There are a lot of mortgage lending institutions, even faceless out-of-state options. But with First National Bank, our knowledgeable and trusted mortgage bankers have your back. We look out for your best interests. And we know local real estate agents, builders, inspectors, and appraisers, which helps you close on your new home even quicker.
First National Bank offers several free, online educational resources and tools to help you get off to a good start on the homebuying journey and determine your financial readiness. Learn more about evaluating when it's time to buy a home, getting started with the homebuying process, picking the best mortgage loan type to meet your financial needs, and navigating the closing process.
Buying a home is one of the biggest financial decisions of your life. We want you to feel comfortable asking any questions that comes to mind throughout the loan process. Let's start with Buyers' Top 6 Questions.
I have student loan debt. Will it prevent me from getting a home loan?
You don't need to be 100% debt-free to buy or home or qualify for a mortgage. However, one of the most important things lenders look at when they consider you for a loan is your debt-to-income (DTI) ratio, which includes debt associated with outstanding student loans.
Your DTI ratio compares how much you owe each month to how much you earn. If your monthly payments make up a large percentage of your total budget, it becomes more difficult to get a loan. The acceptable DTI ratio varies by loan type, but in general, lenders look for a DTI that's 43% of lower.
How does my credit score affect my ability to get a loan?
Your credit score, as well as the information on your credit report, are key elements in determining whether you'll be able to get a mortgage, and the rate you'll pay.
Your credit report and your credit score are different things. Your credit score is calculated based on the information in your credit report. Higher scores reflect a better credit history and make you eligible for lower interest rates.
You have many different credit scores, and there are many ways to get a credit score. However, most mortgage lenders use FICO scores. Your score can differ depending on which credit reporting agency is used. Mortgage lenders look at scores from all three major credit reporting agencies – Equifax, Experian, and TransUnion – and use the middle score.
Errors on your credit report can artificially reduce your credit score. So it is important to check your credit report and correct any errors well before you apply for a loan.
Conventional and government loan programs set their standards for what constitutes an acceptable score, but these are general guidelines:
- A score of 740 or higher is generally considered excellent credit.
- A score between 700 and 739 is considered good credit.
- Scores between 630 and 699 are fair credit.
- And scores of 629 and below are poor credit.
How much money do I need for a down payment?
When you buy a home, one of the biggest up-front expenses is the down payment. Not to be confused with closing costs, the down payment is the portion of the purchase price that you pay upfront at closing.
Generally, if you put less money down on a home at closing, you’ll pay more in fees, insurance, and interest over the loan’s lifetime (and vice versa).
The down payment you make on your home impacts what kind of mortgage you qualify for, how much money the bank will loan you, and loan terms and conditions.
A larger down payment will give you a lower loan-to-value (LTV) ratio. To calculate the LTV ratio, the loan amount is divided by the home's fair market value as determined by a property appraisal. the larger your down payment, the lower your LTV (and vice versa). A low LTV makes you less risky as a borrower because you're starting out with more equity in your home. You may also qualify for lower interest rates and could avoid paying private mortgage insurance.
While a 20% down payment was once the standard, the median is now 12% for many homeowners. Each loan type has different minimum down payment requirements. For loans that will accept lower down payments, consider government-insured programs, such as FHA loans and VA loans.1
How much mortgage can I afford?
To calculate how much house you can afford, take into account your household income, monthly debts (for example, car loan and student loan payments). and amount of available savings for a down payment.
While your household income and regular monthly debts may be relatively stable, unexpected expenses and unplanned spending can impact your savings.
A good affordability rule of thumb is to have three months of payments, including your housing payment and other monthly debts, in reserve. This will allow you to cover your mortgage payment in case of some unexpected event.
An important metric that the bank uses to calculate the amount of money you can borrow is the debt-to-income (DTI) ratio — comparing your total monthly debts (for example, your mortgage payments including insurance and property tax payments) to your monthly pre-tax income.
To calculate ‘how much house can I afford,’ a good rule of thumb is using the 28%/36% rule, which states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.
For example, if your monthly mortgage payment, with taxes and insurance, is $1,260 a month and you have a monthly income of $4,500 before taxes, your DTI is 28%. (1260 / 4500 = 0.28)
You can also reverse the process to find what your housing budget should be by multiplying your income by 0.28. In the above example, that would allow a mortgage payment of $1,260 to achieve a 28% DTI. (4500 X 0.28 = 1,260)
What is a First-Time Homebuyer Savings Account?
The First-Time Homebuyers Savings Account (FTHSA) is a special type of savings account that helps Iowans save for a first home. It includes provisions that allow individuals, including those who already own a home, to make tax deductible contributions into an account to be used by a designated person for certain expenses related to purchasing a home. The account must be opened at a financial institution in Iowa, including any First National Bank branch.
Here's how it works:
- Open either a First National Bank Standard Savings account or Money Market account.
- Each year, account holders may contribute an unlimited amount of money into their FTHSA account. However, the amount of such contributions that a taxpayer may deduct from their Iowa adjusted gross income for tax purposes is limited. The maximum annual deduction is adjusted each year for inflation and differs depending on filing status.
- Interest earned on account balances is exempt from state income tax.
- Taxpayers may establish multiple accounts as long as each account has different designated beneficiaries.
- Accounts can be opened in another person’s name. For example, a parent could open a bank account and contribute to it as a gift to a child. As long as the funds are used toward the purchase of a first home, it will qualify for the tax deduction
- The contributions are required to be in the account for 90 days prior to being used.
- Any remaining money in the account more than 10 years after the account was opened is considered withdrawn, and the account can no longer be a first-time homebuyer savings account after that time.
For additional information provided by the Iowa Department of Revenue, click here. Please consult your tax advisor for additional tax-related questions.