Tracy Johnson's Blog
If you’re buying a home for the first time, you have a lot to learn. There are so many decisions that need to be made and new terms to be understood. While you may have been saving up for a downpayment, you’re most likely going to need t finance the majority of the cost of your home. Knowing how to deal with lenders, real estate agents, and other professionals involved in the process of purchasing a home will make your life that much more straightforward. Read on for some mortgage tips that every first-time home buyer should understand.
Know Your Budget
You may find when you apply for a mortgage that you’re able to finance more than you thought you could. Being able to borrow such a significant amount is where many home buyers get caught in a numbers trap. Although the bank may be willing to loan you a certain amount, you might not actually be able to afford it. While the bank looks at many of your financial numbers, the bank doesn’t know your entire budget. How much you spend on groceries each month or the cost of your monthly phone bill are out of the picture when the mortgage company approves you for a loan. Whatever amount of money you borrow to buy your house will result in a monthly payment amount. If you’re only paying $800 per month in rent but your mortgage payment will be $1400, that will result in a significant budget adjustment. Will you be able to come up with the additional $600 each month to pay the mortgage? You need to look at your entire budget seriously to be safe in your mortgage transaction.
Plan For Out Of Pocket Expenses
You know that you need to save for a downpayment on the home of your dreams. What you may not know is that there are many other out of pocket expenses that you need to foot the bill for when you buy a home. These costs include:
Pizza for the people who help you move
Repairs to the home
There are so many expenses that you need to come up with when you buy a home. Don’t merely save enough for your down payment and stop. Make sure you have a financial cushion for emergencies, money to help furnish the house, and more.
Mind Your Credit
When you buy a new home, it may be tempting to buy new furniture, decor, or other items for your property. Hold off on opening any new credit or making large purchases. While a new car will look great in your new driveway, it won’t look so good on your credit score. Be very mindful of your credit score when you are getting ready to buy a home.
If you bought a house that was over $484,350 prior to 2020, you had to get a jumbo loan, which is a non-conforming loan. The Federal Housing Finance Agency (FHFA) increased the limit on conforming loans to $510,400 in most areas. The FHFA also increased the loan limit to $765,600 in some high-cost areas, which include Alaska, Guam, Hawaii and the U.S. Virgin Islands. FHFA increased the loan limit for conforming loans because home prices increased by an average of 5.38 percent from the third quarter of 2018 to the third quarter of 2019.
What is a Conforming Loan?
A conforming loan follows standardized rules set by the Federal National Mortgage Association (FNMA / Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC / Freddie Mac). The two companies are government-sponsored, and they drive the home loan market. The most common standardized rule is the loan limit. Still, the two organizations dictate how much a loan-to-value ratio can be, your debt-to-income ratio, higher interest rates based on your credit score and what documentation you might need for a home loan. A conforming loan must also have private mortgage insurance (PMI) if the down payment is less than 20 percent.
Jumbo and Other Non-Conforming Loans
Banks do not like to write non-conforming loans because they cannot sell those loans to Fannie Mae and Freddie Mac, or most of the other smaller organizations that buy loans. The most common non-conforming loan is a jumbo loan – a loan that is outside the loan limit, which is increasing for 2020. Other types of non-conforming loans might include loans for people who do not meet the debt-to-income ratio or the loan-to-value ratio. Because those loans are riskier, they often come with higher interest rates. Generally, you must also have a very good credit score to qualify for most non-conforming loans, especially jumbo loans.
While some states and territories were mentioned as high-cost areas above, some places in the continental United States are also considered to be high-cost areas. Washington, D.C. and some parts of California have the higher limit of $765,600 for 2020 because the prices of single-family homes are higher than average.
Qualifying for a Jumbo Loan
To qualify for a jumbo loan, you’ll have to jump through more hoops. Some factors a lender look for include:
A credit score of at least 700. Some lenders require a score of at least 720.
Your debt-to-income ratio (DTI). While non-conforming loans may go outside the typical DTI, some lenders might refuse to go over 45 percent.
The lender might require you to have cash reserves of several months to a year in the bank.
The lender might require extensive documentation. You might have to supply your complete tax returns and several months of bank statements for a jumbo loan.
Lenders might require a second appraisal of the home.
A larger down payment.
You might get a higher interest rate, depending on the lender, your financial situation and market conditions.
Closing costs are often higher because of the extra steps you must go through to qualify for the loan.
As with any loan, shop around for a jumbo loan instead of jumping at the first loan offered.
A land contract and a mortgage have a number of similarities. For example, you can use either option to purchase a home Both loans must be repaid on a monthly basis.
Understanding the Differences
A land contract is a legal agreement between a buyer and a seller. Rather than a traditional mortgage scenario with a bank, the seller becomes the lender. The buyer and seller agree on a price for the home then negotiate terms and a payment schedule.
In many cases, these repayment terms follow a schedule of monthly payments much like a mortgage. However, a balloon payment for the remaining balance is often due within three to five years. At that time, you would then obtain a traditional mortgage to fund the remainder that's due.
Land Contract Risks
While it can seem like a land contract would be an ideal way to secure a home, it does involve risks you need to know about. A land contract can be a way for you to close on a home if you aren't able to qualify for a mortgage that covers the full cost right away. The three to five years that a typical land contract lasts can give you time to improve your credit and increase your financial soundness.
Before you agree to a land contract, though, be aware that the property is not yours until you make the final (balloon) payment. This means that if you make any improvements to the property during that time, you could potentially be out of your investment. You are also not building up any equity in the home during the time that the land contract is in effect.
At any point during the land contract, your position as the buyer could be compromised. For example, the seller is the legal owner of the property until the contract has been fully paid. If they experience financial problems and lose the property, you would have no claim to it and would forfeit your payments.
As the buyer, you are obligated to meet your payment agreement. If you don't do so at any time during a land contract, the deal ends. The property stays with the seller and you are out the money you've invested.
Advantages of a Mortgage
With a mortgage, you must pay property taxes and honor your obligations to the lender. As long as you do so -- and avoid liens -- you have legal recognition as the property owner.
A land contract can seem like an attractive alternative if you don't think you qualify for a traditional mortgage. Before agreeing to one, though, be sure you understand the pitfalls that could be involved.
FHA loans have long been a valuable resource for Americans who want to fulfill their goal of homeownership but who don’t have the benefit of a lengthy credit history and equity.
If you’re hoping to buy a home in the near future but want to explore all of your options in terms of financing, this article is for you.
Today we’re going to talk about FHA loans and how to know if you qualify for one.
What are FHA loans?
FHA loans are issued by private mortgage lenders across the country, just like regular mortgages. The difference, however, is that an FHA loan is “guaranteed” by the federal government.
Lenders decide your borrowing eligibility, and how much you can borrow, by determining risk. If you don’t have a sizable down payment (oftentimes 20% or more) and you have a low credit score, most mortgage lenders will see you as a risky person to lend to.
When you get an FHA loan, however, the federal government assumes some of that risk, allowing you to secure the loan anyway.
This means you can buy a home with a low credit score, a smaller than usual down payment, and save on some closing costs.
How do I qualify for an FHA Loan?
To find out if you qualify for an FHA loan, you’ll head to the same place as a traditional mortgage--a mortgage lender. Oftentimes, you can simply call or visit the website of lenders to get the process started.
As with all things, it’s a good idea to shop around for a mortgage lender. Their offerings will be largely similar, but there might be minor differences that make one better than another for your particular circumstances.
Down payment requirements
To secure an FHA loan, you will need to make a down payment of at least 3.5%. However, this low down payment comes with a price. You’ll typically be required to pay private mortgage insurance (PMI) fees on top of your accruing interest for your loan.
Credit score requirements
While you can often secure a mortgage with a lower credit score through an FHA loan, there are still some requirements. To secure a loan with the lowest possible down payment (3.5%), you’ll need a credit score of 580 or above.
Previous homeowners and FHA loans
A common misconception about FHA loans is that they are only for first-time homeowners. However, you can still qualify for an FHA loan if you’ve owned a home before as long as it has been three years since you’ve had a foreclosure or two years since filing for bankruptcy.
If you meet these three conditions, you should be able to secure an FHA loan through a traditional mortgage lender.
Buying your first home can be stressful enough without worrying about whether or not your mortgage loan pre-approval is going to go through. You may not be prepared for the mountains of paperwork that you'll need to submit before a lender gives you the thumbs' up. That's why it's such a good idea to know the requirements before you narrow down your home search.
Here are the top items your mortgage broker or lender will need in order to pre-approve you for a loan.
1. Proof of Income
W2 employees will need paystubs, IRS 1040 forms, and copies of their W2 form for the last two years.
For self-employed individuals, and small business owners, the burden of proof is higher. In additon to 1099 MISC forms, you may need to submit a letter from your accountant stating that your business is still active and a profit and loss sheet.
2. Asset Information
In addition to the regular taxable income you are bringing in, the lender will want to see proof of other assets, including savings, investment accounts, and written documentation of a family member's intent to gift you money.
These assets will let the lender know if you can afford a down payment, pay for the closing costs on the loan, and have enough cash reserves to afford the transition into homeownership.
3. Employment Verification
Lenders want to know not just that you are employed but also that you are stably employed. Thus, they request a letter from your employer to verify your employment status and the salary you're earning.
Self-employed individuals will need to submit at least two years of their complete 1040 forms in lieu of this verification process.
4. Credit Information
Before they will pre-approve a loan, the lender makes a hard inquiry into your credit. You will need a credit score of at least 620 to qualify for a conventional mortgage loan or a Federal Housing Administration Loan with zero percent down. The government may approve borrowers for an FHA loan with a score between 580 and 620 if they are able to make a sizable down payment.
In order to qualify for the lowest interest rates available — typically the ones you see advertised — you must have a credit score of at least 760. In some cases, it is worthwhile to defer applying for pre-approval until you can raise your credit score. Why? A lower interest rate can save you tens of thousands of dollars over the life of the mortgage.
5. Personal Information
Finally, the lender will want to verify your identity by requesting copies of your driver's license, social security number, and signature.