By Jasmine Gill
The process to becoming a first-time homebuyer can be daunting and stressful. There are many decisions to make and the introduction of new lingo can be confusing. To top it off, first-time homebuyers can find conflicting information on the internet, which makes the process even more difficult.
A good place to start when buying your dream home is to talk to friends or family members and get referrals to trusted lenders, according to Randy Schaub, senior mortgage originator at Guaranty Bank & Trust. This is crucial because first-time homebuyers can be taken advantage of as they do not always know what is normal and what isn’t. Once the first-time homebuyer finds a trusted lender, the lender will help lead the way.
“Sit down with the lender, have a transparent discussion about your needs and desires, as well as your financial picture,” says Schaub. “The loan officer will require certain documentation regarding employment, income, and assets. Once that documentation is provided to the loan officer, they should be able to determine preliminarily whether the applicant qualifies for the mortgage home desired.”
In order to qualify for a mortgage, there are several factors taken into consideration. The three major ones are credit score, loan-to-value ratio, and debt-to-income ratio.
A credit score is a number that ranges from 300 to 850, according to Schaub. It essentially indicates how trustworthy the individual is financially in repaying their debts as agreed. The higher the score, the better. There are currently three credit bureaus that provide credit scores.
“They need to have a good understanding of their credit profile and credit score,” says Schaub. Mortgage lenders often use the middle credit score — the representative credit score — which represents a person's credit profile numerically, according to Schaub. If there are two individuals applying for the mortgage loan, the lower of the two middle may be used the representative credit score.
The loan-to-value ratio is also important in getting approved for a mortgage.
“Loan-to-value is function of down payment,” says Schaub. For example, if someone put down $10,000 on a property valued at $200,000, the LTV is 95 percent. “LTV is important because what folks have in liquid assets drives what price points they are able to buy at,” he continues.
The debt-to-income ratio is the total amount of monthly debt payments, plus the monthly payment on the proposed mortgage, divided by their gross monthly income, according to Schaub. Examples of monthly debt payments include the credit card payments, student loan payments, or payments for a vehicle.
“You need a debt-to-income ratio that is satisfactory,” says Schaub. “It is a calculation of one’s capacity to [re]pay the debt.”
Overall, all three of these factors are important in being considered for a mortgage.
“Having a credit score that is too low or having a debt-to-income ratio that is too high can indicate that they would have difficulty to repay,” says Schaub. “Not having enough liquid assets for down payment or closing costs can also be problematic.”
Another question first-time homebuyers may have concerns loan types and what type of loan is the “best” loan.
“There is not a ‘best’ loan out there — it is about tailoring the mortgage loan to the individual to best meet their needs ... and what works best for the customer,” says Schaub. Loans can have differing down payments and interest rates which all depend on that individual's credit profile. There are also different loan opportunities for certain people. For example, veterans have access to Veterans Affairs loans and those interested in buying rural property have other loan opportunities, such as USDA loans.
Although there is no such thing as a “best” loan, there are certain details homebuyers should pay particular attention to and look for.
“When you are shopping for a mortgage, it is important to understand the fees, the interest rate for the loan, if the interest rate is fixed or if it adjusts, or if there is a prepayment penalty associated with the loan,” says Schaub. There are many fees associated with getting a mortgage. Some of these fees include the origination charge, cost for appraisal, the loan document preparation fee, and title policy fees.
The annual percentage rate is helpful when comparing different mortgage offers that may have differing fees and interest rates, according to Schaub.
“APR gives consumers the ability to make an apples-to-apples comparison of loan offerings,” says Schaub.
Although the process of becoming a first-time homeowner can seem daunting, Schaub wants potential homeowners to know that it is a team effort and pays off in the end.
“To so many people, homeownership is a tremendous source of pride,” says Schaub. “To position oneself to become a homeowner, it is important for them to partner with a good real estate agent and a good lender. The team — the prospective homebuyer, the agent, and the lender — work together to make the prospective homebuyer as comfortable as possible with the process. Hopefully, [the prospective homebuyer] will be receiving the keys to a new home at the closing table.”
