Mortgage expectations for first-time buyers?
July 17, 2011 1:22 PM   Subscribe

Mortgage expectations for first-time home buyers in the post-bubble era?

My spouse and I are planning on buying a house in January or thereabouts. Our understanding is that we shouldn't be talking to lenders about mortgage numbers yet, since pre-approvals don't last that long, and having repeated credit inquiries is bad.

We like to think ahead, so we've been checking out local houses for sale to try to crystallize what we want and get better ideas of what to look for (plus, it's fun). However, we're not really sure what kind of mortgage we'll be able to get.

We have mediocre-goodish credit (630 and 730). In January, we'll have $50k to spend on a house, including lending fees and closing costs. We've found some helpful previous questions (1, 2, 3), some of which reference the Mortgage Professor, and have found his calculator on house affordability to be pretty helpful, but we have a few questions:

That calculator has a default maximum ratio of housing expense to income of 28%. Is that still a good number, and is that just a guideline for personal accounting or is that a number lenders use to limit how big of a loan we'd be able to get?

A lot of the information we're finding and advice we're receiving from friends and family comes from the pre-bubble era. How have things changed in the post-bubble era? Obviously we won't be expecting our new home to be appreciating value at obscene rates (we expect it to hold steady or modestly decrease), but how has that translated into changes in the lending math?

Given our numbers above, would lenders expect us to put down 20%, or is the expectation lower for first-time buyers? We don't really want to pay mortgage insurance, but we want to live in this house for several years and don't want to buy too cheap of a house and be unsatisfied with it.

We live in Oregon if it is relevant.
posted by Vampire Cat to Home & Garden (9 answers total) 12 users marked this as a favorite
Best answer: I bought a home as a first-time homebuyer this spring. My credit score is a bit better than yours. I was not expected to put 20% down - for a conventional loan, it did have to be over 10%. During the pre-approval process, the lender ran the numbers for 10% with PMI, 15% with PMI, and 20% with no PMI. He also gave me ballpark closing costs.

Most lenders will do something called a pre-qualification, which generally does not include pulling your credit. You give them a very soft feeling for your income, savings, and credit rating, and they give you a ballpark maximum mortgage. For us, this number was much higher than we were actually willing to finance.

The banks don't use a fixed ratio. Michael Bluejay claims that
The bank limits your monthly mortgage payment (including taxes and insurance) to no more than 28 to 36% of your monthly income. What determines where you fall on that scale is the size of your down payment and your credit score.
posted by muddgirl at 1:39 PM on July 17, 2011

I'm currently under contract to buy a house for the first time. Before talking it through with my agent and the lender, I found the whole mortgage process very counter-intuitive (I won't know exactly what the monthly payment will be until after I'm already under contract to buy?!), but it (sort of) makes sense now. I haven't finalized the loan yet, so it's possible I'm still missing something vital about the process, just to give you some background of where I'm coming from.

The lenders I've talked to have been able to go down to 5% for a conventional loan (with PMI). There are also FHA loans with 3.5% down (but typically higher insurance fees). These don't, I think, apply to all houses.

And finally, you might check to see if Oregon offers a first-time buyer's assistance program. My state does -- there are income and house price limits, but they offer 0%, forgivable loans to help with down payment and closing costs. There are various strings attached, but they might fit your situation.
posted by brentajones at 2:06 PM on July 17, 2011

Best answer: We bought our first house in April. Our realtor said our entire process went flawlessly. She said it was "like a dream" and we probably got the wrong impression about the ease of the house buying process because of it. Not that I'm complaining! (Although, the ENTIRE TIME I was waiting for something major to drop.)

Anyway, a few thoughts:
1) Your first priority the next six months needs to be improving the lower credit score. It sounds like you already have, but if not, pull your credit report — and clean up what you can. If you have credit cards or lines, get them down below 50% utilization, and below 20% is better. Make sure everything there belongs there and is accurate. Trust me. I had a $14 medical bill from five years ago that I never knew about but which went to collections and caused a very major hit to my score. My BF's score was in the high 700s, but mine came in around 680 (and jumped up 50 points after the collections item was removed — which was after the damage was done, unfortunately). That score cost us a few thousand in additional closing costs because banks use the lower credit score to qualify your loan. You can qualify for an FHA and at some banks, possibly, a conventional mortgage with a 630, but it may cost you and will certainly be more difficult. It didn't affect our interest rate at all, but it did affect what we paid at closing for the loan origination fee. Your deposit is larger than ours was, which might offset that score depending on how much the mortgage you're seeking is, just be prepared to provide a lot of documentation.

2) You mention you're concerned about the debt-to-income percentage. This didn't affect us because we were seeking a mortgage below our means (and keep in mind just because the calculator says you can afford $XXX,XXX doesn't meant you can). However, before doing anything we spoke to our relatives in the banking field and were given the advice you were about housing costs being up to 28% of your income and total debt payments not to exceed about 36%. I understand in some super expensive markets this may be different, but it's a general rule of thumb. This really is to protect you. You don't want to be house poor. Know what your comfortable maximum is and ask them for a loan approval in that amount, not what they can qualify you for.

3) Don't seek new credit (or add substantial amounts to your credit cards or fall behind on other loans, etc.). As you note, inquiries are bad. But when you apply for mortgages, you have a window of about a month or so to apply with several places and have them count as one inquiry affecting your score. So know where you're going to apply and do it swiftly.

4) Have all of your documents ready. This was advice my sister the banker gave me and it was great. When you apply, the bank is going to ask you a million questions and for numerous documents. They will want to know not only what was on your W2s (and probably want copies of the past 2 years), but also what's in your bank account(s) right now. They'll want to verify your employment — and want to see at least a few years in the same job industry, if not the same job. They also want to know about any CDs or savings accounts and how big your 401K/IRA is. We had to provide the bank statements for the current and previous months.

5) Get the loan pre-approved before you find the house. The realtors we interviewed took us more seriously when we handed them a letter saying we were pre-approved (which is different from pre-qualified, look it up). Our offer on the house was likewise taken more seriously and had more weight because we were able to say, we already have financing lined up and we can close on X date.

6) Consider credit unions. We ended up getting a loan through a credit union where I was a member. It had a better rate and was local. The help and response was way better than the national banks.

7) We had a sizable down payment, but it was a little less than 10% down and nobody questioned it. We didn't pay any points to reduce the mortgage interest rate either and weren't pressured to do so.

8) Beyond the loan, the other major part of buying a house is finding it. Now's the time to do the homework on your market. Get references from friends and neighbors now for Realtors. Go to open houses. We started going to open houses a few months before we actually got the loan because we wanted to get familiar with the neighborhoods and to see what our money could buy and what we liked and didn't. It was helpful so that by the time we'd chosen a Realtor, we already knew what neighborhoods and types of homes we were interested in. (That said, the realtor's local knowledge was handy because she actually tipped us off to the neighborhood where we eventually bought, which had never been on our radar from online browsing/driving around.) The specific houses you look at might not be on the market in January, but the one down the street with the same layout or by the same builder might be. Plus, neighborhoods look a lot better in July than in January!

9) Don't put all of your savings in the down payment! You need money for things like a home inspection, locksmith, moving, etc. Not to mention things that need fixed, upgraded or changed when you move in. We had an eat-in kitchen and dining room and back porch that all needed furniture. We went from one bathroom to three. We bought a bed for the guest bedroom. We still haven't purchased everything we want/need, but we've been slowly making our way through a few hundred here and a few hundred there. Not to mention, you still need an emergency fund. The day of closing I had to replace my car tires. We left the closing and went and paid almost $500 to the tire shop! Ouch!

Anyway, sorry for the book but hopefully this advice/experience is helpful. Good luck!
posted by ilikemethisway at 2:39 PM on July 17, 2011 [10 favorites]

I bought a house a year ago with a 10% down payment. At the time, I think that was the lowest I could go for a conventional mortgage, with FHA being 3.5%. Mortgage insurance is not such a bad thing; netting out the value of the tax deduction, mine is about $28/month, and that's not taking into account the value of the flexibility of not having to put 20% down.

Also, I would go ahead and talk to a mortgage guy as soon as you're serious about starting to look; you can certainly ask them not to pull your credit if you don't want them to. They will be happy to give you estimates of what you can get approved for based on info you tell them. This is basically what a pre-approval is, after all, it's essentially just a letter from your mortgage guy saying you've spoken about mortgages and he considers it reasonably likely you'll be able to afford the house you bid on.
posted by deadweightloss at 2:52 PM on July 17, 2011

Best answer: You are going about this backwards. Figure out how much you can afford in a monthly payment given your lifestyle and then figure out what that implies for a total mortgage + factoring in the differing costs of different levels of downpayment (M/I, other fees, etc) + tax benefit of a mortgage + different amortization schedules + property taxes on the sort of homes you would be targeting + upkeep + savings contributions. Build a spreadsheet to figure this out. You will always understand the implications of the whole process better if you actually build the calculator yourself.

That's the way to ask this question. Almost certainly if you underwrite your mortgage like that it will be something that is approvable.

The size of the loan they'll give you, even today, is almost certainly more loan then you should actually be getting.
posted by JPD at 3:16 PM on July 17, 2011 [1 favorite]

Nthing avoiding being 'house poor'. We bought our house in 2001, it's a great house . . . but living paycheck to paycheck and realizing your mortgage means that 60% of your budget cannot be lowered is . . . not fun. If I had it to do over again, I'd have gone with something cheaper.
posted by MeiraV at 3:32 PM on July 17, 2011 [1 favorite]

You should see the mortgage people as soon as possible - just in case there's any unexpected things you need to get cleared up.
posted by Melsky at 3:56 PM on July 17, 2011

You can clean your credit on your own and completely in about 90 days
posted by growabrain at 7:44 PM on July 17, 2011 [1 favorite]

Nthing boost that 630. You can save a lot if you qualify for a lower interest rate. 640 might be the minimum for an FHA loan. You ought to be able to get that up in a few months.
posted by salvia at 1:42 AM on July 18, 2011 [1 favorite]

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