Buying a home is not always an easy process, and there are many obstacles that a first-time homebuyer may encounter.
The best thing you can do is be prepared for those obstacles. An experienced agent can help you find the right home, negotiate for you, and guide you every step of the way. However, that doesn’t mean you won’t encounter any wicked witches or flying monkeys while you’re on the yellow brick road to homeownership.
Finding a down payment. Unless you’re independently wealthy or have just won the lottery, you will probably have to get a mortgage to buy a home. VA loans are the only loans that allow you to purchase a home with no money down, and you need to be active or retired military to qualify. Most loans require some kind of down payment. The most popular loans are FHA loans and conventional loans, which require anywhere from 3% to 20% down.
Obtaining a minimum FICO score. You need at least a 620 FICO score for an FHA loan, and you need a 720 score for a conventional loan with mortgage insurance. However, if your FICO score falls below that, you may still qualify for a mortgage; you will just have a higher interest rate or different requirements that you have to meet.
It’s important to talk to your lender about your credit score, as online credit scores may vary. Get pre-qualified with a lender before you start looking at homes, even if you don’t plan on doing so for another six to 12 months. That way, you can identify any issues with your credit that you may need to repair and you can get some guidance from your lender to make sure that you’re doing everything you can to get the house that you want.
- Meeting lender ratios. Most lenders have a certain ratio that you have to meet. Your PITI (principal, interest, taxes, and insurance) ratio for your mortgage payment cannot exceed 33% of your monthly gross income. Some lenders accept higher than that but again, that is something you need to check with your lender. For example, if you earn $5,000 a month, then the max PITI payment you could qualify for was $1,650.
Your back-end ratio includes your PITI ratio with all of the debt that you pay on a monthly basis. That ratio should fall between 41% and 50%, depending on your lender and the type of loan you are looking for. If you don’t want mortgage insurance, you typically cannot exceed 41%; to qualify for a higher back-end ratio, you can put 20% down.
There are always exceptions to the rule, however, so make sure you work with a lender that you trust.
- Receiving an appraised value. The appraisal occurs after you’ve gone under contract. Before May 1st, 2009, your lender could select their own trusted appraiser that was experienced and comfortable giving appraisals in the area. As a result, you would get a fair and balanced appraisal.
However, a new home valuation code of conduct allows appraisal management companies to pluck an appraiser from a random pool. Your appraiser may be from another area and not know anything about the neighborhood that you’re buying in, which could result in a low appraisal. That’s tough for buyers and sellers alike, but that is the world we live in.
If the appraisal does not come in and the seller does not adjust the price, you can walk away from the transaction, pay the difference in cash, or meet the seller in the middle. Homes often don’t appraise in our current seller’s market, as home prices continue to increase.
- Satisfying your loan conditions. Underwriting can be frightening. An underwriter will review your file and make demands that you might not have even known about. At that point, you’ve probably already gone through your home inspection and your appraisal. When the underwriters come back with conditions and requirements, don’t get upset. They may need more documents or they may have rejected the loan for any number of reasons; they write the rules.
For example, if you’ve remarried but your former spouse went through a short sale or foreclosure with your name on the mortgage, you may be disqualified for your mortgage.
That’s why it’s important to disclose everything about yourself and your finances to your lender so that the loan officer will be able to foresee any problems down the road. You can also get a full underwritten approval before you look at homes to make the whole process easier for you.
These are just a few of the most common obstacles first-time homebuyers may encounter. If you have any other questions, just give me a call or send me an email. I would be happy to help you!