An Open Letter to Potential First Time Homebuyers

Working in the mortgage industry, I thought I knew what it took to get a home loan. I understood the basics, like LTV, PITIA, APR, the CFPB. However, as it turns out, I just understood alphabet soup. For those of you who don’t know these terms just yet, don’t fret, we will arm you with the knowledge you need to achieve the dream of homeownership.

First of all, how do you go from being a renter to being a homeowner? Most of my colleagues would say you start by talking with a real estate agent or talking with a loan officer as they can guide you from the onset. Yet on the other hand, I would more likely go online and visit sites such as Zillow.com, Realtor.com, Redfin.com, enter in my search parameters and find the house that best fits the description. After a speedy review of the pictures, in which more than half are easily eliminated, you’re left with a few choice properties. Now is the next step, filling out a webform that takes your information and feeds it to the hidden loan officer behind the screen.

However, this is where it gets tricky. These loan officers are well versed in the mortgage world, and will start asking you questions regarding the aforementioned alphabet soup. What’s your DTI? How’s your LTV? This is where you may have to pump the breaks, ask for explanations, and it feels like the process lurches to a slow pace. My colleagues would say, this is why you should have talked with a loan officer first.

Meeting first with a loan officer would have checked off the basics such as, making sure you have your last two tax returns in order, making sure your most recent pay stubs are easily accessible, that you have a copy of your driver’s license, W2s, 1099s, and bank statements. This collection period helps paint a better financial picture for the mortgage company.

Most first time home buyers may not know that there are down payment assistance programs at the federal, state, and local level. Some of these programs offer grant money which would not need to be paid back. Other programs offer a second mortgage at a low to no interest rate that can help with closing costs or down payment needs.

Apart from local programs, did you know that family or friends can gift you money to help with the down payment process? Different loan programs have different guidelines on how much money the potential home owners themselves will need to bring in to the transaction. There are some programs in which the entire loan cost can be covered by lender credits and gift money, so that the borrowers themselves may not pay out of pocket.

Let’s take a look at some of these programs.

CalHFA

CalHFA stands for the California Housing Finance Agency and it offers first and second mortgages which can combine to finance up to 105% of the purchase price. These programs come with income limits which mean if your household makes more than a certain amount of income annually, you would not qualify for the program. For example, the income limit for a household in Orange County is $174,200 and the limit is no longer based on family size. Those with a household income under this amount could qualify for a CalHFA Conventional loan. CalHFA offers conventional loans, FHA loans, and down payment assistant programs.

MCC

MCC is offered via CalHFA and stands for the Mortgage Credit Certificate. This is a tax credit program that can reduce a potential federal income tax liability for borrowers. In turn, this can provide borrowers with more money monthly in their pockets. By paying less taxes, borrowers are able to keep more of their paychecks.

SCHFA

This loan program offers a 4% grant to offset the costs of down payment or closing costs. A key feature of this program is that the grant money does not need to be repaid back. This is only eligible for first time homebuyers in LA and Orange Counties, except for the City of Los Angeles. In return for the grant money, the SCHFA loan has a slightly higher interest rate.

FHA

FHA loans are a popular choice to the standard conventional loan. FHA loans have a lower down payment needed to qualify, which can be as low as 3.5% down payment in some cases. When looking for properties, especially condos, some may need to be FHA certified in order to receive a mortgage for that specific property. FHA loans offer an easier entryway to homeownership with the low down payment cost. Since the down payment is under 20%, private mortgage insurance is payable the entire life of the loan, which is different than a conventional loan.

What are your next steps? Talk with a local loan officer and find out which type of programs they offer and ask if they have any down payment assistance programs. Meeting with a loan officer and understanding the loan process is a valuable step in the exciting process of homeownership.