Getting ready to become a first time home buyer can be an exciting and scary time for all involved.
It’s been roughly 6 years since my husband and I purchased our first home, and although we both have an extensive mortgage background, it was still a frustrating experience at times. Our frustrations, however, came from situations that were out of our control.
Our actual understanding of the entire mortgage process from beginning to end did help us tremendously. We definitely had an advantage that I know most first time home buyers do not.
Working as a mortgage underwriter for 7 years with my main focus being in purchase underwriting, I have a lot of experience in what to expect and what you can do to prepare for your first home purchase.
Since I’m very familiar with this process, I wanted to give you some insight into what mortgage underwriters look at when it comes to approving a loan. As a first time home buyer, understanding the information below will give you an advantage and help make the process a smooth one.
Credit is the first and most important aspect when it comes to getting approved for a mortgage. One of the first things the mortgage banker will do after speaking with you is pull your credit report.
Your credit report will be pulled from the top 3 credit reporting agencies: Equifax, Experian, and Transunion. Lenders use your mid-FICO score to determine if you qualify for a mortgage or not. If there is more than one person on the loan, they will use the lower of the two middle scores.
Different loan programs require different minimum credit scores but most mortgage lenders will not accept a mid-FICO score of below 600. However, in order to ensure that you get decent loan terms, I would highly recommend a credit score of AT LEAST 680.
If you’re not happy with your current credit rating, check out my article on 8 ways to rebuild your credit. I go into a lot of detail about how to improve your credit score. If you would prefer to talk to a credit expert about restoring your credit, I highly recommend Credit Saint. They are ranked #1 in challenging inaccurate credit data. Not only is Credit Saint a BBB accredited business, but all programs come with Credit Saint’s 90-day Money Back Guarantee.
You will need to have funds available when purchasing a home. These funds will be needed for a down payment, closing costs, and sometimes reserves. The amount of money you will be required to bring to closing will highly depend on the loan program your mortgage banker puts you in.
DOWNPAYMENT REQUIREMENTS BASED ON LOAN PROGRAM
Conventional Loan: This type of loan is the most common in the mortgage industry and requires a minimum of 3-5% down payment. So if the home purchase price is $100,000, you will need to have $3,000 to $5,000 available to put towards the down payment portion.
Keep in mind that down payments do not include closing costs.
FHA Loan: This loan type has lower credit and down payment requirements. It requires a down payment of 3.5%.
VA Loans: A VA loan is a $0-down mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs (VA). This loan program is only offered to Veterans.
USDA Loans: This type of loan requires no down payment; however, not everyone will qualify. You must meet certain income guidelines and requirements in order to be considered for this option.
Closing costs are fees you will also be responsible for paying at closing. The amount can vary depending on the state you live in but usually ranges anywhere from 3%-6% of the loan amount.
So if your loan amount is for $200,000, you can expect to pay anywhere from $6,000 to $12,000 in closing costs alone. Closing costs typically include some or all of the following fees:
- Flood Certification
- Escrow Fees
- Property Taxes
- Annual Assessment
- Home Inspection
- Title/Attorney Fees
- Loan Interest
- Lender Fees
- Application Fees
- Assumption Fee
- Prepaid Interest
- Loan Origination Fee
- Discount Points
Underwriters generally require 2 months of bank statements for any account you plan to use towards your home purchase. You will want to make sure that you do not have any large deposits that can’t be sourced for those 2 months. If you have a large deposit that you can’t source, the underwriter will have to back out those funds from total assets. This means you will not be able to use those funds towards your home purchase.
Gift funds can be used in certain scenarios BUT those funds will need to be sourced. Meaning the gift giver will have to provide proof that those funds came from their account. Cash deposits are NOT allowed.
Reserves are usually not required for primary home purchases. If for some reason it is required, you will have to have additional assets to cover that as well.
Not having sufficient funds can sometimes be the only thing holding someone back from buying a home. If this is you and you would like tips on how to save money click here: 3 Easy Tips on How to Start Saving Today.
Depending on the loan program that you get into, your debt to income ratio, (DTI), will need to be anywhere from 40%-50%.
SUM OF ALL OF YOUR MONTHLY DEBT PAYMENTS/YOUR TOTAL MONTHLY GROSS INCOME=DTI
Keep in mind that your new home payment plus taxes and insurance (PITI) will need to be included in your total monthly debt payments. PITI stands for principal, interest, taxes, and insurance.
I also discuss How To Pay Off Credit Card Debt in another article. If too much debt is something you are struggling with, I highly recommend checking that out.
You will need to provide 2 years of employment history. The underwriter will require 2 year w2s, tax returns, and 2 most recent paystubs. You will need to explain any gaps in employment as well. Most loan programs do require that you have been in the same line of work for the most recent 2 years.
Income, assets, credit, and debt are the 4 main items that underwriters will review. These four combined will determine whether you will qualify for a mortgage. If you feel that you meet the above criteria and you’re ready to start your home buying journey, I highly recommend getting pre-approved for a home loan first. In fact, most realtors will not even begin to show you homes if you have not been pre-approved. In this post, I discuss How To Get Pre-Approved For a Mortgage in 5 Easy Steps.
Bank of England is a very reputable US-based Mortgage Company that can help you with that process. If you would like to dive right in and get started right away, you can fill out their online application right now and a mortgage banker will get in touch with you after your application has been submitted.
I hope you found this first time home buyer guide resourceful! Good luck on your home buying journey.