Buying your first home is exciting, but the mortgage process can seem complicated when you've never been through it before.
I've been helping homebuyers with mortgage financing since 1999, and my advice to first-time buyers is simple:
Understand the financing before you fall in love with a house.
Before you start making offers, you should understand how much you can comfortably afford, how much cash you'll need, which mortgage programs you're eligible for, and what your estimated monthly payment will actually include.
My job is to help you work through those questions before you're under contract and facing a closing deadline.
— John Madden
Owner, Capital Funding Mortgage Associates
Mortgage Professional Since 1999 | NMLS #960139
Newtown, Bucks County, Pennsylvania
The amount a lender may approve you to borrow and the amount you want to spend every month are not necessarily the same thing.
Before establishing a price range, I like to look at the entire housing payment, including:
I also encourage first-time buyers to think about expenses that aren't part of the mortgage qualification calculation, such as utilities, maintenance, repairs and keeping adequate emergency savings after closing.
My goal isn't simply to tell you the maximum mortgage you can qualify for. It's to help you understand what different purchase prices will actually cost you each month.
A mortgage pre-approval should happen before you seriously start making offers on homes.
I'll review your income, employment, credit, monthly obligations, available assets and anticipated down payment.
This allows us to determine:
How much you may qualify to borrow
Which mortgage programs may be appropriate
How much cash you may need
What your approximate monthly payment could be
Whether there are any potential underwriting issues we should address before you make an offer
I would much rather identify a financing issue before you sign an Agreement of Sale than discover it after you're already under contract.
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One of the most common misconceptions I hear from first-time buyers is:
“Don't I need 20% down to buy a house?”
No.
Depending upon the mortgage program and your qualifications, there may be conventional and government-backed financing options requiring substantially less than 20% down.
Putting less than 20% down may mean mortgage insurance or other program costs apply, but that doesn't automatically make a smaller down payment a bad decision.
For some buyers, keeping additional savings available after closing can be more valuable than putting every available dollar into the house.
The right down payment depends on your particular situation.
Being a first-time homebuyer doesn't mean there is one special “first-time buyer mortgage” that is automatically best for you.
Depending upon your qualifications, we may compare several possibilities.
Conventional financing can be an excellent choice for first-time buyers and may offer low-down-payment options for qualified borrowers.
Depending upon the down payment and other factors, private mortgage insurance may be required.
One advantage of conventional financing is that mortgage insurance may eventually be removable when applicable requirements are satisfied.
FHA financing can be attractive to some first-time buyers because of its down-payment and qualification features.
However, FHA isn't automatically better than conventional financing simply because you're making a smaller down payment.
If you could reasonably qualify for either, I prefer to compare the payment, mortgage insurance, rate and total costs of both.
Eligible veterans, active-duty service members and certain surviving spouses may have access to VA financing.
VA loans can provide significant advantages, including the possibility of purchasing without a down payment, subject to VA eligibility and applicable loan requirements.
First-time buyer doesn't necessarily mean inexpensive home.
If you're purchasing a higher-priced property and the required loan exceeds applicable conforming limits, jumbo financing may be appropriate.
Jumbo lenders can vary considerably in their pricing and underwriting requirements, making lender comparison particularly important.
Pennsylvania buyers may have access to mortgage and homebuyer-assistance programs through the Pennsylvania Housing Finance Agency (PHFA).
PHFA offers several home-purchase financing and assistance options, subject to program requirements such as income, purchase price, credit and other eligibility standards.
One current option is Keystone Flex with K-FIT. For eligible borrowers, K-FIT can provide assistance equal to 5% of the lesser of the purchase price or appraised value toward down payment and/or closing costs. The assistance is structured as a forgivable second mortgage, with 10% forgiven annually over ten years.
PHFA also offers other home-purchase and assistance programs, and program requirements can vary.
Important: Don't assume you need an assistance program simply because you're a first-time buyer.
I believe we should compare the economics of the available options—including rate, mortgage insurance, closing costs and assistance—before deciding which structure makes the most sense.
New Jersey also offers first-time homebuyer programs through the New Jersey Housing and Mortgage Finance Agency (NJHMFA).
NJHMFA's First-Time Homebuyer Mortgage Program provides qualifying first-time New Jersey buyers with a 30-year fixed-rate government-insured mortgage through participating lenders.
NJHMFA also currently offers a Down Payment Assistance Program providing up to $15,000, depending upon the county where the property is located, for qualified first-time buyers.
The assistance can be used toward down payment and closing costs and is structured as an interest-free, five-year forgivable second loan with no monthly payment.
New Jersey also offers additional assistance for certain qualified first-generation homebuyers, which can increase the total available assistance.
Income limits, purchase-price limits, property requirements and other eligibility rules apply.
Because these programs change over time, current eligibility and program terms should always be verified before you make a financing decision.
Your down payment isn't the only money you may need to purchase a home.
Your transaction may also include:
One thing I make sure first-time buyers understand is the difference between actual closing costs and prepaid/escrow items.
They aren't the same thing.
For example, money deposited into your escrow account for future property-tax and insurance payments is still your money being collected for those future expenses. It isn't the same type of expense as a lender or title-company fee.
Understanding this distinction makes a Loan Estimate and Closing Disclosure much easier to understand.
This is something national first-time-homebuyer websites often don't explain very well.
Real estate transactions are affected by state and local practices.
In Pennsylvania, for example, the Commonwealth imposes a 1% realty transfer tax, and local realty transfer taxes may also apply. How those taxes are allocated between buyer and seller can depend upon the transaction and local practice.
New Jersey has its own transfer-fee structure and closing practices.
That's one reason I believe first-time buyers benefit from working with mortgage, real estate and title professionals familiar with the state and local market where they're buying.
This is one of the most important lessons I can give a first-time buyer:
The lowest mortgage rate isn't necessarily the best mortgage deal.
A lender may advertise a lower interest rate but require you to pay significant discount points to obtain it.
Another option may have a slightly higher rate but substantially lower closing costs—or even provide a lender credit.
When comparing mortgages, look at:
Interest Rate
Discount Points
Lender Fees
Lender Credits
Monthly Payment
Cash Required at Closing
Total Cost of Obtaining the Rate
I'll explain those numbers so you can make a meaningful comparison.
Discount points allow you to pay additional money upfront in exchange for a lower interest rate.
Sometimes that makes sense.
Sometimes it doesn't.
I like to calculate the break-even period.
If paying $4,000 in additional points saves $80 per month, for example, the simple break-even period is approximately 50 months.
Then ask:
Do you reasonably expect to keep this mortgage longer than that?
If the answer is no, paying the additional points may not make financial sense.
This is especially important for first-time buyers, who may not remain in their first home—or their first mortgage—for decades.
Another mistake I don't like seeing first-time buyers make is putting virtually every dollar they have into the purchase.
Once you own a home, things happen.
An appliance breaks.
The HVAC system needs service.
You discover something you want to repair or improve.
Your utility bills may be higher than expected.
Whenever possible, I want buyers to think about cash reserves after closing, not merely whether they have enough money to get through closing.
Once you've applied for a mortgage, avoid making significant financial changes without discussing them with your mortgage professional first.
Before closing, don't assume it's safe to:
Changes to your debts, income, employment, credit or available assets can affect mortgage qualification.
When in doubt, ask me before you do it.
Once your offer is accepted, the mortgage process generally moves through:
Application and disclosures
↓
Rate selection/lock
↓
Documentation
↓
Appraisal, when required
↓
Underwriting
↓
Conditional approval
↓
Final underwriting conditions
↓
Clear to close
↓
Closing Disclosure
↓
Settlement
I'll remain involved throughout that process and let you know what is needed and what happens next.
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There isn't one answer. It depends on the purchase price, mortgage program, down payment, closing costs, available seller credits or lender credits, and whether you qualify for assistance.
No. Different mortgage programs have different credit requirements, and credit is only one part of the qualification process.
Not necessarily. Sometimes paying down a particular debt can improve qualification significantly; other times using those funds for down payment, closing or reserves may be more valuable. Let me look at the numbers before you start paying accounts off.
I strongly recommend understanding your financing and obtaining a pre-approval before making offers. That gives both you and your Realtor a realistic price range and financing strategy.
Many mortgage programs permit qualifying gift funds, subject to program rules and documentation requirements.
Straightforward files can often be reviewed quickly once the necessary information is available. More complicated income, credit or asset situations may require additional review.
No. A pre-approval doesn't mean you should stop evaluating your mortgage options. Before committing to a lender, understand the rate, costs and loan structure being offered.
After helping homebuyers since 1999, these are the things I would most want my own client to remember:
Get pre-approved before making an offer.
Don't assume 20% down is required.
Don't choose FHA, conventional or another program based on what a friend used.
Compare closing costs along with the interest rate.
Understand mortgage insurance.
Don't spend every available dollar at closing if you can avoid it.
Don't make large financial changes while your mortgage is being processed.
Ask questions when you don't understand something.
And perhaps most importantly:
Don't be afraid to say, “Show me the numbers both ways.”
That's exactly what I want my clients to ask me.
Capital Funding Mortgage Associates is an independent mortgage broker based in Newtown, Bucks County, Pennsylvania, serving homebuyers throughout Pennsylvania and New Jersey.
If you're considering buying your first home, I'm happy to discuss your situation before you're ready to make an offer.
You don't need to apply for a mortgage just to ask me questions.
We can look at your anticipated price range, down payment, monthly payment and available financing options and determine what makes sense.
John Madden
Owner, Capital Funding Mortgage Associates
Mortgage Professional Since 1999
NMLS #960139
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John Madden is the owner of Capital Funding Mortgage Associates, an independent mortgage broker based in Newtown, Bucks County, Pennsylvania. John has been helping homebuyers and homeowners with mortgage financing since 1999 and serves clients throughout Pennsylvania and New Jersey.
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Mortgage programs, assistance programs, guidelines, rates and terms are subject to change and borrower qualification. State and local housing programs have additional eligibility requirements and may require use of an approved or participating lender. Information on this page is for general educational purposes and does not constitute a commitment to lend.
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