Mortgage and Portfolio Loan Guide

Your Guide to Getting a First Time Home Buyer Loan

Cheers to adulting. When searching for the right first time home buyer loan it can be daunting and confusing to the point of saying “forget it, I’ll just live with Mom and Dad forever!”

The good news for you is that I have put together a full guide below on how to select the perfect first time home buyer loan. A comprehensive list of loan options that will leave you feeling like “okay world, I got this.”

What is a first time home buyer loan?

Basically, a first time home buyer loan is any mortgage option designed to cater to the needs of borrowers who have not bought a home in the past (recent 3 years) and have little-to-no funds available for down payment.

Typically, you need to have income and credit established, but there are options available even if you do not have traditional credit established.low down payment mortgage

Some options below do NOT require you to be a first time home buyer, but they have been listed because they are super popular for first time home buyers to take advantage of regardless.

Low Down Payment Mortgage | 1% Down

If you have a 700 credit score or above, this first time home buyer loan might be for you.

This is a conventional option, with typical mortgage guidelines. Except for one thing: you only have to put 1% down!

The way it is set up is on a 97% loan to value conventional loan, and you are actually gifted 2% from the lender. So it is a true 1% down loan.

In some areas of the US, there income limitations on this product. You can check your area for income limitations here.

This is pretty much a no brainer if you have good credit and stable income. Contact me to learn more on this option.

Main things to keep in mind with this 1% down mortgage

  • Down payment is 1%
  • Income limitations in some areas
  • Cannot have any ownership interest in any other residential dwellings at the time of closing
  • You do NOT have to be a first time home buyer to be eligible for this option

USDA Rural Development Loan | 0% Down

Getting a USDA Rural Development Loan is a great option for low-to-moderate income families who are looking to buy a house with zero down payment.

This is a very popular product for first time home buyers. Every area in the US is different in terms of income restrictions and whether or not the area you’re looking to buy in is eligible for a “rural development” loan.USDA rural development loan

Oddly enough, there are MANY areas in the country that are eligible for USDA rural development loans that I personally wouldn’t necessarily consider to be rural areas.

Some very well established suburban areas are eligible for USDA loans. Take a look for yourself here. Once you click “accept”, you’re able to plug in any address, and it will let you know if that address is eligible for a USDA rural development loan. Very easy to use.

The big thing to keep in mind with USDA loans (besides geographic location) is the income restriction on these types of loan.

All household income is taken into consideration (even if the spouse who will live in the home is not on the mortgage). Check out this useful tool to see if you fit within income eligibility restrictions.

Even some condominiums are eligible for a USDA Rural Development Loan. Unlike FHA loans, where the condo needs to be on the approved FHA condo list, USDA loans simply require a standard conventional condo review to be done (which is nice because it it much more simple than FHA in this case).

Main things to keep in mind with USDA Rural Development Loan

  • 0% down payment
  • Low credit okay (580 FICO minimum)
  • Income restrictions
  • Geographic restrictions

FHA Loan | 3.5% Down

In my humble opinion, FHA loans are probably the most commonly used loan product when it comes to first time home buyer loan options. This is because of low credit requirements and fairly low down payment.

Although you do not have to be a first time home buyer to be eligible for this type of loan, it is an attractive route to go due to the fairly flexible underwriting guidelines.

The nice thing about FHA loans is that they are available in every state and city. There are no geographic restrictions. But do be mindful of the FHA county loan limits. Check out the FHA county loan limits in your state here.

With an FHA loan there is NOT a maximum household income restriction, which is what makes it a nice alternative to USDA loans.

Even though you don’t have to be a first time home buyer to be eligible for an FHA loan, it is extremely rare to be able to have more than one FHA loan at one time. There are very few scenarios where it is allowed. So rare that those scenarios aren’t listed here due to guidelines changing frequently. Contact me for questions on that.

Main things to keep in mind with getting an FHA Loan

  • 3.5% down payment (if 580 or above credit)
  • No maximum income restrictions
  • Low credit standards (as low as 530 FICO – if below 580 higher down payment may be required)
  • Available in all cities in all states
  • Each county has set maximum loan amounts.

FHA Construction Loan | 3.5% Down

When you’re dealing with a market where inventory is low, a construction loan might be the perfect fit. You get to select the lot and build the exact house you want. With an FHA Construction Loan you can buy the land and finance the construction loan all in one loan.

This type of loan is what is known as a construction to permanent one-time close loan. This is where you finance the land and the construction all-in-one. If you already own the land, that is okay too, and you can use the equity you have in the land as collateral (down payment).

If you talk to 100 loan officers, probably 99 of them will tell you FHA construction loans do not exist. This is low down payment home loansbecause most lenders don’t deal with FHA Construction loans because they are a bit more labor intensive than regular FHA loans.

FHA Construction Loans definitely exist and can be done. The key is to understanding how FHA construction loans work.

The income, credit, and asset guidelines are the same as regular FHA loans. The difference is having to work with getting your builder approved for this type of financing.

The best part about this type of construction loan is you get approved up front, building get’s done, and you move in. You DO NOT have to go through the approval process again after the home is completed.

Main things to keep in mind with FHA Construction Loan

  • 3.5% down payment
  • 620 FICO minimum
  • Can use existing equity as down payment if you already own the lot
  • Can buy land and finance construction all-in-one loan
[more on FHA construction loans here]

VA Loan | 0% Down

If you’re currently serving in our armed forces, or are a veteran of the US military – thank you for your service to our country. Semper Fidelis

A VA loan is a fantastic 0% down option for a first time home buyer loan, and a great option even if you have bought a home in the past.zero down mortgage

There are MANY different levels of eligibility depending on when you served, how long you served, and if you were active or reserve. Here is a chart from the VA to show eligibility.

One huge way the VA has given back to their wounded veterans is with regard to the funding fee affiliated with getting a VA loan.

If you’re receiving any percentage of disability from the VA you’re exempt from paying the VA funding fee – which can save you thousands.

The other benefit is that you do not pay monthly mortgage insurance premiums on VA loans.

There are no maximum income restrictions on VA loans, and VA loans are available in every corner of the US.

Main things to keep in mind with a VA loan

  • Must be an eligible veteran of the US armed forces, currently serving, or an unmarried surviving spouse.
  • Can go as low as 530 credit score in some cases.
  • 0% down payment
  • $0 mortgage insurance (big monthly savings)

Which first time home buyer loan is best for you?

There are clearly plenty of options to choose from, and everyone’s situation is different.

Find out which product meets your needs best today. Apply Here


First-Time Home Buyers Guide: Buying With Student Loans And Debt


I invite you to reach out to me.

Get your questions answered.

 

 

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What is a Gift of Equity?

Sometimes it’s nice to be able to pay your rent to family because there is a mutual trust that already exists between tenant and landlord. It’s even better when you can buy your home from a family member. This is one of the cases where you can buy a home with zero down payment with use of a gift of equity.

In this article we’ll go over everything you need to know about how to buy a home from family with a gift of equity and zero down payment.

What is a gift of equity?

A gift of equity refers to the gift provided by the seller to the buyer in the form of existing home equity. In this type of scenario there is no exchange of funds. The seller simply agrees to take less net proceeds at closing, which allows the buyer to have instant equity while providing no down payment.

These types of transactions are common with parents who are selling their home to their child.

 

what is a gift of equity

 

Here is a basic example:

Jimmy has been renting from his parents for 2 years. Paying rent on time faithfully every month.

Instead of putting their home on the market, they agree to sell their home to Jimmy.

The home is worth $200,000 and his parents are looking to sell their home. They are only looking to net $150,000 out of the sale, which means they are willing to provide a gift of equity of $50,000. When the transaction gets to the closing table, instead of little Jimmy coming out of pocket 50K for down payment, the gift of equity is done. This means that he now owns a home that already has 25% equity.

What about closing costs?

Right, so being able to do zero down payment with a gift of equity is nice, but what about closing costs and escrows for taxes and insurance? Good question, glad you asked.

The nice thing about dealing with family is that you can talk things out and get a clear understanding of what the proceeds need to be. In other words, the parent and child can clearly communicate how much funds the parent needs to get at closing for this to make sense for them.

Once that is clearly understood, the sale of the home can be structured in a way to benefit all parties involved with complete transparency.

The way to get closing costs paid for without the buyer having to cover the costs is by adding seller concessions (or seller contributions) to the formal purchase agreement. This is where the seller gives a credit toward the buyer’s closing costs and escrows.

In many cases the seller credits can be up to 6% of the purchase price of the home. Which means that if the sale price is $200,000, the allowable seller concessions can be as high as $12,000. That amount should be more than sufficient to cover costs and escrows (depending on how much real estate taxes are in your area).

So let’s take a look at how that would apply to the case with Jimmy…

Same price as above, at $200,000. Instead of giving a gift of equity of 50K, the parents give a gift of equity of 40K. But now, on the purchase agreement they agree to provide $10,000 in seller concessions.

In this case the loan amount would be $160,000. The sellers still get net proceeds of $150,000, AND the buyer didn’t have to come out of packet to make it happen. It’s a win/win. The loan amount is $10,000 higher (roughly a $50/month difference in monthly payment), but the buyer didn’t have to deplete is assets to make it happen.

It’s basically a way to finance the costs, really just a matter of structuring the purchase agreement properly to meet everyone’s goals.

Important things to keep in mind.

Appraisal – The only way a gift of equity works is if there is actual equity that already exists. The lender is going to order an appraisal to get an opinion of fair market value. If you’re trying to sell your home for $200,000, but it only appraises for $150,000 then the gift of equity amount needs to be revisited, and the purchase agreement needs to be restructured accordingly. [more on appraisals here]

Documentation – The lender is going to need to verify everything (just like a normal purchase of a home). If the child has been renting, there needs to be legitimate proof of rent. If the child gave a deposit of any amount at the beginning of the lease, there is going to need to be a paper trail.

Acceptable Donor – When dealing with a gift of equity scenario, the seller an buyer need to be related. Here is the definition of an acceptable donor with regard to a gift:

“A relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related by blood, marriage, adoption, or legal guardianship; or a fiance, or domestic partner.”

As you can see, there is a little bit of room for discussion on that. There is a grey area. There are endless “what ifs” on this topic of “related”. Bottom line, don’t try to pull a fast one on the underwriter.  If you’re trying to do a gift of equity, it needs to involve a clear relationship like parent/child for example. Otherwise, there is a chance an underwriter could shoot it down.

Conclusion

Buying or selling a home with the use of a gift of equity can be a very advantageous route to take for a buyer and seller. The buyer doesn’t have to provide a down payment, and the seller gets the piece of mind of helping their family achieve the dream of home ownership while getting the proceeds they are seeking.

As always, transparency and communication is key to make the process as smooth and painless as possible.

I invite you to reach out.

mortgage loan officerIf you’re running into any challenges with getting this type of scenario put together, or the buyer doesn’t quite meet normal lending guidelines, you’re welcome to reach out to me with your specific questions.

You won’t be connected with an intern or someone in a call center, you will be connected with me directly.

If I cannot help, I should be able to point you in the right direction at the very least.

 

 

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Do you have to prove your savings to buy a home?

The Asset Piece of the Mortgage Puzzle

There you are, Mr. Hotshot at the blackjack table. You sat down with a hundred bucks, now you’re up two grand. You’re feeling good, top of the world really, and decide maybe it’s time to call it a night. You cash in your chips with a smile on your assets gamblingface thinking how proud your wife is going to be for the first time in years. Things have been a bit rocky since back in ’06 when you bought her that vacuum for Christmas. But not this time. Today you’re a winner. With these winnings in hand, you finally have enough money saved to move out of mom and dad’s basement and buy a house! Monday morning comes around, and you’re devastated. Your buddy at Easy Peazy Funding has to break it to you that the $2,000 deposit that you made into your bank account needs to be sourced if you want a mortgage. There needs to be a paper trail proving where that cash came from. You’re confused because there is no way to prove you made that money from using mind power, and pure skill. When the denial letter comes in the mail your wife kindly throws your clothes into the front yard. She leaves a note saying something about California, and heading west. The rest is history.

Depressing right? Let’s try to make sure you’re doing all the right things to prepare for buying a home. In this portion of the “keeping your home loan process simple” series, the asset piece of the mortgage puzzle is given to you in a gift basket.

When you’re purchasing a home, get all of your financials in one place so they are easily accessible. You’ll need funds for down payment, escrow account (for taxes and insurance), closing costs, and general reserves. Along with all of your pay information, you’ll need bank statements, retirement statements, brokerage account statements, and proof of any other account you’re using to qualify.

Bank statement

  •  Be ready to provide 2 months consecutive bank statements, including all pages. If it says page 2 of 6 anywhere on the assets for mortgagepage, provide all 6 pages.
  • Make sure that your statement shows your name, address, bank name/logo, account number, balances, and activity on the account. If any of those items are missing you’ll need to provide more information. Many times an online print-off will show your account number, but not your name.
  • Non-sufficient fund (NSF) fees will be evaluated. If you show a habit of having NSFs, your lender may decide that pattern is an indication that you’re not ready to buy a home.
  • If the statement you provide is a shared account (someone other than you is also on the account), the individual you share the account with will need to provide a letter confirming you have full access to the funds.
  • Large deposits need to be sourced. If there are any deposits on your bank statement other than your normal income; you will need to provide a paper trail proving where those funds came from. All jokes aside, you may actually be able to use gambling winnings if the casino provided a slip or coupon confirming the amount won. If you sold a vehicle or jewelry you’ll need a bill of sale. Don’t accept cash from the buyer, ask for a check. Additionally, you’ll need to provide a 3rd party opinion (kelley blue book for example) of value in order to confirm the sale price was not unreasonably higher than fair market value. This is to prevent fraud. So Johnny can’t sell his ford escort to his “neighbor” for $10,000. There might be something fishy going on there in the eyes of your lender.

Retirement and Brokerage Accounts

  • If you’re liquidating retirement funds you should be able to print off a most recent quarterly statement. If you are taking out a loan against your 401k your lender will factor that liability into your debt-to-income ratio. In some cases you may have an additional tax penalty if you withdraw retirement funds prior the being 59 1/2.
  • Above and beyond a recent statement, you’ll need to provide proof the funds needed for closing have been liquidated. You’ll also need to show where those same funds were deposited into. It’s wise to deposit those funds into the same bank account that you’ve already provided statements for. The goal is to keep it simple, so putting those funds into a different account could open a new can of worms.

Gift Funds

It’s acceptable to receive gift funds to help with down payment. Each loan program has it’s own guidelines pertaining to gift funds, but here are a few general points to keep in mind:gift from family
  • The person “gifting” the funds needs to be a family member, or someone with an obvious close personal relationship (like a fiance).
  • You both will need to sign a letter confirming the amount and purpose of the gift funds. The letter will also need to confirm there is no expectation of repayment to the donor (the person gifting the funds). They will also need to show their ability to gift the funds by providing 2 months bank statements.

  Grants

Some states and communities offer grants to assist homebuyers with down payment. As long as the entity providing the grant is credible, the lender should accept the grant as an asset because typically a grant does not require repayment. Some grants require a homebuyer course to be completed by the borrower prior to being eligible for the grant. This is to ensure the individual is aware of the pros and cons of homeownership.
There are many unexpected expenses when buying a home. Cash is king, have your assets in place. Aside from lender requirements there are so many things to consider. Carpet, fence, paint, new locks, blinds, and so much more. If you feel like every penny is being scrutinized by your lender, you’re probably right, and it’s truly for your protection. If you feel like things are getting a bit too tight, it might be best to reconsider your price range.


A couple closing tips… 

Bank statements are valid for 60 days. If you’re house hunting for 5 months, send your lender new bank statements as they become available.

Do not overextend yourself. There will always be something that comes up that never crossed your mind. Leave yourself a cushion for those expenses so you can sleep at night.

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