There's a lot more that goes into buying your first home than you may think, but fret not. I've compiled a comprehensive list of everything you need to know as a first-time buyer that will help prepare you for your home-buying experience. Below you will find a list that covers what you need to know about your finances, the types of loan + programs available to you, how to determine what you can afford, and more. Get your pen + paper out, folks, it's time to make this home-buying dream a reality!
Rule of thumb: The higher your credit score, the lower the monthly payments. This is where being financially responsible truly pays off in life. You're going to want to aim for a credit score above 660, because additional fees are tacked on for individuals who don’t have good to excellent credit. The sweet spot for a credit score is 750 and above -- that's where you're going to get the best rates.
Tip: Before applying for a loan, you'll want to pay down as much debt as possible, and be sure to not take out any new loans or lines of credit (yes, this includes new credit cards) for at least 8 to 12 months prior.
MortgageCalculator.com explains, "The front-end ratio is the portion of gross (pretax) monthly salary which is consumed by your monthly mortgage payment. This should not exceed 28% of your gross monthly income for a conventional mortgage backed by Fannie Mae or Freddie Mac, and 29% for FHA & USDA loans." Formula: Maximum Front-End Ratio = Annual Salary * 0.28 / 12 months*
Your back-end ratio is also known as your debt-to-income ratio. According to MortgageCalculator.com, "This includes all other forms of debt obligations (such as auto loans, credit cards, student loans, personal loans, and child support) along with the mortgage payment. This should not exceed 36% of your gross monthly income for a conventional loan or 41% for FHA, USDA & VA home loans. Formula: Maximum Back-End Ratio = Annual Salary * 0.36 / 12 months*
The good news for buyers in today's market is that 30-year mortgage rates are at an all-time low, between 3 - 4% nationwide, which means home-buying is much more attainable, especially for first-time buyers, due to lower monthly payments. There are also several assistance programs that help homeownership a possibility for many first-time buyers who need a little help getting into the home of their dreams. Below is a run-down of available loans and programs for first-time buyers.
CalPLUS Conventional Loan Program*: The CalPLUS Conventional program is a first mortgage loan insured through private mortgage insurance on the conventional market. This loan is fully amortized for a 30-year term and is combined with the CalHFA Zero Interest Program (ZIP) for down payment assistance and/or closing costs. First-time homebuyers can receive more down payment assistance through ZIP Extra.
CalHFA Conventional Loan Program*: The CalHFA Conventional program is a first mortgage loan insured through private mortgage insurance on the conventional market. The interest rate on the CalHFA Conventional is fixed throughout the 30-year term.
Conventional 97: This Fannie Mae-backed loan requires only a 3% down payment, has extremely competitive mortgage insurance rates, and allows for "a 100% gift from blood or by-marriage relatives," according to The Mortgage Reports.
CalPLUS FHA Loan Program*: The CalPLUS FHA program is an FHA-insured loan featuring a CalHFA fixed interest rate first mortgage. This loan is fully amortized for a 30-year term and is combined with the CalHFA Zero Interest Program (ZIP) for down payment assistance and/or closing costs.
CalHFA FHA Loan Program*: The CalHFA FHA program is an FHA-insured loan featuring a CalHFA fixed interest rate first mortgage. This loan is fully amortized for a 30-year term.
Cal-EEM + Grant Program*: The Cal-EEM + Grant program combines an FHA-insured Energy Efficient Mortgage first mortgage loan with an additional Cal-EEM Grant, making energy efficient improvements even easier. The interest rate on the Cal-EEM is fixed throughout the 30-year term.
California Homebuyer's Downpayment Assistance Program (CHDAP)*: Offers a deferred-payment subordinate loan in the amount of (3%) of the purchase price or appraised value, which ever is less to be used for down payment and/or closing costs.
Extra Credit Teacher Home Purchase Program (ECTP)*: Program intended for eligible teachers, administrators, classified employees and staff members working in high priority schools in California. Offers a deferred-payment junior loan of an amount not to exceed the greater of $7,500 or 3% of the sales price or in CalHFA-defined high cost areas an amount not to exceed the greater of $15,000 or 3% of the sales price. Assistance can be used for down payment.
Mortgage Credit Certificate Tax Credit Program (MCC)*: A federal credit which can reduce potential federal income tax liability, creating additional net spendable income which borrowers may use toward their monthly mortgage payment. This MCC Tax Credit program may enable first-time homebuyers to convert a portion of their annual mortgage interest into a direct dollar for dollar tax credit on their U.S. individual income tax returns.
Individual Development Accounts*: IDA's are special savings accounts designed to assist low income borrowers on their path toward ownership of a long-term asset, such as a home, through matched contributions by nonprofit organizations and eligible banks. These organizations may offer up to a 3:1 savings match (i.e., if you save $1,000, you will receive an additional $3,000). To find an organization that offers an IDA program please follow the link above.
(for Servicemembers, Veterans, and eligible surviving spouses)
Purchase Loans: These types of VA loans help qualified Veterans purchase homes with extremely low interest rates, zero down payment, low to no closing costs, and no private mortgage insurance (PMI).
Native American Direct Loan (NADL) Program: "Native American Veterans gain assistance to finance the purchase, construction, or improvement of homes on Federal Trust Land, or reduce the interest rate on a VA loan," according to the VA website.
Adapted Housing Grants: There are two grant programs under the Adapted Housing Grants program: 1) The Specially Adapted Housing (SAH) grant' and 2) The Special Housing Adaptation (SHA) grant. These grants help Veterans "with a permanent and total service-connected disability purchase or build an adapted home or to modify an existing home to account for their disability."
Single Family Housing Guaranteed Loan Program: "This program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas," according to the USDA website. Program offerings include no down payment, low to no closing costs, lower minimum credit score requirement, can be used with other down payment assistance programs, and no private mortgage insurance (PMI).
Section 502 Direct Loan Program: "This program assists low- and very-low-income applicants obtain decent, safe and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Payment assistance is a type of subsidy that reduces the mortgage payment for a short time. The amount of assistance is determined by the adjusted family income," according to the USDA website.
It's important to be realistic about what you can and can't afford when it comes to buying a house. You'll want to look at big- and small-picture dollars when running the numbers, so be sure to consider total property value, monthly payment, and down payment figures. The best way to get a ballpark figure of how much you can afford is by using an online calculator tool, like Bankrate's "How Much Can I Afford" calculator. You may be surprised at how much you can or can't afford after running the number. Be realistic and honest with yourself about your price-point, because you don’t want to buy a house that you can't afford and end up losing it down the road.
There are also other costs that are involved in buying a home that many first-time buyers neglect to factor in when shopping around, such as taxes, fees, closing costs, and insurance, to name a few. For a comprehensive list of "hidden" costs involved in purchasing a home, see this article, here.
Before shopping for a home, it's important to make a list of things you do and don't need in a home. For instance, if you know you need a house with 4 bedrooms and at least 3 bathrooms to accommodate your family of four, then don't settle for a 2-bedroom house with one bathroom -- your family will be miserable. However, on the flip side, don't nix a nearly perfect home off the list simply because one of the closets is too small. Before embarking on your home-buying journey, be crystal clear about the difference between your needs and wants for your dream home. Your home-buying experience will be much more enjoyable when you are realistic and honest about what you and your family need in a home. Plus, your agent will thank you.
The difference between your home-buying experience being a nightmare and a dream come true is the real estate agent you choose to hire to represent your family. It's key to do your research and hire an agent that not only has ample experience, but who also has a proven track record of closing deals successfully and not walking away when the going gets tough… because it will get tough at certain points during the transaction.
Being a first-time buyer is just as scary as it is exciting, and my job is to ensure that you get into the home of your dreams in a timely and seamless manner. Owning a home is one of the greatest accomplishments in a person's life, and I love being a part of making that dream a reality. If you would like to be a homeowner but think it's too far out of reach, then give me a call because a big part of my job is coaching and preparing my clients to be able to become homeowners -- and I haven't been unsuccessful yet.
All it takes is a five-minute call to discuss your real estate options, and you never know, those five minutes could get you one step closer to getting the keys to your dream home in your hand before you know it. Give me a call today: 714) 801-0175, or contact me via email at LindseyActon@att.NET.