Government Aid for First-Time Home Buyers

During the real estate boom, many first-time home buyers ignored government mortgage assistance, favoring instead the subprime, Alt-A and piggyback mortgages offered by private lenders who required little in the way of a credit score or, for that matter, money toward a down payment. But now, thanks to the subprime mortgage meltdown, the easy money is all dried up. Lenders have either significantly tightened their lending standards (see sidebar) or have exited the market altogether.

For first-time home buyers — who typically lack a long credit history or the cash to make a sizable down payment — landing a mortgage with a below-average credit score or with anything under 20% down is now a thing of the past. "We've gone back to the more traditional types of sources for assistance," says Keith Gumbinger, a vice president at HSH Associates, a Pompton Plains, N.J.-based mortgage-information firm."The traditional players are stepping up their roles and that includes the [federal government] and the states."

Now the best recourse for first-time home buyers is to look to government agencies like the Federal Housing Administration (FHA), which offers loans to those with average credit or little money for a down payment, and the U.S. Department of Housing and Urban Development (HUD), which helps out with down payments and closing costs.

Here's a rundown of the federal, state and local assistance available to first-time home buyers.

To qualify, prospective buyers need a minimum credit score that falls in the mid- to high-600 range (much lower than the 720 required by most private lenders), says Curnutte. The lower limits come at a slight cost, however. FHA mortgage borrowers must pay an upfront fee of 1.5% of the loan amount, as well as an annual insurance premium of 0.5%. Yet, even with these fees, FHA mortgages will often cost less than a conventional mortgage that requires private mortgage insurance, says Curnutte. With a conventional mortgage, a borrower who makes less than a 20% down payment is normally required to take out private mortgage insurance (PMI). The cost of this insurance varies depending on the type of loan, the size of the down payment and other factors.

FHA mortgages may get even more affordable in the near future. Earlier this month, the House Financial Services Committee passed a bill that, among other things, calls for changes to FHA mortgages. One of the most important, says Gumbinger, is the proposed new risk-based insurance premiums that will be attached to an FHA mortgage. For example, if your down payment is more than the 3% minimum, and you have a good credit profile, the total premium you pay could be less than what's typically required. The Senate is expected to vote on this bill in the next few weeks.

More than 10,000 banks and mortgage companies nationwide sell FHA loans, says Glavin. To find one in your area, visit the FHA web site. Also, just like private mortgages, FHA loans require buyers to show proof of income and other documentation, including a driver's license, bank statement, pay stubs from the last 30 days, and tax returns.

Under the American Dream Downpayment Initiative (ADDI), for example, each of the 50 states receives funding from the U.S. Department of Housing and Urban Development (HUD) that's specifically tagged for helping first-time home buyers. State and local communities then use this money to provide financial assistance of up to $10,000, or 6% of the home's purchase price (whichever is greater), toward the down payment, closing costs or rehabilitation of the home. To qualify, the buyer's income must not exceed 80% of the area's median income. There are no official credit score or down payment requirements. For now, HUD is only authorized to fund the ADDI program through the end of fiscal 2008, which ends on Sept. 21. Any future funding will be determined by Congress.

In addition, most states, and even some counties, offer their own assistance programs. "There are a number of individualized initiatives for first-time home buyers...intended to address individual circumstances in the states," says Gumbinger. For example, some cities and towns in South Carolina assist homeowners with home repairs while New Mexico offers assistance to those purchasing a home in some rural communities. To find out about these programs, visit HUD's site or contact your state housing finance agency.

Once you choose a mortgage lender, ask if there are any locally-based first-time home buyer programs. "They widely and wildly vary by municipality and region," says Curnutte. Local trade groups may also offer assistance to employees in specific industries. The Chicago Public Schools Teacher Housing Resource Center, for example, offers qualified Chicago school teachers up to $7,500 in home-buyer assistance. While investigating such programs, be sure to ask about any added fees or premiums and weigh them against the terms of your other financing options "Be aware that it's a fractured market," says Curnutte. "If you get $500, [you have to ask] what's my payoff; if my interest rate is higher, then the assistance may not be worth it."