If you’re a first-time home buyer, the idea of buying a house may be exciting and overwhelming. We’re here to help by answering your frequently asked questions. Here at Windermere, we’re proud to partner with Penrith Home Loans and we love our lender, Cherie Kesti. Cherie is a Branch Manager and Mortgage Consultant with over 20 years in the home financing industry and a proud Kitsap local. She graciously made the time for our Q & A.
What are the most common types of loans for a first-time home buyer?
The most common types of loans for first-time home buyers are Conventional, which offers 3% as the minimum down payment; FHA, which offers 3.5% as the minimum down payment and, of course, VA financing, which offers zero down payment for qualified veterans or active duty members. Any of these programs can be coupled with a down-payment assistance program for those borrowers who qualify, as this is an income-driven program.
How does your credit score impact your mortgage rate?
A credit score can affect a mortgage loan in a good way or bad way. The higher the credit score, the better the interest rate structure, and there are more loan options available. The lower the credit score, the stronger impact it has on the interest rate structure (higher rate) and fewer loan options that may be available to the borrower.
What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?
A fixed-rate mortgage is just that. The interest rate is fixed for the life of the loan, albeit a 30-year term, 25-year, 20, 15 or 10-year term. The adjustable-rate mortgage will have a point in the loan where the rate becomes variable. It may be right away, such as on a home-equity-line-of-credit mortgage, or the rate may be fixed for the first 3 years, 5 or 10 years of the mortgage term before it converts to the adjustable-rate feature. An adjustable rate will have a limit to how high it can go during the life of the loan, called a cap. After the fixed rate term, the rate usually fluctuates once a year based on the index and the permanent margin of the loan term.
What is private mortgage insurance (PMI), and do I need it?
Private Mortgage Insurance (PMI) is default insurance for loan amounts that are greater than 80% of the value or purchase price of the home. This is an amazing tool/feature of a home loan because it allows borrowers to put as little as a 3% down payment on a home loan as owner-occupied. Of course, the more you put down, the less you pay in monthly mortgage insurance. For example, someone putting 15% down will pay less each month than someone putting 5% down. Just like you would want to insure your home for fire damage, PMI acts like insurance for the lender in the event the mortgage goes into foreclosure. It’s very expensive for a lender to foreclose on a home. The monthly mortgage insurance drops off automatically when the loan balance to the original purchase price or appraised value reaches 78%. Homeowners can request the loan servicing company to review for removal when it reaches 80%, and their payments have been on time for the past 24 months.
What is the debt-to-income (DTI) ratio, and how does it affect my ability to get a mortgage?
Debt-To-Income (DTI) ratio is the calculation between the total gross monthly income(s) and the total credit reported monthly debt + alimony or child support obligations + new mortgage payment and sometimes the current mortgage payment if keeping the departing residence. If one carries too much debt for the gross income to stay in line with the mortgage loan guidelines, it may affect the buyer’s purchasing power. Or, it may require the borrower to pay off debt as a condition of the loan approval. Every file is different in how their DTI affects them. But this gives you a good idea of what we look for.
What is the difference between pre-qualified and pre-approved?
Being pre-approved will get you further on the integrity of your purchase offer than just a pre-qualification letter. Pre-approved means that your application has been completed, reviewed by underwriting, and conditionally approved. Conditionally meaning that title, appraisal, insurance, and perhaps updated pay or bank statement are needed before closing. Pre-qualified just means that an applicant may have had a conversation with a loan officer, and credit approval is automated vs. being reviewed and approved by an underwriter. At Penrith Home Loans, we have a unique process we take our borrowers through to get them the highest level of loan approval: Certified Home Buyer.
How much can a borrower afford to spend on a home?
Well, that depends on what their loan qualifications and credit look like. Each borrower brings a unique set of qualification features to their loan application. The Loan Officer or Mortgage Consultant plays an important part in helping each borrower answer that question. The affordability aspect may be influenced mainly by the amount of gross monthly income that can be verified and acceptable. Or, it may have everything to do with how much the borrower can bring to the table as their All-In $$ number drives how much they can afford.
What are the advantages and disadvantages of getting a government-backed loan such as an FHA or VA loan?
A government-backed loan such as an FHA or VA loan are common first-time home buyer programs. FHA self-insures their loans for default which allows borrowers with lower credit scores to qualify for a lower down payment with a little better interest rate than what a Conventional loan may offer. Self-insured just means that there is an up-front Mortgage Insurance Premium amount that is allowed to be financed into the base loan amount (after the minimum down payment is applied). Then, there is a monthly mortgage insurance amount that is built into the payment that stays on there until the loan is paid off or refinanced to a conventional loan. Again, mortgage insurance is default insurance for FHA in the event of a foreclosure.
When it comes to VA loans, this is a popular first-time home buyer program, too. But you can use it subsequently with seasoned VA home buyers, allowing as little as zero down each time. VA charges a Guarantee Fee, which acts the same way when a VA loan goes into foreclosure. The VA funding fee or guarantee fee is allowed to be financed into the loan. The percentage of the VA funding fee charged changes depending on whether the borrower has a down payment or not. The more the down payment, the lower the VA funding fee charged. If the veteran receives a VA-related disability income, then the VA funding fee is waived completely. The advantages of either of these programs are that they allow minimum to no down payment, leniency on credit scores, and allow for a higher DTI than a conventional loan may.
What is a home inspection, and why do you need one before buying a home?
A home inspection is usually not required to finance the purchase of a home unless an appraisal report specifically calls one out. Examples include a roof inspection, an inspection on the well or septic, or a structural inspection if there are concerns pointed out on the appraisal about the health and safety of the structure. A home inspection can be an important part of learning if the home being purchased needs immediate maintenance attention. It can also help you plan for maintenance attention down the road of ownership. You’ll be able to learn more about the inner workings of your home, such as furnaces, hot water heaters, electrical panels, plumbing details, etc. When you own a home, you become responsible for its upkeep, which ensures your home will hold its value over time.
An appraisal report is not a home inspection. It is a report, usually required with a mortgage, that compares the subject home with other recently sold and similar homes in the area for value and condition. The appraiser will want to see the terms of the purchase in hopes that the appraised value of the home will support what it’s being sold for. The lender also looks for the home to be in an acceptable condition for health and safety.
If you have additional questions about home loans, you can contact Cherie Kesti or one of our Windermere Poulsbo Brokers. And, when it comes to lenders, a local lender can make a huge difference. Additionally, you may want to check out our home-buying checklist. Best of luck on your homebuying journey!