Owning a home has numerous advantages over renting, including the chance to build up equity and an opportunity to make customized modifications and improvements to your living quarters. However, the complex home-buying process can make it difficult for first-time home buyers to know when it's the right time to take the plunge into home ownership; our team can help you determine if now is the best time for you.
Who Is Considered a First-Time Home Buyer?
There are many loan programs and grants that cater to first-time home buyers, especially on the state and local levels. While a person who has never owned a home before certainly counts as a first-time home buyer, those who have owned a home before can also qualify as first-time home buyers under certain circumstances.
Federal Housing Administration (FHA) loans help many first-time home buyers, particularly when combined with down payment assistance programs sponsored by state agencies. These state programs give first-time buyers low-cost loans or grants to help them comply with the 3.5 percent down payment required by the FHA. Since first-time buyers are not selling a home and using the profit to buy a home, they are more often in need of help with their down payment. The Internal Revenue Service, or IRS, also has special policies regarding individual retirement account (IRA) withdrawals made by first-time buyers for use as down payment money.
The FHA considers some who have only owned a home with a spouse as first-time home buyers. This includes single parents who are now divorced from their spouses or those who are displaced homemakers. Many of these individuals have been on the deed for a home without being on the mortgage. Those who have only owned a mobile home not permanently attached to a foundation are also considered first-time home buyers.
Any person who has not owned a principal residence in three years qualifies as a first-time home buyer under FHA guidelines. It does not matter if the previous home was sold or foreclosed on. It also does not matter if the person has recently owned an investment property. If a person does not qualify on their own, but his spouse does, then they both qualify as first-time home buyers.
The IRS allows first-time home buyers to borrow against their IRAs without paying the standard 10 percent penalty. These home buyers may also borrow against their Roth IRAs tax-free after five years. The money must be used for a down payment or acquisition costs on a principal residence for the IRA owner or close family member. There is a lifetime limit of $10,000 on these exceptions, and you must use the money within 120 days. A first-time home buyer is anyone who has not owned a home for at least the previous two years. If the buyer or spouse has owned a home within the previous two years, IRS guidelines do not consider them to be first-time home buyers.
The first-time home buyer program of the California Housing Finance Agency, or CalFHA, also considers anyone who has not owned a home in the previous three years to be first-time home buyers. In addition, buyers in federally designated “target areas” are allowed to qualify for CalFHA loans even if they have owned a home in the past three years. CalFHA guidelines have a maximum income limit that varies by county and family size, as well as maximum sales price limits. CalFHA borrowers must complete an education class for home buyers and live in the home for the entire loan term or until it is sold.
First-Time Buyer Tips
One of the most important qualifications for a first-time home buyer is a steady income. A buyer's income (or the combined income of a couple, if both are buying the home jointly) will determine the amount of the mortgage lenders offer, which in turn sets the price range that is realistic for you.
Savings and Down Payments
Savings are required as a down payment for first-time home buyers. Many homes require a down payment at or near 20 percent of the home's selling price. If you are a low or moderate income homebuyer, there are special programs designed to help you. Some programs, such as loans through the Federal Housing Authority, or FHA, require lower down payments. Various private and public agencies - including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs - also provide low down payment mortgages through banks and mortgage companies. Most lenders specializing in real estate mortgage loans are aware of these types of loan programs. If you qualify, it's possible to pay as little as 3% up front.
There are several loan programs and public funds available for first-time homebuyers. Here are some links for additional information:
California Housing Finance Agency (CalHFA)
For more than 35 years, the California Housing Finance Agency (CalHFA) has supported the needs of renters and first-time homebuyers by providing financing and programs that create safe, decent and affordable housing opportunities for low and moderate income Californians. Established in 1975, CalHFA was chartered as the State's affordable housing bank to make low interest rate loans through the sale of tax-exempt bonds. CalHFA is a completely self-supporting State agency, and its bonds are repaid by revenues generated through mortgage loans, not taxpayer dollars.
For buyer and property eligibility requirements, and for more information, visit the CalHFA website by clicking here.
Many first-time home buyers use less than 20 percent for a down payment. In this case, mortgage insurance is required. Mortgage insurance provides your lender with security in case you default on your loan. Mortgage insurance adds about 0.5% of the total loan amount to your mortgage payments for the year. So if you finance $200,000, your mortgage insurance will cost $1,000 annually. If you are getting an FHA loan, you'll pay a 2.25 percent mortgage insurance premium up front in addition to monthly premiums. Homeowners insurance is also required when you buy a house. You'll need proof of a policy at closing. Premiums for mortgage and homeowners insurance are often included in a monthly mortgage payment.
In California, Proposition 13 was passed by voters in 1978 that limits property tax to about 1 percent of the assessed value of your home.
When you decide to make an offer on a house, you'll typically need to submit "earnest money" along with it. Earnest money is a deposit, ranging from 1 to 5 percent of the cost of the home, that ultimately gets applied to your down payment or closing costs and is used to show the seller you are serious about the transaction. If the seller does not accept your offer, you get your earnest money back.
On FHA loans, your down payment can be as low as 3.5 percent. On a conventional mortgage, expect to pay somewhere around 20 percent for a down payment. Your individual financial situation heavily influences what is required.
Closing costs consist of a series of fees that are paid when it's time to sign the deal on your house. These may include the appraisal fee, loan fees, attorney's fees, inspection fees, and the cost of a title search. Typically, closing costs equal about 3 to 4 percent of your home's value.