By: Yara Zakharia, Esq.The steps involved in purchasing a home for the first time can be intimidating and stressful. However, first-time home buyers can avoid such a scenario and expedite as well as facilitate the process by doing their homework. One of the critical points that prospective home buyers should research and weigh is whether first-time buyer loans are a better fit than home equity loans. This is an individual decision that depends on the purchaser’s needs. The following synopsis sheds light on the these two key types of home loans and aims at helping buyers choose what is best for them.
1) First-time buyer loans:
First-time buyer loans do not apply solely to first-time home buyers; they are also available for 1) buyers who prove that they have not owned a home within the previous three years and 2) buyers who do not own a home at the time of the new home purchase.
Buyers to which lenders seek to extend first-time buyer loans are those looking to buy in a designated census tract, those with limited resources and those in lower income levels. First-time buyer loans often apply to certain geographical areas designated as lower-income areas. For instance, a household with an income below 70% of a county's median income would qualify for a first-time home buyer loan.
First-time buyer loans vary depending on where they are offered and financial assistance is provided in one of several ways:
- Accept a very low (or no) down payment
- Cover all or part of the interest costs
- Limit fees that lenders are authorized to charge
- Defer payments Extend grants
- Forgive Loans
Advantages of first-time buyer loans:
First time buyer loans enable purchasers to attain the status of home ownership more easily. Since homeowners maintain their properties and contribute to the economy, communities also stand to benefit from first-time buyer loans.
Disadvantages of first-time buyer loans:
First-time buyer loans have strings and restrictions attached. First, they usually place a dollar limit on the property to be purchased. Buyers will be restricted to homes on the lower end of the spectrum. Secondly, the property must be used as the purchaser's primary residence. Thirdly, the targeted property must satisfy certain requirements, such as being free from safety hazards and being kept in good condition.
Some of the main pitfalls posed by first-time buyer loans are the following:
- A lower value home may not be of interest to the prospective purchaser
- If the buyer sells the property too soon, he will lose some of the benefits offered by the first time home buyer loan
- The consumer may be limited to a short list of loan types
- The buyer may have to pay to recapture tax for some of the benefits he received
2) Home equity loan comparison:
With home equity loans, home buyers obtain financing by pledging the property as collateral. These loans are also attractive to prospective purchasers seeking to borrow a relatively large sum of money or who lack good credit.
Lenders, who regard these home owner loans as relatively safe, will likely be more liberal. This is because (1) the borrower has no chance of disappearing with the house or hiding it in cases of default and (2) the buyer is more likely to make the payments if he is at risk of losing his home.
Advantages of home equity loans:
- They are easier to qualify for if the borrower does not have good credit
- They usually have a lower mortgage rate
- Home buyers can obtain relatively large loans
- Home equity loan payments may be tax deductible
Disadvantages of home equity loans:
- Borrowers who default on their loan payments risk forfeiture of their home
- Illegitimate deals with scammers who will cheat the borrower out of his most valuable asset
A person’s first home purchase is a big deal as it involves the investment of money, time, and energy. First-time buyer loans and home equity loans have assisted many buyers in overcoming money hurdles. It is imperative, however, that prospective home buyers shop around and take into account the risks of each option available to them. The right preparation can only yield positive results and help first-time home buyers strike a good deal.
