First time home buyers are sometimes considered a “pump primer” in real estate. Buying an initial home typically means buying from someone else who then buys another home. And on it goes. But it’s often that first time buyer that starts the ball rolling and why they’re encouraged to stop renting and start owning. This group is so important that many state agencies and mortgage companies offer loan programs that cater to first time buyers with special incentives. The incentives could be a lower rate or a contribution toward closing costs and even assistance with a down payment.
How does a lender know if someone is a first time buyer? By asking. Lenders who have access to programs such as a Down Payment Assistance product, will ask the applicant at the early stages of prequalification. A lender will also want to know how many funds are available to close on a home purchase, which includes not just the down payment, but associated closing costs and cash reserves as well. If the applicant responds with “selling my home” then a first time buyer program won’t apply.
Depending upon where the subject property is located, there may be grants available to help with funds needed to close. Grants are funds issued to first time buyers that do not have to be paid back. Many such programs do ask that the applicants live in the property for at least three years and if that’s the case, when the home is sold, the grant is forgiven. Various government agencies can also participate in the first time buyer market with loan programs that offer discounted interest rates. There will typically be certain income limitations for such programs, which limit the amount of household income of the applicants. Or, homes located in underserved markets may also work only with first time buyers. There are different variants depending upon the location of the property but most such programs do carry these guidelines.
Someone can qualify for a first time buyer incentive even if they’ve owned a home before. At first glance that doesn’t make a whole lot of sense, but most programs require someone to not have owned a home within the previous three years. If that litmus test is passed, someone may qualify for a first time buyer program after all. Lenders can ask about previous home ownership but can also look at a credit report for the applicants to see if there is a mortgage account listed. The credit report will report the mortgage account and provide dates when the mortgage was originally issued and when it was paid off. If the mortgage was retired more than three years ago, the report will say so. If the mortgage was retired less than three years, the applicant would not be approved for a first time home buyer loan program.
Finally, if a couple buys a home together, there’s the possibility one will be a first time buyer and the other having owned a home before. In this instance, the loan would not be considered for a first time buyer program because one of the borrowers was a previous homeowner.