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A guide to financing options for first-time home buyers

Education is the key, with preparation on the process and programs available.
Education is the key, with preparation on the process and programs available. (Stephanie Wunderlich/for The Washington Post)
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One of the biggest hurdles for first-time home buyers is financing their purchase.

Thankfully, there are numerous loan products and down-payment assistance programs designed to help consumers achieve their dream of homeownership. One good source for down-payment assistance programs in your area is the website Down Payment Resource.

We asked Darrin Q. English, senior community development loan officer at Quontic Bank in New York City, for financial tips for first-time buyers. English replied to our questions in an email. The responses have been edited for length and clarity.

Q: Do you have some general advice for first-time buyers on financing?

A: Preparing for your first home purchase can be intimidating. It’s important to educate yourself on the home-buying process. Understanding basic financial language will be key in making an inquiry with a lender. Familiarize yourself with the risk factors such as your credit score and your debt that will influence your rate and loan terms. Also:

● Start your search online.

● Attend an online buying seminar.

● Contact a bank you are familiar with as a first step.

● Find a local Department of Housing and Urban Development-sponsored not-for-profit agency. A HUD-certified homeownership counselor will be familiar with your local programs and guidelines.

● Ask family and friends for a referral to lenders to consult.

Q: How much cash do buyers usually need for the down payment and closing costs?

A: Typically, a borrower needs a minimum of 3 percent for the down payment. Closing costs vary by state and range from 3 to 5 percent of the purchase price. Many loan programs also require borrowers to have at least two months of principal, interest, taxes and insurance (PITI) in reserves.

These funds can be obtained from a combination of savings, retirement funds and gifts from family members. It’s important to note that many loan programs require that the 3 percent down payment be derived from a borrower’s own savings.

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Q: What are some good loan options for first-time buyers?

A: FHA loans from the Federal Housing Administration are the federal government’s premier first-time home buyer program. FHA loans require a 3.5  percent down payment and allow borrowers to qualify with a lower credit score and a higher debt-to-income ratio, which compares your minimum monthly debt payments to your gross monthly income. Borrowers can obtain gift funds from family members.

Also, sellers can contribute up to 6 percent of the purchase price toward a borrower’s closing expenses. However, mortgage insurance is required for the life of the loan.

VA loans, which are designed for individuals who have served our country in the armed forces, are a good option for those who are eligible because buyers can finance 100 percent of the purchase price without requiring mortgage insurance.

Freddie Mac’s Home Possible loan program and Fannie Mae’s HomeReady loan program allow for a down payment as low as 3 percent and reduced private mortgage insurance (PMI).

In addition to the common loan programs for first-time buyers, many lenders have their own special programs that are designed for first-time buyers. Some are limited to first-time buyers and some are open to all borrowers but are especially helpful to first-time buyers.

Here are some examples:

Bank of America: Bank of America’s Community Homeownership Commitment, available in many U.S. markets, includes down-payment and closing-cost grants, low down-payment loans and educational resources to help buyers get ready for homeownership.

Bank of America’s Real Estate Center home shopping tool assists buyers to identify homes where grant programs may qualify. Borrowers must qualify based on income and home price limits.

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Chase Home Lending: The Chase DreaMaker Mortgage Program is designed to help first-time home buyers and borrowers with low-to-moderate incomes afford mortgages and buy homes.

The program enables eligible borrowers to buy a home with a down payment as low as 3 percent of the property purchase price, which can come entirely from gift funds. Eligible borrowers can apply for up to $5,500 toward closing costs or the down payment.

To qualify, borrowers need a minimum credit score of 620 and a maximum debt-to-income ratio of 45 percent, which compares the minimum payment on all recurring debt to your gross income.

Borrower’s income cannot exceed the area median income (AMI) for the county in which the property is located.

Citizens Bank: Citizens’ closing-cost assistance program is available for qualified first-time home buyers and can be paired with the bank’s community lending portfolio program, Destination Home Mortgage, which requires a down payment of 3 percent and does not require mortgage insurance or the HomeReady program, which is similar to the Destination Home Mortgage program.

The loans can be combined with community programs that offer down-payment assistance. Citizens’ home loans require an income and credit qualification and are available in 12 states, primarily in New England and the Mid-Atlantic.

Embrace Home Loans: The Affordable Housing Program offers reduced closing costs and lower interest rates for eligible borrowers. The program works with FHA, the Agriculture Department, the Veterans Affairs Department, Home Possible and HomeReady loans and allows down payments as low as 3 percent, from sources including eligible gifts, grants and down-payment assistance programs.

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To qualify, borrowers must be first-time buyers, have a credit score of 620 or above and have income of 80 percent or less of AMI for the property’s location.

Navy Federal Credit Union: The Homebuyers Choice loan is a zero down-payment loan with a fixed interest rate and no PMI requirement. Borrowers don’t have to be first-time buyers. Loan qualifications are the same as other conventional loans, with a review of income, assets and ­credit.

Quontic Bank: The State of New York Mortgage Agency (SONYMA) loan program includes Achieving the Dream, a 30-year fixed-rate loan with a 3 percent down payment requirement that can be combined with grants and subsidies for the down payment. In addition, a low-interest rate program is available on loans with a 3 percent down payment.

Borrowers must be first-time buyers in New York state who will live in the residence. Income and purchase price limits also apply.

TD Bank: The TD Right Step Mortgage offers qualified buyers a low 30-year fixed-rate alternative to conventional or FHA-backed loans and has flexible down-payment options as low as 3 percent without the added cost of PMI.

To qualify, borrowers need to take a home-buyer class and meet the credit standards of the bank. TD Bank also provides extensive home-buyer education and resources, including interactive seminars that explain the mortgage process.

Low- and moderate-income borrowers must have a verified qualifying income, which is 80 percent or less of AMI.