First Time Buyers

Are You a “First Time Buyer” – It’s Likely that You Are

A first-time homebuyer is usually assumed to be someone who has never purchased a home before. Although that might make sense, it’s not necessarily that simple. Homebuyers who don’t have a lot of money banked for a down payment could find help through first-time homebuyer programs, even if they aren’t actually buying their first home. Many of these programs define first time buyers as buyers who have not purchased a home for at least three years. Read more about these programs below, or watch this video.

Not Sure Where to Start?

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You Don’t Need 20% Down

The myth of the 20 percent down requirement has been circulating since the housing crisis over 10 years ago. Access to credit tightened, especially for median-income homebuyers. Even responsible buyers who had the income to buy, but lacked a large down payment, faced home buying challenges. Thankfully, the landscape has improved.

Putting 20% down may be the right choice for you if you have the savings. It gives you 20 percent equity in your home and helps you avoid paying a monthly fee for private mortgage insurance. If you don’t have enough for 20% down, it can take on average, someone making the national median income, 14 years to save enough. That’s an awful long time to put off finding a home. The good news is, you may have other options.

Down Payment Assistance

A 20% down payment on a home is great, but it’s not a requirement. Many mortgages require no more than 3% to 5% of the purchase price as a down payment. Plus, there are loans and grants that may help cover these costs. Click the link below to see if you might qualify for some help with your down payment.

Loan Options

Although there are other loan options available to some home buyers, the three described below are the most commonly used mortgage loans. Below are the basics of those three loan options. The most common mortgage loan is the conventional loan.

Conventional Loan

Down Payment
The most preferred (by lenders) is a down payment of at least 20% of the purchase price of the home. However, there are many options and variations of conventional loans for borrowers that don’t have the cash for a 20% down payment.
Generally, the only time you’ll be required to have 20% equity in your home is if you are refinancing and are taking cash out.

It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%. Your personal situation, the property you are purchasing and the type of loan will affect the minimum required down payment. Here are some other, less than 20% down payment situations:

For a First time home buyer making no more than 80% of the median income in your area, you’ll need a down payment of at least 5%.
For someone who is not a first time home buyer the minimum down payment is 5%.
For borrowers buying a second home, you’ll need a minimum of 10% down.
To purchase a multi-unit home, you’ll likely be required to put down at least 15%.

If you’d like to see the mortgage payments for any of these situation, use this mortgage calculator.

Private Mortgage Insurance
If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects your mortgage investors in case you default on your loan. PMI premiums are based on your credit score, the amount of your down payment, and loan type and is typically added to your monthly mortgage payment. There are other options for paying the PMI on a loan. Your lender can tell you more.

Credit score (FICO score)
Most conventional loans require a credit score of at least 620.

Debt-to-income ratio (DTI)
Your DTI is a percentage that represents how much of your income goes to pay off debts each month. This ratio must be 50% or lower for most conventional loans.

Loan size
Your loan must fall within the loan limits set by the governmental entities Fannie Mae and Freddie Mac to be what’s considered a “conforming loan”. As of 2022, single-family home loans cannot exceed $647,200. This limit will increase to $726,200 in January of 2023. There are exceptions for some regions, but this limit applies to most of the USA.

FHA Loans

The Federal Housing Administration (FHA), provides assurance to approved private lenders by issuing mortgage insurance. Lenders can lower credit requirements knowing that the FHA is protecting them from borrowers defaulting on their loans. Here are the guidelines for the requirements that must be met by FHA borrowers:

• FICO® score between 500 and 579 = 10% down payment.
• FICO® score at least 580 = 3.5% down payment.
• Debt-to-Income Ratio < 43%.
• MIP (Mortgage Insurance Premium ) is required.
• The house must be the borrower’s primary residence.
• Borrower must provide proof of employment and consistent income.

VA Loans

These loans are similar to FHA loans in that they are issued by private lenders. VA loans, however, are insured by the U.S. Department of Veteran Affairs (VA). Although the minimum credit scores and any other requirements are determined by each lender, the most common minimum FICO score required by most lenders is 620. The most significant features of VA loan program are that they are a $0 down mortgage and are only available to active military service members, Veterans, and some military spouses. There are various eligibility requirements depending on not only length of service but also the time period during which the military service member served.

Consult a Lender

If you need information on mortgage loan options and eligibility, consult your lender. If you don’t yet have lender, contact me and I can recommend several local (Downriver and surrounding areas) trusted lenders.