So you are a first time home buyer and you have no idea how to decide which mortgage is the right one for you?!
I can help guide you a little with this article but bear in mind that no one can give you perfect answers unless they know your whole scenario.
I am going to detail this in Question and Answer form to make it easier for you, the consumer, to find the answer you are looking for.
1. Do you have any down payment money saved up?
The answer to this question determines how much Loan to Value (LTV) you will need to borrow. Simply stated, LTV is the percentage of the appraised value OR asking price you will need to borrow. For instance : If you have a 20% down payment on a $200,000 purchase price/appraisal, your down payment would be $40,000. Your LTV would then be 80% since you need to borrow 80% of the price/value.
If you don’t have any down payment money saved up (and most consumers these days don’t), you may have access to a Down Payment Assistance Program (DPA) in your area. There are several of these available locally and nationally (Genesis, Nehemiah, AmeriDream) and you will need to either ask your loan officer about them or do your homework. Generally, the national DPA programs offer 3% down payment and your seller typically contributes another 3% toward your closing costs.
This leads us into discussion of loan programs.
2. Do you qualify for an FHA loan?
If you do qualify (your loan officer can determine this), you can then take advantage of the 97% purchase loan and combine it with the 3% DPA and 3% seller paid closing costs. This leaves the first time home buyer with minimal out of pocket expense. Also ask your title company for a first time home buyer discount. This could save you hundreds of dollars additionally.
If you can not use a DPA program and you do qualify for an FHA loan, you may also qualify for a MyCommunity loan. These are offered nationwide as well and they are 100% financing. No down payment needed. The credit parameters are similar to FHA loans and they are qualified using the same computer grading system as FHA loans. Ask your loan officer about MyCommunity loans and if he/she doesn’t know what these are, do some Internet research on your own and find a lender who offers them.
3. Does interest rate or monthly payment matter most to you?
If you are rate conscious then you won’t care if your monthly payment is Interest only or a 30-50 year amortization. But if you are like 75% of the rest of us consumers, you genuinely care about how big of a check your write every month for your mortgage. You live on a budget so payment will be one of your biggest considerations in buying that spiffy new house. When you consult with your loan officer, have your priorities in mind so you can convey to your loan officer what your “core wins” are. This helps them assist you in obtaining the right loan for you.
4. Do you plan to stay in the home for more than 2-5 years?
If you know going into this that you plan to either move away or upgrade or downsize within the next 5 years, you should also convey this to your loan officer up front. This is especially true if you are for sure about those future plans. Telling your loan officer that you plan to move across country in 3 years when your spouse leaves the Military is very important. It can save you thousands of dollars because instead of paying a higher interest rate to get a loan with a short or no prepayment penalty period, you can actually get the lower rate by selecting the loan with a 3 year prepayment penalty period.
Another way you can save yourself thousands if you know this going in – take a shorter fixed period on your loan. Instead of the traditional 30 year fixed loan, you can now get a better rate (lower payment) taking a 1, 3, 5, 7, or 10 year fixed rate. The rate stays fixed for the fixed period of the loan and then will start adjusting once the fixed period ends. If you know you are definitely moving in 3 years and are buying the home for a tax break, great deal, resale etc, lock in a 5 year fixed loan with a 3 year prepayment penalty. This will give you a rate between 1/2 to 1 point lower with most lenders.
5. Can you reasonably afford the mortgage payment, taxes, insurance, mortgage insurance, and maintenance every month and still be able to pay your other bills AND eat?
Most mortgage lenders limit your monthly complete Debt Ratio (DTR) of out going major expenses (mortgage, taxes, insurance, MI, credit cards, car loans,personal loans, student loans etc) to a maximum of 50% of your gross (before deductions) income.
The average consumer has several of the standard deductions coming out of each pay check so using your gross income isn’t exactly realistic but it is how it’s done. As a first time home buyer, you should be aware of things like “payment shock” (going from a low rent to a high house payment) and “1st payment default” as well as “foreclosure”. If you do not accurately take your entire budget into account before going into debt to buy your first home, you run the risk of losing that home and possibly everything else. It is wise to allow yourself an extra house payment in your budget each month to be put into an interest bearing savings account just in case you get sick or injured and can’t work for a couple of weeks. Most consumer experts suggest keeping $500 in a savings account for emergencies and I agree. But I suggest one additional house payment as a cushion so even if you have to let everything else go, you will still have a place to live.
Good luck and Happy House Hunting!