A Complete Guide for <span class='t-red'>First-Time</span><span class='t-red'>Home</span><span class='t-red'>Buyers</span>

Buying your first home is a monumental step, and navigating the maze of mortgage options and loan programs, down payments, and occupancy types can be daunting. Here’s a comprehensive guide to help you make informed decisions on your journey to homeownership.

If you’re buying in Florida and need an expert to guide you, give me a call.

Conventional loans: the standard path

• Down payment: Typically requires at least 5%. Some mortgage lenders might offer 3% down-payment options for first-time homebuyers depending on your price range.
• Credit score: Minimum 620 mid score but a higher credit score (around 740 or above) opens more doors to favorable terms.
• Debt-to-income ratio: Keep your debt in check; lenders usually prefer a ratio below 43% but will go higher up to 49.9% depending on your overall credit and assets.

FHA Loans: a friendlier approach

• Down payment: As low as 3.5%, making homeownership more accessible.
• Credit score: Accepts lower scores, sometimes starting at 580 but preferably need 620 or higher.
• Debt-to-income ratio: Allows a higher ratio, up to 54.9% but better chance of approval below 45%.

VA Loans: Serving Those Who Served

• Down payment: Often zero down payment, a perk for veterans.
• Credit score: Can be more forgiving, but a higher score is beneficial.
• Debt-to-income ratio: Offers flexibility, with some lenders accepting ratios up to 54.9% but preferably keep below 45%.

While the traditional wisdom says 20% down is the golden rule, it’s not set in stone. Many first-time buyers opt for lower down payment options:

• 3% down: Common for conventional loans.
• 3.5% down: FHA loans often require this modest sum.
• 0% down: VA loans extend this privilege to eligible veterans.

Let’s consider a real-world example of a down payment on single-family home:

Imagine you’ve found your dream home, and it’s priced at $200,000. The down payment is usually expressed as a percentage of the home’s purchase price.

1. Traditional 20% down payment:
   • 20% of $200,000 = $40,000
   • In this scenario, you would need $40,000 upfront as a down payment.
2. Conventional 3% down payment:
   • 3% of $200,000 = $6,000
   • With a conventional loan requiring a 3% down payment, you would need $6,000 upfront.
3. FHA 3.5% down payment:
   • 3.5% of $200,000 = $7,000
   • An FHA loan, which allows a 3.5% down payment, would require $7,000 upfront.
4. VA 0% down payment:
   • With a VA loan for eligible veterans, you might not need any down payment.
   • In this case, $0 would be required upfront for the down payment.

These examples illustrate how down payments vary based on the loan type. While 20% is a traditional benchmark, there are options that allow for significantly lower initial payments, making homeownership more accessible to a broader range of buyers. Please keep in mind that regardless of the down-payment scenario, you will still have about 3% needed for closing costs and pre-paids which can either be paid by you, your Real estate agent or the seller depending on your contract negotiation.

This crucial ratio determines how much of your income can go towards your mortgage:

• Front-end DTI: Focuses on housing expenses compared to monthly income, usually recommended to stay under 28%.
• Back-end DTI: Considers all debts, with a cap around 43% for most lenders but as mentioned earlier can go much higher depending on overall strength of the file.

Let’s break down a real-world example of calculating the Debt-to-Income Ratio (DTI):

Income:

• Monthly Gross Income: $5,000

Debts:

1. Housing expenses:
   • Mortgage payment: $1,200
   • Property taxes: $200
   • Homeowner’s insurance: $50
   • Total housing expenses: $1,450
2. Other monthly debts:
   • Car loan: $300
   • Student loan: $150
   • Credit card minimum payments: $100
   • Total other debts: $550

Calculation:

1. Front-end DTI:
   • Housing Expenses / Monthly Gross Income
   • $1,450 / $5,000 = 0.29 (or 29%)
2. Back-end DTI:
   • (Housing Expenses + Other Monthly Debts) / Monthly Gross Income
   • ($1,450 + $550) / $5,000 = 0.40 (or 40%)

Interpretation:

• The front-end DTI indicates that 29% of the monthly gross income goes towards housing expenses.
• The back-end DTI shows that a total of 40% of the monthly gross income is used for both housing expenses and other debts.

In this example, the Debt-to-Income Ratio is within a reasonable range. Lenders often have specific DTI limits for loan approval, and lower DTI ratios are generally more favorable. It’s crucial to keep your DTI in check to ensure you can comfortably manage your financial obligations and are within your desired monthly payment. A good advice is to not be married to your mortgage payment. keep your monthly obligation at a level that allows you a stress-free lifestyle.

• Conventional loans: Typically, a higher credit score (around 720 or above) opens more doors to favorable terms but can be as low as 620.
• FHA loans: Accepts lower scores, sometimes starting at 580. Some borrowers may qualify with as low as 500 mid score but will require a bigger down-payment of at least 10% and still subject to additional underwriting requirements.
• VA loans: Accepts lower scores, sometimes starting at 500 but most mortgage lenders require a minimum of 580. While they can be forgiving, a higher score is beneficial.

Alright, buckle up for the less glamorous part—closing costs. These are the extra fees and expenses you’ll shell out when sealing the deal on your mortgage. Let’s keep it straight:

What are closing costs?

Closing costs are the additional charges beyond your down payment and mortgage amount. They cover various things like loan origination fees, appraisal costs, title searches, and more. Expect them to be around 2.5% to 3% of the home’s purchase price but can be higher depending on your transaction and if you choose to buy down the interest rate such as paying points.

Simple example: You find a sweet $200,000 home in your price range, and you’re going for a conventional mortgage loan with a 3% down payment. Here’s a ballpark on closing costs:

1. Down payment: 3% of $200,000 = $6,000
2. Closing costs: Let’s say 3% of the home price for simplicity = $6,000

So, for this example, besides the $6,000 down payment, you’re looking at another $6,000 in closing costs. That’s $12,000 you need to cough up beyond the mortgage.

Closing costs can vary, and you’ll get a breakdown once you start your mortgage application. Be prepared and include them in your budget. It’s the less fun but necessary part of the home-buying game.

As a one-man shop, I can give you up to $7k towards closing costs whether it’s your first Florida home or second as long as you are purchasing the home as your primary home. Request a free quote or give me a call today.

Owner-occupied: your primary residence

This is your main dwelling, where you plan to live the majority of the time. Mortgage rates tend to be lowest for owner-occupied properties. Your down-payment requirement is also lower on a primary residence (as little as 3% down-payment for first time homebuyers)

Second home: your getaway haven

A property you frequent but not as your primary residence. Mortgage rates might be slightly higher than for your primary residence.

Investment property: your wealth builder

Purchased with the intention of generating income, like rental properties. Interest rates are typically higher, and down payment requirements may be steeper.

Learn more about the difference between primary, secondary and investment properties

1. Check your wallet: Start by figuring out your financial situation. See how much you’ve got saved up for a down payment, your monthly income, and what you can comfortably afford for mortgage payments.
2. Get mortgage pre-approval: Chat with a mortgage lender or broker to get pre-approved for a loan. It’s like getting a golden ticket that shows sellers you’re serious and financially ready to buy.
3. Hunt for a home: Time to hit the streets (or the internet) and start looking for your dream home! Work with a real estate agent who’s got your back and knows the ropes.
4. Make an offer: Found the one? Awesome! Make an offer to the seller through your agent. Negotiate a bit if needed until you both agree on a price.
5. Inspect your potential digs: Before sealing the deal, schedule a home inspection to make sure everything’s ship-shape. This step helps you avoid any nasty surprises down the road.
6. Secure your loan: Work with your lender to finalize your mortgage. They’ll dot the i’s and cross the t’s to make sure everything’s good to go.
7. Close the deal: It’s closing time! Head to the meeting, sign a bunch of paperwork, pay your closing costs, and voila – you’re officially a homeowner!
8. Move in and make it yours: Time to celebrate! Move into your new digs, decorate to your heart’s content, and enjoy the feeling of homeownership.