Are you currently living with family, staying with friends, or renting an apartment or home? Are you like many that want to achieve the dream of homeownership for the first time? This is a huge step and it should not be taken lightly. Even though Millennials and others may prefer to text or message everything today, don’t do an exclusive online mortgage! So why not an online lender and do the whole process electronically? Because a first time home buyer loan process should start off with thorough conversations and ask detailed questions with an experienced loan officer.
These up-front, detailed conversations about goals, qualification, and products are key. Just think, this is probably the buyer’s biggest financial decision up to this point. When the whole process is done electronically and not actually discussed, there is too much left up to the first time buyer to figure out. I will even throw out that being a top level mortgage loan officer is an extremely difficult job. There are so many programs and guidelines to understand. So why should a first time buyer try to figure it all out on their own without detailed conversations plus Q&A’s? Let’s explore the make up of these detailed and informative conversations.
First Time Home Buyer Loan Conversation Topics
So once the decision has been made by a first time home buyer to make the call, what topics are discussed? Here are a few of the more popular areas discussed in the initial application discussion. Actual conversations vary based on each buyer’s scenario.
First Time Home Buyer Goals
Of course to start the conversation of buying a home, we are going to want to learn about a buyer’s goals. Typical goals mentioned by buyers include the following.
- Low Payments
- Down Payment
- Fixed or Adjustable Rates
- Price Range
Obviously, everyone wants a low payment on their mortgage. Most think the only thing that lowers a payment is the lowest rate. A low rate is very important. But, there are other important factors which could keep a payment lower. Although it is a temporary reduction in payment, an adjustable rate mortgage (ARM) is an option. An ARM will make a payment lower in the first few years and then it can adjust as the market and loan terms dictate. This could be risky for a first time buyer though. As payments increase, it could strain a family’s budget. So it is important to think it through when considering an ARM.
A larger down payment could lower a mortgage payment as you’re not borrowing as much money. Although, typically a first time home buyer is looking for as little down as possible. With a low to no down payment loan, it allows a buyer not to have to wait so long to be a homeowner. Additionally, there are many times where a USDA or VA monthly payment that has no money down is not much more than a 5% down conventional payment. The reason being that USDA PMI is so low and VA does not even require monthly PMI.
Then, of course, a buyer should know the qualifying price range as well as an amount the buyer is comfortable with. Just because a borrower qualifies for a certain amount, doesn’t mean that the buyer should go to their max. That is where knowing the payment and down payment up-front really helps a buyer make quality decisions too.
First Time Home Buyer Loan Qualification
Being a first time home buyer usually means learning mortgage terms and qualification requirements for the first time. The typical discussion includes the following terms.
- Credit Reports and Scores
- Housing History
- Employment History
- Amount & Source of Down Payment
- Hurdles (student loan debt)
First of all, everyone should understand their real credit scores and how credit scoring works. So definitely read the articles on this site which explain the ins and outs of credit. Next, a prior rent history is one of the predictors for how a buyer will pay a mortgage history. A well paid rent payment shows the ability to make a future housing payment. Although a rent history does help, rent is not always required for mortgage approval. Then, employment history, type of pay, and amount of pay compared to debts is key. Typically lenders look for 2 years of stable employment history, but again this is not always necessary. For instance, starting a job right out of college or being on a commission job for as little as a year could work.
One of the first questions asked of a buyer will be “what is the maximum down payment you could provide? Plus, in a perfect situation, what is the amount you prefer to put down?”. These answers will help determine the best mortgage product for the buyer. For instance, a buyer may have 5% to put down but a USDA no money down makes a lot of sense. So the buyer could keep those funds for cash reserves and rainy day fund.
So what if the buyer is providing a down payment or paying the costs at closing? The source of funds is important. For instance, do not deposit cash just before buying as it cannot be used. Also, if using a gift for down payment, there are guidelines for how this must be done and it varies based on loan type. As always, this is why it is best to have a thorough discussion with an expert loan officer. Don’t try to figure it out yourself or get the wrong advice.
Finally, one of the most popular potential issues with millennial and even older buyers is student loan debt. First of all, the sheer amount of debt owed can cause issues for buyers. Luckily several mortgage programs have started relaxing how student loans that are in income based repayment are counted. We receive phone calls and emails from even lenders across the country asking for advice on handling student debt. So our level of experience can often find solutions for buyers straddled with student loans.
First Time Buyer Home Loan Options
After discussing goals and qualification, next comes the first time home buyer loan programs available. Although most of these products are not exclusively for first timers, they work very well for them. Typical first time mortgage loans include these features.
- No Money Down
- Gift Funds Allowed
- Down Payment Assistance
- Low Money Down
No Money Down First Time Home Buyer Loan
It is so surprising that still many think a sizable down payment is required to buy a home. But this is so far from the truth and even first time buyers can obtain a no money down loan.
VA home loans offer active service members, Veterans, or qualified surviving spouses a no money down option for a first time use. Besides this feature, VA does not require monthly PMI to be added to the mortgage payment. That means a lower payment than traditional low down payment loans that have PMI. Additional VA benefits include flexible credit qualifications, lenient student loan guidelines, and even allows for a seller to pay off buyer debt at closing. Learn more about VA loans here.
USDA Rural Development Guaranteed Loans offer 100% financing along with a fixed 30 year term. This gives a first time buyer the confidence in having a stable loan without a down payment. Although USDA requires borrower and property eligibility, it is very flexible. For instance, the household income maximum limits are very liberal. Plus, most of the U.S. is USDA eligible. The only exceptions are in and around large populated cities. In addition to financing the entire purchase price, USDA allows the seller to pay up to 6% of the purchase price in buyer costs. This could make the purchase a true no money out of pocket, first time home buyer loan. Learn more about USDA benefits here.
First Time Home Buyer Loan Allow Gift Funds
Flexibility is usually key on a first time home buyer loan. Whether it is because of new or bruised credit, new employment, or down payment sources. First time buyers may not have saved enough money for a down payment at this point in their lives. But a common solution for obtaining down payment is a gift from a qualifying donor. Depending on the loan type, the gift could come from family, fiancé, employer, or more. These funds if documented correctly and not borrowed can be the final piece of the puzzle to get into that first home. Gift funds must be documented correctly so make sure to discuss this process thoroughly. It is even possible to buy from a family member and the seller could gift equity as down payment! Also check out another article that details gift funds.
Down Payment Assistance First Time Home Buyer Loan
So what if a first time buyer qualification isn’t a Veteran, qualifies for USDA, or has 3 or 5% down? This is where down payment assistance comes into play. Down payment assistance bridges the gap between the purchase price and loan amount. These programs offer a no to low interest rate loan that may be used towards a buyer’s down payment or closing costs. Examples include the NC Housing Finance Agency or SC Housing. These agencies provide assistance to buyers within their respective states.
Low Money Down First Time Home Buyer Loan Options
In addition to the options above, there are low down payment loans that could be as low as 3 – 5% of the price. Conventional loans allow for as low as 3% down including the Fannie Mae HomeReady loan. The HomeReady loan offers lower PMI than traditional 97% loans, which could make a payment more affordable. Fannie Mae or Freddie Mac conventional loans will allow for the whole down payment to be a gift too. Also FHA loans are very popular with first time buyers because of its flexibility and affordability. FHA benefits include gift funds for down payment, higher debt ratios allowed, no income limits like USDA, lower credit scores, co borrowers that don’t have to live in the home, and more. Hopefully by now you can tell that there are a lot of options for today’s first time home buyer.
For such a big step, make sure that you have these thorough conversations. Even if it is out of your comfort zone, it is paramount. Remember there are no bad questions. So make this first step and give one of our loan officers a call.