First time homebuyers are entirely new to the process of buying a home, and generally have many questions about what to expect. We spoke with State College mortgage experts Principle Home Mortgage to ask 10 questions frequently asked by first time home buyers. Owner and lead PHM broker D. Shane Whitteker specializes in helping clients through each step of the mortgage process.

First Time Homebuyer: I’m a first time homebuyer. Do I need a down payment? When should I start saving for a down payment? How much down payment do I need?
Principle Home Mortgage: Most first time home buyers will need some sort of down payment. VA and USDA mortgages do not require a down payment but fewer people qualify for these mortgages. On conventional financing (FNMA and FREDDIE MAC) the down payment can be as low as 1% but this is a restrictive program. Typically the minimum down payment for a conventional mortgage is 3%. FHA requires 3.5% as a down payment. The percentage for down payment is a percentage of the purchase price ( and it’s never too early to start saving.

Q: I have no idea how much home I can afford. How can I know?
PHM: To answer this, you really need to contact a mortgage professional. The maximum debt to income (DTI) ratios vary on a case by case basis. We tell people to think about what their comfort level is with a payment before thinking about maximum debt to income ratio. If the mortgage broker says you qualify but you can't make the payment feasibly then you need to rethink what your plan is.

To calculate DTI we use gross income (before tax). Then we add up all debts - including child support and alimony - along with the projected house payment. The total amount of debt is divided by the total gross income to calculate the back end DTI ratio. For conventional mortgages, the typical maximum DTI ratio is 45%, sometimes a client can be approved up to 50% DTI. For VA and FHA loans, the max is typically around 55%. USDA Rural Housing is a max DTI of around 45% or less. This just gives an idea of max DTI, there are a lot of factors that impact what the max DTI is for a client.

Q: Does my credit score matter? How can I get my credit score up?
PHM: Yes, this matters a lot. Your credit score impacts what type of loan you can qualify for, your max DTI ratio and what your interest rate will be. Managing your credit score starts with making your payments on time. Never pay more than 29 days late if you can avoid it. Once you are 30 days late this will show on your credit and negatively impact your score. Managing revolving (credit card) balances is also something to pay attention to. The higher your balance is compared to your credit limit the less of a positive impact will occur as in your score will go down. Be careful of having too many credit inquiries as well. If you shop for a car don't let the dealership pull your credit a large number of times. This is a common practice that clients need to be aware of.

Q: If I want to buy a car, will that impact my ability to get a home mortgage?
PHM: This can impact your credit score through credit inquiries and may also have an impact on debt to income ratio (DTI). Talk to your mortgage broker before buying a car if you plan to purchase a home within the next couple of years. Consider being frugal. Don't take on a $700.00 per month truck payment before you buy a house. If you can handle both that is fine but we see a lot of people that have large monthly expenses for vehicles which really changes their ability to buy a home.

Q: As a first time homebuyer, are there any programs available for me? What advantages do I have as a first time home buyer?
PHM: There are some advantages to being a first time homebuyer. Some conventional loan products have some benefits for those buying a home for the first time, with a little better rate and lower down payment options. There are some local incentives available depending on your location for first time homebuyers. In general though there is not a lot of difference between a first, second or third time homebuyer.

Q: Ok, I have a down payment. What other costs will I have to pay for during the mortgage process?
PHM: It is important to understand the difference between down payment and closing costs. The down payment does not cover closing costs. There are options to have the seller pay closing costs but if these options are not exercised the buyer will need to come up with the down payment amount and also pay for closing costs. Closing costs vary per transaction but a good rule of thumb is to budget 4.5% of the purchase price for closing costs.

Q: What is a pre-approval letter? Do I need one?
PHM: A pre-approval letter is a letter that your mortgage broker will issue if you are pre-approved to purchase a home. You typically will need this letter to show the real estate agent so you can set appointments to look at homes.

Q: Should I set a budget?
PHM: One thing I would suggest to first time homebuyers is to put yourself on a budget before you buy. Pay attention to how much money you spend per month so you have an understanding of how much of a payment you can afford without stressing yourself out every month.

Q: What advantages does a Mortgage Broker offer to first time homebuyers?
PHM: In general, a mortgage broker will have access to more programs and be prepared to provide more service to the prospective borrower. During the home buying process a first time homebuyer will have more questions and need more help. It is important to choose a mortgage professional that will provide the level of service needed to have a smooth transaction without undue stress.

Q: Any other tips for first time homebuyers?
PHM: Don't ask the wrong people. There is a lot of bad information out there. Call a mortgage broker, don't allow yourself to be given incorrect information on such an important process. Don't be afraid to ask questions. If the person you call doesn't want to take the time with you that you need, contact Principle Home Mortgage, we will take the time with you.

To learn more, call Principle Home Mortgage's State College offices at (814) 308-0959.