A Look at First Home Buyer Policies - USA
In the third part of our series leading into the NZ election looking at first home owner policies, we take a look at the USA.
The US housing market has been through quite a journey in the last decade. Liberal lending policies, low interest rates and strong economic growth led to a property boom and a massive increase in credit. The wheels came off during the subprime mortgage crisis which led into the GFC. The market dropped significantly in many areas and foreclosure rates skyrocketed.
Outside of certain properly hot spots the market has not reached the same heights since.
With prices lower and interest rates low in the wake of the GFC, housing affordability in most areas hasn't become as acute a problem as in New Zealand.
Despite this, the USA still has a number of initiatives aimed at supporting both low income earners and first home buyers into the market. These initiatives are delivered both via Federal Government programmes and locally at the State level.
1. FHA loan
With this option, the Federal Housing Administration (FHA) essentially guarantees the mortgage.
Since the FHA insures the loan, traditional lenders receive a layer of protection. First and foremost, lenders won't experience a loss if homeowners default on the mortgage as the Government will be taking it on the chin.
FHA loans typically come with competitive interest rates and smaller down payment requirements than conventional loans
They are limited by credit score and can see eligible buyers need as little as 3.5% deposit.
2. USDA loan
While not very well known, the U.S. Department of Agriculture (USDA) has a homebuyer assistance program.
The program focuses on certain rural areas, but you don't need to purchase or run a farm to be eligible.
Through this setup, the USDA guarantees the loan. There may be no down payment required, and the loan payments are fixed.
There are credit score eligibility rules and income limitations, which can fluctuate based on region.
3. VA loan
The U.S. Department of Veterans Affairs (VA) helps service members, veterans and surviving spouses purchase homes.
The VA guarantees part of the loan, which makes it possible for lenders to offer some special features.
VA loans offer competitive interest rates and require no down payment. You may not be required to pay for private mortgage insurance, and there isn't a a credit score restriction.
4. Good Neighbor Next Door
The Good Neighbor Next Door program is sponsored by United States Department of Housing and Urban Development (HUD) and focuses on providing housing aid for law enforcement officers, firefighters and emergency medical technicians, and pre-kindergarten through 12th-grade teachers.
Through this program, you could receive a discount of 50% off a home's listed price in specific regions known as "revitalization areas."
Buyers need to commit to living in the home for 36 months.
5. Fannie Mae or Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored entities. They work with local lenders to offer mortgage options that benefit low and moderate-income families.
With the backing of Fannie Mae and Freddie Mac, lenders can offer competitive interest rates and down payment amounts as low as 3% of the purchase price.
First-time homebuyers could also be eligible for home financing education programs with the "HomePath Ready Buyer" program through Fannie Mae.
6. Energy Efficient Mortgage (EEM)
This type of loan's purpose is to help you add improvements to your home that will make it more environmentally-friendly.
The federal government supports EEM loans by insuring them through FHA or VA programs.
The key advantage to this grant is that it allows you to create an energy-efficient home without the need to make a larger down payment. The amount is rolled into your primary loan.
NZ has a similar initiative offering warmer homes grants as opposed to loans.
7. Federal Housing Administration 203(k)
For those looking to renovate an older home there is the 203(k) rehabilitation programme. This type of loan, backed by the FHA, takes into consideration the value of the residence after improvements have been made.
It then lets you borrow the funds you'll need to carry out the project and includes them in your main mortgage.
8. Native American Direct Loan
Since 1992, the Native American Veteran Direct Loan program has helped Native American veterans and their spouses purchase homes on federal trust lands.
The VA serves as the lender.
If you're eligible, you won't be required to make a down payment or pay for private mortgage insurance.
This first-time homebuyer grant also offers low closing costs and a 30-year fixed-rate mortgage.
9. Local first-time homebuyer grants and programs
In addition to the grants and programs provided by the federal government, many states and cities offer help for first-time homebuyers.
While it may be confusing due to the sheer number of schemes available, the key underlying methodology in the US is for federal and state government organisations to guarantee or insure the mortgages from banks and lenders. This means with a low or non-existent chance of default, more favourable terms can be offered to those who qualify who are intended to be low income or first home buyers, or other targeted groups such as veteran or those renovating homes in older neighbourhoods.
The Federal and State Governments are driving the behaviour and outcomes they want via enabling private lenders to offer low cost loans to targeted groups.
Meanwhile in New Zealand
This is something that has merit we believe in NZ, as it enables the government to avoid handing out money and use well established lending pathways which exist and target low income and first home buyers in areas where housing affordability is becoming more of a social and economic issue.
One thing that is crystal clear, is that the NZ government is not doing nearly enough or being creative enough to assist first home buyers or assisting families to relocate with their preference for people to spread further out into the regions.
Simply focusing on low income only with the woeful and limited ‘Home Start Grant’ and ‘Welcome Home Loan’ does not cut the mustard.
Let’s hope there is some creative thinking in the coming months as part of the election process.