As a Mortgage Loan Officer who works with all of the major down payment assistance, bond, and first-time home buyer programs in the Houston area, I speak with prospective home buyers every day who are searching for programs that will assist them financially with their home purchase. This article will separate the myths from the realities of these programs and provide some guidance on who are the best candidates for these programs.

First, I want to address what these programs are not. They are not programs to help people with poor payment histories buy a home. They are also not designed for consumer who otherwise have the resources to purchase a home but want to use taxpayer money to do so. Lastly, it is highly unlikely that a homebuyer will be able to buy a home with no money of their own in the transaction.

That being said, let’s look at what these programs can offer.

Most programs designed for first-time home buyers are funded with block grants from the U.S. Department of Housing and Urban Development. And thus, they are targeted to low to moderate income homebuyers. The income restrictions will vary from state to state and metro area to metro area. In the Houston area, most programs have income limits ranging from $55,000 to $75,000 depending on family size. Often, income limits are higher if the buyer purchases in a targeted revitalization zone; a low to moderate income area the local government is working to turn around.

While a first-time homebuyer program might indicate that a buyer can purchase with as little as $500 down, in reality, it will typically take $1,200 – $1,500 or more to get to the point where assistance is available. A buyer will need to have sufficient resources to cover an earnest money deposit at the time they make an offer (usually $500- $1,000), the cost of an appraisal ($375- $450), and the cost of a home inspection ($300-$500). The exception to this rule would be when a borrower uses a USDA or VA loan in conjunction with a first-time homebuyer program. These scenarios can often result in a buyer getting a rebate at closing for costs already incurred during the home purchase process.

The biggest fallacy with first-time homebuyer programs is the belief that a borrower with poor credit can purchase a home. While this may have been the case several years ago, virtually every program available today will require a credit score of 620 or higher. Most loans are ultimately made by private lenders (not the providers of the programs), and these lenders risk their loans not being insurable by government or private mortgage insurers if established credit underwriting practices are not followed. In the current economic environment, this risk is simply not worth taking to lenders.

The ideal candidate for a homebuyer program is a consumer who has a good credit history and who has some funds of their own to invest in the purchase. Evidence shows that buyers who have “skin in the game” are less likely to default than those who do not. They would also have a stable income with no more than 45% of their gross monthly income going to cover monthly debt payments, including their prospective mortgage.

First-time home buyer programs can be an excellent supplement that helps an otherwise creditworthy buyer achieve the dream of homeownership. However, no lender or government agency wants to set up a buyer for failure nor allocate limited taxpayer resources on a borrower who has not demonstrated the financial responsibility necessary to own a home.

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