As a general rule, I recommend against residents buying a home for a number of reasons. However, there are exceptions to every general rule. More recently, I have become aware of a program that makes buying a home as a resident not quite as dumb, and perhaps even a good idea for many residents. The program is a grant program that provides up to a $10,000 down payment for low to moderate income homebuyers. The main reason I have recommended against residents buying a home is that the break even period for buying (typically 3-5 years) required for appreciation and amortization to make up for the transaction costs is remarkably similar to the length of residencies. However, when you throw a free $10K into the equation, that break even period can shorten considerably for many residents.
This program is called the National Homebuyers Fund. (I have no financial relationship with NHF, but many of my advertisers are mortgage lenders, including Josh Mettle, who bought me lunch and told me about this poorly publicized program.) Here is how it works:
- You must use an FHA, VA, USDA, or Fannie Mae 30 year fixed, full amortization mortgage loan.
- The $10K can be no more than 5% (3% USDA, Fannie Mae) of the purchase price.
- Your income must be below 115% (140% Fannie Mae) of the median income in your area. (140% is $68,700 in my county, $111,695 in San Francisco, $62,215 in rural Alabama, well below typical single resident incomes)
- The money can only be used for a down payment or closing costs, not as cash back to the buyer.
- You must have a minimum credit score of 640 (740 Fannie Mae).
- Your maximum debt to income ratio is 45%.
- Maximum loan is $417,000 (please don’t buy even this much home if you’re on a median income anyway)
- Available in 26 states: AL, AK, CA, CO, GA, HI, ID, IA, KS, KY, LA, MS, MO, MN, NM, NC, ND, OR, PA, SD, UT, WA, WV, WI, WY (There are two similar programs, one of which can be used in NV and CA, and one that is CA specific.)
- Do not have to be a first-time homebuyer.
Where does the money comes from?
The money to fund these programs comes from the penalties that lenders who were caught not following guidelines in the Global Financial Crisis had to pay. There are many similar programs in the various states that are funded by tax dollars. All of these programs change from time to time due to changes in funding.
How do I apply to the program?
The application goes through your lender. If your lender doesn’t know anything about this program, find a new one.
Does this mean residents should all run out and buy a home?
No, you still need to run the numbers. Plus all the other reasons residents are usually better off renting still apply. But this does make it more likely that buying will work out better than renting for any given resident.
What do you think? Have you used a downpayment assistance grant or loan from a government entity to buy a house? Which program and are you glad you used it? Would an extra $10K convince you to buy a house as a resident? Comment below!