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First-time Home Buyer Application & Loan Programs

Buying your first home can be overwhelming, but it doesn't have to be. With a simple understanding of the home buying and mortgage processes, you can feel confident in your decision making when it's time to finance your first home.

Who qualifies as a first-time home buyer?

You may be surprised. Many lenders consider a first-time home buyer to be anyone who has not owned a home within the last three years. Though criteria vary by loan program, they can include:

  • An individual who has owned a home three or more years ago, but is currently renting
  • A previous homeowner who is looking to purchase a home with a new spouse who has never been a homeowner
  • 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
  • A mobile home or RV owner (who is not a current homeowner)
  • A homeowner whose previous property was so significantly damaged it does not measure up to local and state business codes, or it would cost more to fix the property than build new

Keep in mind, the home has its own (separate) criteria. It may include:

  • The home must be occupied as your primary residence
  • The home sales price must fall within a certain limit that is determined by a percentage of your area median home price

Don't let the fear of the unknown deter you from purchasing a new home. If you need help getting a mortgage, finding down payment assistance, improving your credit before you buy, or simply navigating the process of buying your first home, American Financing is here to provide guidance.

Follow these first-time home buyer tips to successfully navigate the process and avoid common mistakes.

Prepare for the mortgage process

  1. Get your credit report
    If your credit needs improvement, work on it. As your credit increases, your interest rate can be more competitive — offering you even more savings.

  2. Look at your whole financial picture
    Know what you can afford. Consider down payment, monthly mortgage bills, mortgage insurance, and closing costs. Don't be afraid to look into assistance programs, or postpone your purchase so you can save up a little more money. Lenders typically want to see that you have plenty of money in your account that's been there for at least two months.

  3. Shop around for rates
    Interest rates fluctuate and vary based on the loan program and even lender. But, it's an essential step in the process because finding lower rates will make homes more affordable.

  4. Attend a first-time home buyer education class
    Some loan programs require the successful completion of an education class before final mortgage approval.* Classes not only help you prepare for the home buying process, but they also help you create a realistic budget when it comes to all expenses — from down payment and closing costs to mortgage insurance and property taxes, and so on. Classes are available in all states, and they can be in person or online. Many of them are free, even to home buyers who are not required to complete the course. So, it's in your best interest to research what's available in your city.

    *If you are taking a first-time home buyer course as a requirement to a loan program, this step may take place later in the mortgage process.

  5. Find a lender you can trust
    The right lender will inform you of the different mortgage options available and will move the process along as smoothly as possible. Be sure you're open with your lender throughout the process. They will be able to guide you through what to do and not to do, regardless of your financial situation.

  6. Get pre-approved
    Once you're ready to apply for a mortgage, seek pre-approval so you know an appropriate price range for your housing search. You'll also have a better idea of the interest rate you will be charged on the loan.

Once you've begun the application process, it's important to avoid doing anything that may harm your chances of approval.

Avoid common first-time home buyer mistakes

Ready to apply?

  1. Applying for or taking on new loans
    New car, personal, existing mortgage, and student loans all have one thing in common. They increase your total debt, which may affect your chances of being approved for a new home loan. Keep in mind each may affect your mortgage worthiness differently.

    Regardless of whether the debt is secured or unsecured, lenders will compare your recurring monthly obligations to your gross monthly income, or your debt-to-income ratio (DTI). It's an important requirement that can make or break your chances of mortgage approval. So, try to avoid taking out other loans or lines of credit or at the very least, put them off until after mortgage approval.

  2. Depositing large amounts of money
    Too often borrowers do not understand that funds for closing have to be sourced to use them for closing. This can make things very difficult for the lender because it is almost impossible to source cash, especially when these deposits are $1,000 or more.

    Prevent this by making large deposits (typically money that does not come from payroll) at least 60 days before applying for a mortgage. And always be sure there is a paper trail, so you can help your lender source where the funds came from.

  3. Opening or closing lines of credit
    The purchase process can be very exciting, and people tend to start shopping for appliances, furniture, etc. while they are under contract. It's okay to window shop and get ideas, but do not do anything that can impact credit scores or debt ratios until after closing and funding.

    At American Financing, we ask that borrowers do not allow any credit inquiries or open any new accounts during the approval process. This is because it changes the credit scores and debt ratios since there are new debts to be added. And, any change in credit scores or history can hurt your mortgage rate. This includes co-signing for other people's credit, which is the same as applying for your own credit in the eyes of the bank.

    Don't close accounts either. Closing an account reduces your available credit. For example, if you have credit limits totaling $10,000, and balances of $2,000, your ratio is 20%. If you then close an unused credit card with a limit of $6,000, you just raised your ratio to 50% — and that's a bad thing to a mortgage lender.

  4. Being late on your monthly bills
    Credit scores continue to be a key player in the loan process. Pay your bills on time, and you can quickly achieve worthy credit status. Remember the higher your credit score, the lower risk for the borrower — meaning the better your chances for approval. Do everything possible to protect your credit score when preparing for the mortgage approval process, especially if you're a first-time home buyer.

  5. Changing jobs
    Lenders will ask that borrowers hold the same job through the process. From contract to closing, your lender is working on underwriting conditions that prove you can repay the loan. This includes verifying income and employment. They'll typically need two years' work and income history through tax returns, W2s, employment verification, and pay stubs. Commission or bonus income also requires a full two-year history.

    So, borrowers who change jobs in the middle of the process create additional underwriting conditions which end up delaying the loan approval process. If you are thinking of switching jobs and want to qualify for a home mortgage soon, consult with a mortgage professional to see if the job move will negatively affect your ability to be eligible for a mortgage.

  6. Focusing too much on the current interest rates
    Interest rates generally don't move much. So, if you find the right property — especially in a highly competitive, seller's market — don't be afraid to make your offer. For example: on a $200,000 home with a 30-year mortgage, the expected increase of a quarter of a point translates to paying roughly $30 more per month.

Before making that big leap into purchasing that dream home, check out a few more tips that are specific to cutting costs when buying a new home.

Explore down payment, closing cost, and loan program options

Apply for down payment assistance money

Grant programs are designed to help home buyers acquire more funds for down payments. Qualified buyers have no obligation to pay back granted funds, as long as they meet program criteria.

Make too much to qualify? You're in luck. Grants are only one way to help home buyers with upfront costs. As of November 2018, there are currently over 2,500 active down payment assistance programs in the United States. So don't be afraid to seek state or government assistance. There may be an option that fits your needs perfectly.

Use gifted money

The larger your down payment, the less you have to finance. If you have family members who are willing to "gift" you money that can be applied toward a down payment, take advantage! The amount you can accept varies by loan program, and it requires a letter that documents the funds are a gift and not a loan. Your lender may ask to see a bank statement verifying that the donor has the money to gift to you, a copy of a canceled check made out to you, or paperwork showing an electronic transfer between the donor's account and yours.

For a full list of rules, a gift letter example, and program requirements, be sure to check out our down payment gift article.

Compare low or no down payment loan programs

Shopping around to consider all loan options is always a good strategy to help cut home costs. Requiring just 3.5% down to get into a home, the FHA loan program provides government backing on loans underwritten by banks. Although your monthly payment may overall be higher, it may make sense for you to consider an FHA loan to pay minimal money upfront and then spend more later.

If you reside in Colorado, take a look at Colorado Housing and Finance Authority's CHFA loan, which can get you into a home for as little as $1,000 down. Even better, if you're active duty military or a veteran, the VA loan comes with no mortgage insurance and no required down payment to get into a home.

Don't forget; there are many more loan programs out there. Our salary-based mortgage consultants can help with deciding which loan is best for your financial situation. They can even customize a loan program, so it's the right fit for your needs.

Negotiate closing costs

Closing costs generally run between 2% and 5% of your loan amount. Depending on the real estate climate in your area, you have the opportunity to get a portion of your closing costs covered if you negotiate with the home seller. Factors like how long the home has been on the market and if the market (in general) is struggling are good reasons to negotiate closing cost options.

Just don't forget the bottom line: be prepared and save what you can along the way. The mortgage process can be relatively straightforward so long as you follow your lender's guidance and you're ready to commit to making that dream (home) come true.

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