Looking into the free programs and grants your state offers is a smart move.
While all the other desperate first-time buyers are aggressively trying to save up a down payment (you have my blessing to point and laugh), you’re doing the smart thing and getting free-ish money.
I’m proud of you!
But if you want to fully squeeze as much juice out of the situation as possible, you need to know your options. And in this post, I’ll lay them all out for you so you can buy your first home the smart way.
Let’s get started!
Introducing PMI (the three letters that will bite you in the a**)
PMI stands for Private Mortgage Insurance. And trust me, you do not want to pay this.
You see, PMI is an additional cost you will have to pay if you put less than 20% down on your home. This type of insurance protects the lender against financial loss if you stop making payments. Typically, you’ll pay .5% to 1% of the loan amount if PMI is included.
That may seem like a small fee, but trust me, it adds up. You’ll have to pay up to around $83 per $100,000 borrowed. Meaning if you purchase a home for $200,000, the cost would be about $166 per month.
However, there is a silver lining. Once you have at least 20% equity in your home, many loan programs allow you to remove PMI. For example, let’s say that you purchased a home for $200,000, and now that home is worth $300,000. You currently have $100,000 in equity, which exceeds 20% of the original amount financed (or $40,000).
The best way to avoid paying for PMI is to take advantage of the programs and grants that you’re about to learn about.
HFA Advantage and HFA Preferred Loans (the perfect one-two punch)
The Connecticut Housing Finance Authority offers first-time homebuyers access to the HFA Advantage and HFA Preferred loan programs. These programs allow first-time homebuyers to save money on insurance costs and receive a lower mortgage interest rate.
CHFA considers a first-time home buyer anyone who hasn’t owned a home in the prior three years. So even if you’ve owned a home in the past, it’s still possible to qualify for this program. Additional eligibility requirements include the following:
- The home purchased must be your primary residence. For example, you can’t purchase a home and rent it out.
- Sales price limitations apply and vary based on the property location.
- Gross income limits apply. The CHFA has a guide that helps you determine if you fall within the program eligibility limits.
Qualifying for this mortgage program makes you eligible for down payment assistance (DAP). This is a significant benefit if you are struggling to save enough for a down payment.
First time home buyer in CT and down payment assistance
Many homeowners believe that you must have at least a 20% down payment. Fortunately, this isn’t true — some programs require as little as 3%. Special assistance programs provide additional help to offset the upfront costs of owning a home.
In addition to your down payment, mortgage closing costs are also required. This expense includes fees such as the home appraisal, credit check, title search, and more. Average closing costs range from 2% to 5% of the purchase price, which adds up to $3,000 to $7,500 on a $150,000 loan.
The CHFA down payment assistance program provides at least $3,000 to help offset these costs. Funds are available in the form of a loan that you must pay back over time. The interest rate is the same as that of your first mortgage. Eligibility requirements include the following:
- You must apply for a CHFA mortgage from an approved lender.
- Any household savings above $10,000, excluding retirement accounts, must be used toward your down payment. This requirement is waived for the police officers and the teacher’s program loans.
- You must show your ability to repay the CHFA mortgage and the DAP loan.
- An application fee of $200 for the program may be charged by the lender.
Funds for the DAP must be at least $3,000 but can’t exceed the minimum down payment required for your home, which is as low as 3% for many programs.
Teachers Mortgage Assistance Program
Another popular program for first-time home buyers in Connecticut is the Teachers Mortgage Assistance Program. CHFA offers an additional 0.125% off their already below-market mortgage rates to help teachers become homeowners. The home must be the borrower’s primary address and can’t be used for investment. Eligibility includes meeting at least one of the following requirements:
- Being employed as a teacher in a priority or transitional school district.
- Teaching at a technical high school located in a priority or transitional school district.
- Graduated from a public high school in an educational reform district.
- Graduated from a historically black college or university or Hispanic servicing institution.
- Teaching in an endorsement area where the state has identified a shortage.
- For a teacher working in a priority or transitional school district, the home must be located within the same district boundaries as the school.
Additionally, the home’s sales price must fall within the CHFA sales price limits, and your gross income must fall within acceptable limits. The home must also be insured through the Federal Housing Administration (FHA), the USDA, or private mortgage insurance. If you put 20% or more down on the home, mortgage insurance may not be required.
Police Homeownership Program
First-time home buyers who serve as police officers have access to a program that is similar to the teachers’ program. Benefits of the police homeownership program include the following:
- Reduced interest rates (0.125% off regular loan rates).
- Access to down payment assistance.
- No asset limit requirements.
There are several eligibility requirements for this program, including:
- You must be a police officer buying a home in the city or town where you work.
- You must be a first-time home buyer or have not owned a home in the previous three years.
- The home must be your primary residence. You can’t purchase a property for investment purposes or to rent it out.
- The sales price of the home and your income must fall within the CHFA limits. The CHFA resource map has a list of current property and income limits.
Additionally, the loan must be insured through the FHA, the Veterans Benefits Administration, the USDA, or private mortgage insurance. If you make a down payment of at least 20%, mortgage insurance may not be required.
Veterans and Military Service Members
The CHFA offers unique benefits to military families who are purchasing their first home. The program is available to all current members and veterans of all branches of the United States military. The program is also open to unmarried surviving spouses or civil union partners of a military member who died as a result of serving or has a service-related disability. A few eligibility requirements include the following:
- You must be a first-time home buyer or have not owned a home in the prior three years.
- Your new home must be your primary residence. You can’t purchase a property for investment purposes or to rent it out.
- The sales price must fall within the CHFA sales price limits, and your income must be within the income limits. The resource map can help you understand how these limits apply to your situation.
Additional first-time home buyer considerations
In addition to meeting the loan eligibility requirements for income and property costs, there are additional factors to consider when using these programs.
- Home buyer education class. First-time home buyers are required to attend a free first- time home buyer class to qualify for CHFA loans. Make sure to take this class early in the home buying process, so you don’t delay the closing of your loan. Home buying classes are available at various locations across Connecticut and even online.
- Recapture tax may be required if you sell the home. If you sell your home within the first nine years after you buy it, you earn a profit on the sale, and your income is higher than the federal recapture tax income limits, you may be required to pay an additional tax. Talk with a tax professional before selling the home to understand the implications of this tax on your potential profits.
- You must work with an approved lender. CHFA does not administer the loans but instead approves lenders to facilitate the program. A full list of HFA Advantage lenders in Connecticut can be found here.
Meeting the required rules and eligibility is worth getting access to home programs that aren’t available to the general population. A lower interest rate translates to a lower mortgage payment, and you can also qualify for a larger loan if desired. This helps in a market such as Connecticut, where demand is high, and house inventory is low.
Creating a stronger financial future
Buying your first home is an exciting adventure, but it isn’t without pitfalls. Understanding the options available to you as a first-time home buyer, and working with a qualifying lender can help get you on the right path to homeownership. As a result, you can get pre approved faster, start shopping for a home and get into the right home quickly and easily.