Which loan option is recommended for first time buyers

First-time home buyer costs can seem overwhelming. But, luckily, there are several loan programs for assistance with your down payment and closing costs, including charitable and government-sponsored programs. Local and federal tax credits can lessen the bite, and educational programs can offer help at every step.

Let’s take a look at some of the most popular first-time home buyer loans and grants.

Down Payment Assistance (DPA)

A down payment is a large initial expense when you buy a home, and it’s required for most types of mortgages. Fortunately, many lenders accept down payment assistance, which can help you cover the upfront costs of a down payment.

Down payment assistance programs are typically grants or low- to no-interest loans, and many are exclusive to first-time buyers. The specific assistance programs you qualify for can impact how you can use your funds and whether you’ll need to pay them back.

DPA Loans

Not sure you can cover a down payment on your own? You may also be eligible for down payment assistance programs through a few specific types of loans to reduce the amount you have to put down.

A few options include second mortgages, deferred payment loans and forgiven loans.

Loans structured as a second mortgage must be paid off at the same time as your main mortgage.

Deferred payment loans must be paid in full when you move, sell, refinance or pay off your main mortgage.

Loans can also be forgiven over a set number of years – but will need to be repaid when you move, sell, refinance or pay off your main mortgage if you move before that set number of years expires or otherwise violate the terms of forgiveness.

DPA Grants

You may be able to get DPA through grants, which don’t have to be repaid. Program requirements for loans and grants may vary, so it’s best to check with your local or state government for details on any first-time buyer down payment assistance programs.

Government-Backed Loans

A loan backed by the federal government can also help qualified first-time home buyers purchase with no down payment – we’ll cover these types of loans in more detail below.

Tax Deductions

Unfortunately, you can no longer take advantage of the Housing and Economic Recovery Act’s $7,500 credit for first-time home buyers. The program ended in 2010.

However, you can still save money on your taxes through various deductions. Federal and state deductions can lower your taxable income.

For example, you can deduct the full amount of your mortgage insurance costs for a primary and one vacation home from your federal taxes if your mortgage is worth less than $750,000 ($375,000 if married filing separately). This deduction has currently been extended through the 2021 tax year. This includes private mortgage insurance (PMI) and mortgage insurance premiums (MIP) associated with FHA loans, as well as the guarantee fees for USDA loans and the funding fee for VA loans.

You can also deduct the cost of interest paid during the year on loan amounts up to the above limits for a primary and one second home. These are perhaps the two biggest homeownership deductions.

Additional deductions and credits may be available through your state or local government.

Closing Assistance

Like down payment assistance, there are government-sponsored and private programs that can help you pay closing costs. Closing costs are additional fees you pay at the end of the mortgage process. Closing costs are typically around 2% – 6% of the total cost of your home loan. Like down payment assistance, closing cost assistance can come through a grant or loan.

You can also look to your seller for help with closing costs, with seller concessions. The seller may be able to help with attorney fees, real estate tax services and title insurance. They can also help pay for points upfront to lower your interest rate and contribute to property taxes.

Home Buyer Education

You can take advantage of online educational programs and resources if you aren’t sure how to start your home search. A good first-time home buying class can be free or low-priced, and can teach you about loan options, the buying process and how to apply for a mortgage. Browse real estate courses online and look for ones aimed at first-time home buyers.

Not sure where to start? Zing University is a free online course from the mortgage experts at Rocket Mortgage®. Zing University takes you through the steps to buy a home, teaches you about mortgage types and can even put you in contact with a local agent to help you become a more confident buyer.

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