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First Time Homebuyers: How to Prepare and Get a Mortgage Loan

Here are some of the factors to consider when looking to apply for your mortgage loan as a first time homebuyer

May 20, 2015

By detailing the requirements and considerations involved in underwriting a mortgage loan, Angel Oak Home Loans hopes to offer guidance and clarity to millennials and first time homebuyers lost in the process of obtaining their first mortgage loan.

One of the first things to consider when thinking about getting a mortgage loan, or really any type of loan, is credit. Credit is quantified by your FICO credit score, managed and kept largely by three credit reporting agencies: Equifax, Experian, and TransUnion. What makes this score so important is that it represents to lenders the likelihood you will pay your mortgage loan back to the lender, signifying whether the opportunity for your mortgage lender to make money is worth the risk. As expected, the higher your credit score, the more likely you will be approved for your mortgage loan.

Risk Management/Cash on Hand/Retirement
As tempting as it may be to purchase a home that pushes the boundaries of affordability, remember there are many reasons not to. You never know when you’ll need some type of buffer on your monthly income, requiring you to have some cash on hand. Repairs, taxes, insurances, and closing costs can easily consume large amounts of money quickly. Also remember that as significant as it is to own equity in a home, saving for the future is important as well.

Check your credit thoroughly, looking for anything that might negatively impact your loan application. Both free and paid options exist, such as Annual Credit Report, which allows you to see your records, but not numerical scores, for free. Identity theft and inaccuracies regarding late payments and defaults unfairly negatively impact your score, making it urgent to dispute and have them removed from your report. Additionally, in the year leading up to your mortgage application, try to hold off on any new credit cards or loans, try to pay off as much debt as possible, and try not to miss or be late on any rent or debt payments.

As income is an indicator of your ability to pay back a mortgage loan, it makes an essential part of the mortgage application and underwriting process. Housing expenses, including mortgage payments, taxes, and insurance payments, typically take about 28-44% of monthly income. If your income includes dividend, interest, commissions, bonuses, overtime, alimony, or child support, your lender will want to know how much they vary from year to year. For the purposes of a mortgage application, a stable income represented by two years of consistent employment is a general requirement, though any job changes within the same industry for advancement or higher pay are understood. If you are self-employed, expect to provide a few years of tax returns.

Personal Assets
Any cash assets you carry need to be deposited into a bank or holding account of some type for it to be officially documented and accounted for. Additionally, some lenders will require you have a certain amount of cash leftover after the down payment is paid for miscellaneous expenses and mortgage payments. This required cash padding is generally in the range of between 2-6 months’ worth of your expected mortgage payment.

Down Payment
Down payments are a percentage of the home’s agreed value, paid up front. In the old days of homeownership, a 20% down payment was the standard by which all lenders and borrowers assumed financial responsibility. Today, down payments vary from program to program, from 3.5% on a Federal Housing Administration (FHA) mortgage loan to 0% on a Veteran’s Affairs (VA) mortgage loan. Conventional mortgage loans offer anywhere between 5-20% down payments. The mortgage loan program landscape may seem complicated with all their different details and requirements, but a good licensed mortgage advisor can help navigate which offerings best suit your situation and needs.

Cash gifts can be used for the purposes of a down payment, though requirements will vary from program to program. Generally speaking, large gifts of over 50% your monthly income may require a statement or documentation from the giver stating that the money was in fact a gift, not a loan.

Debt-to-income ratio, known as DTI, is another factor used by lenders to determine creditworthiness. In essence, DTI checks what percentage of your monthly income is spent on fixed expenses such as student loans, credit card loans, automobile loans, homeowner’s association fees, and your upcoming mortgage payment. Under ideal circumstances, these expenses take less than half of your monthly income.

If this list seems to be in good order, get in touch with a mortgage lender and fill out an application! An underwriter will check a lot of these steps to ensure you qualify for a mortgage loan. With the proper documentation, you should receive a good faith estimate within 3 business days, allowing you to compare mortgage loans between different mortgage brokers and lenders. Listed in the good faith estimate are the various costs and fees associated with the mortgage loan including closing costs, settlement costs, inspections, insurances, reserves, title charges, and taxes. Though they do only represent an estimate of the fees, the final fees can only differ by no more than 10% of the estimate.

With your application in place and your estimate received, you should be well on your way to qualifying for your dream home!

Talk to your licensed mortgage advisor about your options, and look up any specialty programs offered in your area, including FHA mortgage loans, jumbo mortgage loans, VA mortgage loans, interest-only mortgage loans and investment mortgage loan opportunities.

Learn more about the Angel Oak Home Loan mortgage programs

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Angel Oak Focus on Millennials Series
As millennials come of age and begin looking to buy homes for the first time, they are confronted with intricacies in the mortgage process that didn’t even exist when their parents first bought their own homes. As the housing market heats up again and millennials find age-old home buying guides irrelevant, Angel Oak Home Loans seeks to guide prospective homebuyers in navigating the complex world of mortgages through this series, focusing on educating the first time home buyers to make it an easy and simple process.