What do first-time homebuyers want to know as they get on the road to homeownership?
Here are the most-often asked questions I get when helping my clients …
Q: Are there any special loan programs for first-time buyers?
A: Yes. Primarily the programs are for down payment assistance. Several, like the California Housing Finance Agency, offer zero down payment programs, but those typically come with a higher interest rate. A good site to check out is Down Payment Resource, which offers hundreds of programs in California.
Q: What other ways are there to come up with the down payment?
A: In my experience, first-time homebuyers most often save their money (sometimes for years), borrow from their retirement plan, or get a gift or a loan from family members. For military in-service members or veterans, there is a Veterans Affairs’ zero down loan program.
Q: What if I have a co-signer who already owns a home?
A: First-time buyer programs typically require the occupying borrower(s) not to have owned a home in the last three years. However, non-occupant co-signers can be homeowners. Though, not every program allows non-occupant co-signers.
Q: How much money am I going to need for a home purchase?
A: It depends on the sales price and the loan program, for starters. Assuming you don’t do a zero-down program, you can be putting down as little as 3% of the sales price.
For example, on a $500,000 home, you’d be putting $15,000 down. You also will have to come up with closing costs — assuming the seller isn’t paying those charges. Closing costs can roughly be 2-4% of the sales price. You will have to come up with another $15,000 (assuming 3% for closing costs) in the example above.
Q: Are you going to do a hard pull on my credit report?
A: Initially, a soft pull can be used to get a borrower pre-approved for a mortgage. A soft pull offers just one score, and that pull doesn’t affect credit scores. Once the buyer is in escrow, we will have to do a hard pull to get all three scores, which is required by lenders.
Q: What if I don’t have enough credit to generate credit scores?
A: You can manufacture scores by being added to someone else’s credit card account. Another way is to go to your bank and get a secured credit card. That means you put, say, $500 as security. Your bank provides you with $500 as a credit card credit. You borrow and pay back each month for at least six months using a FICO score.
For a VantageScore, you can generate a score in as little as one month. Another way to quickly generate a VantageScore is to have your rent and utilities reported to the credit bureaus.
Q: Should I buy now or wait for interest rates to come down?
A: If you are ready, able and qualified to purchase a home, it’s probably better to buy now instead of waiting. Over time, home values always go up. That also means the longer you wait, the more expensive a home might become. And there is no guarantee if or when mortgage rates are going to come down. If and when they do come down, you can always refinance to a lower rate.
Q: What are some first-time buyer mistakes I should avoid?
A: Don’t go out and take on new credit while you are home shopping or in the middle of escrow. Lenders track your credit until the loan funds. More debt can mean no longer being able to qualify.
Make sure you have additional funds available to pay for property maintenance, repairs and utilities that you might not be used to paying for as a renter.
Don’t quit your job or get yourself fired in the middle of escrow. The lender will call the employer to verify your current employment. No job. No loan.
Q: Should I get a fixed rate or an adjustable-rate mortgage?
A: I recommend you get a fixed rate. It’s stable, and you don’t have to worry and wonder where rates will go. There are a few exceptions.
For example, if you know you are going to own the home for less than five years, you can get a better interest rate and payment on an adjustable-rate mortgage that is locked in for at least five years.
Another example is if the adjustable-rate mortgage has a significantly lower interest rate (1% or more lower) than the fixed-rate mortgage, saving you hundreds and hundreds of dollars each month, it could be worth the gamble.
Q: Why do I have to pay for private mortgage insurance?
A: If you are not putting at least 20% down, lenders require you to pay PMI. It’s an insurance policy that protects the lender if you default on the mortgage.
For conventional mortgages, your lender must remove the PMI once your loan balance is paid down by 22% of the original balance under the Homeowners Protection Act.
Or, once you have 20% equity (equity is the property value minus the loan balance), you can request PMI to be removed by your lender. You need to have on-time payment history and you will need to pay for an appraisal to confirm the value.
For a 30-year FHA mortgage, the monthly mortgage insurance stays on for the life of the loan. The only way to get rid of it is to refinance out of the FHA loan.
Q: What is the difference between qualifying for a home loan and affording a home loan?
A: Typically, lenders will give you an idea of the most for which you can qualify for during the pre-approval process. You may not want to go that high because you cannot personally afford it.
Just because a lender says you are qualified for X, you don’t have to borrow X. You should always stay in your comfort zone. You want to be able to sleep at night without being stressed about how you are going to afford the mortgage and all the other costs of life and homeownership.
Freddie Mac rate news
The 30-year fixed rate averaged 6.52%, 4 basis points higher than last week. The 15-year fixed rate averaged 5.84%, 5 basis points higher than last week.
The Mortgage Bankers Association reported a 10.8% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $176 more than this week’s payment of $5,275.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75 %, a 15-year conventional at 5.625%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.99% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.5% and a jumbo 30-year-fixed at 6.25%.
Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.375% for the first five years payments, and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.