Many potential first-time homebuyers put off applying for a mortgage because they believe it is too complicated and time-consuming. Many new mortgage programs were made available in 2021 so that first-time home buyers could qualify for loans much more easily. FHA loans are an FHA loan is a popular option for first-time home buyers to purchase a home.
First Time Homebuyer Options
FHA loans are popular due to their low credit requirements and down payment requirements. FHA loans are available to borrowers with bad credit scores below 500. However, a 10% down payment is required in order to qualify. A borrower who has a FICO score below 580 will not be approved by a lender.
If your credit score is less than 580, it’s important to first improve it before applying for a mortgage. A 3.5% down payment is required for FHA-insured mortgage loans if your credit score is less than 580.
Request a Copy of Your Credit Reports
First, you need to get copies of your credit reports from all three major credit bureaus. You can also visit annualcreditreport.com, which is a government operated site, to get a free copy of your report. This can only be done once per year.
Also, you should know your credit score. Visit the sites that offer free reports and scores. Credit Karma and Credit Sesame are good places to start.
Check Your Report For Errors
Once you have all three reports, review them one by one to ensure that no errors are found. If you discover any, contact the credit bureau immediately to file a dispute.
What to Look For:
- Incorrect Employers
- Phone numbers and addresses from the past and present
- Incorrect account information
- Accounts you don’t own
- Late payments that shouldn’t be there
- Credit Injuries Not Authorized
By contacting the credit bureau by phone or online, you can dispute incorrect information about your credit report.
Check your credit score
Your credit score is a key factor in securing mortgage approval. Before you apply for a mortgage, it is important to have a good credit score. Credit Karma, Credit Sesame and Credit Karma are two sites that will allow you to check your credit score free of charge.
Credit Scores can be improved
Resolve credit card balances. The amount of credit you have available is known as your credit utilization ratio. This is responsible for 30% your FICO score. You should pay off your balances in a amount that is less than 15% of the credit card limit.
Do not apply for new credit. A hard credit inquiry will be done on you once you apply for credit. This could lower your credit score. You may also be adding debts to your credit report which could negatively impact your credit score.
You must pay your bills on time – it is important to keep up with your payments. You must make timely payments if you plan to apply for a mortgage. It may be beneficial to set up auto-pay for your bills payments.
Be Preapproved Before you Go House Hunting
You must first get preapproved for mortgage financing before you begin your home hunting. A loan officer will assess your credit and verify your income, assets, and bank statements.
Most realtors will not show you houses until you have a preapproval letter. Most sellers won’t accept offers without the preapproval letters. It is easy to get a preapproval. In just minutes, you can get a preapproval. Important documents such as 2 years worth of tax returns, 2-3 month bank statements, proof that you have paid down, W2’s, and pay stubs should be brought.
Find out if you are eligible for an FHA loan
FHA loans are more flexible and suitable for first-time home buyers looking for a loan they can qualify for. FHA mortgages have a maximum loan-to-value ratio of 96.5%. This means that you only need to make a 3.5% down payment.
FHA Loan Benefits
- Minimum credit score 580
- 3.5% down payment
- A down payment can be made as a gift
- Programs for down payment assistance are available in many places
- Low interest rates
- Accepts higher ratios of income to debt
- Available in fixed rate and adjustable terms
Decide your down payment options
The type of mortgage you receive will determine how much you’ll need to put down for your down payment.
Low or no down payment home loans are very popular for first-time home buyers who typically have less cash reserves. FHA loans only require 3.5% of the purchase price for down payments, which makes them a great option for first-time home buyers.
If you do not have 20% down payment, you can get mortgage insurance by taking out a conventional mortgage. Below are some down payment requirements for each type of home loan.
- FHA Loans: 3.5% with a 580 credit rating
- VA Loans – No Down Payment Required
- USDA Loans – No Down Payment Required
- 203k loans – 3.5%
- Conventional loans – 5% to 20%
- Conventional97 – 3%
Hire A Reputable Real Estate Agent
A few home-buyers aren’t hiring a real estate agent when they first buy a house. Do not be one of these people. Remember that the buyer pays the realtor and that the cost of the house is already covered by the agent. A reputable and experienced realtor can help you navigate the home-buying process as well as negotiate a fair price. You can trust that he or she will look out for your best interests.
Budget for All Homeownership Costs
Apart from the mortgage, there are many costs involved in getting a mortgage. There are closing costs, mortgage insurance, homeowners insurance and HOA fees.
FHA loans require MIP (mortgage insurance) regardless of how much you have paid down.
Based on the amount of the loan and the down payment, the MIP for FHA loans can range from 0.80% to 1.1%.
If you have less than 20% down payment, a conventional loan is the best option. You don’t need private mortgage insurance, but MIP is required if you make at least 20%.
Calculate your debt to income ratio
The ratio of your monthly income to debt, or DTI, is the difference between your monthly income and your monthly debt payments. This includes things such as car loans and credit card payments.
The front-end DTI ratio, which is the ratio between your income and debt payments, excludes the mortgage loan, is the front-end DTI ratio. If you earn $5,000 per month and your monthly total payments are $1,000, your front-end DTI ratio would be 20%. Maximum front-end DTI ratio of 28%
The back-end DTI ratio (or income to debt payments) is your monthly income divided by your mortgage payment. If you have a pretax income of $5,000, and your monthly mortgage and debt payments total $2,000, your back-end ratio would be 40%. Maximum is 41% In some cases, however, the ratio may reach as high as 50%.
Look for Grants and Programs Available to First-Time Home Buyers
First-time homebuyers can take advantage of a variety of down payment assistance programs and grants. HUD offers several state programs to help first-time home buyers with the down payment.
Local programs can also be found on the websites of your localities. Some of these programs may require you to attend a homebuyer education class in order to be eligible.
HUD Programs
The U.S. Department of Housing and Urban Development created the Good Neighbor Next Door Program (GNND) to help law enforcement, teachers, and emergency personnel become homeowners. They provide them with 50% of the list price of HUD homes found at hudhomestore.com
HUD offers the One Dollar Program, which allows local governments to purchase HUD homes at $25,000 and below. These homes must have been on sale for at most 180 days. In an effort to revitalize their community, these houses may be offered to low-income families.
Learn What Loans are Available for First-Time Home Buyers
There are many loan options available for first time home buyers, including the FHA loan. Based on your situation, there may be other loan programs available that offer advantages over FHA home loans.
Conventional loan – If you have at least 20% down payment, then you should consider applying for a conventional mortgage. FHA requires mortgage insurance regardless how much you have down. You will not need to carry PMI if you have 20% down. This will save you thousands each year.
Conventional 97 loan – Fannie Mae created this type of loan to rival FHA loans’ low down payments. You can qualify for conventional 97 programs with a 3% downpayment and a 680 credit score.
VA Loan – If you are a veteran, you may be eligible for a VA loan. This mortgage option is the most straightforward. It doesn’t require mortgage insurance nor a down payment.
USDA Loan – This program was established by the US Department of Agriculture in order to help low-income homeowners in rural areas save money on their mortgages. You may be eligible if you live in an area that is eligible for a USDA Loan. The mortgage rate is only 0.35% and there is no down payment.
A 203 Loan – If you’re looking to purchase a fixer-upper, a renovation FHA loan (also known as a 203k Loan) may be available. A loan can be obtained to purchase a house that needs repairs.
Fannie Mae Freddie 3% down loan – Fannie Mae Freddie Mac are the largest buyers of mortgage loans. The conventional 97 mortgages were also launched by Fannie Mae and Freddie Mac. It is a 3% down payment program that allows them to compete with FHA loans.
FHA Energy Efficient mortgage or EEM – This helps borrowers finance the purchase of a home and gives them extra money to make energy efficient improvements.
Additional Important Information
Who are First-Time Home Buyers?
To be eligible for first-time home buyers, you must not have owned a home in the last 3 years.
Are You a Requirement for a Down Payment?
Some programs do not require a down payment, such as USDA or VA loans. Existing homeowners can also apply for them. A down payment is not required for any type of loan.
Which loan is best for you?
When it comes to home loans, first-time homebuyers have different requirements. One type of loan might be right for you, but it may not work for you.
FHA loans are the most preferred home loan for first-time homebuyers. FHA loans have lower down payments and stricter qualification requirements.
What credit score is required to be eligible for an FHA loan?
Federal Housing Administration requires that borrowers have a minimum credit score of 500 and a 10% downpayment. A borrower with a better credit score than 500, or at least 580, will be able to get the loan insured for 3.5% less.
The Key Takeaways
It doesn’t have to be scary to buy a house for your first time. Follow the above tips and work with a trusted Myrtle Beach loan officer and real estate agent to ensure that the entire process runs smoothly.
If you require professional help in purchasing a home, call Full Potential Real Estate, LLC
Full Potential Real Estate, LLC
Myrtle Beach, SC 29577
843-236-0203
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