One of the most exciting, and frustrating, goals that young adults are working towards nowadays is buying a home. Recent trends and higher inflation have been a benefit for existing homeowners, but unfortunately have created a major hurdle for first-time buyers. Real estate prices have soared in the past few years, while at the same time mortgage interest rates have increased. That dangerous combination means that buying a house is now more expensive than many buyers have anticipated. So expensive in fact that many prospective first-time buyers have been priced out of the market! Mortgage payments for many now seem out of reach.
All is not lost though. Information is key, and we’ll help you be better prepared to enter the home buying market. A major step in buying your first home is obtaining a mortgage to finance your house purchase. To help first-time buyers better understand what goes into qualifying for a mortgage, we will break down the essentials, including loan types, application steps, costs to consider, common pitfalls and smart planning.
HighPoint Advisors, LLC, based in Syracuse, NY, provides personalized financial guidance to help clients confidently navigate major life milestones such as purchasing a home. Our team supports families and individuals with a comprehensive range of services including asset allocation, holistic financial planning, and sustainable investing, serving clients both locally and nationwide.
Because this is such an important – and complicated – topic, we will break this discussion into two separate articles. Each part will be a Q&A style discussion……enjoy part 1.
Q: What’s the Mortgage Application Process for First-Time Buyers?
A: The process typically begins with a pre-approval, where your financial profile is reviewed to determine how much house you can afford. This includes looking at income, credit score, debt, and savings. Your pre-approval letter essentially makes you a legit buyer in the market. Upon having your offer on a house accepted, the mortgage banker helps submit a formal loan application. That application goes into the bank’s underwriting, followed by a property appraisal, and final loan approval before closing. Remember, starting early and having your paperwork ready makes everything smoother.
Q: What Types of Mortgage Options Are Available for First-Time Homebuyers?
A: There are several types of loans that may work for first-time buyers:
- Conventional loans: Usually require higher credit scores and stronger financials, but typically offer more competitive rates and lower costs.
- FHA loans: Backed by the Federal Housing Administration, these offer low down payments and flexible credit requirements. Better for lower credit scores.
- VA loans: Available to veterans and active military, with no down payment required.
- USDA loans: For rural properties, offering low or no down payment options.
Q: What Is the Role of a Mortgage Banker in the Home-Buying Process?
A: The mortgage banker guides the buyers through the financial legwork of obtaining a mortgage with a bank. Think of them as your personal mortgage financing concierge. They help you understand what you can afford, find the right loan program, and guide your application from pre-approval to closing. Mortgage bankers also coordinate with underwriters and appraisers to make sure your financing stays on track.
Q: How Do You Choose the Right Loan?
A: Obviously, not every loan is right for every buyer. It will depend on factors such as your income, credit, resources, and long-term plans. An example would be that FHA loans are good for lower credit scores, but a conventional loan could save more money over the long run. And if you can put 20% down, you may avoid other costs, such as private mortgage insurance on some loans. Work with a banker who will help evaluate these options to find the right loan for your situation.
Q: Are There Any Incentives for First-Time Buyers?
Many state and local governments – as well as other organizations such as non-profits – offer down payment assistance programs. These programs include first-time buyer grants, forgivable loans, and tax credits. Do your research so you don’t leave money on the table. A combination of research and guidance from a mortgage banker can uncover options that make buying more affordable.
Q: What Do Lenders Look for When Evaluating a Mortgage Application?
A: You don’t need perfect credit, but a score above 620 generally makes more options available to you. Key approval factors include:
- Credit score – the higher the better.
- Debt-to-income (DTI) ratio – the percentage of your monthly income goes towards servicing your liabilities.
- Employment History – consistency and length.
- Income history – including earned and unearned income.
- Savings and assets – liquid assets including investments.
As we bring Part 1 of this topic to a close, we hope you are starting to feel more empowered to begin the process of talking to a mortgage banker about your home buying plans. This can be an overwhelming project, and we will cover much more in the second half of our discussion. Make sure to go to our Blog section on our website to read the 2nd half.
As you make your way through both parts of this article series, keep in mind that our advisors here at HighPoint Advisors, LLC are well versed in concepts related to home buying and financing. We are here to serve as a resource throughout the process.
Contact us today with any questions!