and down payments as low as 3%. However, the program only applies to first-time buyers in New York state who will live in residence.

The TD Bank Right Step Mortgage offers qualified buyers a low 30-year fixed-rate alternative to conventional or FHA-backed loans and has flexible down-payment options as low as 3% and no private mortgage insurance. Borrowers must meet the bank’s credit and qualifying income standards.

Creditworthiness and Challenges for First-Time Buyers

Abstract illustration depicting the various purchasing processes for first-time home buyers.

This same 2020 report from the National Association of Realtors found that the shortage of available homes for sale in 2020 and 2021 boosted home prices. This made it more difficult for first-time buyers to make the down payment. As a result, many buyers relied on loans or gifts from family members to meet the down payment requirements.

The good news is that many of the first-time home application programs do not penalize borrowers from getting gifts from family members and applying them towards buying a house.

The biggest impediment to affording a house for first-time and experienced homeowners is increasing Federal Reserve interest rates. The Fed does not set mortgage rates, but it does set the Fed funds rate, which affects short-term and variable rate mortgages. Since mortgage rates are long-term, going 15 to 30 years into the future, the more significant factor is monetary policy and bond market activity.

The good news is that the Fed generally increases the Fed funds rate in one-quarter point (25 basis points) increases. These are small, but they can have a great impact on rates. 

In one example provided by Richard Staley, chief production officer of the Atlanta-based mortgage banking firm Angel Oak Home Loans, if rates rose 1% on a $200,000 home with a 30-year mortgage and a 4% interest rate, the monthly payment would increase by $119.

Interest rate increases also translate into lower home prices.  This is because the more people pay in interest, the home price also should decrease to keep affordability measures in sync.  

The Benefits of Home Ownership, – Creditworthiness and investment

Homeownership is an excellent investment and should also be regarded as a significant personal achievement. It’s all about creditworthiness. Being approved to own a house means that objective, impartial, financial professionals have deemed you creditworthy enough to lend you a substantial amount of money over a more extended time.

While homeownership provides real tax benefits, the everyday satisfaction of having a place to call your own is its reward. This also should represent a personal financial milestone for all first-time home buyers.

So, if you want to commit to meet the financial requirements of homeownership, there are many federal and private financial institutions available to help you. They will help you with your creditworthiness. And if you do this as a first-time home buyer and get the keys to a new house, it can be one of the most significant rewards of your life.

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