First Time Home Buyer - Trinity Mortgage

First Time Home Buyer

Every home owner at some point was a first time home buyer. Whether it’s the first home or the last, everyone remembers their very first time. And that’s to be expected because anything that brings in new experiences will be well-remembered. A lot of effort by industry leaders is put into getting people into their very first home. The real estate industry in general wants to get someone in their first property because that typically means someone who is selling a home is getting ready to buy another. Once someone gets into the first home, at some point the second one will come along.

The single biggest obstacle for most first time buyers is coming up with the cash needed for a down payment and closing costs. But once the property is acquired, equity builds up over time and it’s the increase in equity that pays for the next down payment and closing costs for the second home. Most any homeowner will tell you that it’s easier to buy the second home than the first. Instead of saving and scrimping money each month to come up with down payment money, those funds are secured as the mortgage balance is gradually paid down and property values increase.

One technical trick with a first time home buyer program is that someone can be considered a first time buyer that has previously owned a home. The definition for first time buyers is not having owned a home within the previous three years. That means if someone bought a home and sold it four years ago, first time buyer status is restored. But what type of programs are available for first time buyers?

Let’s first take a look at a popular loan program that isn’t relegated to a first time buyer but is the loan of choice for those in the first timer category- the FHA loan. The FHA loan only requires a down payment of just 3.5% of the sales price making it easier to come up with the needed down payment.

For the closing costs, the FHA loan allows the sellers of the property to contribute up to 6% of the sales price of the home to be credited to your closing costs at the settlement table. That’s quite a bit and if the seller agrees to pay for your costs and the sales price is $200,000, that means the sellers can contribute up to 6% of that amount, or $12,000. However, when sellers do pay the maximum FHA limit of 6%, that can mean an offset in the property’s appraised value. With a $200,000 sales price, closing costs will be closer to $3,000 to $4,000 in most areas.

FHA loans are also a bit more flexible as it relates to someone’s credit history. FHA loans are more lenient if there are credit issues. The minimum credit score for an FHA loan with the minimum 3.5% down payment is 580 whereas the minimum credit score for a conventional loan is 620. With a down payment of 10% on an FHA loan the minimum credit score drops all the way to 500.

Income requirements for FHA loan ask there be at least a two year history of employment. This will be verified by providing the last two years of W2 forms. FHA loans also require the lender to compare monthly credit obligations with gross monthly income and do so by calculating debt-to-income ratios. For FHA loans, there are two such ratios calculated, the housing and the total debt ratio, sometimes referred to as the “front” and “back” ratio. These two ratio guidelines are 31% and 43%.

The key word here is “guideline.” FHA loans do not require that ratios be at or below 31 and 43 but be near there. Debt ratios for FHA loans can be as high as 40 and 50 where there are compensating factors the lender can use to justify the higher debt load. For example, if the new mortgage payment which includes principal and interest, taxes, insurance and mortgage insurance approaches 48, the lender can still approve the loan by highlighting positive factors about the entire loan file such as being with the same employer for 10 years or making a similar rent payment for the past two years that is equal to or near the new mortgage.

Fannie Mae offers a first time buyer program that asks for a down payment of just 3.0% of the sales price. This program, called the HomeReady loan, is used to finance a primary residence. The HomeReady loan is available in a 30 year fixed rate term and also requires the applicants complete an approved homeownership counseling course. If the property is located in an area designated as “low-income” there are no income limits on the borrowers but if the property is not located in a low-income area, borrower income cannot exceed 100% of the Adjusted Median Income for the area.

Freddie Mac also has its own version of Fannie’s program called the Home Possible mortgage. This program is designed for the very low or low income buyer and just needs a down payment of 3.0% of the sales price. As with all low-down payment mortgages, including FHA and HomeReady, mortgage insurance is required and paid in monthly installments.

Other First Time Home Buyer Programs

Other programs for first time buyers include providing loans or grants to be used toward a down payment and closing costs. These programs will provide the necessary funds to close and attach a second lien as security on the property. Outright grants never have to be repaid and no payments are made on the second lien while the borrowers occupy the property and only repaid when the loan is retired via sale or refinance.

Most such down payment assistance programs allow interest to accrue on the outstanding loan balance but if the borrowers own the home and keep the mortgage for a specified period of time, say three years or more, the second lien repayment requirement is dropped.

Grants and down payment assistance programs will vary based upon the location of the property and administered by state, county or local government and administered by the appropriate agency.

Frequently Asked Questions About First Time Home Buyer Loans
What is the definition of a first time home buyer?
Technically, a first time buyer is someone who has not owned a home within the last three years.

What types of programs are reserved for first time buyers?
Most programs designed for first time buyers are designed to assist with a down payment and closing costs. Many first time programs are issued by local, county and state governments. Fannie Mae has a program called HomeReady which asks for a down payment of 3.0%.

How do I know how much I qualify for?
How much you can borrow depends upon current interest rates, the term of your loan, your gross monthly income and current credit obligations such as an automobile loan and credit cards. Generally, you can borrow approximately 41% of your gross monthly income including all debt.

How do I know if I’m ready to buy my first home?
There won’t be any big “A-ha!” moment but if you have a two year employment and rental history, it’s probably time to ask a few questions about monthly payments, closing costs and other factors with your loan officer. If you’re curious about owning instead of renting you’re probably a lot closer than you think.

How much of a down payment do I need?
If you’re eligible for a VA loan or buying a property in a rural area with a USDA loan, you won’t need any down payment. There is a first time buyer program that needs a 3.0% down payment and FHA loans ask for a 3.5% down payment. With a conventional mortgage, if your mortgage is greater than 80% of the sales price, you’ll need a private mortgage insurance policy, or PMI.

What is PMI?
Private Mortgage Insurance is in fact an insurance policy that protects the lender from the difference between your down payment and 80% of the sales price of the home.

Do I need a real estate agent?
Yes. While you can certainly do your own house hunting on your laptop real estate agents are almost a necessity. Buying a house is more than just getting a mortgage. You will provide your agent with a list of needs and wants and the agent will take over from there. Once a prospective property is picked out, your agent will craft an offer and negotiate on your behalf. There’s no need to do this on your own. You don’t want to overpay for a home or live in an area that is in decline.

How much does a real estate agent cost?
Representing you, the buyer, costs nothing from you. Instead, the sellers will pay your agent’s commission.

What if the sellers turn down my offer?
When sellers turn down an offer they will typically respond with an offer counter to yours. If you offer $300,000 the seller might respond with a counter of say $285,000. You and your agent can decide which figure is best for you.

What about any upfront costs?
When you submit an offer and it’s accepted you’ll need to provide an Earnest Money deposit which is kept with a third party until your loan closes. This deposit will be credit to you at the settlement table. Should your offer fall out, your earnest money deposit will be refunded to you. Earnest money amounts vary by location but a deposit of 1-2% of the sales price is common for most areas.  You may be asked to pay for a credit report and an appraisal upfront as well. Your loan officer will detail any upfront fees for you.

How much do I need at the closing table?
You’ll need your down payment plus your closing costs.

How much are closing costs?
You will be provided a closing cost estimate but you can estimate lender and non-lender charges to run anywhere from $3,000 to $4,000. This is a moving target depending upon several factors but your loan officer can give you a good idea over the phone.

What type of paperwork will I need for my application?
You will submit your application, either online, in person with your loan officer or by mail and your loan officer will provide you with a list of items needed. You can expect to provide your most recent pay check stubs covering a 30 day period, your last two years of W2 forms, most recent bank statements and a signed authorization form. Self-employed borrowers will need to provide the last two years of tax returns and a year-to-date profit and loss statement. As your loan moves through the approval process you may be asked to provide additional documentation.

Is an inspection and an appraisal the same thing?
No, they’re different. An inspection is a physical evaluation of the property. A licensed inspector will walk through the entire home, flip on light switches, check for faucet leaks, appliances and any signs of physical deterioration. An inspection is optional but highly recommended. An appraisal is used by the lender to establish current market for the home and is a requirement. You may be asked to pay for the appraisal upfront.

If you have questions about other home loan programs – Click Here for our full FAQ page.