Guide to Your First Home Loan

It can sometimes be a little daunting how much there is to learn about buying a home for the first time. However, it is important to make educated decisions about loans because of their extensive impacts on your life. Buying a house is often the largest purchase someone will make, and loans are something that will affect your financial situation for years to come. 

Before getting starting the homebuying process, the best thing you can do for yourself is to be informed on how mortgage loans work. This guide will help you be informed of the process, from loan preparation to application, and will help you be in control when taking the steps toward being a first-time homeowner.

Who qualifies as a first-time home buyer?

The Federal Housing Administration lays out the specifications for who qualifies as a first-time home buyer. If you have never owned a house before, then you obviously qualify as a first-time homebuyer, but there are other scenarios that may also qualify you as well.

If you have owned a house before but not during the last three years, then you are still considered a first-time home buyer. This also applies to anyone who has owned a house with a past spouse, but never on their own. If you’ve had a house before but your spouse has not, then you are considered first-time home buyers when buying a home together. 

It can sometimes be beneficial to be considered a first-time homebuyer when getting a loan, as there are some exceptions granted in their favor. So, it's important to know if you qualify as one, and what it means if you do.

Terms to Know for First-Time Home Buyers

Just like with most major financial decisions, there is a learning curve to understanding how loans and mortgages work for people who have never gone through the application process before. There are some important terms to understand before you start diving into how to secure a loan: 

• Adjustable Rate Mortgages (ARM)
• The interest rate on this type of loan will vary over time. Usually, the ARM starts out with a rate lower than the average fixed rate at the moment, and then changes over the years. It may be cheaper for the first few years, but can eventually become far more than fixed rates, or even go down. It all depends on what direction interest rates go in the future.
• Annual Percentage Rate (APR)
• The APR shows the total cost of the loan in an annualized format. It includes the interest rate, as well as the other costs of the loan. This is a good tool to use when comparing loans, as it allows you to compare apples to apples better, and not be fooled by a flashy interest rate and hidden charges.
• Closing Costs
• These are the fees and expenses directly associated with purchasing a home. These cover the closing attorney, title services, taxes, and more.
• Debt to Income Ratio (DTI)
• DTI compares your monthly expenses to monthly income. It’s a good way of showing how much you can afford and is calculated by dividing your total monthly payments by your income. It's also one of the major factors in deciding whether or not you qualify for a loan.
• Down Payment
• The down payment is the percentage of the purchase price paid up front and not covered by the loan. Some loan options, such as USDA and VA do not require a down payment, but others, such as a Conventional or FHA loan, do.
• Equity
• Equity is the value of your home minus the remaining loan balance. It is the amount you'd expect to make from selling your home before fees/taxes, and after paying off the remaining mortgage loan balance.
• Fixed Rate
• Interest rates that do not change over time, unlike with ARM loans (see above). Because the interest rate does not change over the loan’s life, borrowers do not have to worry about any changes in interest rates in the future.
• Homeowner’s Insurance
• This insurance covers your home and property against damage. This insurance is required by lenders when you take out a mortgage loan, as the property is used as collateral for the loan.
• Interest Rate
• The rate — based off the principal balance — that you are charged by lenders for borrowing money. The interest rate is an annual percentage, and the amount of interest owed each month is calculated by taking the remaining loan balance, multiplying it by the interest rate, and dividing it by twelve.
• Mortgage Insurance Premium (MIP)
• Both FHA and USDA loans require the borrower to pay Mortgage Insurance Premiums. MIPs are meant to protect the lender against the possibility of you defaulting on your loan. With FHA, you must pay an upfront Mortgage Insurance Premium (MIP) of 1.75% of the home purchase price. USDA loans do not have a up front MIP, but they do have a guarantee fee that essentially acts as the same thing. On top of these up front costs, both FHA and USDA loans have a monthly MIP payment that is added to your monthly mortgage payment.
• Outstanding Debt
• Outstanding debt is the total amount of money you owe on any revolving tradelines (such as credit cards) or loans.
• Pre Approval
• Lenders analyze your information and documents to give you an idea of what loans you could receive.
• Prequalification
• Generally considered a softer version of a preapproval. Similar, but without the requirement of borrower documents. Although, some companies use the terms preapproval and prequalification interchangeably. Homestar does not hand out prequalification nor preapproval letters without documentation, so they are treated as one and the same.
• Principal
• This is the amount of money borrowed when a loan is first opened.
• Principal Balance
• This is the current amount of money owed, not including any interest or finance charges due.
• Private Mortgage Insurance (PMI)
• PMI is paid by those with a conventional loan to protect the lender. It is usually added to the monthly mortgage payment, although it can be paid up front. If you put 20% down on a conventional, you will not be required to have PMI. And it will fall off the loan on its own once the loan amount goes down to 78% of the original home value when purchased (usually the purchase price), or 80% if you are proactive in requesting it from the loan servicer.
• Refinancing
• The act of taking out a mortgage loan to pay off a mortgage loan on that same property. It is generally done to save money in some way, whether by lowering the interest rate, or the monthly payment. You can also refinance to tap into the equity you have on your home and take some of it out as cash.

Review Your Finances

Before even attempting to apply for a loan, you should make sure that you are in good standing financially. With loans, you are granted a large sum of money in order to purchase a home, but there are many fees and costs necessary to first receive the loan. Review your financial habits and find out how much you're spending each month compared to your income. Consider if you would be able to afford a monthly mortgage payment on top of your current spending. 

Many of the costs and fees associated with loans will have to be paid upfront, so make sure you have the savings available for it. These are on top of the Down Payment (if applicable), and include application fees, appraisal fees, and closing costs.

Down payments are required for nearly all loans with special exceptions.The minimum down payment, if there is one at all, is determined by your loan type but will be at least 3% of the home’s total purchase price. It is also recommended that you have at least a few months worth of mortgage payments reserved for a rainy day.

All About Credit Scores

Credit scores give a summary of your credit use and financial habits. Some of the main factors that determine your credit score are how long you’ve been using credit, if you pay bills on time, any outstanding debts, and how much variety is in your account. In this way, credit scores can reveal a lot about your financial responsibility. Good credit scores are generally considered to be 670 and above, while fair scores are 580 to 669. Anything below that is considered poor or very poor and will not qualify you for any loans.

How can I build credit?

The best way to get started is by opening a credit card. There are secured credit cards with that purpose exclusively in mind and will not deny you regardless of your credit history or lack thereof. Put money on the card every month and always pay it off on time. Credit will continue to build as the card ages, and you may be able to open a few more cards to show you can handle multiple accounts. Be sure not to do anything that can negatively affect your credit such as skipping payments, maintaining high balances, or opening too many accounts.

How can I improve my credit?

The best way to improve credit is to find out what is negatively affecting your score and changing it. You may be able to find out through a credit report. Try adding variety to your credit and make sure all your cards or loans are being paid on time. Credit will improve as the account gets older as long as you are doing the right thing. Brian also has a credit recovery program to help borrowers get their score where it needs to be.

What are mortgage loans?

Mortgage loans are loans that provide you with funds to purchase a house or property. All loans are given out through a private lender. They look at your qualifications and documents to determine what loans you are eligible for and how much you can get. Different lenders may make you different offers on a loan. In order to properly compare loan offers you must understand the parts of the loan:

• Loan Terms
• Mortgage loans can come in an array of loan terms. This is the length of time that the loan will be paid off over. The most common loan terms for homes are 15 and 30 years. 
• Interest Rates
• Interest is charged on your loan payments as a way of paying the bank for providing the loan. The rates are a set percentage of the remaining balance owed on a loan.
• Monthly Costs
• Your estimate will tell you about how much the loan will cost monthly.
• Down Payment
• All loans require you to pay part of the loan upfront. The minimum is determined by your loan offer but you can pay more if you want. A higher down payment will likely provide lower interest rates.The down payments are percentages of the total purchase price of a home. Whatever is paid down will be taken off the remaining loan balance.
• Mortgage Insurance
• Mortgage insurance is charged on your monthly payment. You will have to pay either mortgage insurance premiums or private mortgage insurance depending on the type of loan. The only way to avoid mortgage insurance is by paying 20% down on a conventional loan. 
• Closing Costs
• The closing costs cover lender, attorney, government, and other fees associated with the loan. They are usually between 3% and 6% of a home’s purchase price, but are determined on a case-by-case basis.

Mortgage Loan Options

There are many different types of home loans available to the public, but they may not all be provided by every private lender. Loans can either be backed by the government, or not.

Government-backed loans are supported by federal departments and administrations but provided through private lenders. These types of loans are meant to help certain types of borrowers. These are the main types of government loans that are available to first-time home buyers:

• VA Loans give special loan opportunities to veterans and those who are serving in the military.

• USDA Loans are meant to provide safe housing to anyone in a rural area who can’t afford to buy a home without assistance. 

• FHA Loans help provide housing for anyone with a low or underdeveloped credit score and not enough money for a large down payment.

• 203K Loans are also backed by the Federal Housing Administration and provide the money to buy and fix a house that is in need of repairs.

Each of the government-backed loans have their own requirements and special benefits. The most commonly used loan is not government-backed, and is called a conventional loan. The government does not insure these loans, so a lender is more at risk with this loan type. Conventional loans usually have stricter qualifications than the others because of that, but come with their own benefits, and are often an attractive option for those who qualify.

Picking a Mortgage Lender

If you believe you are financially capable of affording a loan and qualified to get one, then you are on the right track to pursuing a mortgage. You’ll need to look for a lender that is approved to handle the types of loans you have interest in. 

Your lender should be there to take care of you and walk you through your options. They can answer any extra questions that you may have about the loan process or their business. Good lenders will be responsive when you try to contact them.

It’s beneficial to be preapproved by a lender to see what loans you qualify for. You can be preapproved by multiple lenders to compare their deals before choosing one. You’ll need to bring multiple documents with you to start. They’ll need to see your ID or social security card, along with recent pay stubs, tax returns, and other documentation. Ask the lender that will be preapproving you for a detailed list of required documents.

Prequalification vs Preapproval

Prequalification and preapproval are both ways of receiving an estimate of how much your mortgage loan qualifies you for. Both require you to talk to a lender about your finances, but preapprovals are more solid than a prequalification. 

With prequalifications, none of the information you provide is verified, so prequalification might not mean as much to realtors. They would much rather have preapproval to prove that you can actually afford a house. This also gives you a price range for the houses you should be looking at. 

When you are preapproved, lenders must request your credit report, which can negatively affect your score. Make sure that any hard inquiries involved in preapprovals are done within 30 days. This way, they only count as one hard inquiry and will lessen the effect on your credit.

Finding a House

After you’ve been approved and have chosen a lender, now is the time to choose the house you want to buy. This is a huge decision in your life, so make sure it is what you need and can afford. Use the loan amount that you qualified for in preapproval to keep within your price range. 

When looking at houses, consider the features and area around it. Consider whether the home will still be a good choice years from now, and the life changes that may happen there. Think about what the qualities and features that you want in a home. Which features are most important to you? You may not be able to find a house with them all that is in your price range. 

Whichever house you choose, it should be in your best interest and price range. Then, place an offer on the house you choose. 

Applying for a Loan

Now that you have a house and a lender, it’s time to officially fill out your home application. You may need to bring in more or updated documents for this. The lender will order an appraisal of the house to make sure the loan will cover it and that the offer is reasonable for the home’s value. Within three days of the full application being submitted, you will receive a nearly exact estimate of the full details of your loan. You’ll have to wait a while while all the information is processed by underwriters. 

Closing on Your First Mortgage Loan

Once you are finally approved, the closing documents will be sent to whoever is handling the title of your future home. Just a warning, you’ll be doing a lot more paperwork. One of the forms you will get before closing day is the Closing Disclosure, which will provide the exact and confirmed details of the loan. Make sure that everything is correct before filling out all the home paperwork. Once everything is in order, you are a homeowner!

Purchasing a home involves a lot of money, back and forth steps, and paperwork. By being prepared and understanding more about how it works, you are prepared to face it. Use your knowledge to get the best deals and make the mortgage loan process as painless as possible. 

When you have the loan qualifications, savings, and can afford the payments, you are guaranteed your first mortgage loan.

Get a First Time Home Buyers Loan with Brian the Lender

If you’re a first-time home buyer, buying a home feels like a long and daunting process. But with Brian the Lender at your side, you’re guaranteed a smooth process as you research and apply for your first home loan. For more information about types of mortgage loans or to schedule a sit-down, give Brian a call! 706-973-7933