If you’re planning to buy your first home, it’s an exciting time for you as first-time homebuyers! If you have an outstanding credit score, a large salary, and plenty of money for a down payment, you probably won’t have much problem getting a mortgage pre-approval.
On the other hand, if you have some credit challenges, your salary isn’t in the 6-figures, or you don’t have a large down payment, there’s more you need to know about your mortgage options.
Get Pre-Approved for a Loan
You need to know what price range to look in for your first home. The best way to determine that is to get pre-approved for a loan. When you start working with Broward County Realtors, like the experts at the Teri Arbogast Team, you’ll be able to get referrals to proven loan officers. The Realtors on Teri’s team know which loan officers are reliable and can offer you the best loan alternatives as a first-time buyer. Working with the right loan officer will make your home buying experience much easier.
Once you have that pre-approval, you’ll be able to look for homes that are within your budget, and you’ll be in a much stronger negotiating position. With a pre-approval, home sellers and their real estate agents know that you’re a serious buyer and that you’ll be very likely to close a deal without a problem.
Check Your Credit Rating
Before you start talking to loan officers, check your credit rating. Three credit bureaus publish credit reports, Equifax, Experian, and TransUnion. You can get free copies from each of them once a year.
Check the reports to make sure that all of the information is accurate. There are common errors that you’ll want to look for. If you find errors, you can dispute the information at each of the credit bureaus, usually online.
For initial discussions with loan officers, print out your credit reports and take them with you. Once you’ve chosen a loan officer, that person will obtain an official copy of your credit report. However, you don’t want multiple people to request your report because it will tend to lower your credit score.
Understand Your FICO Score
Each credit bureau will publish a FICO score as part of your credit report. Most bureaus use FICO credit scores. The scores range from 300-850, and lenders know that the higher your score, the less risk there is of you defaulting on your mortgage. Here’s how lenders typically interpret the scores:
- Less than 590, Rating: Poor. This score is below the average score for U.S. consumers.
- 580-669, Rating: Fair. This score is lower than average, but some lenders will approve consumers with scores in this range.
- 670-739, Rating: Good. Most lenders interpret this as a good score.
- 740-799, Rating: Very Good. This score indicates a very dependable borrower.
- Over 800, Exceptional. This score indicates a borrower that presents very low risk.
If you want to improve your credit score, you can follow the advice from the credit bureaus, like these tips from Experian. Once you start an active home search, do not do anything that will cause your credit score to go down. For example, don’t open any new credit card accounts, or purchase furnishings for your new home on credit. If you need to make major purchases, wait until after your loan has final approval.
Find the Best Mortgage
There are many alternatives and special loan programs for first-time homebuyers. It’s easy to get overwhelmed, which is why working with a reliable loan officer is so important. Here are just some of the options you may want to consider.
Conventional and FHA Mortgages
Conventional and FHA mortgages are two of the most common types available. A conventional mortgage refers to any mortgage that isn’t secured by a government agency. Typically, you’ll need a FICO score of 620 or higher to qualify. You’ll also typically need a 5 to 20 percent down payment. If you put down less than 20 percent, you’ll need to pay Private Mortgage Insurance (PMI) until your loan-to-value ratio is at least 80 percent.
For example, if you purchase a $200,000 home, and put down $10,000, you will finance $190,000. If you divide your loan amount by your home value, $190,000 divided by $200,000, your loan-to-value ratio would be 95 percent. As you make loan payments, you will continue to reduce your loan-to-value ratio. Once it reaches 80 percent, you can request removal of the PMI insurance fees.
The Federal Housing Administration provides insurance for FHA mortgages, so the lending criteria are more flexible. Some FHA loans only require a FICO score of around 580, and the minimum down payment can be as low as 3.5 percent.
However, FHA loans require an upfront premium of 1.75 percent of your mortgage amount. And, you will make insurance payments for the life of the loan if your down payment is less than 10 percent. You may be able to cancel that insurance after 11 years if your down payment is 10 percent or more.
Loans offered by the U.S. Department of Agriculture are available in many parts of the U.S., even in areas that you wouldn’t ordinarily think of as rural areas. These loans don’t require a minimum down payment, and the mortgage insurance is less than with an FHA loan.
If you’re active or retired military, you’ll want to look into a VA loan. No minimum down payment is required, and no mortgage insurance is necessary.
These are examples of the most common types of loans that are good for first-time homebuyers. Your loan officer may offer other programs that will be most beneficial for your specific financial situations.
It’s exciting when you decide to buy your first home. But, we understand that first-time homebuyers need the right information and guidance to make informed decisions. If you’re thinking of buying a home for the first time, call us at 954-242-8030 or send an email.
We’ll make sure you avoid the pitfalls many first-time homebuyers fall into. And, we’ll help you find the right financing, neighborhood, and home – and have fun doing it!