Buying a home for the first time can be a stressful process for many. In fact, even the most prepared “first timers” cannot avoid some level of apprehension. Purchasing a home and getting a mortgage is a pretty big financial commitment for anyone. Furthermore, there are many people involved when buying a home, many whom you’ll never deal with again. The buyers work with a real estate agent to help search for houses, the mortgage company, inspector, appraiser, etc.
Yet none of this occurs until after a buyer is pre-approved for financing. The first time homeowners complete an application and provide paperwork documenting their income, savings in the bank and a credit report and other important financial aspects. All of this takes place in a relatively short period of time, too. First time home buyers need also to be aware there are actually two approvals going on at the same time once a sales contract is signed. Not only are the borrowers approved but so is the property being purchased. The property must conform to others in the neighborhood and be in overall decent condition. The home must be considered as “marketable” which means there is evidence of recent sales in the area over the past 12 months.
Many are unaware that a first time homebuyer can actually have owned a home in the past yet still considered a “first time buyer” How so? First time buyer status technically means having not owned a home within the previous three years.
With a little bit of research and preparation beforehand, first time buyers can feel more confident about the entire lending process and what they can expect. When obtaining a mortgage loan, first time buyers should review all available options. Call us at the number above with questions, we have specialists standing by 7 days a week.
The Federal Housing Administration, or FHA, is a division within the Department of Housing and Urban Development, or HUD. Back in 1934, FHA introduced universal guidelines lenders could follow and provided a government-backed guarantee to the lender. As long as the lender approved the loan application using appropriate FHA guidelines, should the loan ever go into foreclosure the lender would be compensated for the loss. This compensation is financed by two forms of mortgage insurance, an upfront policy that is rolled into the loan amount and an annual mortgage insurance premium that is paid in monthly installments.
While the FHA home loan program is not relegated to first time home buyers, it remains the most popular choice among this group of buyers. The FHA loan only requires a down payment of just 3.5% of the sales price which means less cash required at the closing table. FHA loans are not restricted by income or location but do require the buyers occupy the property as their primary residence. FHA loans cannot be used to finance a rental property or vacation home for example. FHA loans can be used to finance a 2-4 unit property such as a duplex or fourplex as long as the buyers occupy one of the units. FHA loans are also more forgiving as it relates to credit and income qualifying.
FHA loans are “fully documented” loans which mean income, employment and assets are verified through third parties. Borrowers will be asked to provide copies of their most recent paycheck stubs covering a 60 day period as well as provide the two most recent years of W2 forms. If a borrower is self-employed or receives more than 25% of annual income from sources other than an employer, two years of tax returns will be needed as well. To make sure there are sufficient funds to cover the 3.5% down payment and closing costs, copies of bank statements will be needed.
While FHA loans don’t limit the amount of income borrowers may have, they do pose limits on the loan amount. FHA loan limits can vary based upon location. Buyer can read about all the latest 2018 loan limits and FHA details here.
FHA also offers a special renovations program for the buyer that wants to purchase a home in need of repairs. Read more about the FHA 203K loan details here. See the video below for more helpful information.
VA loans require zero down payment for eligible active military and Veterans alike. This program is an excellent option for those wanting to come to the closing table with as little cash to close as possible. VA loans are only available to veterans of the armed forces, active duty personnel with more than 180 days of service, members of the National Guard and Armed Forces Reserves with six years of service qualify as do surviving spouses of veterans who died while in service or as a result of a service-related injury.
Eligible borrowers are also restricted from paying certain closing costs. Borrowers may only pay for an appraisal, credit report, discount points, title insurance and related charges, origination fees, survey or abstract fee and recording fees. All other charges must be paid for by others, typically the seller or with a credit from the lender. VA loans also come with a guarantee to the lender should the loan go into default. This guarantee is 25% of the loss and is financed with what is referred to as the Funding Fee. The funding fee is most commonly rolled into the buyer’s loan.
In order for a lender to determine whether or not an applicant is eligible for a VA home loan, the lender will request a Certificate of Eligibility, or “COE” While veterans can request this certificate on their own, the process can take weeks while a mortgage lender can make the request directly with the VA and get a copy of the certificate within minutes. Contact us if you need assistance. Similar to FHA and USDA loans, the VA loan can only be used to finance an owner occupied property. Read the complete 2018 VA Loan Guide here for more information.
USDA Rural Housing
The USDA home loan has been around for several years and like the VA home loan program, there is no down payment required. However, USDA Rural Development has a few restrictions that VA and FHA loans do not have. There are household income caps which limit household income at 115% of the median income for the area. Note, this household income includes all members of the house, not just the income of the applicants on the loan application. Read more about 2018 & 2019 USDA mortgage income limits here.
USDA loans are also limited to location. The USDA program was originally designed to help those finance a property in a rural or semi-rural area where financing can be difficult. The property must be located in an eligible/approved area. Contact us to find a list of USDA approved homes in your area, many suburban locations are still approved for 100% USDA financing. Other benefits include:
- 100% financing, no down payment.
- No loan amount limits, buyers qualify based on their income/debt.
- The seller can pay buyers closing costs thus minimizing out of pocket expense from home buyer.
- Most single family, townhomes and condos located in the approved zone are eligible for the program.
- USDA offers secure 30 year fix terms with no early payoff penalty. This means homeowners can sell their home and pay off their loan anytime without penalty, just like all the other first-time buyer programs listed.
- USDA loans are government-backed just like FHA and VA loans.
By far the most popular of all mortgage loans are those using lending guidelines set forth by Fannie Mae and Freddie Mac. While neither provides guidelines specifically for first time buyers, borrowers will be able to choose from low down payment loans as low as 5% of the sales price and with Fannie’s HomeReady program, as little as 3% down.
Conventional loans, as with government-backed loans, provide different choices as it relates to fixed versus variable as well as loan terms. Conventional loans can be found with loan terms as short as 10 years up to 30 years. Conventional mortgages do have loan limits depending on the property location. Buyers can read more about the 2018 Conforming mortgage limits here.
Yes, even some first-time buyers require financing on larger jumbo loan amounts. This is more common in California, Florida, New York, and other high-cost locations. Jumbo mortgages today allow financing up to 95% for qualified home buyers whether they are first timers or not. With benefits like secure fix rate and adjustable rate terms, no private mortgage insurance and quick closing times to name a few. Buyers can learn about Jumbo mortgage for first time buyers here.
First Time Buyer Tips
- Understand your credit, this is the most important factor when qualifying for a home loan. You can get a free credit report online at www.annualcreditreport.com, a free report sponsored by the three main credit repositories of TransUnion, Equifax and Experian. Get a copy of your report and look for any errors. Unfortunately, credit report mistakes occur far too often. If you see errors, let your loan officer know as they can help fix mistakes quickly with proper documentation.
- Get all your financials in order. We mentioned earlier the types of paperwork that will be needed, so make sure you have copies of your recent paycheck stubs, W2 forms and bank statements before applying.
- Contact your loan officer and get an estimate of how much down payment you will need and a good idea of closing costs. If you still need to save up more cash, set a budget and a timetable.
- Your pre-approved qualifying amount is based on your income, debt and current interest rates. In some cases, buyers might be surprised to find out how much they can borrow and what their monthly payments will be. Always be sure to borrow what you feel comfortable with, not necessarily what you might qualify for.
- Don’t open up any new credit accounts while going through the mortgage process. When lenders review a credit report they look at credit scores, payment history and credit inquiries. Inquiries matter when the consumer requests new credit. Due to reporting times, a lender may not be able to determine what your monthly credit payments will be if something is charged yet not reported. Even if you decide not to take a credit card offer or otherwise change your mind, your lender will want to verify the status of your inquiry.
- Once you decide on a loan program, your loan specialist will provide you with a range of interest rates for that program. Lower rates can be had by paying discount points. Discount points or “points” are expressed as a percentage of the loan amount and are a form of prepaid interest. Paying a point lowers the interest rate on your loan. Work with your loan officer to see if paying points makes sense and compare your options.
- Buy with your mind and not your heart. Take your time and look at several properties just make sure you don’t fall in love with a home to the point where it affects your decision making. Keep your pre-approval amount in mind when shopping.
- Shop for homeowners insurance. There is a fine line between having a large deductible along with a monthly payment and not having enough coverage. Insurance premiums can vary in cost and too high of a premium will cut into your affordability.
- Finally, ask questions. There is a lot going on when buying and financing a home and while your loan specialist can close hundreds of loans each year, odds are you will only own a home two or three times throughout your lifetime. If you’re not sure about something, speak up. Your loan officer is your resource, take advantage of their experience.
Questions about applying for any of the programs mentioned above? Please contact us 7 days a week by calling the number above, or just the short Request Contact form on this page for a quick response.