Free Money for First-Time Homebuyers

Written on March 27th, 2009 at 6:55 am by Joe

home3 Free Money for First Time Homebuyers

As a first-time homebuyer, you can usually benefit from government assistance programs. The types of assistance available to first-time homeowners range from low-interest or no-interest loans to down payment grants (i.e. free money) as well as tax credits and rebates.

Qualifying as a first-time homebuyer is easier than you may think. The law defines the term first-time homebuyer rather loosely. In fact, you are not required to be purchasing your first home. You just can’t have owned your primary residence in the last 3 years.

Similarly, while there are often income restrictions, you don’t have to be dirt poor in order to qualify. Most first-time homebuyer programs accept moderate-income buyers. The maximum income guidelines vary by area. You may be surprised what qualifies as low or moderate income in your area.

FEDERAL ASSISTANCE FOR HOMEBUYERS

$8000 Tax Credit

The American Recovery and Reinvestment Act of 2009 offers a great incentive for first-time homebuyers. If you buy a home between January 1, 2009 and December 1, 2009, you can receive a tax credit for 10% of the home’s purchase price, up to $8,000.

The tax credit is refundable, which means that if you don’t owe any taxes to the federal government, you will get a refund check sent to you. Basically, you’re getting a free gift from the federal government.

The tax credit does come with certain strings attached. For one, you will have to reside in the home for at least three years after you purchase it. Otherwise, you will have to repay the credit. Also, you have to be a first-time homebuyer, which is legally defined as someone who has not owned their primary residence for the last three years.

You can claim the credit by using IRS Tax Form 5405 with your 2008 tax return (due April 15, 2009) or your 2009 tax return (due April 15, 2010). Note that if you have purchased or are planning to buy a home in 2009, you don’t have to wait until next year to claim your credit. You can claim it on your 2008 tax return. Even if you have already filed your 2008 tax return and you are not going to purchase a home until later this year, you can still claim the credit this year by amending your 2008 tax return. The tax credit is phased out for taxpayers whose adjusted gross income is between $75,000 and $150,000 for joint filers. Those earning over $150,000 are not eligible for the tax credit.

By the way, this $8,000 tax credit should not be confused with the $7,500 tax credit offered for homes purchased in 2008. That $7,500 tax credit has to be paid back within 15 years. It’s still a great deal because you’re getting a low-interest loan but it’s not as great as getting a tax credit without having to pay it back.

FHA Loans

FHA Loans are loans that are insured by the Federal Housing Administration (FHA). They are not just available to first-time homeowners. The name is somewhat misleading because it’s not the government agency that is giving you the loan but a private lender. The FHA only provides insurance for the loan, which means that if you default on the loan, the lender can turn to them to get their money back. In return for this insurance protection, you agree to pay the FHA 1.5% of the loan amount upfront and an extra 0.5% per year as insurance premiums. The 1.5% can be added to your loan balance, though, so you won’t have to pay it out of pocket.

FHA loans have several benefits. For one, they reduce the amount of down payment required to purchase a home. It can be as little as 3% of the purchase price of the home. Other loans may require down payments as high as 20%. In addition, you can qualify for a lower interest rate on your loan than you would otherwise.

The downside of FHA loans is that they come with maximum loan amounts. Click here to view the maximum loan amounts for your area. The maximum loan amounts are set low enough such that FHA loans can only be used to purchase modest homes. Consequently, although FHA loans are not limited to low-income households or first-time homebuyers, it is often these groups who tend to use them most often.

If you are interested in an FHA loan, click here to search for FHA-approved lenders in your area. It pays to shop around. Although all loans are insured by the FHA, lenders will have different rates.

If you do not qualify for an FHA loan but you still want to reduce your down payment, you may want to consider private mortgage insurance as an alternative. Private mortgage insurance is similar to FHA loans but unlike FHA loans it is offered by private insurance companies and the rates are usually not quite as attractive.

VA Loans

A VA Guaranteed Home Loan, or VA loan, is insured by the Veterans Administration and only available to qualified veterans. If you are a veteran, a VA loan is a better alternative than an FHA loan. The maximum loan amount on a VA loan is usually higher than on an FHA loan for a home in the same area and no down payment is required at all. Plus, if you experience financial hardship, the federal government may extend leniency to you and even forgive part of your debt.

Like the FHA, the VA charges a funding fee. Click here to view funding fee tables.

For more information about VA loans, contact a local housing counseling office at (800) 569-4287 or a VA regional loan center near you. Not all lenders offer loans insured by the VA.

Good Neighbor Next Door

The Department of Housing and Urban Development offers law enforcement officers, pre-Kindergarten through 12th grade teachers, firefighters, and emergency medical technicians a discount of 50% off the list price of a home. The program is called Good Neighbor Next Door (GNND).

The number of properties available under this program is limited and availability changes weekly. Click here for a list of HUD homes currently available for sale. Once a home is listed, it is available for purchase for the next five days. If there is more than one person expressing interest in the home, the buyer will be chosen by lottery.

You will have to live in the home for at least three years. If you decide to leave before that, you have to repay the government a prorated portion of the discount they gave you. You actually have to sign a second mortgage for the amount of the discount at the time you purchase the home. You won’t have to make any payments on this mortgage but if you don’t stay there for three years, the government can use the mortgage to get its money back.

Another requirement of the program is that you make a good-faith effort to stay employed in your qualifying professions for at least a year after you purchased the home. If within that period you suddenly quit your job to pursue another career, you may have to pay back a prorated portion of the discount you received.

If you are a teacher, you are also required to teach at a school that serves students who live in the same area where your house is located.

The major drawback of the program, however, is that the HUD homes available for sale may not be in the most desirable areas of town. But then again, you only have to live there for three years. If you really can’t take it, you can sell your home and leave after three years. The profit from selling your home will be yours to keep.

For more information about the GNND program, call the FHA Resource Center at (800) CALL-FHA.

Homeownership for public housing residents

If you are a public housing resident, you may be able to convert your rent into a mortgage payment. There are public housing ownership programs as well as homeownership vouchers available to assist you in purchasing your home. The types of assistance vary by area. Contact your local housing agency for more information.

STATE, COUNTY AND MUNICIPAL HOMEBUYER ASSISTANCE PROGRAMS

In addition to the federal government, state and local governments offer a variety of homebuyer assistance programs as well.

Click on your state below to find out more about the types of programs available in your area.