Thursday, 04 June 2020

The True Definition of a First Time Buyer

Written by Posted On Tuesday, 26 March 2019 05:30

First time home buyers are so critical for the housing industry. So much so that various financial incentives and loan programs are developed just to change a renter into an owner. These programs can be national ones such as Fannie Mae and Freddie Mac first time home buyer programs, to local and county governments, which can provide grants and forgivable loans to help first time buyers take the leap.

The biggest obstacle first time home buyers face is coming up with the necessary cash for a down payment, closing costs and cash reserves. Even the FHA program, favored by first time buyers, which has a minimum down payment of just 3.5% of the sales price can still keep future homeowners on the sidelines.

With a $200,000 home the minimum down payment amount is $7,000. There are also closing costs that have to be considered plus funds for an insurance policy, property taxes and impound accounts. When everything is all said and done the minimum cash to close could exceed $10,000 or more. That’s a number that first time buyers look at and it can seem a bit formidable for many.

For those who buy their second or third home the down payment and closing costs are typically paid for with proceeds from the sale of the previous property. Once someone gets in a first home, the real estate wheels begin to turn.

First time home buyer grants are free money. A grant can be used to cover the down payment and contribute toward closing costs. Typically, the grant does not have to be paid back as long as the buyers own the home for at least three years. Second liens are also available to help out with a down payment. These funds are in the form of a loan and not a grant. Again, if the owners keep the home for at least three years, the loan is forgiven.

But for those who have owned a home before and are looking at buying another but are looking for the type of loan available for first time buyers, there is an opportunity to qualify for a first time buyer grant or loan, even if they’ve owned before. How?

For most of these programs the standard definition of a first time home buyer applies. To qualify as a first time buyer, the borrowers must not have owned a home within the past three years. This means someone who owned a home four or five years ago may still be eligible for down payment assistance reserved for first timers. How does a lender know if someone qualifies as a first time buyer? Unless someone paid all cash for a previous home, there will be a mortgage listed on a credit report. The report will show when the mortgage was opened and when it was paid off. If three years have passed since the previous mortgage was retired, the buyers qualify for a first time home buyer loan.

Of course, just because someone qualifies as a first time home buyer it may not always the best choice. That’s a conversation that needs to be had between the buyers and their loan officer. But if someone is buying a first home and is wanting a little financial help with the necessary cash to close, first time buyer programs more than fill that need.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.
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