A Guide for a First Time Homebuyer:
I consider myself a knowledgeable and experienced mortgage loan originator. I have figured out how to work through tricky income scenarios, guide potential buyers on how to fix their not-so-great credit, and figure out if they can afford to buy a home; even I have been a first time home buyer. Many years ago I went out in search of my first home. I remember having endless questions and not understanding exactly what was going on. With this guide I hope to give some basic knowledge to help the first time homebuyer.
Where does a First Time Homebuyer get a Mortgage Loan?
There are many options for mortgage loans for a First Time Homebuyer. There are big banks; you may already bank with them and you might mention to the teller one day you’re looking to buy a home and they refer you to the mortgage department. There are mortgage lender; you may see their commercials and hear their catchy slogans so you go online or give them a call. Then there are local mortgage brokers, these are often smaller “shop local” mortgage businesses. Mortgage brokers have relationships with different wholesale lenders, they review your loan scenario and work to get you a mortgage loan with the mortgage lender that they see is the best fit.
I am a mortgage broker and therefore I am partial to using a mortgage broker but let me tell you why… mortgage brokers tend to offer a more one-on-one experience. They know the area, standard practices, and are often available outside the standard 9-5 hours. Regardless of what you decide, whether it is a bank, a lender, or a mortgage broker do your homework. Each is not created equal. Similar to purchasing any product read reviews and ask for referrals. Buying a home is probably the biggest purchase you will make in your lifetime. It is important that you have a knowledgeable and reputable professional helping you through the process. Getting a mortgage does not need to be nerve-wracking in fact it should be an exciting and simple process.
Local mortgage professionals can offer extra benefits because they should know standard practices in the area. For example for a purchase in Northeast Florida is customary for the seller to pay for, or provide, the survey. If you work a big bank they may include an estimate with costs to include the survey which may lead you to believe more money for closing costs than you do.
Should I get pre approved and what should I expect as a First Time Homebuyer?
YES! Make sure as a First Time Homebuyer you get pre approved, and make sure it’s from a mortgage broker, lender, or loan officer that knows what they are doing. NOTHING and I mean nothing is worse than going house hunting, falling in love with the house of your dreams only to find out that the pre approval letter you got is not worth the paper it was written on. This happens all the time.
At a minimum the pre approval process should consist of a credit report check and a review of the last two years of your income documents. You may feel like it’s an inconvenience to go through the process of being pre approved but when you begin your home search you will know two important things. First that you can qualify for the home you are looking at and second that if you want to make an offer you will have a pre approval letter in hand. This tells the seller that you are a serious buyer and that you have taken steps to make sure you can purchase.
What are the different types of Loans and which is best for me as a First Time Homebuyer?
Ask your mortgage professional about different loan options as a First Time Homebuyer. There are many different products, conventional mortgage loans, FHA mortgage loans, VA mortgage loans (for veterans / active duty), and USDA loans. Each scenario is different and each mortgage loan program has its benefits.
Conventional loans can be structured many different ways for a First Time Homebuyer. There is a common misconception that you need 20% down payment but that is not the case! Down payment options start as low as 3%. For borrowers that want to bring less than 20% down payment there are options of borrower paid mortgage insurance premium and lender paid mortgage insurance premiums.
There are even conventional loan programs for borrowers that make under the median income levels (varies by location/ county of the property) that can offer lower mortgage insurance premiums and mortgage interest rates in exchange for taking a homebuyer’s course. Conventional loans can be underwritten with two different automated underwriter systems, Loan Prospector and Desktop Underwriter. The two vary in the underwriting guidelines and certain scenarios will benefit from each. There are hundreds of different ways conventional loans can be structured, there is no one size fits all to the conventional loan. A knowledgeable professional will be able to guide you towards the conventional loan that is right for you.
FHA loans are federally guaranteed loans down payment options start as low as 3.5%. FHA loans will often allow for lower credit score borrowers to get a mortgage loan. For borrowers that have had foreclosures, bankruptcies, and derogatory credit events occur FHA is often a more viable option. It is also a great option for borrowers just starting to establish credit. FHA is able to extend credit because it has certain safeguards built into the loan program. There is an upfront mortgage insurance premium (1.75% of the loan) as well as monthly mortgage insurance premiums.
With anything less than 10% the mortgage insurance premium will remain for the life of the loan. For borrowers that choose to go with an FHA loan, maybe because they are rebuilding credit, but they can bring 10% down payment the mortgage insurance premium will only remain with the loan for ten years. It is also important to note that FHA loans can only be used for homes that you intend to homestead and live in. It can be a great financing option for multi-family homes that you intend to live in one unit and rent out the rest for income.
VA loans are loans are offered to veterans and active duty military. VA loans offer 100% financing with no monthly mortgage insurance premiums. There is an upfront funding fee for VA loans, certain borrowers are eligible for loans that are exempt of a funding fee. A certificate of eligibility obtained from the VA will verify the funding fee status for the borrower. Like with FHA loans, VA loans must be used for homes that you will occupy as your primary residence. Eligible borrowers may obtain more than one VA loan in their lifetime however additional funding fees, at a higher rate, may apply if the borrower is non exempt.
USDA loans are offered in “rural” areas. You may think vast open fields and lots of acreage but that’s not necessarily the case. USDA has a map tool on their website that you can search any address and determine if the property could qualify for the USDA program. USDA has an upfront fee as well as mortgage insurance (with less than 20% down payment). On a USDA loan you can obtain 100% financing (similar to VA) however USDA does not review the loan and make a determination of if they will accept it until the loan has been approved. Often this can lead to a longer loan process.
A mortgage professional should be able to help guide you towards the right loan program for you and be able to educate you on the different options.
What is the Loan Process Like for a First Time Homebuyer?
There is no set length of time on the mortgage loan process. In our case we average thirty days or less on most mortgage loans. There will be certain scenarios that may lend to longer loan process times. In cases of foreclosures and short sales you may see longer loan times. Occasionally a buyer may need more time if they have a lease ending or if a seller needs to time to find and obtain financing on a new home. What is important is that your mortgage professional should know what timeline is achievable so it is important that you ask them these questions before making offers. Once you have a contract on a property your loan officer should establish a relationship with your real estate agent to help with a smooth transaction.
If you have been pre approved as a First Time Homebuyer the process should progress seamlessly. The mortgage professional should have compiled all of your personal information into a file. All they would need to do is to complete the application and enter information specific to the property that you have chosen. The application (Mortgage form 1003) will be accompanied by a loan estimate and additional loan disclosures. The loan package can be lengthy but thanks to the progression of technology the documents can be signed electronically from the comfort of your home. Once the application is signed the mortgage professional will submit the application along with your supporting income document, purchase and sales agreement (property contract) to an underwriter review.
The underwriter will use the guidelines from Desktop Underwriter or Loan Prospector (Automated Underwriter System Findings) to determine if you are able to be approved for the loan. The underwriter will ask for additional documents; for example, the appraisal, title work, proof of insurance, proof of available assets, verifications of employment, etc. while underwriting the loan. When all items have been reviewed and accepted the loan is approved and you on your way to the closing table. At the closing you will sign all the final loan documents.
When should a First Time Homebuyer Lock in my loan?
Loans can be locked typically for periods of 15, 30, 45, 60, and 90+ days. The terms of the contract and designated closing date is the biggest determinant of when you should lock your loan. If you are not looking to close for 45 days from application then it is simply impossible to lock the loan on a 30 day lock term. Sometimes you might “float” (not lock the loan, if rates are falling or steady) for a period until you are thirty days out. Other times (if rates are in a trend of increasing) you may opt for a 45 day lock term. Like I said each scenario is different and a knowledgeable mortgage professional can guide you in these decisions.
My biggest barrier of entry into owning a home is the upfront cost, any tips?
Of course it is great if you have been saving towards buying your first home and you have 20% but it’s not always realistic. Many borrowers look to other options to come up with the funds. For most loan programs down payments can come from a relative in the form of a gift. These cannot be loans, they have to be bonafide gifts and they have to come from family. Certain documentation is required from the donor for the gift to be accepted. Often borrowers pull funds from their 401k account. Each 401k is different but some allow hardship withdrawals if the funds are being used toward the purchase of a home and others will allow you to take loans against your 401ks that are paid back through deductions in your paycheck.
I hope this information serves to help someone who is looking to buy their first home. The task can be daunting, looking back I can saw with certainty that I didn’t understand much about the process. Find a professional that is willing to help you understand. If you have any questions please reach out to us at Carbon Capital. You can also check out www.MortgageNewsDaily.com which offers intense helpful articles that may meet your needs!