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Understanding Mortgages for the First Time ATX Home Buyer

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Currently, my boyfriend and I are keeping our eyes and ears on the Austin real estate market. We are ready to purchase, but are also first time home buyers. 

We have read those horror story headlines…”Young couple buys home with unescapable mold infestation”… “Newlyweds move into their new home and discover the real reason it was on the market”…”Couple discovers their dream home is haunted”

We don’t want to find ourselves in that kind of predicament; To buy a house with a mountain of BIG problems (or a ghostly one!)

We want a place that could use a bit of tender love and care and is reasonably priced, then turn it into our home. 

So I’ve challenged myself to write a blog documenting my research into the real estate market and home improvement industry, to both track my efforts and share the knowledge I build.

Before we can even begin looking at homes and talking to realtors, we need to understand our budget though, right? 

I answered the first question – How do we get financing for our first home purchase? You can check it out here:

The next step is understanding the different mortgages and lenders to get pre-approved for a loan. So let’s answer focus there for now.

Understanding the Different Mortgages and Lenders to Get Pre-Approved for a Loan

Maybe I am like most people, or maybe not, but the mortgage side of real estate scares me a bit. 

It’s probably due to my lack of knowledge in the area, but I’m hoping we can spend some time bridging the gaps and create an easy guide on how to get pre-approved for the right mortgage!

Let’s start by understanding what types of mortgage loans are available.

Mortgage Loan Types

I’ve heard from a few different sources that typically a first-time home buyer can get the biggest bang for their buck using conventional mortgages or FHA mortgages.

But are they the best for us? Let’s dive in and find out.

Conventional Mortgage Loans

A conventional loan is backed by private lenders without any insurance or guarantee by the government and insurance is usually paid by us, the borrower.

Mortgage loan officer and Austin native, Tiffany Huntrup, suggests that conventional loans are the move if you have at least a 20% down payment available. Although, you can go as low as allowing 3% down.

Given our lender would be at risk if we default on this type of loan, they can try to recoup the remaining balance by selling our house or even foreclosing it.

Um, no thank you.

Another way the lender tries to shed the risk is by requiring us to pay private mortgage insurance (PMI). This will be an added monthly cost only if the down payment is less than 20% of the loan. The PMI costs .5–1.5% of our loan amount per year—for the life of the loan.

With this in mind, It appears the majority of mortgages in the U.S. are still conventional loans.

So why do most people choose conventional loans?

They offer more flexibility than their counterparts. They could offer us low interest rates, quick processing time, low down payment options, and various terms lengths. We can even reduce the PMI entirely with a large enough down payment.

Although, that does give us a few more decisions to make.

How much do we really want or need to put down?
How long should we agree to make payments?

Thankfully, I stumbled on some good tips for us from the personal finance pro, Dave Ramsey!

“Tip #1: Commit to putting at least 10% down. A down payment of 20% is even better because you can avoid PMI! A hefty down payment reduces your monthly payment and ensures you start off with equity in your home.”

“Tip #2: Stick with a 15-year fixed-rate mortgage. Why a 15-year term? With a 15-year mortgage, your monthly payments will be a little higher, but you’ll save hundreds of thousands of dollars in interest compared to a 30-year mortgage. And choosing a fixed rate means you don’t ever have to worry about your interest rate changing. It’s fixed for the life of the loan.”

“Tip #3: Make sure your mortgage payment is no more than 25% of your monthly take-home pay. This is the last step and our final piece of advice. When you have a house you can afford, you’ve got flexibility to save for other important financial goals like retirement and your kids’ college.”

I would say so far, Conventional Loans do seem like a good option. But let’s keep researching.

FHA Mortgage Loans

The Federal Housing Administration (FHA) created FHA loans as a way to decrease the risk for mortgage lenders to first time home buyers. With an FHA loan, the government will insure them if we stop making payments. 

With a safety net like that, FHA loans have less strict credit score requirements, lower closing costs, and offer low down payment -as little as 3.5%.

However, just because the government is protecting the lender doesn’t mean they don’t want some protection for themselves. With an FHA loan we will also have to pay a Mortgage Insurance Premium (MIP) both up front and as a part of our monthly mortgage payment. 

A MIP is how the FHA will pay lenders if we stop paying them. This is also how the FHA loan program gets funded.

MIP includes an upfront payment at closing that’s 1.75% of our loan amount and a recurring payment that costs .45–1.05% of our loan amount per year—for the life of the loan.

And if we do stop paying them, the same domino pieces would come falling down. Foreclosure.  

Bye, bye beautiful new home.

Taking a look at the specifics, FHA seems nice on the front end with limited expenses, but pretty hefty on the back end with the Mortgage Insurance Premium. 

We’ll need to really crunch some numbers before we could commit one way or the other. 

USDA Mortgage Loans

This is the jazzy no-down-payment mortgage I referred to in my financing article. A USDA loan is a government-backed loan that helps people in rural and suburban areas purchase homes.

To qualify for this 0% down loan, our future home must be in an acceptable rural area and we must meet income eligibility rules.

Honestly, it seems like a great option if we ever decide to take the dive and move to Wimberley, Texas!
But for now, we want to stay close to the Austin hustle and bustle.

VA Mortgage Loans

I probably wouldn’t be writing this article right now if I qualified for the VA loan. VA mortgage loans are only for veterans, active-duty members of the military and qualifying surviving spouses.

This loan also allows us to skip on the down payment. Probably because VA loans are insured by the Department of Veterans Affairs.

Since we’re not serving our country, we’ll be forced to pass on this one.

However, if you meet their requirements I suggest you seriously consider using their loan for your mortgage.

Final Verdict

Well, it looks like we have two real options: Conventional Loan or FHA Loan.

Personally, we have the credit score and time to save for a downpayment. I’m going to aim for the conventional loan when talking to the mortgage lender and hope I can be seen as a safe bet.

Getting Pre-Approved By A Mortgage Lender

Now the time has arrived…
We’ve done our research…
We know what we want…
The only thing left is to let the lenders decide!

The process should be relatively harmless when speaking to the lender. While we apply, we will need to answer some questions about our income, assets, and ideal home. We will also be subject to a credit check.

You know, to establish risk and what not.

Our lender will then give us a pre-approval letter that states how much we’re approved for based on all of the information presented.

And once we have that golden ticket, we can show our pre-approval letter to our real estate agent so they can help us find a home within our budget.

Well then, let’s get to picking a real estate agent!

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