.svg){kind=small}
Is now the right time to buy your first home? It’s a complicated question, one that requires you to take a long look at the money you have saved, your household income, and your outstanding debt. Figuring out whether you’re financial ready to buy can feel like a daunting task.
You also need to ask if it feels like the right time to buy a home. Do you have a growing family that needs more space? Did you land a new job and need to rethink your commute? Or are you just tired of throwing away so much money on rent every month?
In a recent report, the National Association of Realtors found that 45% of first-time homebuyers said they moved ahead because “it was just the right time.” This was a much higher percentage than those who made the decision to move ahead based on interest rates (15%) or the availability of homes (9%). And almost none of the homebuyers they polled said they wished they had waited longer.
We know the homebuying process can seem confusing for many people. Below are the top 10 questions we get from first-time homebuyers.
Who qualifies as a first-time homebuyer?
In general, a first-time homebuyer is someone who has either never owned a home or hasn’t owned one in the past three years. The federal government broadens this definition a bit to include a few other categories, such as single parents who owned a home with a former spouse.
The definition is important because first-time homebuyers qualify for some special federal and state programs. First-time homebuyers can qualify for loans with lower down payments and closing costs, which can be helpful because many people buying their first house struggle to come up with the 20% down payment required for most conventional loans.
What federal programs are available for first-time homebuyers?
Certain types of federal loans — such as such as government-backed Federal Housing Administration loans — are popular because they don’t require a 20% down payment. FHA loans can require a down payment as low as 3.5%, but they do require you to pay private mortgage insurance for the life of the loan.
Veterans Administration loans are a great deal for service members, as they require no down payments, have competitive interest rates, and include reasonable closing costs. On top of that, VA loans don’t require private mortgage insurance. For homes in rural areas, USDA loans are also available for no money down. Your financial advisor will be able to help you decide whether these types of loans make sense for you.
What state programs are available for first-time homebuyers?
The State of New York Mortgage Agency offers assistance to qualified first-time homebuyers purchasing a property in the state. They can access mortgage rate discounts and grant programs unavailable to the general population. There are also programs to help you renovate homes in certain areas.
One of SONYMA’s most popular programs for first-time homebuyers is Achieving the Dream, which offers down payments as low as 3% and a total cash contribution as low as 1%. Achieving the Dream can be coupled with other programs, such as down payment assistance.
What is private mortgage insurance?
If a home owner has less than 20% equity in their home, lenders usually require them to have private mortgage insurance. This type of insurance protects the lender if the buyer can’t make their payments.
If you’re considering a loan that would require you to take out PMI, it’s a good idea to crunch the numbers. You might find that the savings on the lower down payment don’t justify what you’ll pay in PMI over the course of the loan.
What do lenders want to know when you apply for a mortgage?
When reviewing a mortgage application, lenders focus on three things: your credit score and credit history, your household income, and the amount of debt that you have. Each lender weighs these factors a little bit differently, but all of them take these three things into account.
Most lenders calculate your debt-to-income ratio when they consider you for a mortgage. Your debt-to-income ratio is your monthly expenses compared to your monthly gross income. Your household expenses — mortgage principal and interest, property taxes, and homeowners’ insurance — shouldn’t be higher than 28% of your household income before taxes. And your total expenses shouldn’t exceed 36%.
What credit score is required to get a mortgage?
According to the Federal National Mortgage Association — better known as Fannie Mae — the average credit score for first-time homebuyers is 748, which falls into the “very good” range. But that doesn’t mean that if your credit score is lower that you need to worry.
Every lender has different criteria, but the lowest credit score for a conventional loan is about 620. Loans from the VA and the USDA will be about the same. And for loans for first-time homebuyers from the FHA, your credit score could even be in the 500s.
This probably goes without saying, but the higher your credit score, the more options you will have. Lenders will generally offer you better terms and lower interest rates. Even a slightly lower interest rate could save you thousands — or even tens of thousands — over the course of your mortgage.
Does it pay to shop around for a mortgage?
Absolutely! The Consumer Financial Protection Bureau found that more than three out of four homebuyers apply to just one lender when they are looking for a mortgage. On top of that, about half of them don’t compare the deals being offered by more than one lender. This means they don’t know if they are getting the most competitive rates possible.
It's a good rule of thumb to compare the rates offered by at least three different lenders. Research has shown that this one step can save homebuyers more than $3,500 in the first five years of their loan.
How much will I pay for a down payment?
For conventional mortgages, lenders often require homebuyers to put down 20% of the total sale price. There are many advantages of a 20% down payment, including lower monthly payments and lower interest rates. You’ll also save on private mortgage insurance.
But according to the National Association of Realtors, first-time home buyers pay a median of 14% for their down payment. As we mentioned before, opting for a lower down payment is a give-and-take proposition. Your monthly mortgage payment will be significantly higher. When you add on the private mortgage insurance payment your lender will probably require, you may end up paying hundreds more each month. This can really add up over the years.
What are points?
A point is a fee paid to the lender to secure a lower interest rate. The term refers to 1% of the total amount of the mortgage. For example, one point on a $100,000 loan would be $1,000.
Why would you want to pay points? Securing a lower interest rate could save you a lot of money, especially if you intend to keep your home for a long time. Like many things having to do with mortgages, paying points has pluses and minuses. Your lender will be able to give you a breakdown of costs associated with paying points.
Besides the down payment, how much should I save up?
It’s a good idea to have three months of mortgage payments, homeowners’ insurance, and private mortgage insurance in the bank in case of some unexpected event. Lenders like to see this cushion in your account when they consider your mortgage application.
And don’t forget closing costs. New York’s closing costs are among the highest in the nation, averaging 2.4% of the loan amount. Some of these costs are related to the title for the property, while others are connected to the loan. Your lender should be able to give you a breakdown of the closing costs.
Do you have other questions about buying a home? We’re happy to help. Reach out to us at hello@hudsonriverlinerealty.com.
