After the Tax Credit: Options for Homebuyer Assistance

After the first-time and move-up homebuyer tax credit expire, what options do you have for help?

By Tracey C. Velt, FrontDoor.com | Published: 3/23/2010

Even after the tax credit expires, options for homebuyer assistance are still out there. Do your research to find a program that works for you.

"My fiance, Steve, and I are getting married in October 2010. Once the wedding is over, we can truly focus on finding our dream house, even if that means we can't use the $8,000 [first-time homebuyer] tax credit," says Tiffany Schooley, who understands her options for homebuyer assistance are greatly reduced once the tax credit expires. If you're not under contract to buy a home by April 30, 2010, you can't receive the credit. And, it's not likely the program will be extended.

The federal homebuyer tax credit has been a boon for first-time and move-up buyers alike. But for those like Tiffany and Steve, timing is everything. And, with the loss of the federal tax credit and the USDA home loan program, which no longer can fund loans to those buying in rural areas, there aren't many options for homebuyers who are looking for a little boost. "As far as I can tell, there aren't any new government incentives coming down the pike," says Rich Hayden, a senior loan officer with HomeFirst Mortgage Corp in Alexandria, Va.

While assistance is limited, you do have a few options. Here they are:

1. Federal Housing Administration (FHA) Loans. According to the New York Times, the FHA is underwriting loans at quadruple the rate of three years ago. In fact, says FHA Commissioner David H. Stevens, FHA loans comprise almost 50 percent of the entire home-loan market. Before the housing downturn, according to the Department of Housing and Urban Development (HUD), FHA loans comprised just 3 percent of the market.

   Why the popularity? Simple, says HUD spokesperson Lemar Wooley, in a time of tighter loan restrictions, "FHA's basic downpayment requirement of 3.5 percent is lower than the minimum required on conventional loans. In addition, with certain restrictions, it permits the use of gifts to make the downpayment and the credit rating requirements are more flexible. It also allows borrowers to carry more debt than conventional loans."

   However, cautions Hayden, "Beginning April 5, 2010, there are some changes to FHA loans in terms of the upfront mortgage insurance premium, which is being raised from 1.75 percent to 2.5 percent. However, that cost can still be financed." In addition, homebuyers must have a credit score of 620 or higher. "The cost of FHA is increasing somewhat, but the low downpayment is not changing, making it a good option for homebuyers," says Hayden.

2. Fannie Mae HomePath. If you're open to buying a foreclosure, this program can give you the boost you need. Special financing is available on Fannie Mae-owned foreclosure properties (find them at www.homepath.com). "There's a low, 3 percent downpayment requirement, no need for an appraisal because Fannie Mae owns the property and no mortgage insurance requirement," says Hayden. In addition, the program is open to both homebuyers and investors.

   The downpayment can be funded by a gift; a grant; or a loan from a nonprofit organization, state or local government, or from an employer. "The good thing about this program is that, generally speaking, the houses are in decent shape, which is always a concern when purchasing a foreclosure. The homes won't be perfect, but for foreclosed properties, they're in better shape than most," he says.

3. State or municipality grants/programs. Many states offer housing assistance programs for first-time or low-income homebuyers. Many times the funding is available for homes in an area that local government is trying to revitalize. Programs can include down-payment assistance, loan guaranties, interest subsidies; tax credits and closing cost help in the form of low-cost loans or direct payments. Many require credit scores in the 520-and-above range and proof that the borrower has income sufficient to repay the mortgage. In many states, borrowers are required to attend homeownership and financial management classes.

   Find out if your state has a homebuyer assistance program by going to: http://www.hud.gov/buying/localbuying.cfm.

Regardless of whether or not you find assistance, Hayden recommends that when you start looking for a home, you "get your loan application in early and provide the lender with everything he or she asks for -- no matter how ridiculous it may sound." Doing so will give you the best chance for getting loan approval and will put you on the fast track to getting the home of your dreams.

Tracey C. Velt is an Orlando-based freelance writer.

More on FrontDoor:

• Federal and State Homebuying Programs
• First-Time Homebuyer's Guide
• Mortgage Quiz: Which Type is Right for You?
• Home Finance Guide
• Foreclosure Buying Guide
• Tools and Calculators

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