Understanding and Using All of Your First Time Home Buyer Options
With all the excitement of the first time home buyer tax credit, buyers often get confused and miss out on other important options.
As a first time buyer, don't let the excitement of the $8,000 tax credit cause you to miss out on many other home buying options. It isn't uncommon for a buyer to confuse the federal tax credit with seller credits, down payment assistance, or first time home buyer grants.
First time home buyers have many options. Utilizing one option does not hold a buyer back from utilizing one or more other options allowed to them as a first time home buyer. This article is written not to go into great depth on each option, but to help you realize the different options available as a first time home buyer and how to utilize each/all of these options.
Read on to understand some common terms and how to take advantage of each option.
Tax Credit
The federal tax credit is the $8,000 incentive that everyone is talking about. Most home buyers that haven't owned a home in the last 3 years will qualify for this. In general, this credit is realized as a credit for you when you complete your taxes in the spring of 2009 (for 2008's income).
For example, if you would have normally received $2,000 back after completing your 2009 tax returns, the tax credit would add an additional $8,000, to make your total amount received $10,000. For additional information and guidelines, go directly to First-Time Home Buyer Credit: Answers.
Seller Credit (Seller Concessions)
A seller credit, better known as seller concessions, is a scenario when the seller agrees to pay a certain amount of your settlement costs. The seller may pay a percentage, such as 2, 3, or 6% of the purchase price, or they may pay a dollar amount, such as $2,500 or $5,000.
For more information on understanding seller concessions visit Understanding Seller Concessions | Seller Paid Closing Costs | Seller Contributions | Seller Assist.
Grants for First Time Home Buyers
Many people miss out on first time home buyer grant options. Once a buyer hears about the $8,000 tax credit, they sometimes go deaf to other options, either out of excitement or because they don't realize they can utilize more than one option.
A grant is a program often issued by a county or state that offers funds to the home buyer for the purchase of a home. Either a flat dollar amount or a percentage of the loan amount is used to calculate the funds offered. A typical grant percentage would be 2, 3, or 4% of the loan amount. For instance, 4% of a loan amount of $100,000 would give you a $4,000 grant.
Grants can be utilized for down payment requirements and/or to pay for closing costs. Depending on the purchase price and the grant selected, a grant can sometimes even cover all requirements the buyer has concerning both the down payment requirement and closing costs.
Down Payment Assistance
As of the date of this article, down payment assistance in the traditional sense is not available.Down payment assistance programs (DAPs) were an option where the seller would indirectly give a buyer the money needed for down payment requirements. These transactions in general had a higher default rate then most, therefore this option is no longer available. Examples were the Nehemiah program or the Genesis program. There is a movement to reinstate these programs. The mentioning of DAPs here is simply to help you differentiate and not confuse them with other options.
How to Utilize More Than One First-Time Home Buyer Option
Here's where the rubber meets the road. A common example of utilizing all of the above options is as follows:
- Buyer meets with grant official or loan officer for qualification requirements pertaining to a specific grant option. In our example the buyer will use an FHA mortgage, which requires a 3.5% (of the purchase price) down payment. The purchase price is $100,000, therefore the down payment requirement for this would be $3,500.
- Loan officer and buyer determine that the use of a 4% grant would be the wisest choice. Since the down payment requirement is $3,500, the financed amount will be $96,500 ($100,000 - $3,500). Based off of $96,500, a 4% grant would be $3,860 (loan amount x 4%, or $96,500 x .04)). Compare the grant amount with the buyer's down payment requirement of $3,500, and the grant amount is $360 more than the required down payment amount. This type of grant covers the down payment requirements and some additional funds to be applied towards the closing costs.
- Assuming closing costs are $5,000, here is how you can determine what to request from the seller to get the closing costs paid as well. We can subtract the extra money left over from the grant, in this case $360, from $5,000. Our sum is $4,640. FHA requirements allow the seller to pay up to 6% of the buyer's closing costs. We don't need all 6% (or $6,000), we only need $4,640 from the seller. So when the purchase of the home is negotiated, the buyer's agent negotiates with the seller's agent that the seller will agree to pay $4,640 towards the buyers settlement fees/closing costs.
- Buyer goes to settlement needing $0 to close, and in fact they will get back the money already deposited with the real estate agent and lender.
- Lastly, the buyer can still maximize the use of the federal tax credit and receive their $8,000 after filing their 2009 tax returns.
All-in-all, in our scenario the home buyer will receive $16,500 for purchasing a home ($3,860 grant + $4,640 seller's concessions + $8,000 tax credit). The buyer is able to utilize three separate home buying options and in the end, still have their own money in the bank, which will then get boosted in several months by the $8,000 tax credit. Now THAT is the kind of lending and buyer representation that creates solid, well founded home owners, which is exactly what we all desire.
By working with knowledgeable professionals, you can utilize multiple buyer options to make your home buying experience an amazing event!
If you would like more information, as a buyer, seller, real estate agent, real estate office, financial planner, college or other party, feel free to contact Steve Kappre directly on his cell at 856-419-3561 or via e-mail at steve@stevekappre.com.
Steve Kappre is a Mortgage Planner with Treasury Mortgage. Steve specializes in;
• All areas concerning First-Time Home Buyer Mortgages, grants, down payment assistance, police and fire loans, rehab loans, and more.
• Reverse Mortgages
• Equity Management strategies for high-end homes and high net worth individuals.
Contact Steve Kappre directly at 856-419-3561 or at www.stevekappre.com
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