The First-Time Homebuyers Quiz
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Your very first mortgage - a daunting prospect, right? It's definitely one of the biggest financial decisions you'll make in your lifetime, and it's a choice you may be stuck with for several years. It's important to get this one right, and researching is the best place to start! While your first mortgage is not likely to be your last, it can be the hardest one to get through. Whether you're just starting to look or find yourself asking these questions and are hoping to gather more information, this is the one-stop-shop for all home buying knowledge.
If you’re getting ready to move out of your childhood home and into your own or just tired of renting, there are a lot of questions to ask yourself before you ever even talk to a real estate agent.
To first understand if you have enough money to purchase a home, you must consider your current budget and how your pre-existing costs impact your residual income. After the obligatory car payments, insurance, and phone bill, are you spending unnecessary pieces of your budget that are hindering you from affording a down payment?
Down payments typically range around 3-3.5% of the purchase price for homebuyers but can be up to 20% on conventional loans. The exact rate will depend on the type of loan, the location of the property, and the qualifications you may meet; however, it is to your advantage to pay as much as possible in order to lessen your monthly payments. This excludes the indirect costs of homeownership like yard work, utilities, overall maintenance of the property, and possible HOA fees.
Other hidden costs may depend on the state of the housing market. However, they are worth considering when you are throwing around the idea of homeownership. Closing costs to first-time homebuyers may be unheard of. They are typically 2-3% of your loan amount but can be negotiated for the seller to pay when you are buying in a buyer’s market.
A better way to understand how much you’d be paying in mortgage costs is to use our payment calculator.
Determine Monthly Income: Most pay periods are either weekly, biweekly, or monthly. Because of this, the best way to base a budget is on a monthly income basis. One of the easiest traps to fall into is not compensating for the tax deductions from your check. Social Security, income tax, 401k, and insurance are all expenses that may be deducted from your paycheck. Make sure you know how much money will be in your paycheck each month!
Estimate Monthly Expenses: Gather up all of your monthly bills, and add up the costs. If you have annual or semi-annual bills, determine what those costs would be per month so that you can budget for them each month instead of once or twice a year. Rent, utilities, water, gas, Netflix, Amazon Prime, and WiFi are all expenses that come every month. Determine what your monthly expenses will be in total. When you subtract your expenses from your income, make sure that it is not a negative balance!
Find a Platform: Having a place to track your budget will make the whole experience of budgeting easier. There are a range of apps that can help, such as Mint and You Need A Budget. Excel is also a great tool to use for budgeting. Find what works best for you and stick to it!
Track Budgeted and Actual Costs: budget is not for recording your actual spending; it's the goal you'd like to meet. To make sure you hit your monthly goal, track your spending and compare it with your budget. If you go over your budgeted amount, make adjustments so you can do better next month.
Categorize Expenses: One of the best ways to keep your budget in check is to break your budget down into specific categories. This helps you know how much money you are spending on bills and necessary expenses such as buying food at the grocery store versus fun and frivolous purchases. If you see that most of your monthly income is going toward entertainment and eating out, rethink your budget to accommodate. Maybe you need to eat out less, or maybe you need to pull money from another category so you can enjoy good food more often. Categories help to keep you and your spending in check!
Down payment assistance programs are state/city/county-backed loan assistance that help homebuyers purchase their homes by offering some or all of their down payment. Every state has its own DPA program, and it can even be city or county-specific. It's essential to do your research and look into what programs your area provides. You should also keep in mind that lenders do not always offer every single DPA – so research your lender, too. Each DPA program is a little different, and they have different eligibility requirements. A majority of them have a few requirements in common, which we'll discuss later. There are four main types of DPA programs.
Whichever DPA you apply for, you’ll be saving money. Either you receive free money from a grant or forgivable loan, or you’re putting a larger down payment on your home and saving money on your monthly payment.
Who are they for?
DPA programs come in many shapes and sizes. Whether or not you think you qualify for a DPA, it’s a good idea to look through your area’s eligibility prior to buying your home. There are DPA programs for veterans, recent graduates, first-time homebuyers, teachers, first-responders, and more. Each of these requires different things, but most of the DPA programs have a few requirements in common:
If you qualify for a DPA, you likely also qualify for mortgage loans that offer a lower down payment. Usually, that mortgage loan can be borrowed along with the DPA. Plus, some states offer tax credits for homebuyers, saving you even more money.
DPA programs aren’t for everyone, and they aren’t offered at every mortgage lender. It’s important to do your research on the topic, and the lender, in order to benefit from these programs.
The down payment is often the biggest obstacle to homeownership. Saving enough money can take months or years, keeping you renting even longer. It’s a vicious cycle. How do you save when you’re throwing away money on rent every month?
Conventional wisdom says you should put down 20% on your home to avoid paying for Private Mortgage Insurance (PMI) and higher closing costs. But conventional wisdom doesn’t pay your bills. In fact, the average first-time buyer puts down 6%. You should put down whatever is right for your situation. But should you need help with your down payment and closing costs, there are options.
Many lenders allow gift money to be used for at least part of a down payment, but you must provide documentation showing that it was a gift and not a loan. If you have family or friends generous enough to help with your down payment, this may be the best financial option. But lenders may take gift funds into account when deciding to give you a loan. Generally, lenders don’t allow personal loans to be used for a down payment, though there are rare exceptions. And there is a point in time when borrowed money is no longer considered borrowed and becomes yours. That point is typically 60 days, depending on the lender, when the money is considered “seasoned.”
Many factors could affect your ability to receive a loan for a mortgage. What many first-time homebuyers don't realize is the opportunities that are still available despite adverse circumstances. Lenders will consider all factors when providing pre-approval and lending numbers.
While student loans, credit cards, and car debt can take quite the hit to your credit when lenders review your application, the logistics of your capability to make monthly payments on all of your financial responsibilities is assessed using a calculation.
That being said, student loans are only one factor in a larger picture, and if your income can support the multitude of loans you are trying to acquire, the lenders will understand that.
DTI (Debt-To-Income) is an important acronym for a homebuyer to understand. Very simply, it is the percentage of your monthly gross, before tax, income that goes toward paying debts. There are two main kinds of DTI, and they are expressed as a pair. An example would be 28/36. Your lender may require a specific DTI ratio to qualify as a borrower for a mortgage.
What do these numbers mean? Let’s walk through the first number. The first DTI is known as the front-end ratio. It indicates the percentage of your income that goes to housing costs. These costs will include your mortgage principal, interest, mortgage insurance - if applicable, hazard insurance, property taxes, and homeowners’ association dues- if applicable. This number provides your lender with information about how your mortgage relates to your income.
The second DTI is known as the back-end ratio. It indicates the percentage of your income that goes toward paying all recurring debts, including those covered by the first DTI, credit cards, car loans, student loans, and other payments. This number provides your lender with information about your mortgage, and other recurring payments relate to your monthly income.
Your DTI information is used in the qualification process to ensure that your mortgage is considered conforming. Conforming loans can look a bit different depending on where you are looking to buy a home — FHA or USDA loans. They can also depend on your status as a veteran if you have served in the Armed Forces.
These two numbers can really affect your chances of getting approved for a mortgage. And unlike your credit score — which you want to be high — a low percentage is in your favor. In most cases, you’ll need a DTI of 50% or less, but the specific requirement depends on the type of mortgage you’re applying for.
In summary, lenders review your income in comparison to your debts and decide what mortgage rate would comfortably fit into that budget.
If your credit score is the looming cloud over your financial prosperity, we have a short yet helpful blog about how to rebuild or repair a not-so-perfect credit score. We advise potential buyers in this position to pay off claims from collections or pay reoccurring bills timely to quickly turn around the score that’s being pulled.
Just because the number on your credit pull was not as pleasing as you would have expected doesn’t mean the opportunity to be a homeowner is out the window. On the low end, it is possible to pull a credit score of as low as 500 and still be approved for an FHA loan; however, expect higher fees and insurance rates.
Because lenders rely on credit scores to tell the reliability of the borrower, lenders may require you to have more money upfront to compensate for lower credit scores or financial discrepancies.
Your credit score is a number that indicates your financial stability and trustworthiness. It is calculated by evaluating your credit history based on five factors: payment history, credit utilization, length of credit history, new credit, and credit inquiries.
The five factors mentioned are weighted with a percentage of your score. The final number comes together to form a score between 300 – 850.
Buying a home is a big decision, and you may not think you're ready to take that leap. Take our quiz and we'll let you know if we think you're ready to start searching for your first home. We'll also give you personalized tips, no matter where you are.
You've decided that buying a home is feasible for you, but you're confused about where to start. Lenders or Real Estate Agents, and what is a pre-approval anyway? It can all sound confusing when you have never had to go through the process before. The process can be lengthy and drawn out when documents are missing or information is inconsistent. To move your clear-to-close a little sooner, come to the table prepared with everything.
When deciding whether to talk to a mortgage lender or a real estate agent first, it is important to understand what they provide at the start of your home-buying journey. Once a decision is made, you must then compare competition amongst the industry and what will better suit your needs.
If you decide to start with a lender, you have the advantage of pre-approval going into the home search. Their loan officers are likely to form a relationship with you and put you in contact with their connections. You are also given the opportunity to wager your interest versus time advantages from lenders without the input of a real estate agent.
Many factors come into play when choosing a lender and a loan product. Consider the following before signing on the dotted line:
You should always work with someone you trust. Go with your gut first. A secondary but also important factor in building trust is to assess the experience of your L.O. Can they provide you with references? How long have they worked in finance? How long has their lending institution been in place?
Ease of Application
It's the digital age. There's no reason you need to take time off work to fill out lengthy and confusing paperwork to get a loan. Your lender, just like the rest of the world, should utilize the technology at their disposal to make your experience better. Your application and any subsequent communications with your loan officer can take place entirely online, which means you will get up-to-the-minute notifications of your loan's progress. To make the process even quicker, you can have a Digital Closing Experience and e-sign your closing paperwork.
Loan Officer Relationship
Your Loan Officer will work with you very closely in your mortgage transaction. It is important that you feel compatible and that your personalities don't clash. When choosing a loan officer, think about your communication style and if they are willing and able to communicate with you that way. For example, do you love talking on the phone, or do you prefer coming to their office? Maybe you like a more hands-off approach and prefer to email or text.
You will also need to consider the intellectual aptitude of your loan officer as well as their emotional maturity. Real estate transactions involve large sums of money, and the transaction can intensify unexpectedly. Can your L.O. stay level-headed and work with all parties such as the Realtor, title agent, and underwriter? Are they in good standing within the local community? Do they have enough financial training and experience to advise you on one of your largest and most important investments?
Fees can vary from lender to lender. Thankfully, our free market system allows for a breadth of competition that generally keeps fees in check. If you’re looking at a unique mortgage product, fees could trend higher. Study your Closing Disclosure and discuss any fees with your lender. All fees charged should have a reasonable explanation behind them.
Unique Loan Scenarios
Some loans are complicated. Do you need a short-term loan? Do you need an exotic loan product that favors asset verification over proof of income? Lenders can't be everything to everyone, so find out if your lender can service your financial nuances. If your loan officer can make it work, they sure will! But now and then, a borrower's situation is so unique that they're better served by changing lenders.
Time to Close
If you want to close fast, tell your lender and be ready to pull your documents together quickly. Find out how much time your lending company needs to process and underwrite your loan. The national average is 35 days. A speedy closing requires a solid lending institution and a loan officer who stays in excellent communication with all parties (not just the borrowers, but the real estate agent, title officer, etc.)
Conversely, if you need an extended rate lock, tell your lender this from the start. Some borrowers need extra time to get their financial ducks in a row before closing. For example, the underwriter may request that you save a certain amount of money or pay down some debt as conditions for final loan approval. Also, if you're buying a house and have negotiated a closing date more than 30 days out, find out how long your interest rate will stay locked. In a market with rising rates, you may want to pay extra for an extended lock. An extended lock comes with a reasonable fee that could differ between lenders. You could also choose not to lock your rate early and instead secure the market rate when it's time to schedule the closing. Keep in mind that your rate must be locked before the closing is scheduled.
Yes, the rate does matter after all. It's just not the only thing that matters. Your interest rate will likely stick with you for a long time – maybe even 30 years. Of all the documents to pay attention to, check out the Loan Estimate. Learn what each item means and use this document to compare the total interest you will pay across lenders. This is especially important if you anticipate taking your loan to term (i.e., not selling or refinancing during the duration of the loan).
From personality to payoff scenarios and down to the rate itself, there is much to consider when obtaining a mortgage. Take care in finding the lender and product that work best for you. And above all, don't be shy about asking questions. Anyone with your best interests in mind will welcome your inquiries..
If you decide to start the search for a real estate agent first, you have the advantage of having a guide throughout the entire process. Your agent is likely to recommend a loan officer and their lender if they have a good history with them, which eliminates the stress of searching for lenders alone.
You'll save yourself a lot of time and energy by getting pre-approved for home financing. A mortgage pre-approval allows you to know how much you can spend on a house before you even start sifting through real estate listings. Most real estate agents prefer you to have a pre-approval letter before starting to shop for a new home.
If you have a pre-approval letter from a qualified lender, your offer is more appealing to both sellers and their real estate agents as it usually means the sale will go quicker and easier. Once you've been pre-approved, remember to keep your financial situation as steady as possible. Your pre-approval is based on your monthly income and costs. If you make a large purchase like a car or new furniture for your future home or change or quit your job, your monthly finances will change, and your pre-approval will become inaccurate.
When it comes to getting a mortgage, the more, the merrier when providing documents. It is better to be over-prepared if you are looking for a fast-paced process. The standard list of documents are as follows:
This is solely to verify who you are. Any state or federal identification is likely to suffice; however, a driver's license is standard.
It is essential that you provide two months of statements for your bank, retirement, and investments. This ensures that the cash flow is not a singular transaction allowing you to afford the home but rather a consistency that can be upheld throughout the life of the loan.
Pay stubs are also required as they are full of information useful to lenders. Most pay stubs show total hours worked, hourly/salary/ commission wages, and year-to-date earnings. They can also inform the lender of other things that you may have forgotten to claim as income or debt—including withholdings for child support, 401(k) loans, and other situations that will affect your usable income.
Tax returns help lenders better understand borrower’s claimed income, especially in cases of the borrower being contractors or self-employed. It is standard to provide the last two years of tax returns to ensure your income is consistent and there are no significant changes year-to-year.
Credit history is, as you know by now, an important part of the buying process. It helps lenders understand how likely you are to make on-time payments. If your credit score is subpar, lenders may allow or request you write an LOE, letter of explanation to explain the hits to your score. When your score is relatively high, your favorability for a loan heightens.
Whether you rent or live with your parents currently, lenders will need to know your residency. Renters will need to provide documentation of paid rent or a letter from your landlord verifying your rent payments. This also helps lenders understand how trustworthy of a borrower you are, especially if your credit score has blemishes. If you are just moving out of mom and dads, lenders will only need an LOE to be written to validate your residency.
While these documents do not apply to every homebuyer, it is important that if they do, you include them in the stack.
If you have been divorced, the divorce decree and any court orders from the divorce must be provided. It also shows lenders what you may owe out of the divorce.
If you have owned a house that has been foreclosed or had to file for bankruptcy, you will need to provide documentation on those events. Bankruptcy often prevents you from buying another home for a period of time, so your re-entry to homeownership should be confirmed by your lender.
If your friends or family are kind enough to gift you money to buy your first home, they must provide written verification of the gifts and that they acknowledge that they will not be paid back.
First things first – you need a pre-approval. Take this step before you begin seriously looking at houses. It will benefit you greatly! Letters of pre-approval are provided by mortgage lenders – banks and mortgage companies – and will give you an accurate estimate of the amount of money you can spend on a home. This is good for multiple reasons: you will be able to look only at homes within your budget, it will prove to sellers that you are a serious buyer, and it can assist your real estate agent during negotiations with the seller's agent. Additionally, because a pre-approval requires many of the same documents that a loan application does, you will have to provide less documentation during the application process.
If you are concerned about the impacts of home-searching, this is the first hit it will make. Each credit pull takes a minor hit to your credit score.
Once you’ve decided on the home of your dreams, it’s time to put in an offer. This is where your real estate agent really shines. Your agent will work with the seller’s agent to make sure you put in a reasonable offer that works for both you and the seller. As soon as your offer is accepted, let your lender know so they can get started on getting your mortgage loan accepted.
Once your offer is accepted and a purchase agreement is drawn up, though, you are expected to hand over a good faith deposit, also known as earnest money, to assure the seller you mean business. This amount tends to be minimal, typically averaging under 5% of the overall purchase price; however, this could still put buyers into the tens of thousands on a high-dollar house. Once that money is exchanged, it is difficult to get back without a viable reason, "cold feet" not tending to be one of them. Should a home inspection go awry, or an appraisal comes back too low, you should have grounds to stand on, but make sure the purchase agreement allows for these reasons for retraction if you aren't inclined to wave farewell to a considerable deposit.
If you’ve been keeping up with your lender during the home search process, you probably already have some idea of the loan product you will choose. There are dozens of options – conventional, USDA, FHA, VA, and more. Each loan has pros and cons, but it all depends on your credit score, your down payment, government requirements, and even the location of your new house. Your loan officer will be able to talk with you about your options so that you can both decide which loan product is right for you.
FHA: An FHA (Federal Housing Administration) loan is designed specifically for borrowers with low-to-moderate income. It requires a low down payment, which means buyers are not responsible for paying a huge chunk of money upfront. Plus, even borrowers with a lower credit score may qualify for this loan.
Benefits for First-Time Homebuyers Younger generations with little to no lines of credit as well as two or three part-time jobs are able to qualify for this loan. No minimum income is required, and with a 3.5% down payment, you will save thousands upfront.
USDA: Another government-backed loan, the USDA (U.S. Department of Agriculture) loan, was created in an effort to bring more families into rural areas. Like the FHA loan, it is also intended for those with lower income. If you qualify, you may be able to borrow a USDA loan with absolutely no down payment at all.
Benefits for First-Time Homebuyers Credit requirements are higher for this loan than the FHA, but those who qualify may be able to get into their new home with no money upfront (down payment and closing costs included). While the home must be in a qualifying rural area, 95% of U.S. homes are considered in eligible areas.
VA: This government-insured loan is for those in active military service, veterans, and their immediate families, typically surviving spouses. Because of this, buyers could qualify for assistance from the U.S. Department of Veteran Affairs if they struggle to make payments on their homes.
Benefits for First-Time Homebuyers Benefits for First-Time Homebuyers: A VA loan does not require a down payment, which means you can move in without an upfront cost. Additionally, this loan also doesn’t require mortgage insurance. Mortgage insurance is typically applied to loans with a less than 20% down payment.
If you followed through on step one, step four will be a cinch. You may need to provide a few additional documents or signatures depending on the loan type you choose. Some government-backed loans, like USDA, VA, and FHA, require some extra steps that aren’t necessary with a conventional loan. Once you have provided the documents required of you, your loan will go into the underwriting stage. This is where your documents and loan are reviewed for any errors or inconsistencies that need to be addressed before your loan is officially approved. This is also the step that will take the longest if you have not already been pre-approved. It can take anywhere from a few days to over a month, depending on issues that arise due to insufficient or incorrect documents.
Finally! Your lender has approved your loan application, and it's time to go get your new house keys. The actual closing on your home is conducted by the title company and requires pages and pages of signatures from both you and the sellers. Depending on the lender you choose, you may be able to electronically sign many of these pages. Some lenders have the Digital Closing Experience, which leaves you with only a few minutes at the closing table instead of hours. Once the last document is signed, the keys are handed over, and your new house is officially yours!
If you follow these five steps, your mortgage journey will be simple and painless!