May 11th, 2017 1:38 PM by Robin 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
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
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.”
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
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
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
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
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
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
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
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:
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
— “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,
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:
Rate locking is one step in the
process that will help alleviate some of the first time home buyer stress
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:
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
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:
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
Tip #8 — Consider Life After
Buying Your First Home
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
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
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:
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:
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
Tip #5 — Get Serious About Your
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:
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.
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?
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
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
Here’s a few simple ways to stay
out of sight:
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
At Premiere Mortgage Services Inc. we have over 35 years experience and a stellar reputation.
Dana Bain & Robin Dunbar Bain
Premiere Mortgage Services Inc.