About First-Time Home Buyer Loans

First-time home buyer loans make it easier to purchase a house if you have not owned one in the past, by incorporating subsidies into the mortgage. Promoted as a stimulus for growth in some communities, special financing for first-time home buyers is part of a federal housing program. Some programs are funded by the state or even private foundations. The downside to this type of a loan is that not only must the buyer qualify; the property in question must meet specific guidelines.

History

The Federal Housing Administration (FHA) was created in 1934 with the mission of providing mortgage insurance to lending institutions to encourage them to offer home loans to new buyers. In 1965, the FHA transferred its authority to the Department of Housing and Urban Development (HUD) and began to broaden the scope of its efforts. Today, the FHA is the largest provider of first-time home buyer loans, although individual states have smaller programs of their own (see Resources below).

Function

A first-time home buyer loan allows young adults just starting out in the workforce and older adults who exist on limited incomes the chance to own their own home by reducing the required down payment and/or by financing closing costs. The greater purpose behind the programs is to maintain a healthy economy, of which new housing starts is an indicator. On a personal level, the programs promote home ownership and individual equity investment.

Types

The FHA is the largest single provider of first-time home buyer loans but most states have their own initiatives that supplement an FHA loan. In addition, some private charities, such as Mennonite Housing, offer funds to individuals that meet strict credit requirements when buying their first home.

Considerations

First-time home buying loans are restricted to buyers who have not owned their own home in the past. However, some exceptions are available for recently divorced singles who purchased a home with a former spouse but are now on their own with a reduced income. Another exception is for home buyers who have attempted to buy a home for at least three years but were unable to do so, based upon their income level.

Warning

Although these subsidized loans make it easier to purchase a house if you do not have a down payment, there are drawbacks. An FHA loan takes up to three times longer to close than does a conventional loan, which makes some sellers shy away from entering into a contract with a first-time home buyer. In addition, an FHA certified inspector must approve the current condition of the home before making a loan. Finally, FHA loans are often restricted to a 30-year fixed mortgage while conventional loans have flexible schedules.

Resources

• Determine which first-time home buyer programs are available in your state.
• Download a Fair Housing Laws brochure.
• Mennonite Housing programs