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Understanding Mortgages

 

Understanding FHA Mortgages Can Help You Get One On Your First Try

The road to homeownership is paved with a plethora of possibilities. Thanks to low-interest financing and closing costs that sellers often agree to pay or split with the buyer, many deals are available if you know where to look and work in close consultation with your lender. In fact, in a recent survey conducted by the National Association of Realtors, nearly two-thirds of Americans believe that the current market is a favorable one to buy. Such optimism may be due to a variety of encouraging developments, such as higher incomes, favorable lending terms and growth in available inventory.

However, with so many loan options out there, it can be difficult to determine which mortgage avenue to pursue. A good place to start is with an FHA mortgage. You've probably heard of this mortgage type before, as it's one of the longest-running home loans out there, around since way back in the 1930s. But have you ever wondered how to actually get an FHA mortgage? The easiest way is by understanding what they're all about. That's what you're about to find out, which can help you better determine if this potential pathway to homeownership is worth traveling down.

But before we get into that, it's helpful to understand what the FHA is and how this government organization works in partnership with private lenders to help more people achieve what remains the American dream.

What is an FHA loan and what's required in order to qualify?

An arm of the Department of Housing and Urban Development, the Federal Housing Administration is a government organization whose primary role is one of oversight. Established in 1934 during the Roosevelt administration, the government agency created FHA loans the same year it debuted.

Instead of selling mortgages directly, the FHA insures FHA loans that are made available through private lenders upon approval. By "insure," this means that should an FHA loan borrower default, the agency provides assurances to the lender that whatever amount remains outstanding will be paid off in its entirety. This added certainty is part of what makes FHA loans popular with first-time homeowners because the terms tend to be looser, which also makes it a bit easier to qualify for an FHA loan versus a conventional loan, for example.

FHA loans require many of the same qualifications that conventional loans do - such as proof of employment, bank statements, two years' worth of tax returns and details of your credit history. However, the extent or degree of those requirements aren't as strict.

Take your credit score as a classic example. Generally speaking, the higher your credit score is, the greater your chances are of being approved, provided the other aspects of your finances all check out. But if your credit score isn't quite as high as you'd like it to be, you may still be approved for an FHA loan.

How does an FHA mortgage compare to a conventional mortgage?

There are a lot of similarities that FHA loans have to conventional loans. Understanding this fact can provide further instruction on how to get an FHA mortgage and determining which  mortgage product is the right one for you.

In addition to both being highly popular mortgage products, their interest rates come as either fixed or variable, down payments are highly affordable - as low as 3.5% for FHA loans - and the length of the loan periods can run between 10 and 30 years.

Overall, though, FHA loans and conventional loans actually have more differences than likenesses. The biggest distinction lies in the fact that conventional loans aren't guaranteed by the federal government. This means that if you were to default, your lender would be on the hook for what has yet to be paid off. As a result of this, it's generally more difficult to gain approval for a conventional loan than it is for an FHA loan.

How long do borrowers have to pay FHA mortgage insurance?

Mortgage insurance is another way FHA loans and conventional loans differ, assuming your down payment was for less than 20% of your prospective property's purchase price (the typical cutoff in determining whether private mortgage insurance is required).  With a conventional mortgage, you don't necessarily have to pay for mortgage insurance for the life of the loan. It can be canceled after a certain period if you have accumulated enough home equity.

This isn't an option with an FHA loan; you have to make monthly payments for mortgage insurance in perpetuity assuming the down payment was for less than 10% of the purchase price.

If, however, you paid 20% or more, then the mortgage insurance requirement is waived.

How does debt-to-income factor into obtaining an FHA mortgage?

There's no magic number, action or sheet of paper when it comes to how to get an FHA mortgage as seamlessly as possible. Every person, situation and FHA loan differs. One of the factors used in approval assessment is your debt-to-income ratio, or DTI. This is a calculation that assesses how much of your earnings goes toward paying down debt on a percentage basis. The higher the figure, the more that you spend on payments. For purposes of mortgages, "debts" are considered credit card bills, credit lines, auto loans, unpaid tuition and other installment loans. Utility bills are not factored into this equation.

Again, there's really no magic number in terms of what DTI ratio you need to be approved for an FHA loan. However, it may not be as low as you think it needs to be. According to the previously referenced FHA report, in 2018, roughly 1 in 4 FHA loans -  went to applicants with a DTI ratio of 50% or more. This represents the largest percentage of FHA loans with DTI ratios above this threshold since the turn of the century. This doesn't necessarily mean anyone with a DTI at or higher than 50% will be approved, of course, but it does further the point that FHA loans are designed to be more lenient when it comes to approval, especially as they compare to conventional loans.

You can calculate your DTI on your own by adding up all your monthly payments (not including utilities, as previously mentioned) and dividing that total by how much you earn each month before taxes are taken out.

What does loan-to-value ratio mean and how does it apply to buying a house?

Another ratio FHA lenders use when evaluating mortgage borrowers' potential purchase of a home is the loan-to-value ratio or LTV.  Like DTI, the LTV ratio is another financial calculation that lenders use, only this one occurs closer to the actual purchase of a house you're interested in. Although it may sound complicated, it's actually pretty simple: It's the size of the loan you seek to obtain versus how much of the house you're interested in buying out of pocket. You divide the amount of the loan by the house's value to get your answer.

Here's an example that can provide added clarity. Say the house you're interested in has a purchase price of $250,000 and you want to put 5% toward it as a down payment, or what amounts to $12,500. The LTV ratio in this scenario would be 95% because you're coming up with 5% of the property's cost.

The higher the percentage, the more risk the lender assumes. For FHA loans, the maximum loan-to-value ratio allowed is 96.5%. This means that you can make a down payment of as little as 3.5% with a loan backed by the Federal Housing Administration.

Is there a maximum loan amount with an FHA mortgage?

If one overarching rule applies to real estate in general, it's the fact that there's a lot of flexibility as it pertains to obtaining a mortgage. A classic example of this is FHA loan limits, which have been known to fluctuate over the years.

For example, the FHA loan limit ceiling rose in high-cost areas last year to $726,525, the government agency announced last December. That's up from a previous ceiling of $679,650. For low-cost areas, the limit among single-family units also rose, to $314,827.  However, in places like Alaska and Hawaii - where the cost of living tends to be a bit more expensive - the maximum loan amount is $1.08 million.

The reason for the wide variation in FHA loan limits is due to the disparity in asking prices from one portion of the country to the next. For instance, in the Northeast, the median price for a single-family residence this past August was $303,500, according to the latest data available from the NAR. But in the Midwest, a median-priced residence went for $220,000. That's substantially below the Northeast, despite jumping over 6.5% from a year earlier.

In short, if you're wondering how much mortgage you can get for your money, your best course of action is to ask your FHA lender. They'll give you a more precise figure, which will largely depend on where you plan on buying. The same goes for closing costs you may accrue. What those are and their amounts will largely hinge on the state you live in or plan on moving to if you're purchasing a place the next state over or one on the opposite side of the country. Generally speaking, as the loan amount increases, so too do average closing costs.

Armed with these facts and figures, you should have all the information you need for how to get an FHA mortgage and whether your current circumstances make you an ideal candidate. If you're still unsure, your loan officer  will be more than happy to point you in the right direction toward the right loan that will lead to success.


Understanding Mortgages

Coffee cup on a desktop, with the words 'bank statements'

"You don't judge a book by it's cover" is a particularly relevant phrase when you're in the market to buy a home. Upon reviewing online listings to see what houses are up for sale, the pictures of the interior can make a property look like the quintessential location, with plenty of space, gorgeous cabinetry, hardwood floors and custom ceilings. Yet upon closer inspection - which usually involves actually visiting the house with a real estate agent - there's much more to the story that the pictures didn't fully capture. Flooring that wasn't depicted may be in severe disrepair, the roof may leak and the wooden cabinetry could be shoddily constructed.

Cardboard house with dollar bills next to itIn short, there's just about always more to the story when it comes to a house up for sale that catches your eye. This same reasoning can be applied to bank statements and why mortgage lenders request them when you apply for a mortgage. You may have the necessary assets, gainful employment or income that makes you eligible to buy a home on paper, but your lender needs to get the back story about various factors. What are those factors? That's what we're about to address, along with tips for what you can do to make this chapter of the mortgage application process seamless.

What do mortgage lenders look for on bank statements?

The overarching reason why your mortgage provider requests a copy of a recent banking statement is to ensure that you have sufficient funds for the house that you're looking to purchase. For most people, real estate is the largest purchase they make in their lives. According to the most recent statistics available from the National Association of Realtors, the typical house in the U.S. costs approximately $265,600. And in certain areas of the country, the median is even higher, such as the Northeast and West ($303,500 and $415,900, respectively).

Examining up-to-date financial records enables your lender to determine if you have the means to pay the asking price of a house and the interest from the loan, whether fixed or adjustable, as well as the closing costs associated with the transaction, whether it’s a purchase or refinance.

Although, it goes a bit deeper than that. In addition to finding out what funds are available, they also need to establish from where they derive. Of course, for most people, the money they earn comes from their employer, and are frequently deposited automatically on a weekly or biweekly basis. That's why in addition to the dollar amount that's deposited, bank statements also detail the date of when the deposits occurred. This helps your lender document consistency and a pattern - or lack thereof - as to how much money is coming in on an ongoing basis and how frequently. For instance, some people - such as those in sales - may receive a commission, so the amounts vary from one pay period to the next. Those who are salaried receive a base pay.

Your mortgage lender doesn't have a preference; they just want to ensure everything makes sense as to how you're paid. The bank statement you provide gives them the context they need to make an informed decision regarding loan approval.

Woman holding her hands up in confusionWhat if my lender can't determine where funds derive?

Although you don't hear about it too often in the mainstream media, Americans usually prefer saving to spending. In fact, according to a recent Gallup poll, most people in the U.S. are saving at least a portion of what they earn and 56% consider themselves to be in "excellent" shape in terms of finances.

But say you have $20,000 in the bank and your lender can't adequately determine where that money came from. If this is the case, you might as well not have it at all. In other words, it isn't enough to have a large sum of money stowed away. Your lender needs to authenticate where, when and over how long a time the funds accrued. In some cases, there may be a simple explanation, such as a gift, end-of-year bonus or lottery winnings. In any of these cases, your lender may need to probe further to obtain greater clarity. This is part of the reason why it's a good idea to work in consultation with your loan officer so you can quickly field questions that arise.

What does the term "seasoned" mean in real estate?

In addition to sourcing, your lender will also check to see if the funds you have are seasoned. As the description suggests, seasoned refers to how long assets or funds have been in your bank accounts. Lenders have different definitions as to the precise time frame that makes assets seasoned, but generally speaking, those that are have been in your account for at least a month. Should deposits exist that occurred in fewer than 30 days, they'll likely ask about what the circumstances were. This may be readily identifiable and not require you to elaborate, but it's important to be familiar with your account activity so you have an explanation for newly available funds. 

All that said, what can you do to make this process go smoothly? Here are a few suggestions:

Woman smiling at a cafe tableBe honest

Any relationship is built upon trust, so if you make assertions about what you earn or where money comes from that is untrue, it will likely disqualify you from obtaining a loan. Transparency and honesty are essential.

Know your numbers backwards and forwards

No one knows your financial situation better than you. Familiarize yourself with your bank statement by checking it regularly. Having answers to your lender's questions will help speed things up considerably.

Avoid overdrawing

Your bank statement is ultimately a "statement" as to how you manage your finances. If you make charges that cause a check to bounce, it may raise a red flag for your lender that suggests you're not a good loan candidate.

Bottom-line: Although your bank statement may be just one page of the mortgage application story, it can serve as a summary that will help your lender come to the right conclusion about loan approval - and the beginning of homeownership


Understanding Mortgages

What makes VA loans special?

The nation's active duty service members and veterans are a lot of things. Loyal. Patriotic. Courageous. Resilient. Strong-willed. Family-oriented. Important. And that's just a handful of the words that come to mind. 

Here's another term that's highly characteristic of America's best and brightest: homeowners. On the surface, you may not think this word applies, given that those currently serving may be forced to relocate themselves at any given time. But as data from the National Association of Realtors shows, former or current members of the military represent roughly 1 in 5 recent homebuyers. And of those buyers who are on active duty, their median age is 34 - quite young compared to the typical civilian buyer (42 years old).

When current and formerly active members of the United States military are looking to buy, they have many options to do so. And when it comes to their preferred mortgage type, one stands supreme: VA loans. Whether you've long been a member of the armed forces or served for only a brief amount of time, VA loans are a great way to enter the housing market affordably and in a manner that's in keeping with your current situation and circumstances. As their title connotes, VA loans are backed by the United States Department of Veterans Affairs. This basically means that should a borrower default, the VA guarantees the mortgage issuer that the loan will be paid off in full.

But there's much more to VA loans than their being supported by the federal government, a fact which on its own make this product a desirable financing tool. Here are a few other elements of VA loans that can help you decide if this mortgage is the one for you and determine whether you're eligible to apply.

No down payment is required
Perhaps the biggest perk of VA loans is borrowers don't have to put any money down up front. A common misconception when it comes to mortgage is the notion that a down payment of 20% or more is required. Not only is this not true, but the actual percentage homebuyers put down is considerably smaller than that, averaging between 3% and 3.5%, according to the NAR. This makes homeownership much more realistic for families who are on a budget, as a 20% down payment on a median-priced home in the U.S. would cost upwards of $53,120 (the current median for an existing home is $265,600). However, even a down payment of 3.5% - the equivalent of $9,285 - is no drop in the bucket, either.

The ability to forego the down payment is part of what makes VA loans so popular. At 56%, most active duty do not put any money down when they buy a house, based on the latest figures from the NAR. Roughly 41% of veterans take advantage of no money down financing as well.

Length of service required varies to be considered eligible
There are roughly 1.3 million men and women who are now on active duty, according to estimates from the Pew Research Center. That's down from 1.4 million in 2010 and 2 million in 1990. Virtually all of them will receive veteran status should they decide to retire from the military. It raises an interesting question: How long do you have to be in the service to be qualified for a VA loan? The answer to this question isn't always clear cut and largely depends on whether the U.S. is in war or peacetime. For example, if it's wartime - a designation that the VA ultimately determines - service time required for VA loan eligibility is usually 90 days. But if it's during peacetime, it's roughly double that at 181 days.

VA loan eligibility may also be contingent on the branch of the military you are or were in. For example, if you're in the National Guard or Reserves, six full years of service is required.

Surviving spouses of service members may also be eligible to apply for a VA loan. But here as well, there are various circumstances that determine when you become qualified. The best course of action if you're unsure is to talk to your lender directly and tell them your situation.

Funding fee replaces private mortgage insurance
Another advantage of VA loans is borrowers usually don't have to purchase private mortgage insurance. Normally, when a buyer takes out a loan and puts down less than 20% of the home's purchase price, they have to buy mortgage insurance to ensure the loan is paid off in the event of default. Such a policy is not mandatory for VA loan borrowers. In lieu of private insurance is a basic funding fee, which is typically around 2% of the home's value. This amount is paid to the VA. However, this amount may be lowered to 1.5% with a down payment of 5% or 1.25% by putting 10% down. The VA Funding Fee can also be financed into the loan amount or paid in cash.

The funding fee may be waived entirely, though, in certain circumstances, such as if your spouse died while in the line of duty or from a disability which stemmed from his or her time in the armed forces. Veterans who have a 10% disability and receive disability checks are also exempt.

If you're in the military or are a veteran, you've achieved quite a bit. A VA loan can put you in position to add "homeowner" to your list of accomplishments. Please contact us to learn more.


Understanding Mortgages

What is DTI Ratio?

If you're brand new to the homebuying experience or already have some familiarity with the in's and out's of real estate, you know that this industry has a bevy of abbreviations. From FRM (fixed-rate mortgage) to FMV (fair market value) or HUD (Housing and Urban Development) to NAR (National Association of Realtors), were housing to have a favorite food, alphabet soup would likely be its dish of choice.

Here's another three-letter initialism you've probably heard of but may not know exactly what it means: DTI. Short for debt-to-income ratio, DTI is something that your lender assesses when you first apply for a mortgage. It's a mathematical equation that helps your mortgage provider determine where you are financially in terms of the ongoing costs you have now and how much of your incoming income is devoted to making payments on outstanding debt.

As you might imagine, there's a little bit more to it than that. For example, how do you calculate your DTI ratio? What's considered a "good" debt-to-income ratio? What payments are evaluated in this mathematical equation? What's the difference between back-end and front-end DTI?

You're about to find out about this and much more, which can help you better prepare for the early steps involved along the path to homeownership:

What does my DTI ratio establish and how do I figure out mine?

As previously referenced, your DTI ratio is a numerical way of identifying what percentage of your monthly salary is going toward debt. Whenever you hear this four-letter word invoked, it's often in a negative context. But debt isn't necessarily a bad thing: Virtually everyone has at least some of it in one form or another to pay for certain goods, possessions or services experienced at various stages of life. In fact, paying off debt on a regular basis helps to improve your credit standing.  

It's too much debt that's the problem. DTI ratio enables your lender to see how much - or how little - you currently have. It's calculated like this:

  • Monthly payments ÷ gross monthly income = DTI ratio

"Monthly payments" is a pretty broad term and will likely vary considerably depending on your situation and age. For instance, if you recently graduated from college, you may still have college loans to pay off or auto payments. If these are costs you currently have, they're used to determine your DTI.

Consider this example, let's say you're paying $1,000 month in student loans and around $350 for that new car you bought. That equals out to be $1,350. 

Once you divide this total by your pre-tax income - say, $4,000 per month -  and then multiplying the total by 100, you get a percentage of 37.5%.

These aren't the only two payments taken into consideration, of course. Other monthly debts evaluated - if you have them - include credit card payments or installment loans. 

It's also worth mentioning the expenses that are not included in determining your DTI. These include rent, medical bills, utility expenses, telephone and cable bills or groceries. Since these cost considerations don't appear on your credit report, they're not used for DTI ratio calculations. 

What's considered a good DTI ratio?

There aren't many absolutes when it comes to applying for a house. Because each person is different, what's considered a "good" ratio for you may be "needs work" for another. The ultimate answer depends on the circumstances of the moment, such as the house in consideration, the terms of the loan and other personal factors. 

That said, the ideal range is between 28% and 43%. Using the above example, a DTI ratio of 37.5% means that slightly more than a third of a prospective borrower's earnings are servicing debt. As noted by the Consumer Federal Protection Bureau, the debt to income ratio should ideally be no higher than 43%, as studies have shown those who devote more than this percentage of their earnings to ongoing debt frequently encounter issues with paying off their expenses. But again, when its evaluated in consultation with your other financials, certain exceptions may apply. 

What's the difference between back-end ratio and front-end ratio?

There are two ways of examining your DTI: front-end and back-end. Both are after the same goal of determining how much of your income goes to certain payments. It's the number of "ingredients," if you will, that's slightly different. The former takes into account things like credit card debt and installment loans, such as if you're making car payments or have a personal loan out.

The latter evaluates these expenses along with your prospective monthly mortgage payment. It's possible - in fact, likely - that your front-end ratio total will be different from your back-end. Neither one is necessarily more important than the other. This is just another way of examining your financial situation so your lender can get a better idea of your current situation to put you in the best position possible moving forward.

How do you go about reducing your DTI ratio?

Of course, the best type of DTI ratio is a low one. But if yours is a bit high, you may be wondering how to cut it down a bit. Here are a few creative strategies, as suggested by Credit.com. 

Prioritize your payments

Just as types of bills run the gamut, so do the ways in which you can prioritize them. For example, some financial advisors recommend paying down the one with the highest bill-to-balance ratio. Here, you concentrate, not necessarily on the total amount owed, but the degree to which you're reducing debt in combination with what your spending. That means that if one monthly payment reduces the balance by 35% and the other cuts it down by 20% or 25%, prioritize the first payment as opposed to the second.

Other experts say it's best to pay down the bill with the highest interest rate first. This strategy will save you money, as you’ll spend less on interest over time.

Then again, it may be a better choice to pay off the balance that's the smallest first, as paying it off completely provides a sense of accomplishment, giving you motivation to continue paying off debts. 

Another strategy is to pay off your credit cards first. This not only decreases your DTI, but also can help to increase your credit score if you are able to decrease your credit card debt to below 30% of the maximum available credit.

The key to success in reducing debt  is knowing what works best for you. Practicing some self-reflection will help you with prioritization. This way, you'll get the most balance-slashing bang for your bill-spending buck.  

Pay off your bills before they’re due

For installment loans like car loans, monthly statements typically feature at least three components: the monthly balance owed, how much still remains to be paid and the bill's due date. Instead of paying the prescribed amount, though, you may want to consider spending a bit more if your budget allows for it. For instance, if you earn a commission and earned a higher dollar figure than is typical, consider devoting the difference - or a portion of it - to your next monthly payment. This will help you pay the debt off ahead of schedule and potentially pay less money in interest in the process.

Ask for a raise

According to a recent poll conducted by staffing agency Robert Half, approximately 50% of full-time working adults in America believe they're underpaid. If you consider yourself one of them, consider asking for a bump in pay. As noted by Credit.com, as it pertains to DTI ratio, people often get caught up on how much they owe. But the "I" in DTI is every bit as important as D. Thus, if your monthly income is $4,000 per month before taxes and after a raise it's increased to $5,000, your DTI ratio will naturally lower, assuming that your debts remain unchanged. Actually receiving a salary increase is easier said than done, but you can state your case by demonstrating why you're an asset to your employer by pointing to previous accomplishments or contributions.

Think about refinancing

The interest rate environment is in a near constant state of flux, but one thing is certain: Rates have remained low for many years. You may want to refinance with your lender if you're still paying off student debt or a car loan. Your credit situation may have improved since you first took out the loan, which could make you eligible for a rate adjustment. 

Your DTI ratio is one portion of the mortgage approval puzzle. RMS can help you put all of the pieces together so you can see the big picture. Contact us and we'll be happy to assist you in coming up with a solution.  


Understanding Mortgages

First-time Homebuyer Loan Programs: What Are the Options?

Whether they're newly minted college graduates, settling down to start a family or simply feel like the time is right, prospective first-time homebuyers come from a variety of different situations and backgrounds. Yet given current residential real estate price trends - increasing for 89 consecutive months on a year-over-year basis, according to the National Association of Realtors - something almost all of them share in common is their need for a home loan to put toward buying a home.

If this sounds like you, good news: There are lots and lots of first-time homebuyer loan programs available. So many, in fact, keeping them all straight in your mind can be harder than decluttering your home after the holidays or a recent move.

Your mortgage lender may not help you tidy up, but they can assist with clearing things up so you know more about each program. Let's go through some of the most popular first-time homebuyer loan programs to give you a better understanding of what's available and determine what may be worth further pursuing before you obtain a real estate agent. 

What is a first-time homebuyer?

Before we get down to brass tacks, it's helpful to understand the meaning of a first-time homebuyer, because the meaning is broader than what you might think. Of course, the most basic interpretation is, someone who has never purchased residential property. The U.S. Department of Housing and Urban Development's definition is rather expansive. According to HUD, a first-time homebuyer can also mean an individual who hasn't owned a house in the last three years.

An awareness of what circumstances are indicative of first-time homeownership can give you a better idea of whether you qualify for a specific loan program. With all that said, let's talk about the options that are out there, in no particular order:

USDA Loans

One of the more popular loan programs out there is officially known as the Rural Development Guaranteed Loan Program. For the sake of brevity, they're more commonly referred to simply as USDA loans - backed by the U.S. Department of Agriculture. 

Frequently, first-time homeowners are in financial situations where they may not be making as much money as they would like, such as if they're fresh out of college or have expenses associated with raising young children. USDA loans are tailor-made for these individuals because people with low-to-moderate incomes are eligible. 

Another characteristic of USDA loans is location. In other words, in order to apply for this program, the property that you seek must be within a rural area. On the surface, this may sound like this confines you to a very limited selection of houses to buy, which when paired with the historically low rate of inventory, may seem potentially problematic. However, as statistics from the U.S. Census Bureau show, 97% of America's land area is rural. Paired with the fact that only 19% of the population live in rural locations, you should have plenty of potential properties to select from, with new and existing-home supply levels starting to improve.

FHA Loans

Another government-backed mortgage offering is an FHA loan, which was developed by the Federal Housing Administration. Similar to the USDA loan program, FHA loans offer a lot of flexibility and may even be a bit more accommodating in certain respects because you can buy a house in the suburbs or the city. Yet unlike USDA loans, a down payment is required. Nonetheless, FHA loans are still highly flexible because the down payment can be as low as 3.5%.

There are lots of advantages that come with FHA loans, but if you had to narrow them down to just one or two, they're likely the down payment and closing costs. As previously mentioned, not only do many people spend as little as 3%, but the source of the money can be a gift from a friend or family member. Closing costs, meanwhile, can be included in your loan amount, so you can pay them off over time rather than all at once as a lump sum.

VA Loans

Are you a retired or active member of the Army, Navy, Air Force, Marines, Coast Guard or National Guard Reserves? The Veterans Administration has a loan product that may be right up your alley. You may not think of VA loans as a prototypical first-time homebuyer loan program, but if you served in one of the five branches of the military and were never dishonorably discharged, you likely have veteran status. You may also be eligible if you are a surviving spouse of someone who was in the armed forces.

This status gives you certain advantages as a first-time homebuyer. Chief among them with VA is no down payment, one of the most well-known features of this mortgage product. According to the most recent statistics available from the NAR, the current median price for an existing home in the U.S. is approximately $280,000. With a 3% down payment, that's $8,400. This is a considerable amount that you don't need to pay with a VA loan.

Another major advantage of VA loans is income limits - there aren't any, which can't be said for other first-time homebuyer loan programs, like USDA and state housing programs. Applicants must, of course, be gainfully employed and earning a steady income on an ongoing basis. Participating lenders - of which there are many - will go over your W-2 forms and tax documents to get a better idea of your salary and ability to make mortgage payments each month. Then again, this is true of all loans.

Conventional 3% Down

We've talked a lot about low down payments, as many people who are unable to buy a house cite this as an obstacle, according to a report from the Urban Institute. This mortgage was made with them in mind. As its title suggests, a conventional 3% down loan program - or 97 LTV (Loan-to-Value) mortgage - is geared for people who may not have tens of thousands of dollars to put toward a down payment and was created by Fannie Mae and Freddie Mac.

An additional reason why 97 LTV mortgages are ideal for first-time homebuyers is the type of loan most often selected upon entering the housing market. Overwhelmingly, the most common is fixed-rate. There are a few reasons as to why, but first and foremost is rates are predictable. In other words, once the interest rate is locked in, it stays that way for the life of the loan. There's a sense of security that comes with this fact, given mortgage rates are quite low today compared to 10 to 20 years ago. So should rates rise in the future, as they often do, the interest paid won't change. 

All this is to say that conventional 3% mortgages are exclusive to fixed-rate mortgages. There's also a maximum loan amount that you can borrow with this mortgage type. That number is presently $484,350.

Good Neighbor Next Door

When you think of truly noble professions, what ones come to mind? Police officer is certainly one of them, teacher is another and firefighter is in the conversation as well. If you recently graduated from college and now are in any of these occupations, HUD's Good Neighbor Next Door may be an ideal loan option. Relative to other mortgage programs, this one is fairly new and was launched in order to provide more of a financial opportunity for the nation's law enforcement, emergency responders and teachers to purchase a home affordably. For the amount of work they do, teachers are among the lowest paid professionals in the country, with the average public school teacher earning around $60,500, according to the most recent statistics available from the Department of Education's National Center for Education Statistics. Many contend that those in public services don't make the type of living they ought to either, with the mean annual wage for police officers at $65,400, according to data from the Bureau of Labor Statistics. 

This is made possible by cutting the list price of certain properties in half. Go to HUD's website and type in the address of a for-sale house you're considering to see whether it's eligible. 

The caveat to this mortgage product is only firefighters, police, emergency medical technicians and teachers can apply, to purchase eligible homes located in revitalization areas through the Good Neighbor Next Door Sales program. Additionally, there aren't as many participating lenders for this program compared to some of the others mentioned.

But in addition to 50% off the listed price, the down payment is eminently affordable: just $100.  

State Housing Programs

Although America is composed of "united" states, you wouldn't know it based on the cost of living from one to the next. Home prices are a classic example. In the Midwest, the median price for a house is $226,300, based on the latest calculations from the NAR. But if you reside in the West, the cost is $408,000. That's a considerable difference.

State housing programs are designed to make homeownership feasible by reflecting and adjusting to the cost-of-living factors that make a particular state unique. These are often available through state housing agencies, who partner with participating lenders by providing payment assistance programs. This assistance can be put toward the costs of home financing. 

First-time homes often fall under the banner of "fixer-upper." Here as well, state housing program can help to reduce the costs associated with renovations. 

There are some eligibility requirements to consider, which vary from state to state. For instance, what's considered a moderate income in Virginia may be quite different in Ohio or Massachusetts. 

This is something that your lender can go over with you more in depth, if this is avenue you'd like to pursue further. 

FHA 203k Rehab

Speaking of fixer-uppers, the Federal Housing Administration designed a loan program for properties that need some restoration to get looking as good as new. It's called the 203k loan program and is a popular choice among first-time buyers hoping to buy a house at a low price. Such homes may be in a state of disrepair and need financing above and beyond the list price. These loans include both the cost of buying and "rehabbing" - hence the name - the house.

There's a lot to like about 203k loans. The down payment can be as low as 3.5%, they're loan types are both fixed and adjustable-rate and you don't necessarily need a sterling credit score (700 or higher) to be approved for one.

As far as restrictions go, the funds for the renovation work must go to a licensed general contractor. In other words, DIY'ers need not apply. A construction consultant may also be a must-have in order to gain 203k loan approval. Participating lenders for this product aren't as numerous as some of the afore-mentioned either.

That's a lot of loans. And believe it or not, this isn't an exhaustive list. What's described is a sneak peek into the product itself and some of the factors to weigh as you and your loan officer narrow down the options that are best for you.

Here are a few other points to keep in mind in your homeownership journey:

  • You'll be hard-pressed to find a lender that offers every single mortgage product that's out there these days. It just isn't feasible. Nor will you be eligible for all of them. This is meant to give you an idea of what's possible. You may find that a first-time homebuyer loan program that is not in your wheelhouse is actually quite relevant to your situation. The only way of knowing is by bringing it up to your lender. Alternatively, they may reference a loan offering if your circumstances point to it as a possibility. 
  • Oftentimes, people who are new to homeownership will talk to friends about their situation and what loan product friends chose. This can give people an inkling into whether they too will qualify. The problem with this line of thinking is every borrower is a package: each comes with distinctions that make them unique. So, if you have a credit score or income that may seem low, it doesn't necessarily mean you won't be approved. Each application is assessed in conjunction with the other materials provided when applying. In short, don't assume anything. 
  • Don't worry too much about the approval process. Look at your lender as an advocate - they want what's best for you. If you're turned down, no worries. Your lender will offer suggestions on what you need to do to get the green light. 
  • All loan programs require minimum credit scores. However, how the credit score affects the interest rate is not as sensitive with state housing loans.

For more information on first-time homeownership, contact us today. We'll guide you home. 


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