First Time Home Buyers
First time home buyers are often given advice from family members, realtors, friends, and colleagues when they start the home buying process. First time home buyers need to consider many factors when they decide in purchasing a new home. Just having minimum down payment and closing costs is not the only factors that is involved. First time home buyers should also consider reserves in the event if something might go wrong. Many times, mortgage lenders do not require reserves for first time home buyers, however, there are times where mortgage lenders will require reserves for first time home buyers if they have less than perfect credit. For home buyers buying a three or four unit residential property, there are mandatory reserve requirements. For three and four unit home buyers, cash reserves of up to 6 months of the home’s monthly principal, interest, taxes, homeowners insurance, and mortgage insurance premium might be required depending on whether you are getting a conventional or FHA multi-unit property mortgage loan.
Down Payment And Closing Cost Requirements By Lenders
To qualify for a FHA loan, you must have a minimum credit score of 580 FICO if you want to only put 3.5% down payment. For those with credit scores between 530 FICO and 580 FICO, a 10% minimum down payment is required on a home purchase. The Federal Housing Administration allows 100% of the down payment to be gifted from a relative or family member. For conventional loans, a 5% minimum down payment is required for a home purchase for single family homes or condominiums and a 15% minimum down payment is required for two unit residential properties. To qualify for a conventional loan, a 620 FICO credit score is required. Besides the down payment, there will be closing costs which are title charges, appraisal fees, tax and insurance escrows, one year insurance premium, attorney fees, and other fees such as recording charges and other fees and costs related to the property purchase. A home buyer does not need to pay closing costs as long as he or she gets a sellers concession toward the buyers closing costs. FHA allows a maximum of a 6% sellers concession towards a buyers closing costs and conventional loans requires up to a 3% maximum sellers concession towards a buyer closing costs. Any excess in closing costs needs to go back to the sellers and cannot be given as a cash credit to the home buyer so home buyers need to make sure they do not get extra closing cost sellers concessions.
Most mortgage lenders do not require reserves from home buyers. There are instances where first time home buyers or home buyers spend every nickel of their savings towards the purchase of their new home and have not enough money to purchase items for their new home. First time home buyers need to realize that with home ownership comes financial responsibility. First time home buyers can delay buying furniture or other items for their new home but what happens if emergency repairs are needed. With home ownership, you cannot rely on your landlord to come and fix the furnace, fix the toilet, fix the washer/dryer, or other repairs associated with your home. Some repairs needed on your home may be minor but there are repairs that are major that you need to be ready for. For example, this past winter, the Midwest had a major deep freeze where many homeowners had broken furnaces and busted plumbing pipes from the extreme cold weather. These repair can cost several thousand dollars where it can impact a homeowners financial situation. Without reserves, this can create a major problem. You have worked very hard to have good credit and you do not want to spend your mortgage funds towards your repairs and be late on your mortgage payment. Even though the mortgage lender does not require you to have reserves for first time home buyers, having reserves on your own is strongly recommended.