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A Complete Guide To Buying Your First Home Dana Bain Premiere Mortgage

May 11th, 2017 1:38 PM by Dana Bain

A Complete Guide To Buying Your First Home!

Our team at Premiere Mortgage prides itself on helping first time home buyers understand the home buying process.

First time home buyer tips come in all shapes and sizes. From little tricks of the trade related to the mortgage process to insider information on selecting a real estate agent, there surely is no shortage of guidance available to a first time home buyer.

But much of this important information is fragmented – meaning a first time home buyer must look in many places to get the information they need throughout the home buying process. This lengthy and often convoluted research process can deter a first time home buyer from starting the home buying process.

Well, look no further. Our team of experienced brokers at Premiere Mortgage have put together a detailed compilation of some of the best first time home buyer tips available. It is our hope that a first time home buyer who follows some or all of these surefire tips will be better prepared for their first home buying experience.

Tip #21 — Be Real About Your Budget

The idea of being realistic with your budget pretty much applies to anything in life — shopping at the mall, going to the grocery store or planning a vacation. But this is principle is especially necessary for a first time home buyer who is taking all the necessary steps to buy a house. In fact, of all of the first time home buyer tips out there, this may be the most important.

In order to determine your monthly housing budget, get familiar with the term “housing expense ratio” — which, according to this Credit.com article, is an indication of a borrower’s ability to make the payments on their mortgage loan. This ratio measures housing expense as a percentage of gross income (income before deducting for Social Security, Medicare, and taxes). Mortgage lenders expect a borrower to have a housing expense ratio of approximately  28%.

“If a borrower’s salary was $4,000 per month, a lender would approve their loan if the housing expense – mortgage payment, fire insurance, and property taxes – were less than $1,120 per month. $1,120/$4,000 = 0.28.”

http://www.myfico.com/

Lenders will also likely consider a borrower’s total expenses — which include housing expenses and fixed monthly obligations. Industry experts say a borrower’s expenses should not exceed 43% of gross income.

Thanks to the new Qualified Mortgage rule, most mortgages have a maximum back-end DTI ratio of 43%. There is a temporary exemption for many loans, but a lot of lenders still want this number to be under 43%!

Let’s look at a basic example of debt-to-income ratio:

$120,000 annual gross income as reported on your tax returns/pay stubs

  • Monthly liabilities: $3,500
  • Monthly gross income: $10,000
  • 35% debt-to-income ratio

In this example, your debt-to-income ratio would be 35% ($3,500/$10,000).

However, the debt-to-income ratio goes into greater detail and comes up with two separate percentages, one for all of your monthly liabilities divided by income (back-end DTI ratio), and one for just your proposed monthly housing payment (including taxes and insurance) divided by income (front-end DTI ratio).

Front-End and Back-End Debt-to-Income Ratios

So in the above example, if your proposed monthly housing payment makes up $2,000 of your $3,500 in monthly liabilities, your front-end DTI ratio would be 20%, and your back-end DTI ratio would be 35%. Many banks and lenders require both numbers to fall under a certain percentage, though the back-end DTI ratio is more important.

You may see a debt-to-income requirement of say 30/45.  Using the example from above, your front-end DTI ratio of 20% would be 10% below the 30% limit, and your back-end DTI ratio of 35% would also have 10% clearance, allowing you to qualify for the loan program, at least as far as income is concerned.

*If you own other property with a mortgage, it should be included in the back-end DTI ratio because it’s not part of the new loan you are applying for.

Max DTI for Conforming Loans (Fannie Mae and Freddie Mac)

The classic, “rule of thumb” ratios are 28/36, meaning your front-end ratio shouldn’t exceed 28%, and your back-end ratio shouldn’t exceed 36%.

However, this measure is more conservative than what you might actually see in practice today. For example, back in the day many homeowners put down 20%. Today, the down payments are often just 3-10%, to give you some perspective.

But, Fannie Mae still does impose a max DTI of 36% for manually underwritten loans, though the majority of loans are approved via their automated underwriting system called Desktop Underwriter (DU).

And DU will allow DTIs up to 45%, and as high as 50% with compensating factors, such as plentiful assets, larger down payment, great credit, etc.

For Freddie Mac, underwriters must include a written explanation that justifies exceeding the 28/36 ratios when files are manually underwritten. Like Fannie, the ratios may go higher if the file is approved via automated underwriting.

Max DTI Ratio for FHA Loans

The max DTI for FHA loans depends on both the lender and if it’s automatically or manually underwritten.  Some lenders will allow whatever the AUS (Automated Underwriting System) allows, though some lenders have overlays that limit the DTI to a certain number. These limits can also be reduced if your credit score is below a certain threshold.

For manually underwritten loans, the max debt ratios are 31/43. However, for borrowers who qualify under the FHA’s Energy Efficient Homes (EEH), “stretch ratios” of 33/45 are used.

These limits can be even higher if the borrower has compensating factors, such as a large down payment, accumulated savings, solid credit history, potential for increased earnings, and so on.

To sum it up, if you can prove to the lender that you’re a stronger borrower than your high DTI ratio lets on, you might be able to get away with it. Just note that this risk appetite will vary by lender.

Also note that mortgage insurance premiums are included in these figures.

Max DTI Ratio for VA Loans

For VA loans, the same automated/manual UW rules apply.  If you get an AUS approval, the maximum DTI ratio can be quite high.

However, if it’s manually underwritten then the maximum debt-to-income ratio is 41% (back-end).  There is no front-end requirement for VA loans.  Again, as with FHA loans, if you have compensating factors and the lender allows it, you can exceed the 41% threshold.

Specifically, if your residual income is 120% of the acceptable limit for your geography, the 41% DTI limit can be exceeded, so long as the lender gives you the go-ahead.

In other words, most of these limits aren’t set in stone, assuming you’re a sound borrower otherwise.

Max DTI Ratio for USDA Loans

For USDA loans, the max DTI ratios are set at 29/41.  However, if the loan is approved via the Guaranteed Underwriting System (GUS), these ratios can be exceeded somewhat, similar to FHA/VA loans.

Long story short, if you have a credit score of 660 or higher, solid employment history, and the potential for increased earnings in the future, you may get approved for a USDA loan with higher qualifying ratios.

How to Calculate Your DTI Ratio

If you’d like to figure out your debt-to-income ratio, simply take your average gross annual income based on your last two tax returns and divide it by 12. Then add up all your monthly liabilities and divide that total by your monthly income and voila. Keep in mind that you’ll need a free credit report to accurately see what all your monthly payments are.

The credit report will show you what your minimum or monthly payment is for each tradeline, which makes it simple to add them up. Some banks and lenders allow installment credit cards such as those issued by American Express to be excluded from the debt-to-income ratio as they often account for thousands of dollars a month, and likely get paid off in full monthly.

The debt-to-income ratio is a great way to find out how much house you can afford, as well as the maximum mortgage payment you qualify for. Simply add up all your liabilities and your proposed mortgage payment plus taxes and insurance to see what type of loan you can take out.

Tip #20 — Get Pre-Qualified, Even If You’re Not Quite Ready

Well before even starting to seriously look at houses, a first time home buyer should get pre-qualified for a mortgage. The last thing you want is to find the home of your dreams and then have the financing fall apart.


“Sellers want to see a pre-approval/qualification letter before signing a contract with you. It is the nightmare of every seller that they will tie up their home for months with an unqualified prospect. A seller wants a fast sale.”

Realtor.com

A good way to shop around for financing is to engage at least three different types of lenders — big banks, regional banks, local lenders, credit unions or mortgage brokers.

The advantage of a well experienced mortgage broker like Premiere Mortgage Services Inc. we have a huge network of Bank & Lenders Nationwide so we generally always have the best financing options and rates available.

Eventually, after shopping around, you will find mortgage terms that make the most sense for you. The next step will be to get pre-qualified, which involves providing your lender with various details related to your credit score, income and assets. Your mortgage broker will then verify all of the information you gave them and issue a letter telling you how much the bank is willing to lend you. And remember, a pre-qualification is not a guarantee.

Tip #19 — Deal With Your Debt…Now!

Debt comes in all shapes and sizes. There’s student loan debt from those fun four (or more) years of college, there’s credit card debt (most likely also from those fun years of college) and there are other forms of debt related to car loans and personal loans.

When dealing with debt obligations, a first time home buyer should get their old debt squared away before applying for a mortgage. If you don’t deal your debt before applying for a home mortgage loan, chances are you either won’t be approved or you’ll get less than stellar terms on your mortgage loan.

More often than not the bulk of debt owed by a first time home buyer is related to student loans, so be sure and take this valuable advice:

“If you have student loans and want to buy a home, you will need to be vigilant about making your loan payments on time. A delinquency on a student loan will not only damage your credit score, it could also stop you from qualifying for a home loan. This is particularly true if you have a government-backed student loan and apply for a loan from the Federal Housing Administration, Veterans Affairs, or the U.S. Department of Agriculture Rural Development, because your lender will check the federal Credit Alert Verification Reporting System database to make sure you are not in default on any government obligations.”

— Michele Lerner, “Student Loans Can Affect Mortgage Approval

Having your debt in order and in good shape will show a lender that you are ready, willing and able to handle a mortgage payment!

Tip #18 — Monitor the Market

A first time home buyer should be like a hawk — surveying the local and regional real estate market similar to how a hawk surveys its prey. Seriously!

By knowing how the market behaves, a first time home buyer can monitor the selling prices of comparable homes in their area, which thereby allows them to be a bit more knowledgeable when going to look at homes.

Getting started is pretty light lifting. Web sites such as Zillow can give a first time home buyer a general idea of what’s out there. Real estate listings are also abundant on the Internet, through sites like National Association of Realtors®. It’s also a good idea to create a few Google Alerts for when new homes come on the market—and don’t be shy about picking up those real estate magazines sitting on the rack in the supermarket either.

Tip #17 — Make Friends in the Marketplace

It’s okay to make the acquaintance of local real estate agents or mortgage brokers, even if you’re not ready to pull the trigger just yet. A first time home buyer shouldn’t be shy about calling and asking for advice about the home buying process. This is also a good way to vet the people who may end up helping you apply for a mortgage and may hold the keys to your new home.

If you have in fact found a broker and a real estate agent that meets your needs in terms of understanding the process, be sure that these folks are also professional, friendly, honest and courteous people.

Another good first time home buyer tip is to ensure that your real estate agent and broker are able to work together. Teamwork is vitally important for a first time home buyer.

Tip #16 — Penny Pinch

Maybe you go out to eat less, maybe you make your own coffee instead of buying it every morning, maybe you reconsider going on that vacation this winter. Whatever it is, a first time home buyer will need to be as frugal as possible prior to buying a home.

Keeping in mind that you will have to make some sacrifices, both large and small. Take a look at some of these recommendations on how to penny pinch towards your goal:

  • Work overtime or find a second job that caters to your work schedule
  • Downsize living situation by either moving back home, finding a smaller, more affordable apartment or take a roommate
  • Eliminate extraneous expenses like cable subscription, eating out, gym membership etc.
  • Scale back your contributions to your 401k or retirement savings plan

There are many ways to save money. Be sure to find the methods that work best for you.

Tip #15 — Get Organized

Organization is a key component to the home buying process. With so much information related to the mortgage process, not to mention the search for that right home, a first time home buyer should try and find an effective way to keep all of this information together.

“The house hunting process does not have to be chaotic. If you take an organized approach to finding the right real estate for your lifestyle and budget, you will have your dream home in no time.”

— “How to Organize Your Real Estate Search,” wikiHow

A good way to stay organized is to create a “First Time Home Buyer” binder and fill it with everything from real estate flyers and mortgage material to pictures and contact information of local brokers and realtors.

Also, consider creating a checklist as a guide to follow throughout the process.

Tip #14 — Create a Wish List

A wish list a will allow a first time home buyer to prioritize what they want in a home, thereby making the real estate search a little bit more focused and easier to deal with.

The important part of doing this, however, is knowing what you’d like to have in your first home and knowing what you can live without. A good way to do this is to separate your list into “Need” and Want.” This allows a first time home buyer an opportunity prioritize what they REALLY should have in their first home.

Wish list items can include: a pool, a big back yard, central air, office, playroom etc.

Tip #13 — Timing is Everything, Don’t Hesitate

It’s not rare for a home to sell super fast — especially when cash buyers are involved. The National Board Realtors reported earlier this spring that properties sold faster for the fourth straight month in April, reflecting the prolonged lag in inventory relative to demand.

While the general rule of thumb for a first time home buyer is almost always to take your time and not rush, making haste when in the home buying process can sometimes result in getting the home of your dreams. But BE AWARE: this only works if you have all of your ducks in a row and feel comfortable pulling the trigger.

Tip #12 — Don’t Settle

While this may seem contradictory to your instinct, as well as to our earlier tip about not hesitating, it’s crucial to be sure you’re not settling for something you may not be happy with six months down the road.

This principle relates to not only the search for that perfect home, but also translates when figuring out the terms of your home mortgage loan. Persistence can pay off, so don’t settle for a price or for an interest rate that makes you uncomfortable.

Tip #11 — Lock in a Rate ASAP

Timing is everything when it comes to getting ideal mortgage terms. Rates are expected to climb in 2017 due to an expected reduction in economic stimulus from the Federal Reserve, so it’s key to lock in a rate as soon as possible.

If you’re working with a mortgage broker, chances are you’re in good hands. If not, there are some things you should know before trying to lock in a rate:

  • Know the difference between a rate lock and a rate quote
  • Typically, you can lock in a rate once you’ve located a property, and up to 5 days before closing
  • Make sure the rate lock is in writing
  • Research whether or not rates are predicted to rise or fall before deciding to lock in a rate
  • Ensure your rate lock expiration date is realistic
  • Be aware of rate caps
  • Settle your loan before the rate lock expires

Rate locking is one step in the process that will help alleviate some of the first time home buyer stress around financing.

Tip #10 — Don’t Be Shy, —Bargain

Believe in your bargaining power — this is what the home buying game is all about.

When dealing with lenders, especially in a down market, be aware that your bargaining chip is the fact that you are interested and they want your business. This gives you some wiggle room to shop around.

But when dealing with home price negotiations, tread lightly. This process can be a back and forth battle of wills. Here are a few good tips to help your bargain efforts:

  • Go into purchase negotiations primed with as much information as you can gather
  • Don’t lowball. The seller wants to know you’re serious
  • Keep a poker face
  • Know when to walk away
  • Know when to throw in the towel and accept a price

And remember to be cautious when dealing with a seller; there are many instances of home buying blunders related to negotiations gone wrong.

Tip #9 — Know Your Rights

Knowing your rights as a mortgage borrower is key for a first time home buyer going through the home buying process.

The U.S. Department of Housing and Urban Development recommends a first time home buyer be aware of their rights before entering into any loan agreement. Because remember, buying a home is perhaps the largest and most important loan you will ever get. Here are some of your rights as a mortgage borrower, courtesy of HUD:

  • You have the RIGHT to shop for the best loan for you and compare the charges of different mortgage brokers and lenders.
  • You have the RIGHT to be informed about the total cost of your loan including the interest rate, points and other fees.
  • You have the RIGHT to ask for a Good Faith Estimate of all loan and settlement charges before you agree to the loan and pay any fees.You have the RIGHT to know what fees are not refundable if you decide to cancel the loan agreement.
  • You have the RIGHT to ask your mortgage broker to explain exactly what the mortgage broker will do for you.
  • You have the RIGHT to ask questions about charges and loan terms that you do not understand.
  • You have the RIGHT to a credit decision that is not based on your race, color, religion, national origin, sex, marital status, age, or whether any income is from public assistance.
  • You have the RIGHT to know the reason if your loan was turned down.
  • You have a RIGHT to ask for the HUD settlement cost booklet “Shopping for Your Home Loan”.

The Consumer Financial Protection Bureau recently enacted a slate of new rules for borrowers. These are especially important if you run into issues with your mortgage servicer in 2014 or fall behind on your payments.

Tip #8 — Consider Life After Buying Your First Home
First Time Home Buyer Tips Life After Buying

The excitement of buying that first home can sometimes blind a first time home buyer to the true investment of home ownership. For instance, the only thing a new homeowner may have on their mind is what their mortgage payment will look like when it’s all said and done. And while this is certainly an important figure, it’s critical to recognize that home ownership is much more than a monthly mortgage payment.

Personal finance guru Suze Orman recommends that before committing to a mortgage amount, a first time home buyer should take into account the true cost of making those monthly mortgage payments — such as the amount of principal, interest, taxes and insurance payments that will come about each month. Orman also suggests considering all of the “extras,” which more commonly refers to maintenance, repair and unexpected disasters like a broken water heater or burst pipe.

“Don’t worry about mortgage deductions or the after-tax consequences – just look at the numbers and think about what else you spend each month and try to understand if you’ll feel comfortable. Because if you can’t sleep at night worrying about paying the mortgage or fixing your broken water heater, you’re spending too much.”

— Suze Orman

Lastly, the true cost of home ownership is not always about money. For instance, that green grass that comes along with your new home will eventually need to be cut and that old fence will likely need to be fixed at some point. While both of these activities may require a financial investment of some sort, they also require some time and energy on the part of the homeowner.

Tip #7 — Select a Reputable Home Inspector

This is a no brainer for a first time home buyer. Selecting a knowledgeable home inspector is just as important as a great real estate agent, and in the long run, can save you thousands of dollars.

The first thing you should do is ask friends, family and co-workers for referrals. Also be sure to talk to your broker, if you are using one, as well as your real estate agent.

Once you’ve gotten a few names, do the following to ensure they are right for you:

  • Conduct interviews — ask questions related to their process and how long an inspection takes.
  • Ask for proof of credentials and/or association with organizations — this is a good way to check for references and determine the home inspector is who they claim to be.

Some other good recommendations, according to this post from MSN Real Estate, involve: asking tough questions, checking for complaints and getting it all in writing.

Tip #6 — Survey Your Surroundings

While the type of home you choose is of utmost importance, so too should be the neighborhood that surrounds it.

Consider the following when looking beyond the borders of the home itself:

  • Are the streets/sidewalks in good condition?
  • Who are your neighbors?
  • How close are you to places you visit on a regular basis, such as schools, gym and grocery store, etc.?
  • Is it safe for children (i.e., is there good lighting, do cars speed by on a regular basis)?

In the case of getting to know your neighborhood, take the time to consider all of the factors that can play into whether a neighborhood is right for you.

Tip #5 — Get Serious About Your Credit Score

Lack of a good credit score can be one of the biggest obstacles a first time home buyer will have to conquer when buying a home.

Generally, a first time homebuyer with a higher credit score will have a better shot at securing a mortgage loan with a low interest rate, meaning lower monthly payments. A first time homebuyer with poor credit, however, will experience difficulty securing that low interest rate, among other things, and will likely incur higher monthly payments.

Luckily there are some simple steps a first time home buyer can take to begin the healing process now. Here’s just a few:

Step 1:

You should go to your bank and give them $1,000 (or whatever you can manage) and ask them for two “secured” credit cards. They should give you a Visa and a MasterCard against the funds that you gave them. Use these cards monthly for gas or something nominal and pay it off in full each month. This will build a credit history for you. Within 6-12 months you will have established credit scores. Once you have established credit, you can ask for your secured funds (deposit) back.

Step 2:

If possible have a family member or close friend add you to one or more of their accounts as an “authorized user.” You will gain all of their past history, so if they have had a card for several years or more. You obviously want to make sure they had a good credit history with these accounts.

Have poor credit?

http://www.myfico.com/credit-education/improve-your-credit-score/

Tip #4 — Accept Assistance

A first time home buyer has a variety of tools available to them when kicking off the home buying process.

The U.S. Department of Housing and Urban Development recommends you contact one of the HUD-funded housing counseling agencies in your area to talk through other options for help that might be available to you. Also, be sure to check with your local government to see if there are any local home buying programs that could help you.

Tip #3 — DON’T Wear Your Heart On Your Sleeve

While this may be easier said than done, try to not become emotional when embroiled in the home buying process.

As one expert states in this round up of home buying advice, “First time buyers should check their emotions at the door.” When not properly kept in check, emotions can lead to mistakes.

Put on your poker face and remember that buying a home is all about business.

Tip #2 — Fly Under the Radar

A first time home buyer should try to stay out of sight when waiting on approval for a home mortgage loan. Things like overspending or taking on new debt can throw a wrench in a potential approval.

Here’s a few simple ways to stay out of sight:

  • Don’t make any large purchases
  • Don’t apply for any new credit accounts
  • Don’t close any credit accounts
  • Don’t move your money around
  • Don’t skip or miss payments

Tip #1 — Ask A LOT of Questions

Again, buying a home is usually the first significantly large purchase a first time home buyer has made. Therefore, you shouldn’t be afraid to ask all of your questions, and ask again until you’re comfortable with the answer.

Also, don’t ever feel like you’re bugging your real estate agent or broker — they’re getting paid to help.

At Premiere Mortgage Services Inc. we have over 35 years experience and a stellar reputation.

Dana Bain & Robin Dunbar Bain

Premiere Mortgage Services Inc.

www.BainMortgage.com

Posted in:General
Posted by Dana Bain on May 11th, 2017 1:38 PM

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