First-time Home Buyer

Applying for a mortgage does not have to be a stressful process. Knowledge of the available products and loan types will assist you in the selection of the financing that best suits you. A home should be a blessing to your family—not a long-term financial nightmare! If you are about to sign on the dotted line for a mortgage, there are a few things you need to know first.

When you have made all the necessary corrections to your 5 C’s of credit, you are ready to start the loan application process. Before shopping for a home, you will complete the pre-qualification and pre-approval phase.

Activities to avoid after completing your mortgage loan application:
Don’t deposit large sums of cash into your bank account.
Don’t change your bank account.
Don’t make any large purchases.
Don’t change jobs or how you receive payments.
Don’t co-sign on another person’s loan.
Don’t apply for any new credit.
Don’t close any current credit accounts.

What is a mortgage?
A mortgage is a secured loan in which the property purchased is used as collateral. If you don’t repay the loan on time, the lender takes possession of the property to recover the outstanding balance. Therefore, determining the property’s value is critical in mortgage lending. The typical method of assessing value is via an appraisal.

An appraisal is an unbiased professional opinion of a home’s value and is required whenever a mortgage is involved. A qualified appraiser creates a report based on an in-person inspection, research into recent sales of similar properties, current market trends, and the details or amenities of the home. If the appraised value is lower than the contract price, the lender will only finance based on the appraised value. The borrower has to make up the difference.

As a first-time homebuyer, many different types of loan programs are available. Knowing the types of mortgages and the ones you may wish to avoid is a good idea. Conventional, FHA, VA, and USDA are the most popular mortgage types.

Ideally, you are ready to take out a mortgage when:
You are debt-free.
You have three to six months of expenses in an emergency savings fund.
You have saved 10-20% of the down payment.
Your mortgage payment will be no more than 25% of your take-home pay.

Conventional loans are the most popular type of mortgage. More than 70% of all mortgages fall into this category. A credit score of at least 620 is necessary to qualify, but it’s ideal to have a score of 740 or above. A higher score could allow you to make a lower down payment, get a more attractive interest rate, and save on private mortgage insurance. Conventional loans require at least three tradelines (any combination of credit cards, student loans, car loans) that have been active within the past 12-24 months.

A conventional mortgage has a fixed interest rate, which means your interest rate stays the same for the entire time it takes you to pay off your loan. This is a good choice if you want your payment to remain the same over time. The most common terms are 15-year or 30-year.

The three main parts of a conventional loan are interest, principal, and amortization.
Interest: This is the rate set by the lender at the onset of the loan. The interest portion of the payment is a percentage of your remaining balance.
Principal: Principal is the original amount of money borrowed from the lender.
Amortization: A financial term used to describe the process of paying off a mortgage. Over time, the principal and interest you owe on the loan changes. An amortization table shows you these numbers and the progress you make each month toward paying off your mortgage.

If you are financially able and motivated, your best option is a 15-year(or less) fixed-rate mortgage. But if your current financial obligations do not allow you to make a loan payment of that size, remember the end goal is to own your home. Choose the best loan option for you to realize that dream.

The second category of home loans that we will discuss is government-backed mortgages.

The Federal Housing Administration designed the FHA loan to allow those who can’t qualify for a conventional mortgage the ability to buy a home. FHA loans are designed specifically with the first-time home buyer in mind. In Arkansas, to be considered a first-time home buyer, you must not have owned a home in the last three years.

To qualify for an FHA loan, you must have:
at least two tradelines.
a credit score of 580 or higher.
the ability to pay a down payment of 3.5 – 10%.
two years of verifiable, consistent, steady employment with a maximum income of $137,000.
the ability to pay the mortgage insurance premium.
property in an accepted location that will pass a higher home inspection standard.
a maximum home price of $300,000, and the loan must be for your principal residence.
a debt-to-income ratio of less than 57%.

The purpose of the Department of Veterans Affairs or VA Loans is to make it easier for our military veterans to become homeowners with virtually no down payment.

The Veterans Administration only guarantees and insures the loan; they don’t give you the actual money. You must apply for and receive a certificate of eligibility from the VA, which verifies that you meet their loan requirements and specifies the loan amount they will guarantee. The funds come from a private mortgage lender, broker, or bank. Private lenders will require a credit score above 620, and they will consider your debt-to-income ratio.

The United States Department of Agriculture (USDA) offers a loan program managed by the Rural Housing Service (RHS). These loans are available to people who desire to live in qualifying rural areas and show a financial need based on a low or modest income. The qualifications are very similar to those of a FHA loan.

USDA loans do not require a downpayment and have low mortgage insurance rates and 30-year low-interest fixed-rate mortgages. They do require an appraisal and an inspection, and the dwelling must pass occupancy criteria.

An additional type of mortgage is an adjustable-rate mortgage (ARM).
An ARM has an interest rate that goes up or down depending on market conditions. You will receive a lower rate for the first few years of the loan. Many people find this mortgage appealing because they can qualify for a larger home loan. Be cautious if you decide to apply for this type of mortgage. When your rate increases, the payment can quickly become too much for you to afford.

Other aspects of the home-buying process are appraisals, inspections, and surveys. The appraisal and home inspection usually occur right after the seller accepts an offer from the buyer.

Typically, the buyer pays for these services because their lender requires it; the individual who orders it will pay for it. Cost depends on various factors, including the home’s size, location, and amount of property involved.

You may not feel these steps are essential, but they ensure you get what you pay for. You love the house, but these individuals evaluate it without emotional attachment.

Appraisers use a specific set of factors to create an appraisal. They consider the home’s condition, improvements, and nearby home values. Their job is to evaluate the living space for safety hazards and check the functionality of home systems, thereby determining if a home is livable. A licensed appraiser includes a brief analysis of comparable properties near your home. They check sale prices and current property values to determine an appropriate dollar amount for your home.

Home Inspections are a much more in-depth process. The inspector specifically looks for problems in the home and determines whether certain areas need repair.

A property survey conducted by a licensed surveyor is a precise, professional measurement drawing of your property that details the lot’s location, property lines, home, and any other structures within its bounds. A survey confirms land boundaries in the event of a legal dispute. While not mandatory, a survey is strongly suggested. Many lenders and title companies require a property survey to ensure no encroachments before issuing title insurance.