Buying your first home is such an exciting experience! At first it may seem like a big puzzle, but it isn’t that difficult at all. However, having a great agent and a reputable lender can help putting it all together pain free. Regarding the financing you will have to meet some requirements, including coming with a small amount of cash for your down payment and closing costs. You will have to be credit worthy, have a stable employment history and you must be able to afford the mortgage monthly payment. Some of the criteria used to measure these may vary from lender to lender.
DOWN PAYMENT. There are several ways to finance your home, depending on what program you may qualify for. The Veteran Administration offers a mortgage (VA Loan) guaranty program with $0 down. This program is available to eligible service members, veterans, reservist and certain unmarried surviving spouses. The program requires an upfront funding fee that can be added to the mortgage.
The next lowest down payment program is a HomePath mortgage, available when you buy a home owned by Fannie Mae (a “repo”). It requires only 3% of the purchase price and offers very flexible terms. Down payment can be a gift from family or friend, a grant from a non-profit organization, the state or even an employer. It’s available for primary residence only but they do finance 2nd home or investment property with 10% down. This program requires a buyer with an excellent and longer credit experience. No mortgage insurance or appraisal is required.
The most popular program for first time buyers is an FHA mortgage. The Federal Housing Administration guarantees these loans. Minimum down payment is 3.5%. Qualification for one of these loans is a bit easier than any other program. Down payment plus closing cost can be a gift from any family member. This program is only available for primary residence and requires mortgage insurance.
Buyers that can afford a higher down payment may benefit from a Conventional loan program. The minimum is a 5% down payment, but now days these are very hard to get. It’s usually a 10% down but if you want to avoid mortgage insurance you will need to put down 20% or more.
Finally, there are various Public Housing programs sponsored by the state, cities and non-profit organizations. Normally, these programs offer down payment/closing cost and renovation assistance. One of such programs is the City of Phoenix’s Neighborhood Stabilization Program: $15,000 to assist with down payment and closing costs. Right now they are looking for buyers to use this money.
All of the above mentioned loans require additional funds for closings costs and pre-paids. These are costs associated with purchasing a home such as credit report, appraisal, lender fees, inspections, title insurance, escrow fees, etc. You can expect these items to add another 2 to 3% of the purchase price to your total investment. Most loan programs allow the seller to contribute to this part of the investment so you can ask the seller to pay for them.
CREDIT WORTHINESS. Your credit history must be clean for the last couple of years; definitely no pending judgments, open collections, repossessions, and no delinquent accounts. There are mitigating circumstances for having something negative (“dings”) in your history, and these can be explained during the application process. Having no credit or very little credit history can also be considered a negative and will lower your FICO scores. The minimum FICO score the lenders will normally accept is 640 for an FHA loan. We’ve heard some lenders are accepting lower scores, but we suspect they require a higher down payment. If you are considering buying, pull your credit report before the mortgage lender does and make sure it is accurate. Any changes to your report may take as long as three months.
EMPLOYMENT HISTORY. You must demonstrate you’ve had a permanent jog for the last two preceding years. If you had more than one job, the subsequent jog(s) will have to be related or in the same field. Recent graduates working in their fields will be given some credit for time spent in college.
AFFORDABILITY. Under FHA guidelines, your house payment can’t exceed approximately 29% of your gross monthly income. So lets say you earn $3,000 a month before any deductions, then your maximum monthly payment will be approximately $900. This amount should include payments to the principal, interest, real estate taxes and insurance (PITI) plus Homeowners Association fees if your prospective home has one. This is called the “Front Ratio:” monthly house payment/monthly gross income. Now, this house payment plus all of your other monthly credit debt (auto loans, student loans, credit cards, etc.) can’t exceed approximately 41% of your gross monthly income. In the above case $1230 is the “Back Ratio:” total monthly credit debt/gross monthly income. There is some flexibility on these ratios depending on your particular circumstances.
There you have it, a piece of cake… now go and shake your $$ source, check your credit report, call me, and I will take care of the rest… promise!
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