As a first-time home buyer, you have an exciting journey ahead. We know applying for your first mortgage loan and navigating a complex housing market can be daunting. Nevertheless, it is one of the biggest financial decisions you’ll make in your life. One of the largest sources of stress for many first-time buyers is the financing process. Unless you’ve done a ton of research, getting a mortgage can feel confusing or even a bit overwhelming. The good news is you can have a smooth and less stressful transition knowing how the buying process works.
First thing is to get qualified. Find out what you need to qualify for a first time home buyers loan. Some states and local agencies will offer their own programs to help buyers get into their first home, and your mortgage loan advisor can help you understand the local programs available to you. Also you can contact one of the housing counseling agencies that are funded by the U.S. Department of Housing and Urban Development. Agents will help you understand whether you will qualify as a first-time home buyer and which programs will be beneficial to you. If you have down payment or credit concerns, they can also address questions regarding those issues. A list of housing counseling agencies can be found on the HUD website as well.
Next thing is to find out about the down payment. After getting qualified, you must start saving for your down payment in most cases. Some loan programs have a zero down payment requirement while many first-time homeowner programs require 3 to 10 percent down payment. Conventional loan programs might seek 20 percent. You’ll need proof of these assets and they should be “seasoned,” meaning in your account for at least three months. If the down payment is being given to you by family as a gift, you’ll need the proof of assets along with a letter stating the gift of funds. For veterans, VA loans (for military members and veterans) typically offer 100% financing. That means there is no down payment requirement for a first-time home buyer who uses a VA-guaranteed mortgage loan. That’s a huge benefit for those who are eligible for this particular program.
Credit scores are another important mortgage requirement for first-time home buyers. These three-digit numbers give lenders some insight into how you have borrowed and repaid money in the past. Credit scores are based on information contained within a person’s credit report history, which includes such things as car loans, credit cards, and other forms of borrowing activity. First time home buyers using an FHA loan will have to meet a separate set of mortgage requirements. Those rules are established by the Department of Housing and Urban Development. According to current HUD guidelines, FHA home buyers need a credit score of at least 500 just to be eligible for the program. To qualify for the 3.5% down payment mentioned above, borrowers need a score of 580 or higher.
Lastly, the debt ratios are another important mortgage loan requirement for first-time home buyers. And this is an area where we have seen a bit of easing over the last couple of years. Lenders today are allowing higher debt levels than they were two or three years ago, and this is partly due to policy changes made by Freddie Mac and Fannie Mae. Earlier this year, Fannie Mae announced it was increasing its debt ratio limit for the loans it can purchase. They raised the debt-to-income limit from 45% to 50%, for the back end. This means that a home buyer could have combined debts (including the mortgage loan) totaling 50% of their monthly income, and still potentially qualify for a mortgage loan.
Buying a home can be a complex process, requiring to know and have certain qualifications. Though first-timers are unfamiliar with real estate dealings, they stare down many of the same concerns facing seasoned home owners. For most buyers, the best approach is to first wrap-up financing commitments to get qualified for a first time home buyers loan, before embarking on a property search. Once pre-approved for funding, making a list of must-have home features refines the search for suitable housing and gives real estate agents the tools they need to find prospects. In addition to connecting buyers with listed properties, agent/partners are invaluable negotiators, helping first-time buyers strike reasonable deals with sellers. With proper planning, organization and professional help, most first-time buyers have no problem joining the ranks of home owners.