The recent crisis in the credit markets makes home buying a bit more difficult than it was in the past few years, but even with more challenging lending criteria there are plenty of reasons to own your own home. Besides the intangible benefits, homeownership lets you build equity, and is the single biggest tax break available to most consumers. Here are some things to consider for first time home buyers who want to make the most of your home buying opportunity and assist in obtaining the best mortgage loan. Before leaping into any home loan, be sure to check the numbers on a mortgage calculator to compare programs, rates and costs.
First, try to pay off as much if not all of your existing debt. People planning to buy a home for the first time fall into the trap of focusing on the down payment amount, and while the down payment is important, paying down existing debt may be just as important. If you pay down or pay off the balance on a credit card, for example, it helps you in a number of ways even if it makes your down payment smaller. Credit card debt is expensive, both relatively and absolutely. Credit card interest rates are almost always more than twice the interest rates for home mortgages, and one of the first rules of personal finance is to pay off your higher interest rate debt first. And, high interest rate credit cards limit your ability to save more money because that money is going toward monthly credit card payments. Credit card debt may also limit how much you can borrow. Mortgage lenders won’t allow your total monthly debt service — which includes payments for credit cards, student loans and car loans, as well as homeowners insurance, property taxes and a mortgage — to exceed approximately 40% of your gross income. Having a credit card, making on time payments, and keeping your balance low all contribute to an excellent credit rating, but the amount you owe on a credit card may keep you out of the mortgage you need for the house you want. A potential borrower can use the mortgage calculator to review their current debt ratios and qualifying status.
Second, know how much of a home can you afford along with how large of a home loan you may qualify for. A variety of events may factor into this. One is to know how much money you have for a down payment. You can’t consider all of the cash you have because you need a reserve, and there will be origination fees or “points” payable at a closing that also must be paid in cash. Two, you need to know how much a lender will allow you to borrow, and how much it will cost each month. Third, the rule of thumb is that your annual mortgage payment, taxes and homeowner’s insurance shouldn’t exceed 28% of your gross income. The mortgage calculator can be beneficial in evaluating debt ratios and down payment amounts to measure what type and size mortgage loan you may qualify for. Don’t be optimistic about future raises or fudge your current income. Being realistic from the start is the smart thing to do and helps to narrow down the home search and avoid making purchase that turns out to be more than your budget can handle. Once again, use the mortgage calculators to assess your qualification ratios and determine your own level of comfort with the monthly mortgage payment
Shop carefully for a new home loan. Qualifying for a loan and signing the paperwork is only half the battle. Educating yourself about mortgages is an important step before jumping in. Especially as credit tightens in the aftermath of the subprime mortgage crises, and educated borrower is his or her own best friend. Knowing the ins and outs of mortgages and being on top of mortgage rates will help assure that you do not get stuck with an expensive home loan payment or loan that does not have a competitive mortgage interest rate. Most importantly, talk to a number of people at different kinds of lending companies and check mortgage rates and loan programs online. You’ll learn more and you’ll be able to compare offers. Anytime there is a new home loan program that comes to the market it is best to compare lenders and use the mortgage calculators to compare interest rates and costs.
If your credit is below average, things are tough for you now. Many mortgage lenders have expanded programs that allow consumers with slightly blemished credit to qualify for mortgages at competitive rates, but the criteria is changing now. Check your credit report first. Try to fix as many errors as possible on your credit report. And interpret the term errors loosely – fix whatever derogatory information there is in your credit report. Don’t hesitate to apply for home loan. Until you ask, you don’t know.
If your credit’s still not good enough for standard conventional Fannie Mae loans, you may yet qualify for a home loan insured by the Federal Housing Authority, or FHA. These government-insured loans are issued with even more lenient credit criteria. You can also put down as little as 3% for an FHA loan, and can wrap your closing costs and fees into the mortgage. Mortgage rates are typically less than a quarter of a point higher than those in the conventional market. To get a government-insured loan, make sure you find a HUD-approved lender or a mortgage broker who works with one.
There’s no income limit to qualify for an FHA-insured mortgage loan. However, since these loans are geared toward helping first-time home buyers and low- to moderate-income families, there’s a limit to how much you can borrow for a home loan. Check the FHA (Federal Housing Authority) web site for information. The mortgage calculator can be used to check qualifying loan amounts based on FHA loan limits and down payment requirements.
The more money you can muster for a down payment, the more options you will have. If you are doubtful of your ability to come up with a down payment, don’t be discouraged. There are various down payment assistance programs. Each year HUD, a federal housing agency, various state and municipalities put together grant programs to distribute to low- and moderate-income families for housing. Much of it is put toward down-payment assistance programs. Many young prospective home buyers may qualify for a grant (or in some cases a loan that’s forgiven if a home buyer stays in the home for at least three years) worth 3% to 5% or even more of the sale price to put toward their down payment or closing costs. Private lenders are also coming up with their own programs to tap into the first-time home buyers’ market, investigating the mortgages that are available regardless of your situation should be a top tip. To qualify for a down-payment assistance program, a consumer typically must earn less than the region’s median income. Call your state housing finance authority, county housing and community development office or mayor’s office for information on programs that may be available.
Asses your own financial picture first, including your credit profile. Improve your position if you can by cleaning up and removing erroneous data in your credit report and eliminating consumer debt. Know the mortgage products and mortgage rates available. Throughout this process, the work that can be performed with the mortgage calculators should be gathered. The mortgage payment calculator will help to determine your ability to afford the payment for your own piece of mind as well as helping to erase any doubt that it meets the mortgage lenders criteria. The mortgage comparison calculators will help evaluate the loan programs and compare different mortgage lenders to see which loan may fit best. Mortgage amortization calculators will help determine the total costs over the life of the loan and see how a new home affects the household budget. Now its time to shop and investigate the housing market that interests you.
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