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First Time Home-Buyer Guide

Learn

If you've never made a home purchase, you may be unfamiliar with some of the terms and acronyms mortgage lenders use or some of the tools you can use yourself to learn about home financing. Understanding what these are and how they play into homeownership is a great way to get started!
 

What is a FICO Score?

FICO is an acronym for a credit scoring model developed by the Fair Isaac Corporation. A FICO score ranges between 350 and 850 and is a quantification of various factors in a person’s credit history, such as current amount of debt, how long a person has made purchases on credit, and how well a person has made timely repayments. The higher the number, the better the FICO score. You can learn a lot more here: https://www.myfico.com/credit-education/credit-report-credit-score-articles/

 

What is a Credit Report?

A credit report is a summary of your financial history and includes information collected from your use of credit as reported to or collected by the major credit-reporting agencies, Experian, Equifax and Transunion. Your FICO score is typically included in your credit report.

 

How can I View my Credit Report?

Federal law entitles you to a free copy of your credit report every twelve months. To obtain your credit report from all three credit reporting agencies, go to www.annualcreditreport.com

 

What is Credit Worthiness and How is it Evaluated?

Creditworthiness is a valuation performed by lenders to determine a person’s eligibility to borrow money. Most lenders use your FICO score in combination with your current income, your current level of debt, and how much of your available credit you currently use. Having credit cards with minimal or no balance impact your credit worthiness differently than if your cards have balances near their maximum limit.

 

What is a Down Payment and How Much Will it Be?

A down payment is a portion of a home’s purchase price that you pay with your own funds. The amount you will ultimately need will depend on the purchase price and the mortgage program you decide to use as different home loan programs have different down payment requirements. Additionally First Time Home Buyer programs are often available that provide down payment or closing cost assistance grants, tax credits or other features that may help you achieve your down payment faster.

 

What are FHA, USDA, VA, Fannie Mae, Freddie Mac and all those acronyms?

There are a variety of loan programs available to people that meet various eligibility requirements, such as active duty or military veterans, residents of rural areas, low-to-moderate income families, etc. If you research mortgage options online, you will probably run into these terms. Typically these are nationally available mortgage programs that work with local lenders who will help you understand if any of these programs are a good option for you.

 

What are Loan Closing Costs?

Closing costs are fees due at the time a mortgage is "closed", when ownership of the property is officially transferred from the seller to the buyer. There can be a variety of fees involved, such as, an origination fee, legal fees, credit report fees, appraisal fees, etc.. The kinds of fees and the dollar amount of these fees can vary depending on the type of property and the type of loan. When you apply for a mortgage, within three days, your lender is required to provide you with a loan estimate which summarizes the initial loan amount, interest rate, monthly payment and loan term. It also indicates whether escrow fees and property taxes will be collected and a summary of estimated settlement fees. The loan estimate helps you know the approximate amount of cash you will need to bring to your mortgage closing.

 

What is PMI?

PMI stands for Private Mortgage Insurance and is typically required when your down payment is less than 20% of the purchase price. The cost of PMI varies depending on the size of your down payment, your credit score and the insurer you choose and is often an additional monthly payment in addition to your actual mortgage payment. When you’ve paid down your loan principal balance to 80% of the home’s original appraised balance, you are eligible to cancel your PMI.

 

What is a LTV Ratio?

LTV is a financial acronym for Loan to Value and represents the ratio of the mortgage loan compared to the purchase price or appraised value of the property, which ever is lower. This ratio is a factor in determining the minimum amount required for your down payment, and is also a factor in determining whether you need to purchase PMI.

 

What is Mortgage Pre-Qualification?

Pre-qualification is an important preliminary step in the home purchasing process that helps you understand how much you may be able to borrow. A lender will ask you for some financial information about your income, credit and debt history and assets and will provide you with an estimate of how much house you can afford. If you get pre-qualified and then delay your home search or have any other changes in your finances, consider getting an updated pre-qualification as your estimate could change. Working off current information gives you the best chance of successfully obtaining a mortgage without unexpected surprises or disappointments.

 

Are There Tools for Financial Modeling?

Budget and Mortgage Calculators are great learning tools. Plugging numbers into calculators let you see the impact of financial decisions. You can model situations such as:

What happens if I get a raise?

What happens if I have a lower or higher down payment?

How long will it take me to save my target down payment?

What happens if I save more or less?

What is the impact of a higher or lower interest rate?

 

We have a lot of financial calculators available here and encourage you to use them to assist you as you plan for your home purchase.

 

Save

Saving Strategies for First-Time Homebuyers

Start by creating a SAVINGS PLAN. A good savings plan starts with a savings goal. In the case of saving for a down payment, we recommend you determine a realistic savings goal by going through the following steps:

GO THROUGH THE MORTGAGE PRE-QUALIFICATION PROCESS. This will help you understand what home price range is affordable and what down payment amount you’ll likely need. An added and very important benefit to this is that you establish a relationship with an experienced lender who may have suggestions to help you reach your goal quicker.

 

REVIEW YOUR INCOME AND EXPENSES and determine how much you can afford to devote to saving and how long it might take to get to your goal. Use financial calculators to model different scenarios.

 

OPEN A FIRST TIME HOMEBUYER SAVINGS ACCOUNT (FTHSA).  It's easier to see your progress when your house savings are not co-mingled with other funds and saving in an officially designated tax-advantaged First Time Homebuyer Savings Account can grow your savings faster and smarter. Here is a list of advantages:

 

Each financial institution sets their own interest rate but State Savings Bank pays a higher interest rate on our First-time Homebuyer Savings account than our Classic or Super Savings Accounts. Click here to see our current rate and compare savings accounts. https://www.ssb.bank/personal/current-rates/

 

Money deposited into an officially designated FTHSA, can be excluded from the account holder’s Iowa adjusted gross income in amounts up to $2,000 or $4,000 a year depending on whether the account has a single owner or is owned by married taxpayers filing jointly.

 

You can be the beneficiary of multiple FTHSAs.

 

Iowa’s First Time Home Buyer Accounts created by the state legislature allow anyone, not just first time homebuyers, to open a FTHSA. Any individual, including those who already own a home, can open and make contributions into an account as long as they name an eligible first time home owner as the beneficiary of the account funds. This means that if you have a parent, grandparent, or friend who wants to help you save for your first home purchase, they can make tax-deductible contributions on your behalf. Learn all the details about our FTHSA, including a list of FAQs here.

 

Customers who open FTHSAs at State Savings Bank automatically are provided a dedicated first-time homebuyer account specialist to help navigate all steps of the process from pre-qualification through closing the mortgage. Our specialists understand that first time homebuyers often have questions and need extra information or assistance. Whether you call rarely or call a lot, we pledge our help every step of the way.

 

SET UP AN AUTOMATIC CONTRIBUTION TO YOUR FTHSA. The easiest way to save is automatically as it does not rely on you remembering to make a deposit, you just set it and forget it! Once you’ve determined how much you can afford to devote to saving, talk to your employer about splitting your paycheck direct deposit between your checking account and your FTHSA. If your employer is unable to set up a split deposit for you, we can help you set up an automatic transfer to occur as soon as the money is deposited into your checking account.

 

Investigate whether other types of high interest accounts can benefit you. For example, put your money to work in a REWARDS CHECKING ACCOUNT. Our Rewards Checking  pays higher interest if you meet a list of requirements, which in all likelihood, you are already meeting. To compare checking accounts, click here. https://www.ssb.bank/personal/checking/

 

Prepare

Preparing for your Purchase

While you’re saving for your down payment, here are some things you can do to be ready when the time comes to apply for your mortgage.

CLEAN UP CREDIT ISSUES. Negative information typically stays on your credit report for about seven years, although a bankruptcy or an unpaid tax lien can stay on the report for ten years or longer. When you review your credit report, if you spot any negative information, review it carefully for inaccuracies. Depending on the nature of the item, review the account number and balance, the account opening and/or closing date, the payment status, credit limit and any other information you can discover from the report. If any of the information is inaccurate, you can dispute it. Click here to obtain a copy of your credit report.

 

The Fair Credit Reporting Act (FCRA) requires the credit reporting company and the person or company providing information to the credit reporting company to provide accurate information and requires credit reporting companies to investigate complaints in a timely manner, usually within 30 days. The Federal Trade Commission website includes good information, including a sample letter you can use to dispute an error. Click here to see this helpful information.

 

WORK ON YOUR FICO SCORE. Your FICO score is closely related to your credit score and typically changes in small increments rather than by large jumps. But you can do small things to improve it. If you’re not satisfied with your FICO score, learn what goes into a score calculation. Click here to see tips of things you should or should not do.  You can also talk to a lender for additional ideas.

 

VERIFY WHAT YOU READ AND HEAR WITH A MORTGAGE PROFESSIONAL. It’s natural to listen to your family and friends and to read articles and blogs on mortgage and home ownership topics. We see nothing wrong with this and encourage any efforts to educate yourself. However, things may have changed since your parents obtained their mortgage and you can’t be certain your favorite blog writer is up to date with current regulations or trends in your area.  Verify what you hear and read with a lender!

 

ADDITIONAL THINGS TO CONSIDER WHEN YOU'RE CLOSE TO APPLYING FOR A MORTGAGE. As the time draws near to apply for your mortgage, there are things that can lessen or improve the chance for a smooth underwriting and loan approval process. Careful consideration of these items can minimize delays or disappointments. If circumstances are such that you can't avoid something on this list, such as purchasing a new car to have reliable transportation or accepting a better paying job, do not be distressed. Such things do not automatically disqualify you from obtaining financing, they just may require additional documentation or time to arrive at a loan decision.

 

Double-check your prequalification to verify it reflects your current financial circumstances and if necessary, get it updated. Knowing the amount of loan you can qualify for can help you narrow your home search to the appropriate price range.

 

Avoid opening new accounts or financing a major purchase such as a new car. Taking on new debt could negatively impact your ability to get loan approval or reduce the loan amount you qualify for.

 

Be careful about switching jobs. You need to be able to show you have a stable source of income and a new job may make income verification difficult.

 

Avoid making large deposits or transferring large amounts in and out of your banking, investment or retirement accounts. Asset verification can be difficult if your accounts show large deposits and you may have to provide additional documentation.

 

Do not co-sign on a loan. A co-signer makes you responsible for the loan which can adversely impact your ability to obtain a mortgage.

 

Do not run your credit cards up to their limits. Doing so will more than likely lower your credit score and create a higher monthly payment and could reduce your chances for loan approval.

 

Do not miss payments. Missing a payment will negatively impact your credit score and possibly your ability to get loan approval. Setting up automatic payments for at least your minimum monthly payment amount can help avoid missing payments.

 

Organize your financial paperwork and obtain replacement copies of items you can not find. The faster you can provide requested documentation to your lender, the quicker the process can proceed. Once you apply, you will be asked to provide the following items:

 

30 days of paystubs and the most recent year's W-2 for salaried employees. Paystubs must include the employers name and address as well as YTD earnings and they must show all deductions.

 

Previous 2 years of personal and business tax returns for commissioned and self-employed borrowers. We will also need to see all schedules including the K-1s.

 

60 days of full asset statements (Bank, Investment, Retirement) that will be used for the down payment and closing costs. We need to see all pages; summary pages are not adequate.

 

If you are using gifted funds, please let your lender know as soon as possible as additional items will be required such as a gift letter and proof of transfer.

 

Full Executed copy of the purchase agreement and any addendums that go along with it.

 

Preparing for Home Ownership

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