In recent months I have been studying up on first time home buyer (FTHB) assistance programs available to low- and moderate-income people in Massachusetts, so I thought I would share some of the wisdom I’ve gained (much of which applies to other states as well). A lot of this stuff just isn’t widely promoted. When I bought my first home in North Adams, Massachusetts, I probably could have qualified for some of these programs to get a better mortgage rate or down payment assistance, but I had no idea that such assistance even existed.
The resources listed below are certainly not comprehensive, but they’re among the major ones to know about.
1. Homebuyer counseling agencies. I start with this because I highly recommended seeking out the kind of local knowledge and broad-based understanding of the homebuying process that can come from participating in a certified homebuyer education program. Such programs are a requirement for many other forms of assistance, and they help people to understand all aspects of house-hunting, negotiation, mortgage application, inspection, etc., etc. Citizens’ Housing and Planning Association (CHAPA) does the certifying and maintains a list of programs in Massachusetts. However, especially if in-person courses won’t work for you, you should also check out online resources such as Nehemiah’s homebuyer counseling program, or general calculators and tips from places like HUD , Domania, and Realtor.com. (And although this post isn’t really focused on strategies for choosing a house and negotiating a price, I have to mention Zillow, which is a tremendous tool in that it often shows what previous owners have paid for a particular house and how much people have paid recently for comparable houses, which can be critical in deciding whether to make an offer on a house and how much to offer.)
2. Equity Builder Program (EBP), from the Federal Home Loan Bank of Boston. EBP grants are the mother lode of true down payment assistance (as opposed to seller-funded down payment assistance, about which I’m less enthusiastic). EBP assistance can be worth up to $15,000, and these grants are available in many communities throughout New England, but my experience in western Massachusetts is that relatively few people hear about the program in order to take advantage of it. To qualify, your household income can be no more than 80% of the area median income which, in many communities, includes perhaps the majority of first time home buyers, who tend to be younger and less affluent than other home buyers. Here is a list of banks currently able to offer EBP down payment assistance, covering most regions of Massachusetts and the New England states. Each bank will structure their EBP program differently. Some will only offer 30-year fixed rate mortgages; some will only offer adjustable-rate mortgages; some will offer multiple options; it depends on what has been approved by the Federal Home Loan Bank. Certain banks may offer a flat percentage of the purchase price, such as 5%, as down payment assistance (up the $15,000 limit), so that buyers of less expensive homes would be likely to receive less than the maximum allowable amount of assistance. Some will offer their normal market rate mortgages, while many will offer a discounted rate. My main advice is just to be persistent in asking specific questions about the program when talking to people at the bank, because often the loan officers themselves won’t know all the ins and outs of the program; they may have to consult with their Community Reinvestment Act (CRA) officers for details on the program. Also, you need to be aware that there’s only a certain window of time during which the assistance is likely to be available. The participating lenders receive authorization to offer EBP assistance around May 1 each year, but the money gets used up first-come first-serve and is unlikely to last far into the fall. Also note that there’s a 5-year recapture period; if you own the home for less than 5 years, you’ll have to repay a pro-rated portion of the grant back to the Federal Home Loan Bank.
3. Municipal down payment assistance. A number of cities in Massachusetts and across the country have access to funds from the federal government to provide down payment assistance through the American Dream Demonstration Initiative (ADDI) and other sources. These funds can also be quite substantial, although the need-based limitations and recapture provisions are often more restrictive than EBP grants, and the paperwork is likely to be more burdensome. Still, it’s definitely worth investigating if you’re below 80% of the area median income, which is the usual cut-off, and if you have limited resources for a down payment. In most cases, the municipalities require that you be a resident of the town or city (as a renter) before you purchase your home (which also must be located in that same town or city).
4. Soft Second Loan Program. This product from the Massachusetts Housing Partnership doesn’t provide any down payment grant assistance, but it does offer a below-market interest rate on a low down-payment loan, and low-income people can qualify for a subsidy to cover some of the interest payments, which also helps minimize total housing payments for first time home buyers. You have to put down 3%, you generally get a standard 30-year fixed rate loan for 77% of the purchase price, and the “soft second” part is a second mortgage for 20% of the purchase price (at the same below market interest rate) on which you pay interest-only for the first 10 years, then principal plus interest for 20 years (and if you’re a low-income borrower the state may cover a portion of your interest costs on the second mortgage portion during your first 9 years in the house). This helps first time home buyers in a variety of ways. One of the big benefits is that, unlike conventional mortgages, you don’t have to pay private mortgage insurance even though your down payment is only 3%. Also, by owing interest-only on the soft second part for the first 10 years, you have a reasonable amount of time during which to grow your earnings before you have to pay the full principal and interest costs, but you’re still growing your equity base gradually since the 77% first mortgage is fully amortizing, which makes for a nice balance between affordability and equity growth. Virtually any community in Massachusetts can be served by this list of participating banks. But again, you need to make a point to ask the loan officer specifically about the SoftSecond program from Massachusetts Housing Partnership (not to be confused with the MassAdvantage program from MassHousing, described below), because otherwise you might never hear about it; the loan officer may just steer you to one of their standard mortgage products (as long as you qualify) because there’s less paperwork for them and their profits are higher.
5. MassHousing loans. The mortgages available to first time home buyers through MassHousing are less restrictive than the SoftSecond product, but the benefits are a bit less generous. With MassHousing’s MassAdvantage loans, you get a similarly below-market interest rate, and the typical down payment requirement is also 3% (although there is also a o% down option); the main difference that makes this somewhat less attractive than an MHP SoftSecond is that private mortgage insurance (PMI) is still required. MassHousing provides discounted PMI, but they don’t waive it altogether, as is the case for SoftSecond loans. And MassHousing’s loans don’t offer an opportunity for some of the interest payments to be paid by the state if you’re a low-income borrower, which is another attractive feature of the SoftSecond. On the other hand, MassHousing’s products are a bit more widely available. As mentioned for the SoftSecond product, you can’t expect a bank to steer you into a MassHousing loan just because you happen to qualify; their first instinct will naturally be to sell you one of their conventional products if you meet the underwriting criteria, so you’ll need to ask about MassHousing’s loan rates and terms.
6. Individual Development Accounts (IDAs). I’ve mentioned these matched savings accounts often in other posts on this blog. First time home buyers are frequently among the beneficiaries of IDAs, in which a person’s monthly savings can be matched (often at a greater than 1:1 ratio) by public and private sources, but only if the money will be put into a productive asset such as home ownership. Depending on the program, the free match funds can be as much as $4,000 – $10,000, and you receive training from skilled home ownership counselors. However, the income limitations are often lower than those for EBP and MassHousing assistance, and it’s not much help if your goal is to own a home in the short term, since IDAs require 6 months to several years of steady monthly savings by the participant before the match money becomes available. An IDA is the way to go for a family that needs time and support to build its saving capacity before taking the plunge into home ownership. Organizations sponsoring IDA accounts in Massachusetts are listed here, and a number of new programs are being formed by community action agencies (CAP agencies) in Massachusetts, so check with your local CAP agency too.
7. Section 8 Homeownership Program. This tip is only for families that are recipients of HUD Section 8 vouchers for rental housing. If you have a Section 8 voucher, and if the housing authority that issued you your voucher participates in the Section 8 homeownership program, then you can apply for home ownership assistance. This essentially allows you to use your voucher money to pay mortgage costs as opposed to rent costs, thus allowing some of that federal money to go toward building equity in your own home rather than simply paying a landlord. Check here to see if your housing authority participates.
8. Habitat for Humanity. Many Habitat chapters only build one house at a time, so there may only be one slot every couple of years, and the income guidelines are fairly strict, but Habitat provides an amazing opportunity for those fortunate enough to participate. The details are nicely summarized on this page from Massresources.org, which also has information on many of the other topics I’ve covered in this post.
9. Affordable Home Ownership Lotteries. When developers agree to build affordable home ownership units as part of a larger project, the purchase rights to those units are usually distributed via lottery. Citizens’ Housing and Planning Association (CHAPA) tries to keep tabs on such lotteries in Massachusetts and lists them here. These homes are typically priced significantly below market rates in accordance with an agreement by the developer, and although they often have resale restrictions attached to the deed which prevent them from being sold in the future at full market rates (and thus the potential for equity growth is somewhat limited), they do offer amazing opportunities to buy more house than one could otherwise afford. As with other programs, there are income and asset limitations to make sure that these units are provided to people who need the help.
My major conclusion: it pays to do your homework. Banks and developers aren’t likely to come knocking at your door with opportunities like these (the opportunities that come knocking at your door are usually the ones to avoid, like sub-prime mortgage offers). But if you’re persistent, there are a lot of resources to help you get a first home with an affordable, responsible mortgage, which can be a crucial step in building a strong financial future.
If you know of other significant forms of assistance for first time home buyers in Massachusetts, please comment and let me know.