BUYER FAQs

Information for First Time Home Buyers

 

About Programs for First Time Home Buyers

Government, at both the state and federal level, actively encourage home ownership, and therefore have established a number of programs to assist buyers to purchase their first home. These programs essentially "guarantee" the loans of first time home buyers, or in some cases provide lower cost money to lenders. This enables lenders to offer mortgage loans to first time home buyers at lower interest rates or with lower down payment requirements. Down payment requirements can be as little as 3% (1% for some programs targeted to very low income buyers), and some closing costs can also be incorporated into the loan amount. While programs differ in their specifics, they generally include:

The household income and purchase price ceilings can be fairly generous. In Sullivan County, SONYMA, the State of New York Mortgage Agency, has an income limit for 2010 for a 1 or 2 person household of $67,900 for a buyer purchasing a home in a "non-target" area, and $81,480 in a "target: area (designated by the Federal Dept. of Housing and Urban Development as economically distressed.) The income limits for a 3+ person household are $78,085 (non-target) and $95,060 (target). The purchase price maximum in Sullivan County for a single family home are $258,690 in a non-target area and $316,170 in a target area. SONYMA provides loans up to a 4 unit structure (with higher purchase price ceilings for 2, 3 amd 4 family homes.)

The U.S. government offers a one time tax credit of up to $8,000 to first time home buyers for homes with a binding purchase contract executed by April 30th, 2010 and closed by June 30th, 2010. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $8,000 for either a single taxpayer or a married couple filing jointly. There are income limits to qualify for the tax credit: $125,000 for singles and $150,000 for married couples filing jointly, with a reduced credit for buyers with incomes slightly above these amounts but below $145,000 (single) and $170,000 (married filing jointly.) One difference between qualifying for this program and a SONYMA mortgage is that the federal tax credit is available to first time buyers of a main or primary home even if you've owned a second or vacation home in the past three years. In addition, New York State offers first time buyers what is known as a "Mortgage Credit Certificate", which translates into a substantial reduction on your federal income taxes, for homes closed before June 30, 2010. Frankly, I don't understand quite how mortgage credit certificates work, so you should check out the info yourself on the SONYMA website.

FHA loans (loans made by private lenders and guaranteed by the Federal Housing Administration), alhtough not limited just to first time home buyers, are also a good option. FHA loans, like SONYMA loans, must be used for the purchase of a primary residence. The maximum mortgage amount (not purchase price) in Sullivan County for a single family home is $271,050. But unliked SONYMA, there is no income ceiling for borrowers. If you qualify, FHA loans permit lower down payments — as low as 3.5% — and closing cost assistance. (Note: Congress is considering a bill to raise the minimum down payment to 5%.)

Qualifying for a Mortgage

Your first step, before even starting to look for a home, is to talk to a few lenders. Note that SONYMA and FHA do not make loans directly to buyers, but guarantee or underwrite loans made by banks and other mortgage lenders. So you need to talk with a lender,who can discuss these programs with you, as well as other options that you may qualify for.

There are lots of mortgage websites online, where you can calculate payments, check what you can afford, and even apply for a mortgage. I'd strongly recommend, however, that first time home buyers pick up the phone or go into your local bank and talk to an experienced mortgage consultant. Also, ask your bank if they have mortgage consultants that work specifically with first time home buyers. Many do.

If you'd like to speak with someone is this area, I'd suggest:

Susan Boersema
Ulster Savings Bank
(845) 294-7922

Paola Aguilar
Walden Savings Bank
845-978-5236

Linda Fuller
Wells Fargo Home Mortgage
570-729-8330

SONYMA also has a list of particpating lenders in the mid-Hudson region on their website at http://www.nyhomes.org/index.aspx?page=278. Any lender offering SONYMA mortgages will also likely offer FHA loans.

When you talk to lenders, tell them you're a first-time home buyer and just starting out to look. You want to understand what programs are available to you and what it will take to qualify for them. Be upfront with the mortgage consultant about the amount of cash you have available for a down payment and closing costs, as well as your income. They'll make a few calculations and discuss the options with you. They may also pull a quick credit report and credit score (known in the business as your FICO score). Don't be alarmed if your credit report has some blemishes or your FICO score is low. An experienced mortgage consultant can make some suggestions to help you clean up your credit report or improve your FICO score which may help you qualify for better mortgage terms. Its not ucommon for potential home buyers with less-than-perfect credit to spend 3 or 6 months improving their credit picture. Think of it as training for a marathon. If you're not in great shape, you wouldn't go out and run a marathon without months of preparation. Getting your credit into shape could take the same amount of effort and persistence.

Getting Your Down Payment Together

In most purchases, money, is well, money. But when it comes to down payments, not all money is the same. Many home buyers are surprised to learn that lenders don't look as favorably on down payment money that's given to you (or lent to you) by your parents or other family members. They prefer down payment money you've earned and saved yourself. Your lender will most likely ask you to include your 2 or 3 most recent bank statements with your application. Why? They're looking to see if there's been any recent large deposit, e.g. money from your parents for your down payment. If you're planning to get down payment assistance from your family, mention that at the outset with your lender so they can guide you to a loan that will permit that. FHA, for example, tends to be more lenient on gifts for down payments than SONYMA.

How Much Home Can I Afford?

This is a curcial question to ask — and answer — before you start home shopping. The best place to get that answer is from your bank or one of the mortgage consultants listed above. You can get a rough idea using one of the online mortgage calucators. A good course of reliable mortgage rate information to plug into the calculators Wells Fargo Mortgage Rates. You'll find plenty of sites and web banners advertising lower rates, but they can be come-ons or loaded with extra fees or points (a percentage of the loan amount you pay upfront to bring the interest rate down.)

In general, the best rates you'll find on line are for conventional 30 year loans with a 20% down payment for borrowers with excellent credit. If you're putting down less than 20%, add .5% to .075% to the rate for PMI (private Mortgage Insurance). And if you have just "very good" rather than "excellent" credit, your rate could be ,5% to .075% higher as well. (Chase has a great calculator to test out assumptions about credit history and down payment at http://mortgage.chase.com/pages/purchase/crq_p_landing.jsp.) With higher rates, your monthly payment will be higher. So if your credit score is low, and as a result the bank wants to charge you a higher rate, that means you won't be able to borrow as much for the same monthly payment — and so won't be able to afford quite as much house.

But your credit score and history aren't the only thing that lenders are looking at. They also want to make sure that you can afford to repay the loan. That's where "ratios" come in. Lenders will calculate the ratio of your housing expenses. In the business, this is referrered to as P-I-T-I, for principal, interest, taxes and insurance. Principal and interest are what comprise your mortgage payment. On top of that you add property taxes and homeowners insurance, plus any homeowners association dues if you're in a condominium or development with fees. Lenders want to see a ratio of your housing expense to your gross income no greater than 28% to 33%. They'll also look at your total consumer debt (credit cards, car loans and student loans), and add the monthly payments for that to your housing expense to arrive at total housing and debt ratio, that they don't want to see above 35% to 38% of your gross income. These are very general guidelines, and ratios and underwriting requirements often change. But they should give you some idea of what lenders are looking for.

What About Foreclosure Properties?

Houses that have been foreclosed on by lenders and put on the market for sale can be great deals. Foreclosure houses, however, while often very well priced, generally won't qualify for these special financing programs like SONYMA and FHA. SONYMA and FHA generally only guarantee loans on properties that are in good condition with working systems (although both offer rehab loan programs for properties needing substantial repairs, see below.) The lender-owners of these foreclosed properties sell them "As Is", and in a cold climate like Sullivan County, they've had the pipes drained and the systems turned off to prevent freeze damage. They're usually unwilling to turn those systems back on for an inspection or appraisal, to determine that they are in working order. This results in a bizarre Catch-22, where SONYMA or FHA can't determine that a house is in working order because the systems aren't on, so they won't guarantee the loan. The lender-owner won't turn the systems, so the buyer can't get the loan — and the lender-owner doesn't make a sale and get the property off their books.

Both SONYMA and FHA offer rehab or renovation loan programs that don't necessarily require the house to be in good working order at the time of purchase. These loans include money to repair and renovate the house. On the face of it, these would seem a perfect match for a foreclosure property. But there's another Catch-22. Those lender-owners have very tight closing deadlines — typically 30 days between signing the contract and closing. SONYMA and FHA rehab loans involve a number of extra steps, including contractor estimates, two step appraisals (the value before and after the repairs) and additional underwriting review, which are impossible to complete within the 30 day deadline.

I'm not saying that its impossible to buy a foreclsure property using a SONYMA or FHA mortgage. But buyers planning to use one of these loan programs should probably focus on foreclosure properties in better condition, rather than those in need of substantial repair.

Veterans

Veterans have the option of obtaining a VA-guaranteed home loan. A VA loan permits a veteran to essentially purchase a home with no down payment. The VA program also permits sellers to pay buyer closing costs up to 6% of the loan, although the house has to appraise for the sales price plus the closing cost concession. To be honest, I haven't handled a VA purchase and am not as familiar with the program. If you're a veteran looking to purchase a home with a low down payment, mention your veteran status to the lender. SONYMA also offers more generous terms for its loan programs to veterans.