Financing Options for First-Time Homebuyers in NC

Are you a first-time homebuyer in North Carolina? Congratulations! Purchasing your first home is an exciting milestone, and there are a number of financing options for first-time homebuyers in NC. Let's explore the benefits of homeownership for first-time buyers and the various mortgage loan programs available to help make your home purchase dream a reality.

Benefits of Homeownership for First-Time Buyers

Owning a home brings numerous advantages. Here's a look at what a few of those are.

1. Building equity: When you own a home, you are gradually building equity, which is the difference between the market value of your home and the remaining amount you owe on your mortgage. This equity can be used as leverage to secure loans for future investments or to upgrade to a larger home.
2. Stability and security: Owning a home provides stability, as you don't have to worry about changes in rental prices or being asked to move by a landlord. It gives you a sense of security and permanence, as you can establish roots and become a part of a community.
3. Tax benefits: As a homeowner, you may be eligible for various tax credits, such as mortgage interest, property taxes, and sometimes even closing costs. These deductions can reduce your overall tax liability and potentially save you money.
4. Freedom to personalize: When you own a home, you have the freedom to personalize and make modifications to meet your unique needs and preferences. You can paint, renovate, landscape, or make any changes you desire without seeking permission from a landlord.
5. Potential for rental income: If you have extra space in your home, you have the option to rent it out and generate rental income. This can help offset your mortgage payments or be a source of additional income.
6. Long-term investment: Real estate is often considered a long-term investment. Historically, home values have appreciated over time, which means that as a homeowner, you have the potential to build wealth through property appreciation.
7. Sense of belonging: Homeownership creates a sense of belonging and connection to a community. It allows you to become a part of a neighborhood, build relationships with neighbors, and get involved in community activities and events.

What is a Mortgage?

If you don't have enough cash on hand to pay for your house outright, but you have a steady income and can cover monthly housing costs, buying a home with a mortgage may be your best option. A mortgage is a home loan from a bank or other financial institution. Don Fowler, Sr. Loan Officer at Movement Mortgage, explains that it's an agreement between a borrower and a lender that allows you to borrow money to buy a home. You'll put down a certain amount of money upfront, and the bank will cover the rest. Then, you pay back the loan over a set period with interest.

Leslie Person, Senior Vice President with Pinnacle Financial Partners notes that "a key feature about a mortgage is that it gives the lender the right to take possession of or foreclose on your property if you don't hold up to your end and pay back the money and interest that you've agreed to pay."

According to the Consumer Financial Protection Bureau (CFPB), most homebuyers opt for a 30-year mortgage. But, there are loans with shorter terms available like 10, 15, or 20 years. The longer the term of the loan, the lower your monthly payments will be. You will though end up paying more in interest over time¹.

Qualifying for a Mortgage

When assessing mortgage applications, lenders consider several factors to determine an individual's eligibility and their mortgage rate. These factors can vary slightly between different lenders, but some common factors include:

1. Credit Score: One of the most significant factors lenders consider is an individual's credit score. This three-digit number, usually ranging from 300 to 850, provides lenders with an indication of the borrower's creditworthiness. Leslie describes a credit score as "a rating that you earn based on how you pay your bills, how much debt you carry, and how long a credit account has been open. Borrowers with better scores tend to get better mortgage rates because their history of consistent payments creates less risk for the lender."
2. Income and Employment History: Lenders evaluate an applicant's income level and stability to ensure the ability to repay the mortgage. They consider factors such as employment history, job stability, and income consistency. Borrowers with a consistent and sufficient income are more likely to meet the eligibility criteria.
3. Debt-to-Income Ratio (DTI): The debt-to-income ratio compares a borrower's monthly debt obligations to their gross monthly income. Lenders prefer borrowers with a lower DTI as it indicates lower financial strain and greater ability to handle mortgage payments.
4. Down Payment: Leslie says that the amount of down payment provided by the borrower is also considered. A higher down payment typically results in a lower loan-to-value ratio, providing lenders with added assurance and potentially more favorable terms for the borrower.
5. Loan-to-Value Ratio (LTV): Lenders assess the LTV ratio, which is the loan amount divided by the property's appraised value. Lower LTV ratios are preferred, indicating a lower risk for the lender.

Additionally, factors such as the property type, location, and purpose (primary residence or investment) may also affect the eligibility criteria for being approved for a mortgage.

Understanding the Down Payment

A down payment refers to the upfront payment made by a buyer towards the purchase of a house. It is a percentage of the total purchase price that the buyer pays in cash, while the remaining amount is financed through a loan.

The significance of a down payment lies in its role in reducing the loan amount needed to purchase the property. When a buyer pays a significant down payment, it lowers the lender's risk as they are financing a smaller amount. This increased equity in the purchase reduces the lender's exposure to potential losses and gives them more confidence in approving the loan.

The standard recommended down payment percentage is usually 20% of the purchase price. There are several benefits associated with this percentage:

Lower Loan Amount

Putting down 20% means that the buyer will finance only 80% of the purchase price. This reduces the loan amount needed and leads to lower monthly mortgage payments.

No Mortgage Insurance

In many cases, if the down payment is less than 20%, lenders usually require borrowers to pay for private mortgage insurance (PMI). Leslie explains that PMI protects the lender in case of default, but it is an additional cost for the buyer. By making a 20% down payment, buyers can avoid this expense altogether.

More Favorable Interest Rates

Lenders consider lower down payments as higher risks. By making a 20% down payment, buyers often qualify for better interest rates on their loans. This translates to savings over the life of the loan, as a lower interest rate results in lower overall interest payments.

Improved Equity

A larger down payment increases the buyer's equity in the property. Higher equity gives buyers more financial security and flexibility, as it can be tapped into for emergencies or other investments.

Leslie notes that it is important to remember that while 20% is often recommended, it is not a mandatory requirement. Some buyers may not have the means to put down such a large sum of money. In such cases, they can opt for a smaller down payment but should be aware of the potential drawbacks like possible higher interest rates and added costs. If you’re a first-time homebuyer in NC, rest assured that if you can’t afford to put down 20%, there are other options available to you. 

Mortgage Loan Programs for First-Time Homebuyers in NC

North Carolina offers several first-time homebuyer loan programs. According to the North Carolina Housing Finance Agency, first-time buyers are those who have not owned a home as their principal residence in the past three years. Here's a look at what these programs are.

NC Home Advantage Mortgage

This program is available to both North Carolina first-time and move-up homebuyers, who are homeowners trying to buy a bigger and more expensive house. It offers "stable, fixed-rate mortgages" as well as down payment assistance up to 3% of the home price.

NC 1st Home Advantage Down Payment Program

The program offers $15,000 in down payment help for eligible first-time homebuyers and military veterans. It has a sales price limit which varies by county. For example, in Durham, the NC 1st Home Advantage Down Payment Program sales price limit is $480,000. You can find that information by entering your county on the program's website.

NC Home Advantage Tax Credit

This program allows first-time homebuyers to save up to $2,000 a year on their federal taxes with a Mortgage Credit Certificate. The North Carolina Housing Finance Agency advises that if you qualify for an NC Home Advantage Tax Credit, “you can claim a federal tax credit for 30% of the interest you pay on an existing home (50% on a newly built home)—up to $2,000 per year for every year you live in your home²." The tax credit can be combined with the NC Home Advantage Mortgage™ to get even more savings. You can also claim a mortgage interest deduction for the remaining amount of the mortgage interest paid.

It's important to note that eligibility for the NC 1st Home Advantage Down Payment and NC Home Advantage Tax Credit programs are based on income and will vary based on county and family size³. Both down payment programs are deferred second mortgages, and assistance is "forgiven 20% per year at the end of years 11-15, with complete forgiveness at the end of year 15⁴."

Additional Financing Options for First-Time Homebuyers in NC

In addition to the loan programs previously mentioned, there are other financing options available for first-time homebuyers in North Carolina.

Municipality Down Payment Assistance Programs

Leslie notes that many local municipalities offer down payment assistance programs. "In Durham and Raleigh, this can be up to $80,000 to some borrowers. The programs are usually income-restricted based on household size that vary by city or county, and may only allow a certain portion of your gross income to go toward the mortgage. This can make it challenging, but they are still very helpful to some borrowers. For example, the City of Durham has a down payment assistance program that will offer up to $80,000 in assistance and allows these funds to cover up to 35% of the purchase price."

North Carolina State Employees' Credit Union First-Time Homebuyer's Mortgage

The first-time mortgage programs offered by the North Carolina State Employees' Credit Union (SECU) are worth singling out because they are among the best available if you're a member.

First-Time Homebuyer's Mortgage

SECU's First-Time Homebuyer's Mortgage is one of the few programs that offers 100% financing. The SECU team shares that "the program is designed to empower members to realize their dream of homeownership by providing up to 100% financing of the purchase price of a home with a maximum loan amount of $500,000. An additional $2,000 may be advanced to assist with closing costs. This program is available under the 5-year Adjustable-Rate Mortgage product.

Eligibility for the program is limited to any member trying to purchase a primary residence, where the borrowers have not owned any interest in a home in the past three years. Members may also be eligible (regardless of prior home ownership) if they are a new employee (employed less than one year) of a North Carolina state agency or school system, or current employee of a North Carolina state agency or school system who are required to relocate to accept a new position with a North Carolina state agency or school system."

FHLBA First Time Homebuyer Product

SECU also offers the Federal Home Loan Bank of Atlanta (FHLBA) First-Time Homebuyer product. It "provides grants in the form of a forgivable second mortgage in amounts up to $12,500 in down payment and closing cost assistance for the purchase of a home by a first-time homebuyer. To be eligible members must be able to contribute at least $1,000 of their own funds towards down payment or closing costs and have a total household income that does not exceed certain limitations. Members will not have to repay these funds if they remain in the home for at least five years."

This product cannot be used in conjunction with SECU’s First Time Homebuyers program.

Government-Backed Loan Programs for Homebuyers

Besides these programs, there are government-backed loan programs for homebuyers as well. Leslie says they "allow the buyer to make less of a down payment." While we go into much more detail on each of these types in our blog post on 8 Types of Mortgage Loans for Homebuyers, here's a snapshot of what these programs are.

• Federal Housing Administration (FHA) loans: With this type of loan, your down payment could be as low as 3.5%⁵.
• Veteran Affairs (VA) loans: To qualify for a VA loan, you must be a veteran, service member, or eligible surviving spouse. According to Don Fowler, most VA loans can be 100%.
• U.S. Department of Agriculture (USDA) loans: USDA home loans help low- to moderate-income homebuyers purchase houses in eligible rural areas⁶. This type of loan typically doesn't require a down payment.

Seeking Professional Guidance

Navigating the homebuying process can be complex, especially for first-time buyers. It's recommended to seek professional guidance from a real estate agent, mortgage lender, or mortgage broker who can provide expert advice and help you find the best financing option for your needs.

Bottom Line on Financing Options for First-Time Homebuyers in NC

As a first-time homebuyer in North Carolina, you have access to a wide range of financing options and assistance programs to help you achieve your homeownership goals. Remember to explore the various loans available, understand the down payment requirements, and seek professional guidance to make an informed decision about which program to choose for your first mortgage. Our agents are here to help you every step of the way!

Good luck on your journey to homeownership!

Sources

1. Consumer Financial Protection Bureau. Understand Loan Options.
2. North Carolina Housing Finance Agency. NC Home Advantage Tax Credit.
3. North Carolina Housing Finance Agency. Income Limits.
4. North Carolina Housing Finance Agency. NC 1st Home Advantage Down Payment.
5. Federal Housing Administration. Let FHA Loans Help You.
6. U.S Department of Agriculture. Single Family Housing Programs.