First Time Home Buyers Loans

Buying your first home is a rush; you’ll soon be signing onto an agreement to make the largest purchase you have ever made over the next 15 to 30 years. But before you start thinking about prospective homes, which paint colors you might use in your new kitchen, or even start shopping altogether, now is a great time to start looking for ways to finance your purchase.

First time homebuyers, contrary to popular thought, are not at a disadvantage in the lending market. While first time homebuyers may be inexperienced in owning a home, or paying for a mortgage, they are often times better suited for a new mortgage than their peers. This is because they’re usually younger, have more time to manage their personal finances, and are likely to earn more in the future than they earn right now.

Borrowing for the first time
One of the few disadvantages that first time home buyers may have in the lending market is that they either have a poor credit score, limited credit history, or they have high debt-to-income ratios from student loans, car loans, and loans from earlier purchases. Luckily, there are a few steps you can take to make sure that you are just as capable to get a loan from a lender as any other borrower.

Taking care of your credit
The first thing you should do is make sure that your credit report reflects the best possible record that it can before applying, here are a few things you can do:

Get your report –, a service provided by the government, allows Americans to get a free credit score from all three major credit agencies once per year. Before applying for credit from a mortgage company, grab your score online for free, and also be sure to print out a paper copy of your credit report. Look for any obvious errors, and be sure to contact the credit bureau should you find any reporting errors. Some 33% of all people in the United States have errors that adversely affect their scores; you wouldn’t want an error to get in the way of getting a home, so be sure to review your report diligently.

Reducing your balances – Credit scores are calculated using a proprietary algorithm which isn’t disclosed to the public. One of the most important parts of your credit score is your total “utilization,” or the amount of debt you have relative to the amount of credit available to you. You should seek to use no more than 50% of your total available credit (e.g. having $5000 of debt with credit lines of only $10,000) both on an individual loan basis, and also on a total sum basis. If you can, try to pay off as much of each credit line as you can so that each is well below the 50% threshold. A credit card with a $2,000 credit limit should never carry a balance of more than $1,000.

Stop applying for credit – One of the surest ways to lower your credit score, and show redflags to a lender, is to seek out credit from a lender before shopping for a home. The number of people who view your credit report is listed on your credit report (annualcreditreport does not affect this number) and lenders will have reservations if they see you’ve been trying to get more credit before getting a loan. If you’re a first time home buyer, this is very, very important.

Understanding the loan terms
The number of different types of mortgages can be overwhelming for first time homebuyers, and they should take the time to understand the various loan types available to them.

Fixed rate mortgages – a mortgage with a fixed rate, your monthly payment will not rise or fall with interest rates. This is a great way to lock in a payment for the long haul so that you’ll know exactly what to expect in terms of how much you owe your lender.

Adjustable rate mortgages – Lenders often push adjustable rate mortgages or ARMs onto new home buyers because they have a lower monthly payment. While the monthly payment is lower, all things being equal, your monthly payment can rise quickly when interest rates rise. These may not be a good way to finance your new home if you don’t want exposure to what happens in the markets.

Loan lengths – There are two very common loan lengths, 15 years and 30 years. A 15 year loan will come with a lower interest rate, but a higher monthly payment. On the other hand, you’ll own your home 15 years faster, and save hundreds of thousands of dollars in interest. A 30 year mortgage comes with a higher interest rate, but the monthly payments are lower than a 15 year loan. In total, you’ll pay more with a 30 year interest rate, since the rate of interest is higher than a 15 year mortgage, and you’ll own your home 15 years later than you would with a 15 year loan.

Down payment – People with decent (but not exceptional) credit qualify for loans that are backed by the Federal government. Issued as FHA loans, these require only a 3% down payment, and are among some of the most affordable. On the other hand, loans that aren’t done through the FHA will require a heftier down payment of 5-20%, depending on location, cost of the home, and the borrower’s credit quality.