Does a First-Time Homebuyer CDA Loan Make Sense?

Like everything else in Real Estate, it all depends!

I got a call from one of my buyers that is under contract on a short sale and he said but we want to take advantage of the first-time buyer's program and we income qualify!

I said yes, you income qualify, but I don't think this is for you and this is why...

In the central Maryland area, rents are so high that it can be hard to save up for your downpayment, even if it's only 3.5% of the purchase price.  Some homebuyers turn to the CDA program.  CDA, or the Maryland Mortgage Program, will LOAN you $5000 towards your downpayment or closing costs.  All you need to do is take an online home buyers education class and income qualify.  The income limits are pretty high; in Anne Arundel County as a single buyer or a household of 2, the income limit is $88k, household of 3 or more is $101k.

But note that I said LOAN; this is not a gift!  And this LOAN will cost you.  There's no interest on it and you don't have to pay it back until you refinance or sell the house, but the way you pay is with the interest rate.  Today's rate for a regular FHA loan is about 3.75% - 3.875%, but the rate for a CDA loan is 4.125%. This increases your monthly payment substantially.

For example, on a $250,000 home purchase, your payment of principal and interest at 3.875 would be approximately $1154.30 (not counting taxes or insurance), and at 4.125%, it would be $1210.50, an increase of $56.20 every month to BORROW that $5000.

You may not care because the cost to rent that same house could be $1700/month.  With an FHA loan, you can be gifted that downpayment money if you have super generous parents, or you may be getting back a large tax refund that you can use, or you can even borrow the money from your 401k!

But if you don't have a way to get that extra $5000 and can take advantage of today's still historically low interest rates, then go for it!!!  Just know what it is costing you.  You can pack your lunches or skip Starbucks to make up the extra money so that you can buy your new home today!