10 Tips for First Time Home-Buyers
Qualifying for a home loan doesn’t have to be intimidating.
There are new mortgage programs available in 2018 that make it easier to qualify for a loan than ever before.
This article will tell you everything you need to know to qualify as a first-time home buyer.
Get a copy of your Credit Report
The first thing you need to do is get a copy of your credit report from all three major credit bureaus. You can get a free copy of your report at annualcreditreport.com. This is a Government-run site that allows consumers to get a free copy of their credit reports once per year.
Check your Credit Score
Your credit score is one of the most important factors in getting approved for a mortgage. It is important to make your score is as high as possible before applying.
You can check your credit score for free on sites like Credit Karma and Credit Sesame.
Here are a few tips to help you increase your credit score quickly:
- Pay down credit card balances – Your credit utilization ratio is the amount of available credit you’re using, it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the cards limit.
- Do not apply for new credit – When you apply for a new line of credit, a hard credit inquiry is reported to the credit bureau. It lowers your score, and you’re debt to your report which can negatively affect your scores.
- Pay all your bills on time – It is always important to pay your bills on time, every time. But when you’re going to be applying for a mortgage soon it’s imperative you do not have any new late payments. Set up auto pay which all your bills so you ensure you stay on top of your bills.
Pre-Approval Comes Before House Hunting
It is important speak to a lender in order to get pre-approved for a loan . A loan officer will check your credit and verify your income and assets with your W2’s, tax returns, bank statements and paycheck statements.
Most realtors will not even start showing your houses before you have a pre-approval letter in hand. Most sellers won’t accept offers that do not come with pre-approval letters.
Documents Required for Approval:
- 2 years of tax returns
- W2’s and Paycheck stubs
- 2-3 months of bank statements
- Proof of down payment
See if you qualify for an FHA Loan
FHA loans are perfect for first-time buyers because they have less strict requirements making them easier to qualify for. They are the most popular type of loan for first-time buyers because you just need a low 3.5% down payment with a 580 credit score to qualify.
Know your Down Payment Options
The amount of the down payment needed to buy a house will depend on the type of mortgage you get.
First time homebuyers typically have less money in savings which is why low and no down payment home loans are so popular. FHA loans require just 3.5% of the purchase price as a down payment making them an attractive option for first-time buyers.
If you do have at least 20% for a down payment then you can avoid mortgage insurance by using a conventional mortgage.
Hire an Experienced Real Estate Agent
Some first-time buyers believe they can save money by not hiring a Realtor. Don’t make this mistake, the buyer pays your real estate agent and the price of the home already includes the cost.
An experienced realtor will not only help you through the home buying process, they will negotiate on your behalf and look out for your best interest.
Budget for All Home Ownership Costs
Getting a mortgage involves many costs. There is homeowners insurance, mortgage insurance, closing costs and HOA fees.
Mortgage insurance, or MIP is required for FHA loans regardless of how much money you use for your down payment. MIP on FHA loans is between 0.80% – 1% depending on the size of the loan and the amount you put down.
If you have at least 20% to put down you should look into a conventional loan. Conventional loans do not require private mortgage insurance (PMI) if you put 20% or more down.
Know Your Debt-to-Income Ratio
DTI is your debt-to-income ratio, it is the amount of your monthly income compared to your monthly debt payment obligations. This includes items such as credit card payments, car loans and all other loans.
Front-end DTI ratio is your ratio of income to debt payments before adding a mortgage loan.
For example if your gross income is $5,000 per month and your total payments comes to $1,000 per month you have a front-end ratio of 20%. The max this ratio should be is 28%.
Back-end DTI ratio is your income compared to your debt payments after factoring in the monthly mortgage payment.
For example if your pre-tax income is $5,000 and your debt payments including your mortgage loan comes to $2,000 your back-end ratio is 40%. This should be 41% or lower, however in some cases this ratio can be as high as 50%.
Check for First-Time Buyer Programs and Grants
There are many down payment assistance programs and grants for first-time homebuyers available. HUD has many local state programs that offer first-time home buyers down payment assistance programs to buy a home.
You can also find local programs on your city or counties website. Some of these programs may require you to take a homebuyer education class to be eligible.
Know the Types of First-Time Buyer Loans Available
As a first-time home buyer you have more loan options than just an FHA loan. Depending on your situation you may qualify for some other loan programs that offer advantages over an FHA home loans.
Conventional Loans – If you have at least a 20% down payment then you should consider a conventional mortgage. FHA requires mortgage insurance regardless of how much money you put down.
VA Loans – If you’re a Veteran then you may qualify for a VA loan. VA loans require no down paymentor mortgage insurance making them the cheapest type of mortgage available today.
USDA Loans – The US Department of Agriculture has the USDA mortgage program that helps low-income buyers in rural areas of the country save money on a mortgage. If you’re in a USDA eligible location then you may qualify with no downpayment and low mortgage rate of just 0.35%.
203k Loans – If you’re interested in buying a fixer-upper then there is a renovation FHA loan called a 203k loan. Where you can buy a home in need of repairs and get a loan for both the purchase of the property and the cost of repairs and home improvements.
Fannie and Freddie 3% Down Loans – Fannie Mae and Freddie Mac are the two largest buyers of mortgage loans. In order to compete with FHA loans they launched a 3% down payment program called a conventional 97 mortgage.
FHA Energy Efficient Mortgage (EEM) – The Energy Efficient Mortgage Program helps borrower finance the purchase of a home plus get additional funds to make energy efficient improvements.
Buying a house for the first time doesn’t have to be scary. Follow these tips and make sure you work with a great realtor and loan officer.
Check your credit score, hire a good realtor, compare loan offers from multiple lenders and don’t apply for new credit during the home buying process.
As long as you follow all the tips in this article you can achieve the American dream without any headaches.
