First-Time Homebuyer Tips: The Preapproval Process

What are the first steps in buying a home?

So, you are interested in buying your first home, but don’t know where to begin? Here is a helpful guide to get started.

The first step is to get pre-approved. This involves giving us a call around 3-6 months before you intend on purchasing the home. 

This is to prevent any surprises that might come up, either in the credit report, or due to income, etc. Even if you aren’t ready to buy at this time, we can come up with a plan to help you become a homeowner in the near future.

Here are some of the things that we can go over with you, to help you prepare for a home purchase.  We can:

·         Go over different home values that you would be able to afford given a specific down                 payment at this time.

·         Find a home value where the monthly payment would be comfortable for you to make.               (For instance, how much home you could acquire with a $1200 a month payment.)

·         Get you pre-approved to buy a home.

This last part is important.
Even if you aren’t yet ready to buy, a home just yet, we can assist you in getting your credit and finances ready for when you want to move forward.  A pre-approval letter allows you to put an offer on a home, backed by the guarantee of the mortgage broker and lets real-estate agents take you more seriously.

There are certain requirements to get pre-approved, you will usually need to have your credit checked, which means that you will need to give them info such as birthdays, social security numbers, and the address of the borrower, or both borrowers if there is more than one.

At Evergreen, we like to go one step further with automated underwriting.  We can run your information through Fannie Mae and Freddie Mac’s systems and they can give us a decision right then.  Now we have to back it up with an appraisal and other things, but 95% of the time we get approval on the automated underwrite, we get approval on the loan.  This is just another layer of protection for you, the consumer.
 

Down Payment Options That First-Time Homebuyers Should Definitely Consider

For most people, owning a home is a major step in life. There are many financial and even emotional benefits to owning your own home. Unfortunately, for many the idea of owning their own home seems too far-fetched. Among the most common of problems, is coming up with the money for a down payment. This is a major problem for many would-be first-time home buyers, or at least they think it is.

Many first-time home buyers believe that they need to be able to put at least 20% down, this isn’t the case, in fact, in most cases it is better to put less down.

The reality is, you can afford to get a home with as little as 0%,1%,or 3.5% down. Each option carries different benefits as well as drawbacks.

The 0% down option:
 

This is a topic that I have covered in another blog post here.  I’ll briefly cover the benefits and drawbacks of a 0% down, but for more detailed info, check out the post linked above.

VA, FHA, and USDA loans all have methods to get a home without putting a single penny down out of pocket!

Benefits: 

·         These are good options if you don’t have any money saved, but still have good (700+) credit

·         Allows you to move in without putting any money down.  

·         You also immediately start building equity, though you are starting from 0% equity.

Drawbacks:  

·         Depending on which loan you get, you may end up paying a bit more per month with a 2nd loan, as well as mortgage insurance. However, it is likely still going to be comparable to renting a home of the same value.  

·         In the case of USDA loans, you end up living in rural areas, which, if you like that sort of thing, isn’t really much of a drawback.

·         There are also limits in some cases on how much income you have, and what kind of home you can get.

 

The 1% down option:

This is a much better option for those who can afford to save up a small amount of money. Consider for a moment a $200k home. The down payment at 1% would be around $2,000 or around 2 months’ rent for a 2 bedroom apartment.  

This loan is actually a 3% loan that the lender pays 2% out of their own pocket as a grant to help finance, money that doesn’t have to be repaid (a gift). This option requires that the borrower have good credit (700+). The remaining 1% can either be paid by the borrower, or be a gift by parents, friends, etc.  This is a better option for those who have access to some kind of down-payment.

Benefits:

·         You get to move into a home quicker.

·         You don’t need a 2nd loan to help finance the home or have to live rural.  

·         This gets even better if you can convince mom and pops to gift you the 1% down for the home.

Drawbacks:

·         The mortgage insurance can be a bit higher if you only put 1% down. 

·         This would effectively be a 3% conventional loan, which means that for a while the payments will be higher that they would normally be. But eventually this mortgage insurance drops off.

·         The borrower needs good credit to qualify for the program

 

The 3.5% down option:

FHA minimum requirements are usually around 3.5% down, which for a $200k home is around $7,000. This is a great option for those who are a bit deficient in their credit. And while $7k may seem like a lot, remember that some of that can come in the form of a gift. The loan carries mortgage insurance, which will make it a bit more expensive, but typically these loans are refinanced later into a conventional loan by the borrower once they have paid down the loan a bit. If you have around 3% saved up for a down payment, this might be the option for you, saving that extra .5% or having it gifted, can net you less mortgage insurance than you would pay with a 3% conventional.

Benefits: 

·         You get to move into a home quicker.

·         Credit scores can be lower.

·         FHA is more forgiving of debt.

·         Lower Interest rates!
 

Drawbacks:

·         Carries mortgage insurance, which causes the loan to be more expensive than if it were conventional with 20% down, due to the extra payment of mortgage insurance.

·         Limitations on what kinds of home you can buy (No fixer-uppers, no loans over $337k).

 

The Bottom Line:

The above options are only a few available to the average home buyer.  Don’t let a down payment deter you from owning a home. There are so many options these days for people to move into a new home with little to no down payment, that it doesn’t make sense to pay rent anymore. 

While having a larger down payment reduces the overall amount that you end up having to repay, moving into a home immediately means that you are building equity.

As for paying 20% down, it’s great if you can afford it right off the bat, but most people can’t. Remember, you will always end up paying a mortgage. Either your own, or someone else’s.  If you aren’t sure that you are ready to own a home yet, check out our guide of things to consider before buying a home.

If you have any questions, don’t hesitate to contact us for free information regarding the path to home ownership.
 

In the meantime, take care and have a wonderful day!
 

Mortgage Definitions Made Easy

Whether you already have a mortgage, or are planning on purchasing a home, there are a lot of industry related terms that get thrown around rather casually. Here’s a handy guide for navigating through some of the lesser known terms.

Amortization

This simply refers to the schedule of how the loan is going to be repaid. For instance, you have both 15 year and 30 year fixed rate conventional loans. In the case of each of these, the amortization schedule would be the monthly payment for a 15 year, and 30 year respectively, including interest rates.

Closing Costs

These are costs associated with closing the loan which can include, but is not limited to: fees for a credit report, loan origination fees, and underwriting fees among others. 

Mortgage Escrow

An escrow is the payment that is collected by the lender each month, along with the regularly scheduled mortgage payment, to pay for real estate taxes and hazard insurance premium. While mortgaged homeowners can choose to make these payments themselves, they often benefit from mortgage rate discounts by simply passing them on through the lender, who then holds the funds for payment to the homeowner’s county assessor and insurance company when the payments are due.

To find your home escrow payments, simply find your latest home real estate tax-bill, add in the annual insurance premium, and divide it by 12 (the number of months in a year) This is your monthly escrow payment.

PITI

This is an acronym which stands for Principal, Interest, Taxes, Insurance and represents the total housing payment made in that month. It is calculated by simply adding all of them together.

PMI (Private Mortgage Insurance)

When the loan to value ratio (LTV) is above 80% lenders will generally require private mortgage insurance (PMI) to guarantee the loan against default. Borrowers pay a monthly premium until the loan to value ratio (LTV) drops below 80%. In the case of FHA loans, the only way to get rid of PMI is to refinance into a conventional loan once the LTV is below 80%. Another popular option for conventional loans, to avoid having to pay the monthly mortgage insurance, is to take on a 2nd mortgage.

Points

Percentage points of the loan amount. As an option to borrowers, lenders can allow the borrower to “buy down” the interest rate by paying portions of the loan up front, saving the borrower money over the long term in the form of lower interest rates.

Title  Insurance

Insurance paid by borrowers that ensure the property is free and clear of any liens against it, so that the property may be used as collateral in the event of a default on payment.

This is just a small list of terms that many individuals will often face when refinancing. For more information on terms like LTV, check out our video.

Common misconceptions: Renting is cheaper than owning a home pt. 2

“I can’t buy a home, because I can’t afford the down payment”

Traditionally, to get into a mortgage, a buyer would need to put down 20% of the purchase price at the time of closing. This can be quite daunting (the down payment for $200,000 home would be $40,000) and for most, just isn’t a possibility.  In fact, 20% down payments are now an exception as opposed to the norm, especially for first-time homebuyers.

Here are several low-down payment options:

·         FHA loans – FHA loans only require 3.5% as a down payment.  Their rates are also lower than conventional mortgages and allow for less income/lower credit scores.  Most first-time homebuyers buy homes with FHA loans.

·         Conventional loans – You can still get a conventional loan without 20% down.  In fact, you can now get a conventional loan for as little as 3% down.

In addition, there are several no-down payment options:

·         VA loans – For those who are serving or have served in the military (not just veterans), VA loans are available and don’t require any down payment.  They also offer lower rates, no mortgage insurance, etc.

·         USDA loans – For borrowers willing to live in “rural” areas (in Utah, that’s north of Ogden and south of Spanish Fork), USDA also offers loans which don’t require any down payment. 

·         Grants, Gifts, and Seconds – Most loan types allow for down payments to be gifted from family, friends, and even employers.  There are also programs that allow borrowers to get grants for the down payment or borrow 3.5% as a low interest 2nd mortgage.

At Evergreen, we have significant experience helping clients without access to large down payments.  While owning a home takes budgeting and planning, don’t let the immediate absence of a down-payment deter you. 

Common Misconceptions: renting is cheaper than owning a home.

One idea that I often hear, especially from people my own age, is the statement “I couldn’t afford to own a home, whether due to the down-payment, or due to the amount of monthly payment.

For many, the prospect of owning that first home can be rather daunting. But is owning a home really more expensive than renting one? Let’s take a look at some comparisons.

Home Value                                 Mortgage per month                     Rent per month

$150,000 (condo)                       $1023                                               $1150

$250,000 (house)                       $1500                                              $1600

(Both mortgage values were calculated using 3.5% down at a 3.375% fixed interest rate)

We can see in a side by side comparison that renting isn’t necessarily cheaper than owning a home, in this case, both the condo and the house were slightly cheaper to own than to rent. While this isn’t always the case, there are plenty of benefits to actually owning a home, such as consistently growing equity and value.

If owning a home is something that you are interested in, contact a mortgage broker, as they can point out price ranges in the area, present options, and outline the steps needed to be taken to actually accomplish the goal of moving into a home.

Debunking the Myth: “I should choose a home before talking to mortgage broker.”

I think this misconception stems from new buyer enthusiasm.  People get excited about owning a home, not paying a mortgage, so they gravitate towards the shopping step and figure they’ll deal with the mortgage side when they have to. 

In short, unless you plan on paying cash, looking at homes before consulting a mortgage broker puts the cart before the horse.  If you don’t know how much you can afford, you won’t know what homes are even options.  If you put an offer on a home without knowing that you can actually get a mortgage for it (or how much that mortgage payment will be), you risk losing your Earnest Money (the money you give the seller with your offer), not to mention the time and other costs associated with buying a home.  In fact, most sellers will require that you show a Letter of Pre-Approval from a mortgage broker before they will even let you walk through the home!

It’s crucial to first know what your home-price range is before looking at homes.

At Evergreen, we do this in steps:

1.       Step One:  The “Quick and Dirty” Consultation – We’ll take a “verbal” of your income, monthly debt payments, estimated credit score, and availability of down payment funds.  With that info, we will give you estimates of (a) The maximum home price you can afford, with the corresponding payment and; (b) How much home your maximum budgeted monthly housing payment will afford.  This only takes about 15 minutes but gives you a reasonable price range to consider.

2.       Step Two:  The “Cursory Glance” Stage – With the info from Step One, you can go online and see what homes are your price range.  Zillow.com, Trulia.com, and UtahRealEstate.com, will show you pretty much all of the homes for sale, including those listed on the MLS (a home-selling database for realtors).

3.       Step Three:  The “In-Depth Analysis” – If you like what you’re seeing from Step 2, then we do the in-depth analysis.  This is a crucial step, because as they say, the devil is in the details, and that couldn’t be more true in mortgages and real estate.  In this step, we will check your credit and review your tax returns, income documentation, and asset documentation (bank statements).  We will even run an Automated Underwrite that will tell is with 99%+ certainty if the loan is going to be approved.  During the process, we may change your maximum home purchase price, depending on the results.  This is a crucial step, because it lets you shop with true confidence.

I should note as well that we encourage potential home-buyers to have a consultation 6+ months before they think they will actually buy a home.  That’s because there may be items (like credit report issues) that will take a bit of time to remedy. 

In short, unless you’re loaded, you can’t buy a home without a mortgage, so let us figure that out for you first.