So, you're looking to buy your first house. A Home Possible or HomeReady loan through Fannie Mae or Freddie Mac requires a 3% down payment; USDA 3%, FHA, 3.5%, and conventional, 5%.
There are programs through most lenders that offer Down Payment Assistance. Here's how it works. If you qualify, you can receive 2-3.5% DPA to help meet down payment requirements, an amount that's forgiven after the loan has been in place for 5 years. Sounds good right? Well it is to an extent. However, if you refinance or sell in less than 5 years, most of these lenders will require you to give the money back at a rate of 20% per year. In other words, if you've owned the home for 3.5 years at the time of the new mortgage, the lender will require you to pay 40% of the assistance you received. Some lenders will require full repayment of the assistance if the loan is ended any time under 5 years. Some borrowers have found it more beneficial to get a gift or an unofficial loan from a relative, which has no such constraints. Then if your home value increases, you can work with the equity without taking the hit.
It's good to remember that all government backed loans, except VA, will require that you pay monthly private mortgage insurance. And unlike conventional loans, the PMI doesn't come off until you reach 80% of the original loan value, not the equity. With minimum payments, that will take about 11.5 years. With conventional loans, the PMI can be removed by the lender when the loan balance to value reaches 80%, assuming there are no late payments on the note in the last year. It will be automatically removed at 78%.
Get a mortgage broker who will explain the ups and downs of these programs clearly. I'm that guy.
