Why should an individual buy a home instead of renting?

Simonson: "Buying a home has always been the “American Dream”. Owning a home gives a person as sense of pride knowing that they have worked hard for the opportunity to put their name on a place they can truly call their own. However, owning isn’t for everyone. Ownership of a house, townhome, or condominium means that a person needs to be able to show fiscal responsibility, both in the past and the future. The benefits include potential tax breaks and the eventual buildup of equity in a home, equating to another potential type of “savings” plan.

"Another aspect for comparison is that many times the rent payment and housing payment are very comparable. Even when there are other parts to a house payment such as taxes, insurance, and mortgage insurance, the overall amounts can be very similar, thereby not creating any undo financial hardship."

How much money will a first time home buyer have to pay upfront for a home?

Simonson: "To purchase a home, a buyer is going to be responsible for a down payment of some sort as well as the closing costs involved with the purchase. These are two very different costs. The down payment can range from as little as 3.5% of the purchase price if the person is getting an FHA loan to 5% or more for a conventional loan. This can all the way up to a person paying for the entire purchase price in cash and not obtaining a loan at all.

"Closing costs are the fees charged by the various parties involved in the transaction to help to facilitate everything from beginning to end. These include fees from title companies, appraisers, lenders, credit reporting agencies, etc. and generally total up to a range from 1.5% to 3.5% of the purchase price. Please note that this amount does not come off the purchase price, but rather is on top of it. It should be mentioned that sometimes some or all of this amount can be negotiated to be paid by sellers, but this should not be counted on as this is a negotiating point.

"There is one other up front amount that needs to be mentioned and that is the earnest money. Earnest money is generally an amount equal to 1% of the purchase price that is presented with the contract and is used to show that the buyer is “in earnest” to buy the property if terms can be agreed upon by the buyer and seller. This money is credited back to the buyer at the time of the closing as either a credit towards the down payment amount or towards the closing costs."

What first time home buyer programs are available?

Simonson: "First time homebuyer programs are varied. FHA financing is very popular among first time buyers because of the low down payment amounts and very competitive interest rates. Other assistance programs are available such as down payment assistant programs can potentially help with the first time process. These include CHFA, various county based affordable home ownership programs, and even gifts from immediate family members for the down payments."

What are the differences between mortgage prequalification, preapproval and final loan approval?

Simonson: "A prequalification means that the buyer has spoken with the lender and through the information provided, based upon the mortgage lender’s opinion, the buyer can afford to buy a home.

"A preapproval is defined as paperwork has been provided to verify the statements made by the buyer and through either an automated underwriting system or manual underwriting the buyer has passed the initial scrutiny of the lending institution and is qualified for a home so long as the home falls in to the guidelines set forth by the lender.

"Final loan approval means that all conditions for the purchase of a home have been met and the bank is ready to give the money for the purchase. You get to be a homeowner!"

What options are there for first time home buyers with no money down and no cash for closing costs?

Simonson: "The first question that would be prudent is “Can I really afford to purchase a home right now?”. With that being said, each of these pieces need to be treated differently.

"The down payment for a home is a necessity as there are no longer “80/20” loans or 100% financing available. The down payment may come from one of the programs mentioned above or may be a gift from an immediate family member so long as the source of the money can be documented.

"The closing costs are easier to handle only because they are still a negotiable aspect of any potential purchase. Lenders will generally allow for up to 3% of the purchase price to be contributed by the seller on the buyer’s behalf to cover closing costs and other immediate nonrecurring fees associated with the purchase."

What are front and back ratios, and how do they affect first time home buyers?

Simonson: "Ratios are the percentage of a person’s gross income versus the financial debt load a person has. The first one is the front end ratio that is defined as the proposed mortgage payment taken against a person’s income. This ratio is generally capped at 36%. The back end ratio takes all of the person’s debt in to consideration including car payments, credit cards, lines of credit, etc. along with the proposed mortgage payment. The general top end on this number is 44%. These ratios give underwriters another gauge as to whether a potential buyer can afford to buy a new home."

What is PMI (Private Mortgage Insurance? Do first time home buyers have to pay it?

Simonson: "PMI is an insurance policy placed on the loan by the lender to guarantee payment of the note if the buyer defaults on the loan. The only time buyers have to pay PMI is when the loan is for more than 80% of the purchase price. Lenders generally feel that if the buyer were to default on a loan that is less than 80% LTV (Loan To Value), they have the ability to recoup their money through the foreclosure process."

Can first time home buyers use their IRA retirement funds for a down payment on their new houses?

Simonson: "While any funds that are yours can be used to purchase a home, I would always advise the buyer to contact their tax advisor or CPA for clarification of any tax or income consequences."

What mortgage options are there for first time home buyers how have poor credit?

Simonson: "Currently, the options for clients with poor credit are very limited. Banks have tightened their lending guidelines to the point of looking only for “A to A+” credit. The only potential option for poor credit would be to try to assume a loan currently in place (FHA loans are the most predominant assumable loans). An assumption means qualifying for and taking over a current mortgage under the guidelines it was originally written at.

"Beyond that, poor credit buyers should just continue to clean up their credit and continue to pay their bills on time until they can qualify."