At FirstHomeAdvisor we help you prepare the smart way to buy your first home. We provide you information so you can make better informed decisions. Keep reading to learn more about your next steps in preparing for homeownership.
Who is a First Time HomeBuyer?
For most homeownership programs funded by federal, state or local funding, a first-time homebuyer is an individual who has not owned and occupied a home of their own in the past three years.
The U.S. Department of Housing and Urban Development (HUD), a funder of many related homeownership programs, has an expanded definition of the term which includes any individual that meets any of the following criteria. Find out more.
How to Buy a House
There are many steps in the homebuying process and it is important to understand them in order to have a good homebuying experience. Find out more about the steps.
As the the saying goes…’knowledge is power.” Knowledge of the homebuying process, terms, players, and programs empowers first-time homebuyers to take charge of their homebuying experience and goals. By taking a reputable homebuyer education course before you start shopping for a lender or a home to purchase, you’ll be in the driver’s seat on your way to a home of your own. Learn more about homebuyer education.
Online Homebuyer Education
No one should buy their first home without first taking a homebuyer education course and that course should be provided by a HUD-Approved Housing Counseling Agency such as the one that develops and delivers the eHomeAmerica course. Find out more.
Homebuyer counseling is a great service for anyone who is preparing for homeownership. A homebuyer counselor from local non-profit housing counseling organization can help you sort out and address any barriers or challenges that stand between you and your first home. They will also help you identify any barriers and help you take the appropriate action. Most non-profit service providers include the cost of homebuyer counseling in the fee you pay for homebuyer education. Homebuyer education services range from being free to as much as $75 on the high end. Since everyone is different, a one size fits all approach just does not work for everyone. A homebuyer counselor can help you get ready to buy a home of your own. Learn more about homebuyer counseling.
Individual Development Account
An Individual Development Account (IDA) is a program that helps low and very low income eligible households get in the habit of saving by matching each dollar the IDA participant saves with $1, $2, or sometimes even $3 of matching IDA grant funds. That is the equivalent of getting a 100%, 200% or 300% return on your savings! Once you have completed your savings plan, you can use the IDA grant funds to buy a home of your own. Learn more about Individual Development Accounts (IDA).
Your Credit Report and Score
One of the biggest and most common challenges first-time homebuyers face is improving their credit score. Don’t worry though even if you have a lower credit score as it may not take as long as you think to raise your score. You don’t even have to have perfect credit to buy a home of your own. Learn more about your credit report and credit score.
As a first-time homebuyer it is good to know at least a little bit about some of your rights during the homebuying process. Doing so will help you better understand the many different disclosures you will be provided, why they are being provided, and serve to inform you about your options if you feel your rights have been violated. While this is a very complicated and lengthy subject and FirstHomeAdvisor.com does not provide legal advice, the following are overviews of some of the related laws that first-time homebuyers should know a bit about. If you feel your rights have been violated, you should contact the applicable regulatory agency or an attorney who specializes in the related type of law. Find out more.
What Can I Afford?
First-time homebuyers need to know exactly how much house you can afford. It is the only way for you to know if you can actually qualify and afford to buy the type of house you want to buy in your local real estate market. While it is a simple question, the answer is not. The answer to this question varies a lot based on many different considerations and factors. Find out more.
Who is a first-time homebuyer?
For most homeownership programs funded by federal, state or local funding, a first-time homebuyer is an individual who has not owned and occupied a home of their own in the past three years.
The U.S. Department of Housing and Urban Development (HUD), a funder of many related homeownership programs, has an expanded definition of the term which includes any individual that meets any of the following criteria:
- An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
- A single parent who has only owned with a former spouse while married
- An individual who is a displaced homemaker and has only owned with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.
How do they check to see if you are a first-time homebuyer?
Typically homebuying program staff or mortgage lenders prove that a client is a first-time homebuyer by reviewing recent federal tax returns. They look at them to see that an applicant has not claimed the federal mortgage interest deduction for a principal residence in the past three years.
Have you owned a home in the past three years?
The most commonly used definition of a first-time homebuyer includes individuals who have owned home more than three years ago. So that means if you used to own a home but have not for the past three years, you can still qualify for most first-time homebuyer programs!
Ask your local housing agency and mortgage lenders to see if you qualify as a first-time homebuyer for the programs they offer.
How to Buy a House
So you want to buy a home of your own, but first you want to get a better understanding of what you will need to do and when you need to do it. Smart move! You really do need to understand what you are getting into to ensure you have a good homebuying experience.
Here is a quick overview of a typical homebuying process. The steps include:
- You decide it is time to buy a home of your own.
- Take a first-time homebuyer education class offered by your local HUD- Approved housing counseling agency and/or you can take the class online at e-home America.org.
- After completing the class, you decide that buying a home is still right for you.
- Meet with a homebuyer counselor to analyze your financial situation. You’ll review your budget, examine your credit standing, and decide what you can afford to spend for a monthly house payment.
- Research and shop for a loan officer who specializes in offering first-time homebuyer programs in your state.
- Compare loan officers to see which one can offer you the best programs and terms to meet your specific needs.
- Select your lender, gather your documentation and submit a home loan application.
- Once your loan is approved by an underwriter, obtain a pre-approval letter from your lender.
- Research, interview and select a real estate agent to be your buyer’s agent.
- With the help of your buyer’s agent, research and refine the type of home you want to buy, the size, the number of bedrooms, the key characteristics you are looking for, where you want to buy and how much you are willing to spend.
- Begin shopping for a home within your affordable price range as determined by your lender.
- Once you find the right house, your buyer’s agent will help you make an offer, negotiate a sales price, request any seller concessions and identify the contingencies of the sale.
- The seller then accepts your offer by signing the Real Estate Sales Agreement or the equivalent of what your real estate agent uses in your state.
- With your accepted offer you will need to obtain a check for an earnest money deposit or the equivalent in your state. You may now be only 30 or 45 days away from owning a home of your own.
- Get the home inspected by a professional home inspector to verify the home’s condition and to determine if any repairs are needed prior to purchasing the home. If there are repairs, your real estate agent will need to negotiate repairs with the seller.
- Once you are satisfied with the home’s condition, the lender orders an appraisal to determine the property’s fair market value in order to support the loan amount you have requested.
- Shop for and obtain homeowner’s insurance and provide the home insurance agent’s contact information to your lender.
- The lender notifies the escrow company or closing agent (in some states this may be an attorney) that you are ready to purchase the home and close the loan. You go to the escrow company or closing agent and bring the required funds to close the loan. These funds are typically provided in the form of a Cashier’s Check that you obtain from a bank.
- You sign all the documents and then the real estate transaction is processed, funded and closed. After your lender authorizes funding of your loan, ownership in the home is leaglly transferred to you and then you get the keys and move into your first home!
- Congratualations! You are now a homeowner and can begin moving!
Bravo! I can tell you are a smart because your instincts are telling you to learn before you leap into buying your first home. You know that you need to understand what you are thinking about doing before you do it. You also know that you need to get your information from a neutral source that you can trust and one that has your best interest in mind.
Taking an approved homebuyer education course is not just about helping you make more informed decisions, but also completing the course may also help you qualify for:
- Down payment assistance loan or grant program
- Homeownership loan programs available from your state
- Discounts or reduced rates on your home loan
- USDA Direct or Guaranteed Rural Housing Loans
- Reduced mortgage insurance premiums on an FHA loan
HUD Approved Housing Counseling Agency
One of the smartest moves you will make on your way to a home of your own is to take a homebuyer education class from a non-profit HUD Approved Housing Counseling Agency. This is a really smart move because the more you learn about the process the better prepared you will be and the more likely you are to get the best programs and loan terms. A homebuyer education class delivered by a HUD Approved Housing Counseling Agency will help you :
- Understand the homebuying process
- Ask more intelligent questions
- Help you make better informed decisions all along the way
Homebuyer education is an important class you need take before you decide to purchase your first home. It teaches you the basic homeownership terms, steps, and strategies so you are prepared to have a positive homebuying experience. For some government-sponsored programs it is required, but for other programs it is not.
The best and most reputable classes are hosted by non-profit HUD Approved Housing Counseling Agency. It is ideal to take the class in person so you can ask questions, hear questions, and to verify the organization has your best interest in mind.
There is also a great network of non-profit homebuyer education providers who are affiliated with NeighborWorks America®. Make sure as you are searching for a local homebuyer education provider that is a non-profit organization that you feel you can trust and has your best interest in mind. You need to see that they are committed to educating you about the homebuying process from a neutral perspective and that they are not trying to sell you a home, loan or other product. Their primary purpose should be to help you make informed decisions that are in your best interest.
Online Homebuyer Education
While taking a homebuyer education course in a classroom setting is ideal, for some it is not feasible due to the availability of courses, their work schedule, or many other reasons. If you find yourself in this situation, online homebuyer education from ehome America is a great option. You go at your own pace and complete the course when it fits nicely into your busy schedule from the comfort of your own home. It can also be a great supplement to taking a live class as well. After all, this is the biggest purchase of your life and you can never have too much information to help you make an informed decision. FirstHomeAdvisor has partnered with ehome America to help future homebuyers access a high-quality homebuyer education online. The ehome America course was developed and is offered by a non-profit HUD Approved Housing Counseling Agency who is also a NeighborWorks America® Home Ownership Center.
Completion of the ehome America course will meet the homebuyer education requirement for most programs that require it. However, before taking the course, it is a good idea to check with your lender and homebuyer program administrator to verify the course meets their specific education requirement. To learn more about online homebuyer education for first-time homebuyers click here .
Lender or Real Estate Agent Seminars
Many lenders and real estate agents offer free homebuyer education seminars on their own. It is fine to attend these workshops, but most of them will not meet the typical education requirement for most homebuyer programs. So if you do decide to attend one of these types of workshops you need to still attend a homebuyer education course from a HUD Approved Housing Counseling Agency. Any lender or real estate agent who is the type you want to do business with will support your decision. If they don’t, consider finding a different lender or agent who supports your goal of being a well informed homebuyer.
If you have any questions or concerns about an education provider you should call your local or government housing agency for a referral. The class should be free or very low cost. Be careful of any homebuyer education classes or services that attempt to charge you high fees or try to sell you costly grant information you cand get for free. Many of the reputable classes charge a nominal fee which covers some of the non-profit’s expenses in offering the program. Also be careful of any seminars that profess to help you access free government assistance. These types of seminars are expensive and a rip off.
Online Homebuyer Education
No one should buy their first home without first taking a homebuyer education course and that course should be provided by a HUD-Approved Housing Counseling Agency such as the one that develops and delivers the eHomeAmerica course.
Unfortunately for some first-time homebuyers, it is difficult for them to take a class in person due to work schedules, child care, having to travel long distances, or other conflicts and considerations. That is why we partnered with eHome America to bring you online homebuyer education that you can complete from anywhere you have internet access and at a time that fits your schedule. Other first-time homebuyers just need to complete the course prior to closing and sometimes find it hard to get into a local class.
About eHome America
The online first-time homebuyer education course was developed by Community Ventures Corporation (CVC), a nationally recognized non-profit HUD-Approved Housing Counseling Agency and NeighborWorks® Chartered Member based in Lexington, Kentucky. The online course follows Neighborworks® “Realizing the American Dream” homebuyer education course. eHome America includes numerous educational videos, worksheets, sample forms, a glossary, and lots of other downloadable materials. Everything on the site is designed to enhance your understanding of the homebuying process by allowing you to read, watch and learn related information. By taking the class you will even have ongoing access to all the materials for 90 days after you complete the course.
eHomeAmerica through FirstHomeAdvisor.com is a homebuyer education course, but it is not one-on-one housing counseling. If your lender or program, such as the FHA Back to Work Program, requires you to complete housing counseling you should contact a HUD-Approved Housing Counseling Agency.
How does eHome America work?
The full course is available online 24/7 and you are just a few clicks away from starting the course. You can complete the course from your computer at home, work, or even the local coffee shop. You can take breaks anytime you like and resume the course right where you left off. You can complete the whole class in approximately eight hours and can complete it all at once or in chunks of time that conveniently fit your schedule.
Once you are done and pass the course quizzes, you will be issued a Completion Certificate that you can use as proof that you took and passed the course.
What will you learn?
You”ll learn about the homebuying process, terms, and programs from an unbiased and consumer-freindly point of view. It covers the entire homebuying process from start to finish. Here is a quick snap shot of what you’ll learn and get out of the course:
- How to determine what you can afford to pay
- How lenders review and approve loan applications
- How to choose the right house, the right lender, the right mortgage
- What special programs may be available to you
- Unbiased education without any pressure to buy a home or get a loan
- Learn what you need to know to ask smart questions
- Prepare yourself to make informed decisions
Why should you take the course?
Completion of this course will not only prepare you to buy your first home and make informed decisions, it will also meet the homebuyer education requirements for many federal, state and local first-time homebuyer programs. Accessing these programs can save you hundreds or maybe even thousands of dollars. The course may even help you learn about programs that can lower your payments a make your first home more affordable.
Take eHome America now!
You are just a click away from starting your homebuyer education course. Click here to register and take the homebuyer education course now. Once you have paid the $99 course fee, you can immediately start the course.
After The Course
Once you complete the course, you will be able to immediately print out a certificate of completion. Your lender or special program administrator may need a copy of the homebuyer certificate to prove you have completed the course.
After the course you may need or just want to access one-on-one homebuyer counseling. Completing the online homebuyer education course will help you better understand how prepared you are to buy a home of your own and if you will need one-on-one homebuyer counseling. Homebuyer Counseling is available through HUD- Approved Housing Counseling Agencies, such as, the NeighborWorks® organizations and others. Many of these agenicies even offer homebuyer counseling over the phone so you don’t have to travel long distances to meet with them.
Homebuyer counseling is just like it sounds. They work one-on-one with you to help you prepare to buy a home. They typically work for the same organizations who provide homebuyer education classes. These homebuyer counselors help you identify any challenges or areas you need to address. Their goal is to help you get prepared and approved for a home loan. Homebuyer counselors will help you craft a personal action plan to become “mortgage ready”. Just like a good coach, they help you prepare for the game of buying a home of your own. They are your personal guide to help and encourage you along the way to your first home.
Homebuyer Action Plan
The homebuyer counselor will assist you to develop and implement an individualized action plan to prepare you to buy a home. While everyone has different needs and would need a plan unique, the following are some examples of the types of goals that might be in such a plan:
- Paying off and resolving past due bills
- Saving for a down payment
- Paying your bills on time
- Improving your credit score
- Establishing new credit accounts (if needed)
- Closing credit accounts (if needed)
- Reducing credit card or other balances
- Resolving any negative items on your credit report
- Preparing yourself for the responsibilities of ownership
- Increasing or stabilizing your take home pay
- Completing homebuyer education class
- Completing a fiancial education class
Finding a Homebuyer Counselor
You will most likely find your homebuyer counselor through your local non-profit HUD-Approved Housing Counseling Agency or through a non-profit organization affiliated with the NeighborWorks America®.
As you are doing this research, remember that it is best to work with staff from a well established non-profit organization that you can trust and that you know has your best interest in mind. Their primary goal should be to help prepare you to buy a home, but not attempt to sell you a specific home, make a certain loan or other have you buy any other specific product.
Most experienced homebuyer counselors are a very good source of information about local programs and home ownership opportunities available to you. When providing referrals make sure they provide you multiple referrals to lenders, real estate agents or other real estate professionals.
Participation in homebuyer counseling sessions is a great way of ensuring you are “mortgage ready” to buy a home before you try doing so. The length of time it takes to complete this step depends on you and your current state of preparation to buy a home. For people who are all ready to buy, they may not need any sessions, while others, who have more long-term challenges to address, may take years. Regardless how long it takes, homebuyer counseling is a great resource to use on your way to your first home.
What is an Individual Development Account (IDA)?
An Individual Development Account (IDA) is a program that helps low and very low income households get in the habit of saving by matching each dollar the IDA participant saves with $1, $2, or sometimes even $3 of matching IDA grant funds. That is the equivalent of getting a 100%, 200% or 300% return on your savings! Once you have competed the program, these grant funds can be used to purchase a home of your own.
What are the benefits of getting an IDA?
Participating in an IDA program is a great way to getting in the habit of saving and to build an asset for you and your family. Here are some more benefits of participating in an IDA program:
- Many programs allow you to use the funds for a down payment on a first home
- The funds are typically treated as your own funds to help you meet your minimum investment
- The IDA funds are usually a granted to you not loaned to you
- Most programs allow your income to go up while you are participating in the program
- IDA grant funds are compatible with most home loan and down payment assistance programs
- IDA programs are offered from local non-profits throughout the United States
- The funds can often also be used to start or grow a business or to pursue education if you decide not to buy a home, but check with your local IDA program staff for details and restrictions
Who is eligible for an IDA?
To be eligible for an IDA program you will need to check with your local IDA program provider about their specific rules and requirements. The following though, are some examples of typical requirements you are likely to see across the various programs:
- You must meet the specific program’s income limits which vary from program to program, but typically the most any program would allow you to earn is 80% or less than the area median family income adjusted for size
- The IDA participant who is using the funds to buy a home will need to be a first-time homebuyer
- IDA participants typically must complete homebuyer education course provided by a HUD certified housing counseling agency prior to closing on the home they are purchasing with IDA funds
- Must make regular deposits into your IDA account on a monthly or more frequent basis as determined by your local program provider
- Failure to meet the minimum savings requirements typically results in being disqualified from the program
How do IDA programs work?
To participate in a program you must find a local program that allows you to use the funds to buy a home. You must apply for the program with that agency and meet all of their program requirements. Once enrolled in the program you then must begin saving funds into your IDA savings account and the IDA program provider will begin matching your funds according to their program rules. It is common to have a minimum of six months of participation in the program prior to being eligible to buy a home and the maximum amount of time you can participate is typically three years. There will also be minimum and maximum savings and matching requirements which you will want to inquire about with your local program provider. Remember it is typical that you will not have access to the funds you have saved in your IDA account unless you withdraw the funds to buy a home or you decide to discontinue your participation in the program. It is also common that the total funds in your IDA account (your savings plus the matching IDA grant) will be paid directly to the closing agent at the time you buy your first home.
Finding and Selecting a Local IDA Program
There are a growing number of non-profit organizations throughout the country who offer an IDA or Matched Savings Program. Remember though, not all programs will allow you to use the funds to buy a home, so you need to check with your local program providers to see if they do and to learn about their program requirements. You may also want to check and see if their particular program allows you to switch how you use the funds in case you decide you would rather use the funds to either start or grow a small business or to pursue additional education. The Corporation for Enterprise Development (CFED) maintains a national IDA Resource Directory where you can search for a local IDA or Matched Savings program near you.
Your Credit Report and Score
Buying a home and proving your are creditworthy go hand in hand. Most of the time proving you are creditworthy and have a good credit score do too. The mortgage industry has tightened down their lending standards and they are requiring their borrowers to have higher credit scores to qualify for a mortgage loan. This is especially hard on first-time homebuyers because they typically have less credit history, less available credit, and usually lack ever having had a previous mortgage. All of these factors add up to a lower credit score even if you have never missed a payment!
To get on top of your credit you should begin by learning your score, understanding how credit scoring works, and then if needed take the necessary actions to improve your score.
Mortgage lenders use what is called a FICO® score which runs as high as 850 points. Generally a good score is anything at or over 720, but you still have many good loan options if your credit score is in the mid to upper 600’s.
Don’t worry if you don’t have an 800 credit score because relatively few people do. You do need to worry though if your score is in the low 600s or below. If your score is under 660 you can expect to have far fewer loan options and you may need to pay higher fees and or a higher interest rate to get a mortgage. A reputable mortgage loan officer will help you sort out your options when you are ready to apply for a loan.
The first step to learning your score is easy and typically a part of any high-quality homebuyer education and counseling service. With the help of a housing counseling agency, you can get your credit score and then you will also know what, if any, action is needed to get you in a position to be able to qualify for a home loan. Your homebuyer counselor will be a great resource for you if you need to work on improving your score before you apply for a loan.
A homebuyer counselor can also teach you about how to maintain a good score. The credit score factors listed here show you how the credit scores are determined and which credit habits have the largest impact on determing your score.
Credit Score Factors
10%-Source of credit
Free Credit Reports
You can obtain free credit reports from the three credit bureaus at www.annualcreditreport.com on an annual basis. This is the only true free service available to consumers and authorized by the federal law. The other services may at first free, but they aim to sell you additional credit monitoring and or related services which are not.
Some people like to stagger their pulling of the credit reports from www.annualcreditreport.com as a free way of tracking their report every four months.
The only downside of this free service is, it does not include the score. Your score is what you and your lender really need to know to sort out your mortgage loan options. For a small fee from www.annualcreditreport.com, you can easily get your credit score or you will likely get it when you sign up for homebuyer counseling services.
Improving Your Credit Score
The good news about your credit score is that there is a lot you can do to improve your score right away! Here are some of the keys to improving your credit score or keeping your credit score as high as possible:
- Always pay your minimum payments on time
- Keep your credit balances low (30% or less of your available credit limit)
- Do not close your credit card accounts (you’ll lose the balance and the history)
- Correct inaccurate information on your credit report
- Don’t co-sign a loan unless you can afford the payment on your own
- Guard against identity theft by keeping your Social Security Number private
- Spread out your credit card balances among all your cards
- Carefully document payment of any past due accounts
More Information about Your Credit
While these are just a few things you can do to improve your credit score, there are a lot more tips and information available directly from the source of the secret credit score formula, the Fair Issac Company. For more information about your credit report and score, visit their online consumer education center at www.myfico.com.
You’ve Got Rights!
As a first-time homebuyer it is good to know at least a little bit about some of your rights during the homebuying process. Doing so will help you better understand the many different disclosures you will be provided, why they are being provided, and serve to inform you about your options if you feel your rights have been violated. While this is a very complicated and lengthy subject and FirstHomeAdvisor.com does not provide legal advice, the following are overviews of the some of the related laws that first-time homebuyers should know a bit about. If you feel your rights have been violated, you should contact the applicable regulatory agency or an attorney who specializes in the related type of law.
Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) covers how a consumer’s credit information is managed by the credit bureaus and it provides consumers rights to dispute and resolve any inaccurate information showing on their credit reports. The Federal Trade Commission (FTC) enforces FCRA. FCRA also ensures that consumers may obtain a free copy of their credit report from each of the three credit bureaus every 12 months which are available through www.annualcreditreport.com. For more information about the Fair Credit Reporting Act visit www.ftc.gov/credit.
Fair Housing Law
As it relates to buying your first home, the Fair Housing Law essentially ensures that first-time homebuyers regardless of their race, color, national origin, religion, familial status, sex, or handicap status recieve equal opportunity, treatment and consideration for home loans and housing services. Among other things, the law makes it illegal for a provider of housing services or a loan orginator to discriminate against applicants who are members of one of the “protected classes” listed above when they request or are provided any type of housing services. The U.S. Department of Housing and Urban Development (HUD) enforces the Fair Housing Act and is the agency to contact if you feel your Fair Housing Act rights have been violated. To learn more about Fair Housing Law visit www.hud.gov/fairhousing.
Homeowner Protection Act of 1998
The Homeowner Protection Act of 1998 protects homeowners who obtain a conventional loan from unnecessarily paying Private Mortgage Insurance (PMI). The act requires lenders to automatically cancel PMI payments for homeowners, who are in good standing, once they have 22% equity in their homes. The law also allows homeowners, who are in good standing with their lender, to request the cancellation of their PMI payment once they have 20% equity in their home. It is important to note that lenders are provided flexibilty in calculating a homeowner’s equity, so you will need to check with your lender about this calculation if you are getting a conventional loan. To learn more about the Homeowner Protection Act visit frbs.org .
Real Estate and Settlement Procedures Act (RESPA)
The Real Estate and Settlement Procedures Act is known as (RESPA). RESPA is enforced by the U.S. Department of Housing and Urban Development (HUD) and it covers specifics of how a loan originator must disclose the terms and the costs of getting a home loan. More specifically, RESPA requires the loan originator to provide loan applicants a Good Faith Estimate (GFE) that is intended to help the buyer understand the type and fees being charged for the type of loan they are being offered. The law also governs how a closing agent must disclose and record the loan fees and costs of the loan being offered by the lender. This infomation is provided to the loan applicant in what is called a HUD-1 Settlement Statement. To learn more about RESPA visit www.hud.gov/respa.
The S.A.F.E. Act is short for Secure and Fair Enforcement for Mortgage Licensing Act of 2008. This federal law provides consumers a way to check the licensing status of any individual loan orginator or mortgage company who is required to have a state license. The law created the Nationwide Mortgage Licensing System (NMLS) where a consumer can check to see that an individual loan originator and their company meets their state’s licensing requirements. You should know though that loan officers employed by nationally chartered banks or from states that do not require mortgage licensing are not included in the NMLS registry. To learn more about the S.A.F.E. Act visit www.ffiec.gov/safeact.htm.
Truth In Lending (TIL)
The Truth In Lending Act (TILA) is a law that regulates how lenders must advertise and disclose the interest rates and terms they offer their borrowers. One of the big requirements of the law it that it requires the lender to disclose the true cost of the loan by factoring in the fees they charge to make the loan which is expressed as an Annual Percentage Rate (APR). Using the APR to compare similar loans is a good way for first-time homebuyers to compare various loan offers. The law also requires lenders to provide consumers a Truth In Lending (TIL) Statement shortly after they apply for a home loan. The TIL shows important details about the borrower’s proposed loan.
How much house can I afford?
First-time homebuyers need to know exactly how much house you can afford. It is the only way for you to know if you can actually qualify and afford to buy the type of house you want to buy in your local real estate market. While it is a simple question, the answer is not. The answer to this question varies a lot based on many different considerations and factors.
Important Factors and Considerations
How much house you can afford depends on many different considerations and factors such as:
- How much you and others who will be on the loan earn on a monthly basis
- Your credit score, as well as, the credit score of others on the loan
- Your minimum monthly debt payments (car loans, student loans, and credit card payments)
- Maximum monthly house payment you are comfortable making
- Amount of the loan you are requesting
- Amount of the down payment you will make
- Type of home loan you can get
- Eligibility and utilization of special first-time homebuyer programs
- Cost of monthly mortgage insurance premiums (if applicable)
- Term of the loan you are getting (often a 30 year loan term)
- Current interest rates for the type of loan you are getting
- Property tax rates on the types of home you want to buy
- Home Owner Association Fees (HOA) if you are buying a condo
- Cost of monthly homeowner’s insurance premiums
Pre-Qualification vs. Pre-Approval
In order to truly know how much house you can afford you need to know how much money a lender is willing to commit to loan to you. If the approval is in writing this is a pre-approval letter. A pre-qualification on the other hand, is typically a verbal statement from a loan officer stating how much they think you may qualify for based on the information you provide in a short conversation without providing the necessary documentation. This is not a pre-approval, but rather, a pre-qualification. You should not rely upon a pre-qualification to determine how much house you truly can afford.
Steps Before Pre-Approval
Before you seek a pre-approval from a mortgage lender, you really should first take a homebuyer training course and determine if you need the help of a homebuyer counselor in order to fully prepare yourself before you apply for a loan. Also you will first want to carefully research which programs you feel best meet your needs and then which lenders offer those specific programs. FirstHomeAdvisor.com and your local homebuyer education provider can help you get the information you need to make informed decisions. Once you know the type of loan you want and who offers it, then it is time to meet with a lender to request being pre-approved.
Preparing for Pre-Approval
Once you research and select a lender, you will then often meet with the loan officer either on the phone or in person to provide the loan officer all of the required information they will need to consider you for pre-approval. The list on the left side of this page includes the typical documents you will need to provide your first-mortgage lender in order to request a pre-approval. Ask your lender though what other documents they need to see and be prepared to provide them accordingly.
Based on the documentation you provide the lender and the information in your credit report, the lender will calculate:
- Your gross monthly income (before any taxes are taken out)
- Gross Monthly Income for any co-borrowers
- Minimum Monthly Debt Obligations as a percent of total gross monthly income
- Maximum Monthly House Payment Calculation (included Principal, Interest, Taxes and Insurance, and HOA if buying a condo) – front-end ratio
- Maximum monthly house payment plus other monthly debt obligaitons as a percent of your gross monthly income -back end ratio
- Amount of cash required to close the proposed loan request
Once your lender has completed their review of your file, they will either issue you a pre-approval letter or a letter declining your loan application in which they state the reason your loan application was denied.
Assuming you get a pre-approval letter, your lender will include the exact amount of home loan they are willing to make to you, as well as, the amount of cash you will need to close this loan. The letter will also state other conditions you must meet in order to obtain the loan, as well as, the length of time the commitment will be honored. Once you have a pre-approval letter you will then know how much house you can afford.