First Time Home Buyer’s Guide – Recommended Tips Before Applying A Loan: Part 3

For the third and final part of this blog, we’ll be discussing some more documents as well as giving additional tips that may help the first time home buyer speed up the mortgage-lending process. In the last blog update, we talked a bit about some additional income documentation that will be needed if the first time home buyer has pay stubs and W-2 forms, as well as sources from third parties like Social Security Administration income, or Pensions. We also spoke about the opposite, when there are garnishments or liens against the borrower. This section will be about other items that will be needed to be resolved, or documented prior to closing.

 

A Driver’s License and Social Security Card is needed for each borrower.

Identification Documents: What’s Needed?

The first time buyer can be required to send in quite a few documents for submission.  These documents include a copy of the first time home buyer’s Driver’s License, Social Security Card, verification of rent, verification of employment, and Consumer Explanation Letters. 

For the identification items, a clear copy of the first time home buyer’s Driver’s License and Social Security Card will be needed. Keep in mind that a copy of each identification card will be needed for all borrowers on the loan. The underwriter mainly checks the Driver’s License of the first time home buyer to make sure it’s not expired, but also confirms the name, as well as address listed on the Driver’s License. If the first time home buyer has a different last name than what was put on the loan application, this may prompt the underwriter to ask for confirmation. This confirmation can be a letter of explanation from the first time home buyer, and a copy of the divorce decree, birth certificate, or other proof of name change documentation. These will need to be submitted with the file so the underwriter can confirm that the identification used and the first time home buyer on the loan application are one and the same. Consequently, if the first time home buyer’s driver’s license has a different address than what is listed as their current on the loan application, a letter of explanation will need to be sent to the underwriter as just explaining why there is a difference.

Payment shock is when the potential first time home buyer goes from living rent free to having a mortgage.

More Documents: Verification Needed

The first time home buyer will need to provide verification of rent and verification of employment. For verification of rent, this is usually for first time home buyer’s who are currently renting from a landlord, either private or through a leasing company. This verification of rent is to confirm that the first time home buyer does not have any late payments in paying rent. If there are difficulties with getting the verification of rent front the landlord, the borrower can provide a copy of the leasing agreement and copies of the last 12 months of rent checks. If the first time home buyer is not currently paying rent, the underwriter will be looking for something called a Rent Free Letter. This letter basically indicates that the first time home buyer is currently living rent free. The underwriter may need to request an additional letter that indicates that the borrower will be fine with “payment shock,” or the introduction of a mortgage into the monthly budget.

 

For the next section we will be talking about a few more documents, closing out the series. 

 

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First Time Home Buyer’s Guide – Recommended Tips Before Applying A Loan: Part 2

For this second part of the blog, we will be talking about very commonly requested documents that can be gotten ahead of time. We’re hoping this blog post will speed up the process of the loan as well as to prepare first time home buyers for additional items that may be requested upon review of other documents. Some of these additional items the first time home buyer will need to request either from their employer or from other third parties.

Pay stubs are one of the few items that the underwriter may require to close a loan

Additional Income Documentation

As mentioned before, the first time home buyer may be required to attain some additional information from third parties. These can be pay stubs, W-2 forms, 1099 forms, award letters, and award continuance letters. As mentioned before, pay stubs are needed to source any large deposits on bank statements. However, the lender will still need the first time home buyer to send in the most recent thirty days of pay stubs. The underwriter will also be looking for additional information on those pay stubs. If there are any garnishments, for example, this will trigger the lender to ask for supporting documentation.

For example, if the garnishments mention tax or IRS, the lender will need the IRS documentation that illustrates the details of the tax lien in question. This letter will include how much is owed, the total balance, and how much each payment will be. Another garnishment example is child support. This takes a step into more legal documentation. The underwriter needs to know exactly where the first time home buyer’s income is coming from, and also exactly how much of that income needs to go to another third party. The underwriter will also need to know for how long this percentage of the first time home buyer’s income is garnished for as well, and will adjust the debt-to-income ratio accordingly. 

The underwriter will also need third party documents such as Social Security Administration Award letters, Social Security Disability Award letters, and Pension Letters to show that there is an income from a third party. These letters must be accompanied by, OR include the continuance of those benefits. The usual length of continuance that the underwriter is looking for is three years. The Social Security Administration award letters usually indicate that these benefits will continue for a lifetime

Garnishments on pay stubs will need to be sourced and explained.

Additional Legal Documentation That May Be Needed

There are several court-ordered documents that will need to be submitted with the first time home buyer’s file, if applicable. These documents are needed to properly source  any court-ordered agreements, child support and other possible sources of income or garnishment. For example, if a first time home buyer is receiving child support, the underwriter will need the following documentation: The full court-ordered Child Support Order, evidence of 12 months of child support payments, and proof that the child support will continue. The Child Support Order can be received from the attorney that helped with the filing. The attorney will also be in possession of the first time home buyer’s full divorce decree and separation agreement, if those items are also applicable.

 

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First Time Home Buyer’s Guide – Recommended Tips Before Applying A Loan: Part 1

For this blog update, we will be giving a few tips that will help prepare a first time home buyer for the mortgage lending process. These tips are to help a first time buyer prepare for a very smooth process, with as few delays and obstacles as possible. 

The first time home buyer should make sure that they take care of all adverse credit items they can before engaging in the loan process.

Taking Care of Your Credit

One of the most important things the first time home buyer can take care of is their credit. Having a credit score of 640 and higher is very important, but making sure the first time home buyer’s credit is as clean as possible is also important. The lender will be taking into account any late payments, collections, and other forms of adverse credit that will show up on the first time home buyer’s credit report. If the first time home buyer has a majority of on-time payments, the creditor, upon request, may delete a late payment. This isn’t guaranteed but sometimes they may honor the request depending on credit-worthiness and history with that borrower. Any forms of adverse credit that is found on the first time home buyer’s credit report will need to be explained in detail. A qualified letter will need to cover the following aspects: What happened, how it was out of the first time home buyer’s control, and what steps they’ve taken to prevent future occurrences. As with all letters of explanation, this will need to be signed in pen and dated.

 

All large deposits in bank statements will need to be sourced if they are not payroll.

Getting Asset Documentation Together: Bank Statements and Paychecks

One of the possible slow-downs for the first time home buyer’s loan process can be documenting assets and funds for closing. The lender will require the most recent two months of bank statements for submission. Depending on loan program, the first time home buyer may need to provide all of the bank statements of the household, or just the bank statements needed to show the funds required for closing. One of the easiest things the first time home buyer can do is switch over from receiving paychecks to direct deposit, as these deposits will not need to be sourced. Remember, depending on the loan program, large deposits that are not payroll will need to be sourced to ensure there isn’t another income-source for the first time home buyer, or that this money is not from money-laundering. If the first time home buyer decides to stay with pay checks, an easy way to source the large deposits on the bank statements would be to collect them and send them with the bank statements, along with a letter of explanation that explains to the underwriter the source of these deposits. This letter of explanation should have any discrepancies in the pay checks written out and include the check dates responsible for each deposit for clarity. For example, if the first time buyer deposits a check for $731.31, the deposit into the bank account shows as $700.31, the first time home buyer will need to address why there is a difference. 

 

For the next part of this blog, we will be discussing about other asset documentation such as 401k documentation and what is needed for submission for those items.

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First Time Home Buyer’s Guide: What is Escrow?

For this blog update, we will be discussing the mortgage term “escrow,” and what it means for the first time home buyer’s mortgage lending process. Escrow in the mortgage lending process is essentially an account that is created during the lending process that holds items such as the Earnest Money Deposit and Due Diligence checks. This account is created by a third party, such as an agent, attorney, closing escrow officer, or title company escrow officer, to hold documents such as Earnest Money Deposit and Due Diligence checks and other contract items until closing. The escrow officer makes sure that the Earnest Money Deposit and Due Diligence checks as well as other documents exchange hands in a smoothly and timely manner at the closing table. 

What is eligible to go into an Escrow Account?

An escrow account will usually contain items that depend on the Purchase Contract. For example, a Due Diligence check isn’t required for every loan, but if it’s on the Purchase Contract it will be placed into the Escrow Account. Another item that may not be on every Purchase Contract is a home inspection. The cost for a home inspection, required home repairs, termite inspection, or water tests may also be added to the Escrow account, depending on how the Purchase Contract is executed. When these are completed, the Escrow officer keeps these items in the escrow account as the loan progresses. 

Escrow and Tax Prorations

Another purpose for an escrow account that lenders will also take advantage of is paying off the tax prorations owned on the property at closing, as well as paying for the first year of homeowner’s insurance for the first time home buyer. Property Tax Proration is essentially the splitting or allocating of property taxes for closing costs. The tax proration costs can go to the seller, the first time home buyer, or both seller and buyer, with the costs split. This allocation is based on how far into the year the sale is happening compared to the the tax due dates and the tax amounts. Whether the taxes are due or have been paid for the current year also determine the allocation of the tax prorations. The tax prorations for the first time home buyer will be reflected on the final closing disclosure form drawn up at closing. 

Escrow Accounts and Homeowner’s Insurance

As mentioned before, the homeowner’s insurance in most cases will be paid by the lender. The lender will use the escrow account to cover the first annual payment for Homeowner’s Insurance to insure that the home is insured. The first time home borrower is not at all required to keep home owner’s insurance on homes, however it is highly recommended as repairs for a home can quickly add up in cost. These costs can skyrocket, especially during times of natural disasters such as flood, hurricanes, tornadoes, and earthquakes. The first time home buyer should keep in mind that flood insurance, if it is required by the lender before closing, is paid out of pocket by the first time home buyer, not out of the escrow account. The underwriter, before a loan is issued a clear to close, must have an active flood insurance policy with a paid invoice to prove it.

 

 

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First Time Home Buyer Guide: An Introduction to Homeowner’s Insurance: FHA and Conventional Loans

This latest blog update will be about the Homeowner’s Insurance policies for the remaining loan programs. USDA Loan Programs will not be covered in this blog update, as it is the only one with specific requirements. Homeowner’s Insurance requirements for the FHA and Conventional Loan programs and additional policies like Flood Insurance that may be required by the lender for the loan. For every loan program, a Homeowner’s Insurance policy may be mandatory for closing, especially if a home is being financed through a mortgage. However, a Homeowner’s Insurance policy does not always need to be active and is up to the sole discretion of the first time home owner after the first year of ownership. While this is not generally recommended, in case something happens that would otherwise be an extremely costly repair, it is not a law to have Homeowner’s Insurance.

FHA and Conventional Loans have one less requirement for Homeowner’s insurance than USDA Loans.

Homeowner’s Insurance Requirements for the FHA and Conventional Loan Program

The Homeowner’s Insurance requirements for the FHA and Conventional Loan programs indicate that in order for the loan to be able to closed, the policy must have the following items:

  1. Dwelling Coverage to match the loan amount.
    1. If it’s lower than the loan amount, the Insurance Company must provide what is called a Replacement Cost Estimator, or RCE for short. This document breaks down how the Homeowner’s Insurance Company arrived at their dwelling coverage amount. This document along with the Homeowners Insurance should be enough to clear the condition, but it is also underwriter’s discretion.
  2. Named Insured and Mortgagee Clause to match loan documents
    1. The Homeowners Insurance policy must have the insured person(s) match the person(s) on the loan. 
    2. Additionally, the Mortgagee section should have the Mortgagee Clause of the Lender, including the loan number. All of these items should match the loan documents exactly.

If you noticed, there isn’t a deductible restriction like there was for the USDA Loan program. While the deductible can be anything, the premium must be low enough to keep the debt-to-income ratio within the limits put together by the loan officer.

An insurance binder, Evidence of Insurance, Memorandum of Insurance, or Certificate of Insurance are all acceptable documents up to closing. However, a Homeowner’s Declaration’s Page and Invoice must be provided at closing. This is because an Evidence of Insurance and other documents have premiums and coverage that can be changed. If the premium increases past what has been previously accepted, this may render the first time home buyer ineligible for the loan due to debt-to-income ratios. For the FHA and Conventional Loan programs, the first year of insurance is paid by the first time home buyer’s lender out of the escrow account. This is so it’s guaranteed by loan closing that at least the first year is covered. 

Flood Insurance must have a paid invoice before closing.

When the Home is in a Flood Zone: FHA and Conventional Loan Programs

When the home is considered by FEMA to be in a Flood Zone, the Lender may require Flood Insurance. This is indicative early on in the process by the Appraisal Report, as well as a Flood Certificate. For FHA and Conventional Loans, Flood Insurance has the same guidelines as regular Homeowner’s Insurance for Dwelling Coverage. The only difference is the underwriter requires the invoice to show as paid in full. 

 

 

 

 

 

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First Time Home Buyer Guide: An Introduction to Homeowner’s Insurance: USDA Loans

This latest blog update will be about the Homeowner’s Insurance policies, Homeowner’s Insurance requirements for the USDA Loan programs, and additional policies like Flood Insurance that may be needed for the loan. For every loan program, a Homeowner’s Insurance policy may be mandatory for closing, especially if a home is being financed through a mortgage. However, a Homeowner’s Insurance policy does not always need to be active and is up to the sole discretion of the first time home owner after the first year of ownership. While this is not generally recommended, in case something happens that would otherwise be an extremely costly repair, it is not a law to have Homeowner’s Insurance.

Homeowner’s Insurance for USDA Loans are typically required.

Homeowner’s Insurance Requirements for the USDA Loan Program

The Homeowner’s Insurance requirements for the USDA program indicates that in order for the loan to be able to closed, the policy must have the following items:

  1. Dwelling Coverage to match the loan amount.
    1. If it’s lower than the loan amount, the Insurance Company must provide what is called a Replacement Cost Estimator, or RCE for short. This document breaks down how the Homeowner’s Insurance Company arrived at their dwelling coverage amount. This document along with the Homeowners Insurance should be enough to clear the condition, but it is also underwriter’s discretion.
  2. Named Insured and Mortgagee Clause to match loan documents
    1. The Homeowners Insurance policy must have the insured person(s) match the person(s) on the loan. 
    2. Additionally, the Mortgagee section should have the Mortgagee Clause of the Lender, including the loan number. All of these items should match the loan documents exactly.
  3. Acceptable Deductible
    1. The deductible for USDA homeowner’s insurance policies MUST be either 1% of the dwelling coverage OR a $1000 whichever is greater.
      1. For example, if a policy’s dwelling coverage amount is $160,000, the deductible is allow to exceed $1000, up to a maximum of $1600, but no greater.

An insurance binder, Evidence of Insurance, Memorandum of Insurance, or Certificate of Insurance are all acceptable documents up to closing. However, a Homeowner’s Declaration’s Page and Invoice must be provided at closing. This is because an Evidence of Insurance and other documents have premiums and coverage that can be changed. Due to USDA’s strict guidelines, if the premium increases past what has been previously accepted, this may render the first time home buyer ineligible for the loan due to debt-to-income ratios. For the USDA program, the first year of insurance is paid by the first time home buyer’s lender out of the escrow account. This is so it’s guaranteed by loan closing that at least the first year is covered. 

The deductibles for both Flood and Dwelling Policies must be either 1% of the Coverage, or $1000, whichever amount is greater.

When the Home is in a Flood Zone: USDA Loan Program

When the home is considered by FEMA to be in a Flood Zone, the Lender may require Flood Insurance. This is indicative early on in the process by the Appraisal Report, as well as a Flood Certificate. For USDA Loans, Flood Insurance has the same guidelines as regular Homeowner’s Insurance for Dwelling Coverage, including the restrictions on deductible amounts. The only difference is the underwriter requires the invoice to show as paid in full. 

For the next update, we will be discussing Homeowners Insurance policy for FHA and Conventional Loans, as the requirements are very much similar to each other. 

 

 

 

 

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Fannie Mae’s HomePath REO Program: A Brief Look for the First Time Home Buyer

Fannie Mae’s HomePath REO homes are foreclosed homes purchased by Fannie Mae.

Fannie Mae’s HomePath REO Program: An Introduction

For this blog post, we will be talking about the Fannie Mae’s HomePath REO program in the eyes of the First Time Home Buyer.  Fannie Mae’s HomePath program is essentially for the selling of newly foreclosed properties that are purchased by Fannie Mae. Fannie Mae can obtain ownership of a foreclosed property, or a property that is going to be foreclosed. The main advantage of Fannie Mae’s HomePath REO program is that it allows first time home buyers to see foreclosed and to-be-foreclosed properties before investors have the chance to. This allows for home-buyers who wish to live in a home can take it off of the market, instead of an investor who would put money into the home, and then re-sell it later on. Investors can also purchase these homes, however. But the incentives are different than for the first time home buyer.

Homes listed on Fannie Mae’s HomePath website come in all varieties, as they can be Condominiums or Single-family homes. Another detail to watch out for, is whether or not a home will be “move-in ready,” or if it will need repairs prior to being able to complete the purchase of the property. Some homes may need maintenance or repairs. These homes are sold as is, so the first time home buyer may need to protect themselves by order a home inspection. A home inspection can give the first time home buyer an idea of how much and how many repairs are needed after the purchase of the house, and if it’ll be worth it.

Fannie Mae’s HomePath Homes may need repairs. Fannie Mae sells these homes as is, so they will not be responsible for any repairs needed.

The Initial Steps For Fannie Mae’s HomePath Program

Fannie Mae’s HomePath program have a few different requirements than other programs. In order for a first time home buyer to put a bid on a HomePath home, a few things must happen first. Fannie Mae has an online website in which HomePath eligible homes are listed. In order for a first time home buyer to bid on a home, they must first contact the Listing Agent assigned to that specific home. The first time home buyer must submit an offer in writing to that specific listing agent, and usually by a specific time and date as well. Interestingly enough, Fannie Mae does not require a pre-qualification letter with the first time home buyer’s offer on a home. However, this does speed up the process as a whole and is highly recommended.

Loan Programs, Credit Requirements and Down Payment Assistance Programs

Many first time home buyers opt to go through with a Conventional Loan for this program.. Accordingly, the credit score requirements are 620+ and to also put at least 5% down as a down payment. The minimum level of debt-to-income ratio for this program must be equal to or less than 36% of your monthly income. However, the better loans are given to those who have a higher credit score and down payment, as well as being able to forego the need for private mortgage insurance.

First time home buyers are also eligible to go other routes for a loan program, such as Fannie Mae’s Home Ready, which reduces the required down payment to 3%. However, this program will almost always require the purchase of private mortgage insurance. This program requires the first time home buyer to take a home ownership course in order to be eligible for this down payment assistance program.

Additionally, there is a program called Fannie Mae’s HomePath Home Ready program, which is another down payment assistance program. This allows for the low 3% down payment, as well as a 3% credit at closing if the first time home buyer participates in the HomePath Home Ready Buyer course. 

Fannie Mae’s HomePath Program is also available for USDA, VA, and FHA loan programs as well. 

 

 

 

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