Financial Tips for first Time Home Buyers

The great American dream of home ownership has long been the stuff legends are made of. In spite of the lagging economy in 2012, and record high mortgage foreclosures, home ownership is still a dream that is alive and well.

Due to the sluggish housing market, historically low mortgage interest rates, and the large number of single family homes currently flooding the housing market, now is an excellent time to become a homeowner.

Before you rush out and make an offer on the house of your dreams, there are a few things to keep in mind. First, an improving housing market is a sign the economy is getting better, but it isn’t in full swing yet. As a result, lenders have tightened the purse strings. Before they sign mortgage contracts with clients, they scrutinize their financial picture under strict guidelines adopted following the financial crash in 2008. One bump in your recent earnings or credit history can force prospective home buyers to postpone their dream a bit longer.

Unless prospective home buyers are independently wealthy and intend to pay cash for their new home, it is likely they will seek a loan from a bank, mortgage company, or credit union. The Home Buyers Institute is an excellent resource to help the first time home buyer wade through the loan process.

Before you approach a lender, take a long hard look at your finances. You should look at your monthly expenses and determine how much money you can afford to pay for your mortgage each month. Try to pay down existing debt such as credit card balances and student loans. Make sure your payments are paid on time. Late charges can be a sign of an unreliable borrower. If possible, keep your credit card balances no greater than one-third of your credit limit. Do not open any additional credit card accounts or buy a new car until you have the keys to your new home in your hands.

Remember loan officers will expect the buyer to have a minimum down payment of five percent of the selling price of the home they want to buy. Some lenders can require a minimum of 20 percent of the selling price for a down payment. To meet that criteria, it is best to save, save and save. 

Prospective home buyers need to do their research to learn about the different types of mortgages. Traditional mortgages are fixed-rate loans. That means if you borrow $100,000 with a 4.99 percent interest rate. That rate is set, or “fixed” for the life of the loan. Adjustable rate mortgages are exactly what their name implies. The rate you will pay on your loan will vary according to  the terms of you loan agreement. Most “ARMS” as they are called include a cap which prevents the rate from exceeding a predetermined limit. Other types of loans can include interest only loans where the buyer pays interest for the first portion of the loan. Bubble loans are another option that means payments  grow larger over the life of the loan so your last payment will be much bigger than your first.

One of the first things a mortgage broker will consider is employment history. A client who has a stable work history is considered a better candidate for a loan than someone who jumps from job-to-job or may have periods of unemployment on their work record. Lenders like to see two years of employment with the same company to demonstrate stable income. Credit scores are also critical in the loan approval process. Today most lenders want to see clients with a minimum credit score of 620, according to the Home Buyers Institute.

Another key element bankers consider during the loan application process is your debt to income ratio. They will look at what you earn and what you owe and decide if you can afford a mortgage. As a standard rule, loan officers want that ratio to be below 50 percent of your income.

Other considerations include making sure you have cash on hand to pay for the closing costs, That money covers realtor fees, taxes and other aspects associated with the house you will be calling home.

Walking through the mortgage quagmire can seem daunting. Take one item at a time and complete it before moving on to the next. Before you know it, you will be sitting at the closing table accepting the keys to your new home.