Spooky times for first-time home buyers
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It’s no secret that the housing market is experiencing spooky times, with home prices around all-time highs and mortgage rates at multi-decade highs. This isn’t good news if you are looking to buy a home right now, especially if you are a first-time home buyer.
Because of these factors, many first-time home buyers need assistance. Redfin conducted an interesting survey of movers in Spring 2023 and found that 38% of those under age 30 used a cash gift from a family member or an inheritance to afford their down payment.
Although home prices and mortgage rates are unfavorable, there are some programs that first-time home buyers can use to their advantage, whether they are high- or low-income earners.
Who is a First-Time Home Buyer?
Knowing if you qualify as a first-time home buyer can provide availability to special loan programs and assistance. Most states recognize the federal definition: anyone who has not owned a principal residence in the past three years. Indiana also follows this definition.
Mortgage Options in Indiana
You must get a mortgage if you don’t have enough cash to purchase a home outright. There are many different mortgage options other than your typical conventional mortgage.
- Federal Housing Administration (FHA) Loans: These loans are backed by the FHA and are popular for first-time home buyers with low-to-moderate incomes. They are typically easier to qualify for and usually require a down payment as low as 3.5% if your credit score is above 580. Closing costs are generally between 3% – 6% of the loan amount. However, you must pay mortgage insurance premiums (MIP) upfront and monthly. The upfront MIP is 1.75% of the loan amount, and the monthly payment is between 0.15% – 0.75%.
- Department of Veteran Affairs (VA) Loans: These loans are designed to help veterans, servicemembers, and surviving spouses. Attractive features include no required down payment, low-interest rates, limited closing costs, and no Private Mortgage Insurance (PMI). Plus, these loans are available to all home buyers, not only first-time ones. You must meet the eligibility requirements to qualify for a VA loan.
- Physician Loans: These loans are designed specifically for new medical professionals just entering their field. Many doctors will graduate with high debt and little savings; however, they are entering into a lucrative field. Physician loans are designed to accommodate those individuals, typically requiring no down payment and offering no PMI.
Private lenders, not the government, issue the three loans above, so shopping around for different rates and terms is beneficial.
Down Payment Assistance Options in Indiana
The Indiana Housing and Community Development Authority (IHCDA) encourages home ownership in Indiana by assisting if you don’t have enough cash for a down payment on a home.
- First Place Program: Helps first-time home buyers, buyers in targeted areas, and qualified veterans get down payment assistance of up to 6.0% of the home’s purchase price in the form of a second mortgage. This second mortgage has no monthly payments or interest if you don’t sell or refinance the home within nine years. Otherwise, the full amount must be repaid. To qualify, you must use an FHA mortgage and meet certain debt-to-income ratios and credit score requirements.
- Next Home Program: Helps home buyers with a 30-year fixed rate FHA loan get down payment assistance of up to 3.5% of the home’s purchase price. This is also subject to certain debt-to-income ratios and credit score requirements. This is not limited to first-time home buyers.
Summary
Borrowing money from family members or using inherited funds isn’t an option for many people. Even if that is available, it’s not always a choice that some prefer to make. Just know several different programs are available from the Federal government and states depending on your specific situation. It is important to research and consult a mortgage professional to find your best option.
Austin Stagman, CIMA, is a Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email David at astagman@bedelfinancial.com.