First-time home buyers have a lot to be excited about, but they often have a lot of questions. Which loan product should you choose? How much money do you need to put down? What size mortgage payment can you afford?
You’ll need the answers to these questions and much more. In this guide, we discuss everything first-time home buyers in Lake Charles, LA need to be successful.
The Loan Programs
First, let’s explore the available loan programs. We work with lenders that offer each of the following programs. This allows us to give our buyers options.
Conventional Loans
Fannie Mae and Freddie Mac loans are the most recognizable conventional loans. Buyers with good credit and a decent down payment benefit from these programs.
Conventional loans have the reputation of requiring a 20% down payment, but you can get around it. Any down payment less than 20% requires Private Mortgage Insurance. PMI protects the lender should you stop making your mortgage payments.
If you pay PMI, you’ll pay it until you owe less than 80% of the home’s value. We can help you determine when this would happen.
FHA Loans
FHA loans are the most popular government loan program. It’s a great option for first-time homebuyers and buyers with less than optimal credit. FHA loans have lower credit score and down payment requirements.
All FHA borrowers, regardless of the amount of the down payment, pay a mortgage insurance premium. FHA borrowers pay upfront mortgage insurance and annual mortgage insurance.
Today, borrowers pay 1.75% of the loan amount in upfront premium (at the closing). They also pay 0.85% of the loan amount every year, on a monthly basis.
VA Loans
Veterans of the military or active members with at least 181 days of service may be eligible for a VA home loan. This 100% financing program has flexible underwriting guidelines. It also doesn’t require mortgage insurance. VA loans typically have lower than average interest rates, making it a great benefit for veterans.
USDA Loans
If the rural areas of Louisiana call your name, you may be eligible for USDA financing. In order to be eligible, your total household income must be less than 115% of the average income for the area. You don’t need a down payment, but you’ll pay mortgage insurance for the life of the loan.
The USDA charges a 1% upfront mortgage insurance fee and 0.35% of the loan amount annually. Just like FHA loans, though, borrowers pay the mortgage insurance monthly.
Steps for First-Time Homebuyers
Now that you know the loan programs available, it’s time to learn the steps necessary to secure financing as a first-time homebuyer.
Have Money for a Down Payment
Before you choose a loan program, you need a down payment. We can’t stress this enough, start saving early. Fortunately, you don’t need 20% down for most loan programs today, but you need something. Each loan program has a different requirement:
- Conventional loans – 5% down
- FHA loans – 3.5% down
- VA loans – 0% down
- USDA loans – 0% down
Veterans and those buying a home in a rural area may get away with no down payment using the VA and USDA loan programs. All other buyers need some money down.
Even if you don’t need a down payment, it does lower your mortgage payment. If you have the means to save money, do it. Aim for a 20% down payment, but anything between 3.5% and 20% will suffice.
Have Money for Closing Costs
Many first-time home buyers don’t realize the amount of closing costs involved in financing a home. Lenders, appraisers, title companies, and attorneys all charge fees. On average, buyers pay 2% – 5% of the loan amount in closing costs.
What if you don’t have money for closing costs? You may be able to negotiate with the seller. Most loan programs allow sellers to pay some or all of your closing costs. Each program has its own maximum allowance.
In exchange for the seller credit, the seller will increase the home’s selling price. In other words, you take a higher mortgage amount and have a higher mortgage payment as a result.
Check Your Credit
Lenders look at your credit before moving forward with your loan application. Before lenders pull your credit, you should look first.
You get free access to your credit report here. Pull one or all three reports – you can do this once a year for each report. Look closely at your trade lines and ask yourself:
- Are your accounts up-to-date?
- Are your outstanding credit card balances less than 30% of the total credit line?
- Is everything accurate, including your payment information?
- Do all accounts belong to you?
If you notice any errors on your credit report, write a letter to the credit bureau. Include all details of the incorrect information along with proof of your claim. The credit bureau has 30 days to respond to your request. Take this time to contact the creditor reporting the information too.
If you want access to your credit score, check with your bank or credit card company. Many offer free credit score services. The number may not be exactly what lenders will see, but you’ll have a good estimate.
Each loan program has different credit score requirements as follows:
- Conventional loans – Minimum 680 credit score
- FHA loans – Minimum 580 credit score
- USDA loans – minimum 640 credit score
This gives you a good idea of where you stand.
Get Pre-Approved for a Home Loan in Louisiana
Don’t waste time looking at homes until you know you can afford. Even if you have the highest credit score and a huge down payment, you still must qualify or a mortgage.
Getting pre-approved for a loan before you look at homes saves you time and hassle. Lenders look at the following before pre-approving you for a loan:
- Credit scores
- Income documents
- Asset documents
- Total debts
Your debt-to-income ratio plays a large role. This is the comparison of your gross monthly income to your outstanding monthly debts. Each loan program has specific housing ratios (mortgage payment vs income) and total debt ratio requirements:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 41% total debt ratio
- VA loans – 41% total debt ratio
- USDA loans – 29% housing ratio and 41% total debt ratio
Once you have a pre-approval letter, you know how much you can afford. Now you can look at homes in the right price range.
Hire a Realtor in Louisiana
Looking at homes is exhausting and overwhelming. Many homes in the area are listed by realtor too. If you have your own realtor, you’ll get your foot in more doors and see more homes. You’ll also have an advocate by your side as you negotiate sales prices and contingencies when you find the right home.
Let your realtor guide you to the right areas of Louisiana. Ask questions about the schools, neighborhoods, communities, crime rates, and location to amenities. Of course, do your own research too. Visit the area during different times of the day and different days of the week. Check out the noise level, crowds, and traffic.
Remember, when you buy a home, you buy more than a home; you buy into a neighborhood too. You want it to be somewhere that you and your family feel safe and welcome.
Place a Bid on the Home
Once you find the right home and have your financing in place, place a bid on the home. Again, using a realtor can simplify the process. If you don’t have a realtor, hire a real estate attorney to read the contract and make sure it’s fair for all parties involved.
Finish the Underwriting Process
Once you sign a sales contract, the lender can finish the underwriting process. Often times the only conditions on the pre-approval pertain to the home. The lender needs to know the home’s value, condition, and if there are any liens on the property.
After ordering the appraisal and title search, you are just about ready to close on your home loan.
The Final Steps
As you go through the process of buying your first home, it’s important to keep your financial life as stable as possible.
Once you approve us to pull your credit, try avoiding making large purchases, opening new credit, or paying your bills late. Lenders will run a credit check one more time right before you close on your home. They will also verify your employment one more time. If anything changes between the pre-approval and loan closing, it could delay the closing process.
Bottom Line
There are many resources for first-time home buyers today. Preparing yourself as much as possible for the mortgage before you apply will increase your chances of favorable terms and interest rates. As a mortgage broker in Lake Charles, LA, we have access to many lenders that help first time buyers just like you. Let us help you find the perfect way to finance your first home in LA.
