First-Time Homebuyer Programs in Delaware

As a first-time homebuyer, satisfying all the purchase requirements, including the down payment, may feel like an uphill task. But through the help of a first-time homebuyer loan, your dreams of owning property can become reality.

MoneyGeek evaluated different types of first-time homebuyer programs in Delaware, including options with zero or low down payments through state-specific agencies that offer financial assistance to first-time home buyers.

There are several expenses associated with the purchase of a new home, one of which is the mortgage down payment. This is the amount paid upfront for a property purchase that’s separate from the mortgage loan amount.

The amount you pay as your mortgage down payment impacts your monthly payment amounts for your loan. If you make a higher down payment upfront, the cost of your monthly payments will be less.

Your down payment amount is usually calculated as a percentage of the total price of your home. A first-time home buyer program can help alleviate the cost of this initial down payment.

In Delaware, first-time homeowners can find various types of assistance programs, including $0 down payment programs, conventional loans and state-specific programs like the Delaware First-Time Homebuyer Tax Credit.

Typically, the best lender or program is different for each buyer based on their unique needs and situation.

Zero-down-payment programs do not have any down payment requirements. USDA and VA loans are examples of zero-down-payment programs available for first-time home buyers.

USDA loans are excellent for first-time home buyers seeking an option with a $0 down payment. Available through the U.S. Department of Agriculture, USDA loans have cheaper rates than conventional and FHA loans.

Eligible home buyers purchasing property in a rural area may consider a USDA loan, including those with limited income, since no mortgage insurance is required.

Generally, eligible borrowers can get the following three types of USDA loans:

• Single-Family Housing Direct Home Loans – These are offered to low- and very-low-income home buyers in eligible rural areas.
• Section 502 Guaranteed Rural Housing Loan – Offers 100% financing for low and moderate-income first-time homebuyers with a 30-year fixed rate repayment period.
• Section 504 Home Repair Program – Eligible borrowers can get this loan to fund home improvement and repairs. The borrower needs to have an income that’s below 50% of the state’s average income, and the repayment period is 20 years.

If you stay in Delaware, you may get a USDA loan if your property is at most 2,000 square feet and the area where you live has fewer than 35,000 people.

First-time home buyers who are active or retired military personnel, as well as eligible family members, may consider reaching out to the U.S. Department of Veterans Affairs for a VA loan. VA loans require no down payment, which is not the case with most other loans.

VA loans feature various advantages over conventional and FHA loans, including lower interest rates and closing costs. As an additional bonus, applicants do not need a private mortgage insurance policy for the loan to be approved.

VA loans are considered non-conforming due to the low number of restrictions applied. Credit score requirements and loan amounts may vary between lenders.

First-time homebuyers in Delaware may use a VA loan to buy a family home or condominium, construct a new home or buy and repair an old property.

Delaware home buyers may also consider programs with a low down payment amount as a source of funding for their purchase. Such programs, which require a down payment that’s below the standard amount of 20%, include FHA and conventional loans.

Conventional or Fannie and Freddie loans are funded by private lenders rather than the government. These loans suit first-time home buyers who do not qualify for government-sponsored homebuyer programs. Although this is the most popular type of loan, credit score requirements and income vary from one lender to the next.

Typically, the standard down payment for a mortgage loan is 20%. However, private lenders offer conventional loans with a down payment as low as 3%, allowing more borrowers to apply for funding. For this reason, most lenders ask borrowers to obtain private mortgage insurance to protect the lender in case of a loan default.

Conventional loans are known as conforming loans, since applicants must adhere to Fannie Mae and Freddie Mac’s guidelines.

FHA loans are low-down-payment loans offered by private lenders under the guidelines of the Federal Housing Administration (FHA). The loans feature more friendly minimum requirements, including a minimum credit score of 500 minimum credit score, a down payment of 3.5% and a high maximum debt-to-income ratio of 56.9%.

While the loans follow FHA guidelines and policies, they are only available through private FHA-approved lenders. These include mortgage providers, credit unions and banks.

Loan limits may vary significantly based on the borrower’s county of residence in Delaware. One drawback of FHA loans is that some properties may not qualify for funding. Additionally, insurance premiums may be on the higher side and last the entire duration of the loan. Borrowers also need to pay 1.75% of the loan amount upfront.

An FHA 203(k) loan combines two loan types to assist buyers who wish to purchase and renovate an old property for use as their primary residence. This federally backed loan features a conventional mortgage loan and a home construction loan.

Homebuyers can get FHA 203(k) loans in two forms — standard and limited.

• Standard 203(k) loans are ideal for first-time homebuyers who intend to carry out significant repairs and modernization of their purchased home. You may apply for the loan if you need to upgrade most aspects of your new home.
• Limited 203(k) loans are for those who need to make minor repairs to their home.

Just like FHA loans, FHA 203(k) loans require a credit score of at least 500, a down payment of 3.5% and a debt-to-income ratio of less than 31%.

Although there are several federal first-time homebuyer programs in Delaware, state-specific programs may also provide cost reductions to eligible residents.

Delaware offers a special tax credit to first-time homebuyers, who may claim up to 35% of the annual interest paid on their mortgage, up to a maximum of $2,000 per year. The credit facilitates reduction of owed federal tax, and the amount can be used as a down payment or closing cost on a mortgage. Applicants must use a Delaware State Housing Authority participating lender to receive the credit.

The Chenoa Down Payment Assistance Program offers first-time homebuyers throughout Delaware 3.5% of their mortgage loan as down payment and closing cost assistance. All borrowers with a minimum credit score of 640 and those that participate in the Home Ready Program qualify for this assistance.

First-time homeowners interested in financial assistance from the program must be active participants of Habitat for Humanity and have a low to moderate income. Specific income requirements vary by county.

Purchasing your first home in Delaware can be challenging. To ensure you make an informed decision, MoneyGeek answered some commonly asked questions about first-time homebuyer programs in the state.