History does not lie – no matter where we are in any of the past real estate home value and mortgage interest rate cycles, there has always been first time home buyers. This will be the case into the future. With this said, there are some things you ought to know when it comes to buying your first home, if you are a first time home buyer.
First Time Home Buyer Tips
Credit Scores Matter – There is not much leniency here anymore – you gotta have a middle credit score greater than 620 to have a chance at a mortgage. The one exception to this is you do not have a credit score but you have other forms of established credit that you can show to an underwriter. If your scores are less than 620 you will want to do what ever you can to improve your scores before you apply for a mortgage.
Home Buyer Tax Credits Available – First time home buyers are eligible for up to an $8000 tax credit to buy a home until December 1, 2009 from the IRS. The tax credit cannot be used as down payment or closing costs to buy a home in 2009 as you can only get the tax credit once you buy your home. So you will still have to come up with money for your down payment and closing costs. One possible source of down payment and closing cost assistance is from your home state’s housing authority. You may also get a gift from a relative depending on the type of mortgage you ultimately get.
States With Short Term Tax Credit Loan Programs – Some states have short term tax credit loan programs that provide a loan to qualified first time buyers money for down payment and closing costs. Generally these programs are designed to have the first time buyer pay the loan back when they receive their first time home buyer $8000 tax credit from the IRS in 2010.
Some Savings Are A Must – Many first time home buyer loan programs require you to have at least $500 up to 3.5% of the sales price of the home you want to buy in order to qualify for the mortgage. If you are anticipating buying a home in the near future, you’ll need to start putting money away, or arrange for a gift from a family member.
Gotta Have A Job – There is no way around this one like there used to be. To prove your income, you need a paycheck or at least 2 years of self employment history where you have income showing on your tax return. As a first time home buyer, be prepared to supply your last several years of tax returns (maybe as many as three years) in order to qualify for your mortgage.
Keep Your Expenses Low – The days of getting a mortgage approved with a debt to income ratio of 65% are over for now – perhaps forever. You need to keep your total debt to income ratio less than 45% to have a shot at a mortgage in todays mortgage market. The message here is that you need some credit to get a mortgage, but you need to control you spending while you prepare to buy a home.
Pre Payment Penalties – Most fixed interest rate conventional mortgages, FHA mortgages, VA mortgages and USDA mortgages do not have pre payment penalties. Pre payment penalties are primarily for adjustable rate mortgages and subprime mortgages. Make sure you ask about a pre payment penalty as you apply for a mortgage.
PMI – What is PMI? Private Mortgage Insurance? PMI is insurance that your mortgage company will make you get if you do not put more than 20% down on the home you want to buy. Many people do not have the money to put 20% so PMI is common. Gone are the days of the 80/20% no money down mortgage. Home equity mortgages to 100% are impossible to get now in 2009, so your option is a first mortgage to 97% with PMI if you are going to buy a home with very little money down.
Home Price Trends – We are at one of the lowest home price declining cycles we have seen since the depression. No matter what home prices are going – going up or down – if you plan to stay in your home for the long term (at least more than 5 years) you might not want to worry so much if your home price is going to go down another few thousand dollars. You run the risk of someone else coming in a buying the home that you want. You may also may miss the window for getting a low rate if rates happen to be low at the time when you are looking.
Interest Rate Trends – If you are qualifying for a mortgage you will know what interest rates you qualify for. The best way to think about mortgage rates is their general trend as you prepare to make an offer on a home. Ask your loan officer if they are going up or down and what the trend has been. The longer you can wait to lock your loan to closer to your closing date, the better interest rate your loan officer can get you.
30 day locks are common, but you can get shorter locks if your loan is approved and ready to close in the short term. If rates have been trending down, then you may wait to lock until later in the approval process. Make sure you discuss this strategy with your loan officer. In the reverse, if rates are trending up, then you’ll want to lock your rate as soon as you can.