If you’ve been wondering how to finance your first home, you’ve come to the right place! We will unpack all the ways to pay for your new home, from loan types to credit scores.
Financing 101
Find a local lender who is a perfect fit for you.
Why a local lender?
Because they understand our taxes and insurance like no one else, they also have information about down payment assistance programs available through the state and certain parishes. Would you hire a real estate agent in Minnesota to help you buy a house in New Orleans? Nope! So, why would you employ a lender nowhere close to home?
This lender will take your social security number and other personal info – don’t be scared! All of this info is needed to determine what price range you qualify for.
One of the most critical questions a lender should ask is, “How much do you want to spend per month?” Your monthly payment is essential, and we need to stay within budget! What you qualify for and want to spend can vastly differ!
Here is a short list of some of the documents/info your mortgage lender will need:
- 2 most recent year tax returns
- 2 most recent years W-2, 1099, or pay stubs that cover the last 30 days
- Credit history (they will pull your credit info)
- Photo ID
- Bank statements & other asset documentation
- Divorce decree/judgment/child support documents
- IRS Payment plans
Loan Types
Loan #1: FHA Loan
FHA stands for Federal Housing Administration. This is a federally backed loan, meaning the house meets a certain standard to be approved for an FHA loan. If you plan on using an FHA loan, you cannot purchase a home that doesn’t meet their guidelines.
Why would you want to use an FHA loan?
This loan type is more lenient on credit scores and typically requires a lower down payment. It allows a more significant seller credit. (think closing cost assistance) It was created to help low-to-moderate-income borrowers accomplish home buying.
What are the FHA loan requirements?
The minimum credit score for an FHA loan is 580; however, many people do not qualify for this score. A score of 620 is more likely to get you fully approved. A credit score of 580 means your interest rate will be much higher, and additional compensating factors will be required. Improving your credit score to 640 or 660 will lower interest rates.
FHA debt ratios vary based on multiple factors. But, the max total debt ratio is 56.9%. This is where you need to speak with your mortgage lender about your credit report!
What’s the down payment amount for an FHA loan?
You will need a minimum of 3.5% of the purchase price as a down payment. For example, if the house is $200k, you will need to put down $7000.
Lagniappe FHA Info:
- Your downpayment can come from grant or bond assistance or a family member! Check with your lender to see if you qualify for any programs the state of Louisiana or parishes offer.
- If your parents want to gift you the downpayment money, that’s perfectly fine, too.
- If you use an FHA loan, you will have to pay upfront mortgage insurance added to the loan amount and monthly mortgage insurance. Your local lender should factor that in when creating your home-buying budget.
- You can ask for up to 6% of the seller’s purchase price in closing costs assistance when using this loan type. Your lender and real estate agent should help you determine how much you need to ask for. You don’t get to keep any extra money that isn’t used.
- If you have previously filed for bankruptcy, you must be two years removed from it before acquiring an FHA loan. If you have a previous foreclosure, that must be a minimum of three years before your new purchase.
- An FHA loan cannot be used for a second home or an investment property.
- Mortgage insurance does not go away unless you refinance later to a conventional mortgage. Or you can put down 10%, and it’s only required for 11 years.
Loan #2: Conventional Loan
This is a loan that the government does NOT insure. A conventional loan is available through private lenders – like a bank, credit union, mortgage lender, etc.
Conventional loans can also be acquired through two government-sponsored programs – Fannie Mae & Freddie Mac.
What are the conventional loan requirements?
To qualify for a conventional loan, you must have a minimum credit score of 620. Interest rates are lowered when your credit changes to 640, 660, 680, 700, 720, and 740. It is also based on the loan amount, down payment percentage, property type, and property use.
What is the minimum down payment for a conventional loan?
This amount can vary from 3% (for qualifying incomes!) to 5% as a minimum on a single-family residence.
A common misconception is that you must have 20% of the purchase price to put down – and this isn’t true.
Lagniappe Conventional Loan Info:
- If you put down less than 20%, you will have monthly mortgage insurance to pay. However, when you reach 20% home equity, mortgage insurance can be removed. You must own the home for 24 months before being able to remove mortgage insurance as well.
- Many use conventional loans when buying investment property, houses over $500k, and second homes.
- While you can ask for closing cost assistance when using a conventional mortgage, the amount you can ask for varies based on how much you’re financing.
- Down payment minimums change if the property is a 2-unit, 3-unit, 4-unit, and/or second home or investment property.
Loan #3: RD Loan
The RD loan is also known as a USDA loan. RD stands for “rural development.” This loan can provide a potential buyer with 100% financing. When using an RD loan, remember that the house must meet specific standards. You will not be able to purchase a “fixer-upper” or something in need of significant repairs.
What are the RD loan requirements?
Qualifying credit scores must be a minimum of 600. Your mortgage payment cannot exceed 29% of your monthly gross income. Your total debt cannot exceed 41% of your gross monthly income. (Double-check with your local lender that this hasn’t changed!)
Your interest rate can be lowered once your credit score exceeds 640, 660, and 720.
What is the minimum down payment for an RD loan?
ZERO DOLLARS. ZEEEEERO.
However, you still need money to pay for your deposit, inspections, appraisal, and closing costs.
Lagniappe RD loan info:
- An RD loan can only be used on the Westbank of Jefferson Parish, Plaquemines Parish, the Northshore, and other neighboring parishes. Orleans parish does not qualify, and neither does the Eastbank of Jefferson Parish.
- This loan cannot be used for an investment property or a second home.
- There are income limits to using an RD loan.
Loan #4: VA Loan
Established by the United States Department of Veteran Affairs, VA loans help veterans, current service members, and qualifying family members become homeowners. The VA sets the standards for this loan as well.
What are the VA loan requirements?
The VA does not have a minimum credit score, but the VA does not make the loan. It will vary depending on the mortgage lender. Most require a 620 credit score. We have a common misconception that Navy Federal and USAA offer better rates and/or are the only companies offering a VA loan. NOT TRUE! Check with your local lender – many have better rates or can at least match what is offered.
What is the minimum down payment for a VA loan?
Nothing, in many cases. Using a VA loan means you can finance 100% of the purchase price. Many local lenders waive fees for military members as well.
Lagniappe VA Loan Info:
- You do not have to be a first-time homebuyer and can reuse the benefits.
- There is no private mortgage insurance, but VA charges a funding fee added to the loan amount. Some potential home buyers are exempt.
- To prevent defaulting on the loan, the VA offers assistance with making payments if you ever find yourself in trouble.
Is that everything on how to finance your first home?
Are there other loan types than just the ones listed above? Sure! These are just some of the options for financing your first home.
Schedule a chat with us today to discuss your home purchase.
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