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Learn the Basics

Learn the Basics

What are the benefits of being a first-time homebuyer?

Buying your first home has many benefits. You’ll become part of a community, experience the security of owning the roof over your head, and have the opportunity to create a home that meets your needs and style.

Your first-time homebuyer benefits also include opportunities to:

  • Build home equity - Unlike rent, the principal portion of every mortgage payment you make has the potential to grow your home's equity like an asset.
  • Gain potential tax benefits - Your mortgage interest and real estate property taxes are usually tax deductible when you file your income tax returns. (Consult a tax advisor regarding the deductibility of interest.)
  • Build your credit - Making on-time mortgage payments can help you create and keep up a strong credit history.
  • Take control - Rent increases, cancelled leases and other unexpected tenant hassles will be things of the past.

What should I consider before buying a home?

When buying your first home, you may have questions and concerns. We understand and are here to help.

You may want to think about the following considerations before buying your first home:

  • Added financial responsibility. You will need to pay for utilities, maintenance and repairs. That’s on top of your mortgage payments, property taxes and homeowners insurance.
  • Potential risk. Real estate often increases in value over time, but not always. Your property value can also go down.
  • Tighter ties. As a renter, you can pick up and move with short notice. When you own a home, selling it before moving on is more complicated.

While owning a home has some wonderful advantages, it is one of the largest purchases most people make. Knowing what to expect as a homebuyer can help you make sound financial decisions.

What basics should I understand about home mortgage loans?

Knowing what to expect when getting a home loan can make finding and financing your first home an exciting and rewarding experience. If you obtain a mortgage to help buy your home, you will probably repay more than you borrowed. In addition to your interest rate, term and loan amount, how much you repay is determined by several factors. Here are the components you need to know:

Interest Rate
  • The interest rate is the percentage of your loan amount we charge you to borrow money to buy your home.
  • Interest rates are based on current market conditions, your credit score, down payment, and the type of mortgage you choose.
Discount Points
  • One point equals 1% of your mortgage amount.
  • If you qualify, you may be able to pay one or more points to lower your interest rate. A lower interest rate means lower monthly mortgage payments.
  • Points are usually tax deductible. (Consult a tax advisor on the deductibility of discount points.)
Origination Charge
  • The amount that includes all charges (other than discount points) that all loan originators (lenders and brokers) involved will receive for originating the loan.
  • This charge covers items including fees, document preparation, underwriting costs, and other expenses.
  • If you qualify, you may be able to finance the origination charge as part of your mortgage amount.
Loan Term
  • Your loan term is the amount of time you have to pay off your mortgage balance.
  • Shorter loan terms typically mean higher monthly mortgage payments, but often have lower interest rates. And if you pay off your mortgage balance within a shorter term, you may pay less in total interest than with a longer-term mortgage.

Remember that interest rates only tell part of the story. The total cost of a mortgage is reflected by the interest rate, discount points, and origination charges. This total cost is known as the annual percentage rate (APR), which is typically higher than the interest rate. The APR enables you to compare mortgages of the same dollar amount by considering their total annual cost.

Your monthly mortgage payment is typically made up of four parts:

What is PITI

Principal
Interest
Taxes
Insurance

PITI stands for the four parts that make up most mortgage payments

  • Principal is the amount of money you borrowed.
  • Interest is the cost of borrowing the money.
  • Taxes are the property taxes charged by your local government. Typically we collect a portion of these taxes in every mortgage payment and hold the funds in an escrow account for tax payments made on your behalf as they become due.
  • Insurance refers to homeowners or hazard insurance that provides protection against property damage due to wind, fire or other risks. Like taxes, insurance costs are typically collected and paid from an escrow account.

View your loan options

Depending upon your property location, property type and loan amount, you may incur other monthly or annual expenses such as mortgage insurance, flood insurance, and homeowners association fees.

How will you evaluate my mortgage application?

When your application is complete, we review the following four components:

Income:

  • Do you have a reliable, continuing source of income to make monthly payments?
  • Income can come from primary, second, and part-time jobs, as well as overtime, bonuses, and commissions.
  • You may use other sources of income if you want them considered for payment – including retirement or veteran’s benefits, disability payments, alimony, child support, and rental or investment income – provided they can be verified as stable, reliable, and likely to continue for at least three years.

Current debts and credit history:

  • Do you pay your bills, loans, credit cards and other debts on time?
  • We examine your payment habits before deciding to loan you money.
  • Your credit history and credit score are also examined prior todeciding to loan you money. It's a good idea to Check your credit history and correct any problems before applying.

Assets and available funds:

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  • Do you have enough funds for a down payment and closing costs?
  • You may use funds from a savings account, certificate of deposit (CD), investments, and retirement fund.
  • In some cases, you may be able to use a gift from a relative, friend, employer, or not-for profit organization.
  • In many cases you will also have to demonstrate that you have additional funds in your accounts to cover several months of mortgage, tax, and insurance payments.

The property:

  • What is the market value of the property you want to purchase?
  • We will order a property appraisal to make sure your property’s value meets our underwriting requirements.

Responsible lending guidelines

We approve applications where we believe the borrower has the ability to repay the loan or line of credit according to its terms. We use two ratio-based guidelines to evaluate your ability to repay.

Debt-to-income ratio:

  • Your expected monthly mortgage payment (principal, interest, taxes, and insurance) plus your other monthly debt obligations to your gross (pre-tax) monthly income are compared.
  • Mortgage program guidelines vary, but a good rule of thumb is to keep your total debt level at or below 36% of your gross monthly income.

Housing-expense-to-income ratio:

  • We also compare just your expected monthly mortgage payment (including taxes and insurance) to your gross monthly income.
  • Mortgage program guidelines vary, but a good rule of thumb is to keep your housing expense level at or below 28%.

How to calculate your ratios

Even if you fall within the 28%/36% rules of thumb, make certain that you feel comfortable making your monthly mortgage, insurance and tax payments and the payments on all your other monthly obligations. Homes have other costs—such as utilities, maintenance and repairs—that may not exist if you rent.

How can I get started as a first-time homebuyer?

Understanding the financial considerations that go along with purchasing a home will increase your chances for a successful start. You can also prepare by:

Creating a financial plan

  • Understand your credit needs and borrowing ability.
  • Know your credit history, assess your ability to make payments, and determine whether you can borrow using collateral such as the equity in your home.
  • Make a plan to get your credit in shape if necessary and establish a budget.
  • Check your credit history
  • Compare your income and expenses
  • Total the amount of your savings and other down payment sources

Estimating what you can spend

  • Calculate your monthly payment.
  • Use our payment calculator to estimate payments for various mortgage amounts and interest rates.
  • The total amount you need is the sum of your down payment and your closing costs.
  • If you have less than 20%, you will need private mortgage insurance (PMI) which protects the lender if a borrower stops paying the mortgage.
  • Closing costs and prepaid expenses are also a necessary part of getting a mortgage.

What are Closing Costs?

Closing costs include the origination charge, discount points, out-of-pocket expenses, and prepaid items.

  • Origination charge - the amount that includes all charges (other than discount points) that all loan originators (lenders and brokers) involved will receive for originating the loan. This charge covers items including fees, document preparation, underwriting costs, and other expenses. If you qualify, you may be able to finance the origination charge as part of your mortgage amount.
  • Discount Points – which are calculated as a percent of your loan amount – are an option if you want to pay to reduce your interest rate. Discount points are charges paid to the lender voluntarily, usually at closing by the borrower or the seller. One point is equal to 1 percent of the loan amount.
  • Out-of-pocket expenses cover third-party services, such as fees for appraisals, attorneys, credit reports, deed recording, and tax services.
  • Prepaid items include homeowners insurance, private mortgage insurance, and deposits for establishing an escrow account.
  • Depending on the closing date, you may prepay some interest and pay property taxes at closing.
  • An escrow account is established by the lender to help you to save toward your property tax and homeowners insurance instead of paying the entire amount at once.

How do I estimate what I might be able to borrow?

We offer different ways to find out how much you may be able to borrow. When you know how much you expect to borrow, you will have a price range before you begin looking for a home.

  • A prequalification lets you estimate how much you can borrow to buy a home, does not require a credit check, and is not a commitment to lend.
  • A preapproval is based on our preliminary review of credit information only and is not a commitment to lend. We will be able to offer a loan commitment upon verification of application information, satisfying all underwriting requirements and conditions, and providing an acceptable property, appraisal, and title report. Not available on nonconforming products or for certain FHA transactions.

Buying your first house?

Know how much you may be able to borrow.

What is the difference between a prequalification and a preapproval?

  Prequalification Preapproval
Cost No fee or obligation to you Inquiry to a credit bureau with a fee
Results A ballpark loan estimate A preliminary credit review
Credit check No credit check Does include a credit check

Preapproval is not a commitment to lend. A commitment is contingent on verifying application information, satisfying all underwriting requirements and conditions, and an acceptable property appraisal and title.

Verification of this information, satisfying underwriting conditions, plus a satisfactory title search and appraisal are required for final loan approval.

Remember: Neither a preapproval nor a prequalification obligates you to borrow from us.

How can I benefit from a preapproval?

  • You can identify and address possible qualification problems early in the homebuying process.
  • Obtaining a preapproval tells real estate agents and home sellers that you have been preapproved for a specific mortgage amount. Real estate agents and sellers increasingly rely on preapproval to identify serious offers. A preapproval is based on our preliminary review of credit information only and is not a commitment to lend. We will be able to offer a loan commitment upon verification of application information, satisfying all underwriting requirements and conditions, and providing an acceptable property, appraisal, and title report. Not available on nonconforming products or for certain FHA transactions.
  • Provides an advantage over buyers who are not preapproved.
  • Adds to your negotiating strength when you are ready to make an offer on a home.
  • Lets you shop confidently because you know how much you may be able to borrow.
  • May allow for a faster closing, since much of the loan work is already completed.

First-time homebuyers can benefit in the following ways:

  • Without a record of previous mortgage payments, it can help you feel much more confident pursuing your first home purchase.
  • It shows the seller that a lender has already run the numbers and is willing to proceed with the mortgage.

How does the process work?

  • If you’re still in the early stages of house-hunting and want to know roughly about how much home you can buy, request a free consultation.
  • If you’re ready to move forward, line up your financing ahead of time with a preapproval, which requires a credit check and a completed mortgage application. A preapproval is based on our preliminary review of credit information only and is not a commitment to lend. We will be able to offer a loan commitment upon verification of application information, satisfying all underwriting requirements and conditions, and providing an acceptable property, appraisal, and title report. Not available on nonconforming products or for certain FHA transactions.
  • Work with us online, over the phone, or in person with a local consultant.

Have questions or need help? Our home mortgage consultants are available to help you throughout the home financing process.