First-Time Home Buyers' Few Options

Homeownership is a bit of a nightmare for many first-time buyers. There are still programs that help people purchase their first home, but qualifying standards are strict. The programs also carry first-timer restrictions, so it's wise to shop around.
By: JEFF D. OPDYKE: WSJ.com
Homeownership, the bedrock of the American Dream, is a bit of a nightmare these days for many first-time home buyers.

Lenders are demanding higher credit scores, mandating private-mortgage insurance on many more loans, and requiring larger down payments. Fewer first-timers qualify for the house they want, or they're paying a larger monthly amount to own it.

There are still some programs for first-time buyers that offer slightly more lenient underwriting standards that make it easier to get into a home, or discounted interest rates that make homeownership more affordable. But even these are tougher to qualify for.

Freddie Mac requires a solid credit score of at least 700 for a low- or no-down-payment mortgage through its Home Possible first-time buyer program. Previously, it imposed no minimum. Freddie saw "an influx of business" amid the subprime bust, says Patricia McClune, a vice president, because it's the only way to obtain 100% financing. Loan volumes are still up, but the tightened standards mean fewer first-timers qualify.

Volumes at the Federal Housing Administration are up, too. The agency hasn't changed its underwriting standards, but does impose income-verification and debt thresholds. Moreover, FHA loans require that a mortgage-insurance premium of 1.5% of the loan value be financed into the mortgage; and borrowers must pay an additional 0.5% mortgage-insurance premium every year. Together, that adds $75 a month on a $150,000 loan.

"Every borrower faces a steeper hill" now, particularly first-timers, says Pete Ogilvie, president of the California Association of Mortgage Brokers.

Many programs for first-timers carry restrictions, so shop around. Connecticut's Homebuyer Mortgage Program offers a 5.625% interest rate fixed for 30 years, half percentage point below the area average. That can save $60 a month on that $150,000 mortgage. The problem: Reduced funding means the agency is doing only 2,750 mortgages this year, down from roughly 4,000 previously.

The catch: The loan is subject to a federal recapture tax. If you sell within nine years, you could be required to give up as much as 50% of the profits, depending on various factors.

"That's the problem" you need to be aware of with some first-time buyer programs, says Michael Menatian, president of Sanborn Mortgage, a mortgage bank in West Hartford, Conn. "You get the lower rate, but you're potentially robbed of a big part of the equity to buy your second house. But in this market, it's better than nothing."