The Basics of Financing a Home for First-Time Homebuyers
Interested in buying a new home for sale in Corpus Christi, TX? Financing a home can seem like a complex and intimidating process, but we are here to make the process less stressful.
Taking time to educate yourself is a great idea before you dive in. Knowing what exactly to expect will make the process simpler and will help save you money in the long run.
When purchasing your first home, getting a mortgage is an important step, and selecting the most appropriate one requires careful consideration. Although the many financing options available for first-time buyers can be overwhelming, investing time in researching the basics of property financing can lead to significant savings.
Being familiar with the market where the property is located and identifying whether it provides incentives to lenders can result in additional financial benefits. By examining your finances closely, you can ensure that you acquire the mortgage that aligns with your requirements.
Let us go over some important information that first-time homebuyers need to consider in order to make their significant purchase.
Requirements for First-Time Homebuyers
To be approved for a mortgage, you’ll need to meet several requirements depending on the type of loan for which you are applying.
In order to qualify as a first-time homebuyer, you must satisfy the criteria that define a first-time homebuyer. A first-time homebuyer is someone who has not owned a principal residence for three years, a single person who has only owned with a spouse, an individual who has only owned a property that was not in compliance with building codes, or an individual who has only owned a residence not permanently affixed to a foundation.
Typically, you must provide evidence of a two-year minimum income that can cover the mortgage, make a down payment of at least 3.5%, and have a credit score of 620 or higher to secure a mortgage. Nevertheless, as a first-time homebuyer, you may be eligible for programs that permit you to purchase a home with a low income, zero down payment, and a credit score as low as 500.
Types of Loans
Conventional Loans
Conventional mortgages are not backed or insured by the federal government and are typically fixed-rate loans. They are among the most challenging types of mortgages to qualify for due to their stricter requirements, which include a higher credit score, a larger down payment, lower debt-to-income ratios, and the possibility of needing private mortgage insurance. However, if you can qualify for a conventional mortgage, they are usually less expensive than government-backed loans.
Conventional mortgages are classified as either conforming or nonconforming loans.
Conforming loans adhere to specific guidelines established by government-sponsored enterprises like Fannie Mae and Freddie Mac, such as loan limits. These loans are often sold as securities on the secondary market, but must meet certain requirements to be considered conforming.
The maximum limit for a conforming conventional loan in 2022 is $647,200, but may be higher in designated high-cost areas. Loans above this limit are considered jumbo loans and usually have slightly higher interest rates due to the increased risk associated with larger amounts of money.
Nonconforming loans are underwritten by the lending institution, typically a portfolio lender, which sets its own guidelines. These loans cannot be sold on the secondary market due to regulations.
Federal Housing Administration (FHA) Loans
The U.S. Department of Housing and Urban Development (HUD)’s Federal Housing Administration (FHA) offers various mortgage loan programs to Americans. FHA loans have lower down payment requirements and are easier to qualify for than conventional loans. These loans are particularly suitable for first-time homebuyers because they have lower up-front loan expenses, less strict credit criteria, and permit down payments as low as 3.5%. However, FHA loans are limited by the statutory limits mentioned earlier.
All FHA borrowers are required to pay a mortgage insurance premium, which is included in their mortgage payments. Mortgage insurance is a policy that safeguards a mortgage lender or titleholder if the borrower defaults on payments, dies, or is otherwise unable to fulfil the mortgage’s contractual obligations.
Income and Equity Requirements
Lenders determine home mortgage loan pricing through two methods based on the borrower’s creditworthiness. Along with evaluating the FICO score from the three main credit bureaus, lenders use the loan-to-value (LTV) ratio and the debt-service coverage ratio (DSCR) to decide the loan amount and interest rate they are willing to offer.
LTV refers to the actual or implied equity available in the collateral being used to secure the loan. In the case of home purchases, LTV is calculated by dividing the loan amount by the home’s purchase price. Lenders assume that the more money a borrower puts down as a down payment, the lower the risk of default. Therefore, the higher the LTV, the greater the risk of default, and the higher the interest rate charged by the lender.
To improve the chances of getting approved for a loan or securing the best possible rate, borrowers should disclose any qualifying income sources to the lender, such as part-time jobs or business income. A mortgage calculator can help borrowers understand the impact of different interest rates on their monthly payments.
At Hogan Homes, we understand that the entire process can be daunting, especially for first-time homebuyers. Hogan Homes is with you every step of the way! We understand how overwhelming the mortgage and financing process can be, and this is where our caring and efficient Sales Counselors come in. You can count on them to help assist and guide you throughout your home financing process.
We’re here to help make your home-buying experience exceptional. Learn more about Hogan Homes’ simplified home buying process.
Sources:
“What is a First-Time Home Buyer? [Definition & Qualifications]” HomeBuyer, https://homebuyer.com/learn/first-time-home-buyer
“The Definition of a First-Time Homebuyer is Broader Than You Think,” Twin Cities Habitat for Humanity, https://www.tchabitat.org/blog/first-time-homebuyer-definition
“Federal Housing Administration (FHA) Loan: Requirements, Limits, How to Qualify,” Investopedia, https://www.investopedia.com/terms/f/fhaloan.asp
“FHFA Announces Conforming Loan Limits for 2022,” Federal Housing Finance Agency, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limits-for-2022.aspx
“What is a jumbo loan?” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-is-a-jumbo-loan-en-116/
“What is mortgage insurance and how does it work?” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
“How much is an FHA loan down payment?” Bankrate, https://www.bankrate.com/mortgages/fha-loan-down-payment/
“Seven factors that determine your mortgage interest rate,” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/about-us/blog/7-factors-determine-your-mortgage-interest-rate/
“What is a loan-to-value ratio and how does it relate to my costs?” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-and-how-does-it-relate-to-my-costs-en-121/