If you're plunging into the home market for the first time, or getting back in the market after renting for a few years, state and federal programs may be available to help with down payments and mortgage costs. The rules for each program are different, and most buyer assistance plans are means tested -- meaning you'll have to meet income and asset guidelines to qualify.
The Federal Housing Administration administers a pair of useful assistance programs for home-buyers. The American Dream Down Payment Assistance Initiative helps by providing the lump sum you'll need to qualify for a mortgage loan and close on a house purchase. By the program rules, you must be in the market for your first single-family home, or must not have owned a home for three years prior to the new purchase. Household income is limited to 80 percent of the local median income. If you live in a county with a median income of $80,000, for example, you would have to show $64,000 or less in household income to qualify for ADDI. One other catch -- the program has been designed for urban neighborhoods. As a result, the population of the city where you're buying must be at least 150,000. Check the ADDI website for information on programs in your area.
The Zero Downpayment Act
The Zero Downpayment Act is another federal program that assists first-time homebuyers by qualifying them for loans backed by FHA mortgage insurance that don't require the customary down payment. The agency sets the insurance premiums, which are rolled into the monthly payment, slightly higher than they would be on loans for which a down payment is made by the buyer.
Another zero-down program is available for rural first-time buyers through the United States Department of Agriculture. This agency also sets income limits and requires a minimum credit score of 640 for applicants. Buyers file their applications through the lender, not directly with the federal agency, which provides the needed funds to local state and county-level agencies.
At the state level, first-time homebuyers often can find help with interest rates, down payments, closing costs and taxes. My First Texas Home, for example, is available if you're in the housing market in the Lone Star State for the first time, or haven't owned a home there for at least three years. The website explaining these programs provides a helpful PDF guide to restrictions on household income, broken down by county. The Ohio First Time Homebuyer Program benefits not only first-timers but also veterans and those purchasing homes in a "target area," designated by state law to encourage local home-ownership and economic development.
The IRS boosted first-time ownership with a First-Time Homebuyer Credit available from 2008 through 2010. Although this particular program has expired, the tax rules still favor first-timers by allowing a penalty-free withdrawal from a tax-advantaged retirement savings account. If you own an Individual Retirement Account, for example, you can withdraw funds at any age for the purchase of a first home without paying the 10 percent early withdrawal penalty that might otherwise apply. Several states have set up similar programs. The Florida Housing Credit Certificate Mortgage Program, for example, allows first-time homebuyers to claim a credit on their federal tax returns. Applicants claim half of the mortgage interest amount they paid, up to $2,000, during the year. The program allows the credit for the life of the mortgage.