Financing Basics for First Time Buyers

Still renting and tired of it? Your noisy neighbors can’t seem to be quiet for any normal length of time? Your parents are telling you it’s time to stop being a renter and throwing your money away each month? Maybe your best friend just bought a condo and you’re thinking, “Well, if she can then I can too!” Buying a first home is an exciting experience and simply shopping for a home on the internet and comparing home prices and places to live takes on a whole new meaning. But the mortgage part, well, that’s not really something to jump up and down for, is it? We agree. Getting a mortgage isn’t won’t really get your heart pumping with excitement but for many it can also be a bit scary. For first time buyers, here are some financing basics you can use.

Affordability is based upon current and future debt along with your gross monthly income. Lenders compare monthly credit obligations along with your future mortgage payment, including amounts for property taxes and insurance and compare that total with income. The result is your debt-to-income ratio, or simply “debt ratio.” Lenders like to see this ratio be at or below 43. If you make $7,000 per month, 43 percent of that is $3,010. Your mortgage payment along with other debt such as a credit card or car payment should be at or below this amount.

Mortgage payments are calculated using current market rates, a loan amount and a loan term. For example, calculating a principal and interest payment on a mortgage considers the loan term. Loan terms can range from 10 to 30 years. The mortgage payment is also figured using current market rates and a loan amount. Lenders can provide you with a qualifying loan amount taking your gross monthly income and figuring all monthly debt.

Getting financing for a home is also based upon your recent credit history. Most loan programs ask for a minimum credit score of 620 but there are some programs which will approve a borrower under certain conditions with a score as low as 580. You have three credit scores, one from each of the three credit repositories of Experian, Equifax and TransUnion. The mortgage company will throw out both the highest and lowest score, using the middle one for qualifying purposes.

Finally, you’ll need some cash to close. Most loans require a down payment. Loans that do not require a down payment are the VA and USDA programs. All loans however do have closing costs and the lender will verify you have enough funds available to you for both a down payment and closing costs by looking at copies of your most recent bank statements.

That’s really about all there is to it. Yes, there will be no shortage of documents to sign and there will be even more financing terms you’ve probably never heard of but in essence your lender makes sure your debt ratios are in line, you’ve shown an ability to repay your debts when they’re due and you have enough funds in the bank for a down payment. If you pay attention to these three areas, everything else will fall into place on its own.