A Guide For First Time Homebuyers
A Guide for First Time Homebuyers
Buying your first State College home is an exciting rite of passage. It can also be a bit daunting as you start looking into getting a loan and finding the perfect home. There are so many decisions to make. We sat down to discuss the process with local mortgage broker D. Shane Whitteker from Principle Home Mortgage.
One of the first steps that first-time homebuyers should take is to get a copy of their credit report. Your credit score will be used to determine how creditworthy you are deemed by mortgage lenders. Loan guidelines vary depending on the type of loan you pursue.
“Credit is of course a major factor when purchasing a home. It is good to monitor your credit and speak to a mortgage broker even a year out from the time frame of purchasing a home,” Whitteker says.
Whitteker warns that there are a few common ways people run into credit score problems.
“Payment history and collections are two of the biggest factors when considering credit score. Medical collections can sneak up on you, so it is important to monitor this properly,” Whitteker says.
If you do have outstanding medical bills, Whitteker recommends considering establishing a payment plan.
“You can set up a payment plan for any medical bills if you do not have the money to pay the bill outright and this will typically keep the account from going into collection.”
When building your credit, remember that even a few missed payments on a line of credit can hurt your mortgage qualifications. It’s also vital to develop a budget to stay on financial track.
“Payment history is obvious but still can be overlooked by people that don’t understand the significance that one or two late payments can have on credit and qualification for a mortgage,” Whitteker says. “If someone is going to purchase a home, they really should start to budget at least twelve months prior to the purchase to help prepare them for the financial realities of home ownership.”
Conventional loans require a minimum of a 620 credit score while FHA and VA don’t have a specific minimum credit score requirement. However, FHA and VA do have credit requirements and banks set limits as far as credit score goes. The higher your credit score, the more likely you are to qualify for the best interest rate. For that reason, it is critical for borrowers to review their credit report before applying for a loan and searching for a home.
USDA loans also do not have a specific minimum credit score but this loan product is very strict considering credit history. The USDA guaranteed mortgage will allow for manually underwritten loans but the borrower needs to have a 640 middle credit score. There are a number of other criteria to qualify for a manually underwritten USDA mortgage, a 640 credit score does not guarantee approval.
There are many manuals and articles written about the best ways to improve your credit score. Serious buyers should do everything in their power to improve their credit score before applying for a mortgage. There are often errors on credit reports that can lower your score. Challenging these errors can get these mistakes deleted from your credit report to raise your score.
There are no hard and fast rules about work history requirements when it is time to apply for a mortgage. While that might be a bit disconcerting, this fact actually works in favor of the borrower since many lenders are much more flexible than others. Knowledge is power when it is time to select the best loan for your unique home buying needs.
Let's start with the official norm for employment requirements. There are general employment guidelines when getting a mortgage, however it’s important to speak with a mortgage broker to know all the details, Whitteker says.
“Job history is a very important aspect of qualification for a mortgage. Typically, lenders want to see a two-year work history. There are ways to work around this but make sure to discuss this with your mortgage broker to avoid potential issues,” Whitteker says.
According to Whitteker, periods of unemployment, as well as the type of job you have can have an impact on your mortgage.
“Gaps in employment can be an issue here. It is important to keep a solid 12 months of work as steady as possible to have a higher probability of approval. Jobs that are paid commission or something similar and also self-employed borrowers need a full two year work history along with two full years of income verification. For someone that is self employed this means they will need two years of tax returns,” Whitteker says.
The mortgage world is not that rigid though. Each type of loan has its own set of exceptions. For example, conventional loan standards state that they require two years of related work or educational history. In other words, if you attended college to get an accounting degree then moved into your first accounting position after graduation, meeting all the other mortgage requirements, then you will probably qualify for a conventional loan.
FHA requires two years of consistent history. Additionally, you need to be able to prove you have been in your current job for at least six months if you had a gap of employment of over 30 days. Work consistency means working in the same field or making logical career moves. If you worked as a bartender, a tennis instructor and are currently three months into a new sales position, then you are less likely to be approved.
Considering that VA loans are specifically designed for veterans and other service members, the employment requirements are consistent with this type of applicant. To qualify, VA borrowers must be able to prove two years of related instruction or military service. If you have served in the military it is a good idea to check with a mortgage broker about whether you have access to a VA mortgage. If a broker is approved with the VA they should have access to the VA portal which allows access to your potential certificate of eligibility.
USDA requires at least one year of full-time employment on your current job and two years of total employment history. There are case by case exceptions to this rule but the 12 months on the current job is basically written in stone.
Down Payment and Expenses
First-time homebuyers have to come up with a down payment to qualify for most mortgages. This can be difficult since you have no equity to roll over into the loan from a previous home sale like older buyers do.
“Planning for down payment is another important piece to the puzzle of getting approved for a mortgage,” Whitteker says. “Again, speak to your local mortgage broker to figure out which mortgage you will be working toward obtaining. This will help you to understand what type of mortgage you need to prepare for.”
Think all down payments and mortgage expenses are the same? Think again. Whitteker says your down payment and expenses will vary depending on the type of mortgage you get.
“As an example, most conventional conforming mortgages will require more out of pocket expense including down payment than government mortgages like FHA, USDA, and VA. If a borrower does not have sufficient funds saved for down payment in a checking or savings account, there are other options to come up with this money,” Whitteker says. “Borrowers often overlook options like pulling money from a 401K or other form of retirement account. Gifts from family members or employers are also an option.”
Not surprisingly, different loans have different down payment requirements. VA and USDA loans have no down payment requirement. FHA loans require a 3.5 percent down payment with conventional loans typically requiring a three percent down payment at a minimum.
A practical way mortgage underwriters evaluate your ability to pay your mortgage is to review your rental payment history. Usually, the largest monthly payment that you make is rent. Being able to consistently pay your rent on time is considered an excellent predictor of whether you will pay your mortgage on time. While an occasional late rent payment probably won't kill the deal, evictions or a lot of late payments may throw your application into the rejection pile.
“Current rental history can really help with approval when there have been some credit issues on the past. Typically, the bank likes to see this history in the form of cancelled checks from the borrower(s),” Whitteker says.
According to Whitteker, an established rental payment history helps to lower the perceived risk on the part of your lender.
“A twelve-month history really helps the underwriter to see that the borrower has the ability to pay rent on time and is also used to calculate payment shock. Payment shock is the difference between the current rent payment and the amount of the housing expenses that will be incurred. Housing expenses include principle, interest, real estate taxes, homeowner’s insurance, and mortgage insurance.”
First-time homebuyers should shy away from debt whenever possible so they will qualify for a higher home loan amount. Strict debt guidelines define the mortgage loan landscape.
According to Whitteker, debt-to-income (DTI) ratios refer to your total debt load as compared to your gross income, and your DTI impacts the type of mortgage you can get.
Unsure how a purchase might effect your DTI? Ask your local mortgage broker.
“Debt ratio is very important to manage when you are planning to purchase a home. Don’t buy the expensive truck or car without speaking with your mortgage broker. This can have a very big impact on what you qualify for,” Whitteker says. “It is important to be able to qualify for the home that fits your needs and not be limited on purchase price because of an expensive vehicle.”
Remember, a little sacrificing today can have payoffs tomorrow.
“Owning a home is one of the main ways people build assets in their life,” Whitteker says. “Limiting this based on expensive vehicle purchases can have a significant negative impact on a person’s future wealth. This goes back to the concept of having a budget worked out well ahead of purchasing a home. Making frugal financial decisions at least twelve months out from purchasing a home can really make a big difference in what type of home you can purchase and what type of location you will be able to live in.”
FHA and VA have the most liberal guidelines with DTI. Conventional and USDA are more strict. FHA, VA and USDA all have options for manually underwriting a loan. This mean the system may not have approved a client but they still may have approval options. The DTI guidelines are more strict on manually underwritten loans.
Selecting Your First Home
After the hard work is done and you have qualified for a loan, it is time to have some fun and look at houses. New homes are bright and shiny, but you will pay top dollar for that piece of property.
According to Whitteker, for a variety of reasons, a "fixer upper" might be the answer for building equity fast with some hard work.
“Don’t be afraid of a fixer upper. If you have some flexibility in housing or even if you don’t, buying a home that needs renovation is a good option for many people,” Whitteker says.
Whitteker says fixer uppers can help a buyer gain entry into tight housing markets.
“These properties tend to be less sought after, so you don’t have to compete with as many potential buyers. This helps to acquire the property at a lower price. The fact that the home needs to be renovated also typically allows for a significantly lower purchase price,” Whitteker says.
A fixer upper also allows the home owner to make big strides in building equity.
“Depending on your market you may end up with significant equity after the renovations are complete. This is one way to set yourself ahead of the game as far as home equity and future purchases go. The more equity you have in a short time frame opens up a lot of options. If you sell the home, you have that equity to use for your next purchase. If you keep the home the equity can be pulled out in the form of financing and be used for any number of investments or anything really.”
It makes sense to meet a home loan advisor first to evaluate your options as a buyer. Only after you know what you can afford, is it time to go shopping. Home buying can be an exciting first for smart buyers.