Home Residential Tools & Tips First Time Buyers

Purchasing a home can be a confusing process, especially for a first-time buyer. Here's more background on some of the terms you'll encounter during the home buying process. If you have questions, your Gershman Mortgage loan officer would be happy to help.

Government Programs
Government programs offer borrowers low down payment loans. FHA loans, insured by the Federal Housing Administration, are popular among first-time buyers but anyone can apply for a FHA loan. VA loans, guaranteed by the Veterans Administration, are available to qualified veterans. Both programs offer low and no down payment options.

First-time buyers in Missouri may also be eligible for Missouri Housing Development Commission's (MHDC) Mortgage Revenue Bond Program. The program offers first-time buyers below-market interest rates and cash assistance for down payments and closing costs. The program can be used for initial purchases with FHA, VA, or conventional loans. For more information, talk with a Gershman Mortgage loan officer or visit the MHDC website.

Credit Reports
Your credit report includes information on the types of credit you've maintained as well as information on late payments, collections, judgments, bankruptcies, and outstanding debts. Before you apply for a mortgage, request a copy of your credit report from each of the three main credit bureaus (TransUnion, Equifax, and Experian) and check to make sure all of the information is accurate. A higher credit rating is better, but don't worry if your report isn't flawless. It's not the only factor in underwriting.

Underwriting
Underwriting is the process of evaluating a potential borrower, assessing their risk, and determining the amount and rate of the loan. The process looks at the borrower's ability to pay, their likelihood to pay, and the value of the property. Underwriting takes into account both the credit report and other factors such as equity, loan-to-value ratio, debt-to-income ratio, the property itself, and the loan's purpose, type and term.

Points
Points, often called discount points, are premiums paid to reduce the interest rate. Each point is equivalent to 1% of the loan amount. Paying points results in a lower interest rate and lower monthly payments. To figure out which is best for you, consider how long you'll own the house. The longer you plan on staying in the house, the greater the benefit of paying points.

Mortgage Insurance (PMI)
Mortgage insurance allows homebuyers to purchase a home with less than 20% down and protects the lender in case the borrower defaults on the loan. Payments, typically $60/month on a $100,000 loan, are usually cancelled when the loan-to-value ratio drops below 80%.

Closing Costs
Closing costs include points as well as out-of-pocket and prepaid expenses associated with the financing process. Out-of-pocket expenses include fees for appraisals, title insurance, credit reports, deed recording, and tax services. Prepaid expenses include homeowner's insurance, mortgage insurance, and costs to set up escrow accounts.