Amid a turbulent economy and a historically uncertain real estate market, there remain many people looking to step into homeownership for the first time. And, although the local mortgage market has changed significantly, there still are special opportunities for many would-be homeowners.
The good news is that the slide in area home prices from the heady highs of several years ago, coupled with historically low interest rates, have opened the path to homeownership for many newcomers.
“It’s a pretty good time to buy right now for a young couple because rates are down and prices are good,” said Steve Baugher, executive director of the Virginia Association of Mortgage Brokers.
The bad news, however, is stark. “There is a loss of programs as a result of the mortgage crisis and tightening up” of available credit, said Mary Dooley, vice president, MPD Mortgage, Arlington.
The area’s private mortgage market sharply contracted during the subprime market collapse and ensuing credit crunch. The result has been a tightening of qualifications for first-time homebuyers and an elimination of most loans for prospective buyers who lack significant down payments or income documentation.
The leading loan option that has emerged for first-time buyers is mortgages backed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. FHA loans can be obtained with a down payment of as little as 3.5 percent.
“FHA is the way to go for first-time homebuyers,” said Diane Cook, president of Metropolitan Mortgage Services in the District.
FHA has no hard minimum credit score. “We ask lenders to look at the entire credit package,” HUD spokesman Lemar Wooley said, “with the requirement being the ability to repay the loan.” If the credit score is less than 500, however, the down payment jumps to 5 percent, Wooley said.
FHA also provides buyers with mortgage insurance. While private mortgage insurers have generally refused to insure mortgages in areas they or others deem a “declining market” — which includes much of the Washington area — FHA has no such limits. The agency charges an up-front premium of 1.75 percent that can be made part of the total loan. The additional annual premium of 0.5 percent of the balance is paid over time as part of the monthly payment.
The narrowing of the market to FHA-backed loans has largely simplified the complex loan selection process for first-time buyers. Because all lenders essentially offer the same loans, would-be buyers need only check for hidden fees and extra charges to find the best deal.
FHA-backed options include both 30-year and 15-year fixed-rate mortgages as well as adjustable mortgages. The 30-year loan is traditionally sought by people who plan to remain in the home for at least 10 years. The 15-year loan is a good fit for those who are comfortable with larger, but also unchanging, monthly payments at interest rates that continue to be about a quarter point lower than the 30-year option. Adjustable-rate loans might be advantageous for those who expect to relocate to another area within a few years.
First time buyers have a real opportunity in the recently approved 2009 federal first-time homebuyer tax credit. This credit, which was passed in the stimulus bill, is an update on the 2008 federal credit, which was actually a loan that drew little interest from area homebuyers. The new program offers an $8,000 tax credit or up to 10 percent of the purchase price. The credit is also refundable — meaning you get the full credit back even if the amount of tax you owe is less than that.
The full credit is available to single people making up to $75,000 and couples with incomes up to $150,000. As with many government assistance programs, first-time homebuyers include anyone who has not owned a home for the previous three years. The deal only applies to purchases of a principal residence.
But would-be homeowners need to move fast. The credit only applies to homes bought after Jan. 1, 2009, and before Dec. 1, 2009.
And there are still some local programs available to help hopeful homeowners. Prince William County is rolling out a new program that will help buyers purchase foreclosed homes with deferred loans for down payments and closing costs. You do not need to be a resident of the county to participate. As jurisdictions respond to the real estate downturn, they may offer more help. Check county Web sites to find out what is available.
