First-Time Home Buyer Mortgages
Are you planning to buy your first home in the near future? If so, mortgage loans are probably on the top of your mind. But what does a first-time home buyer need to know about the mortgage industry? Where do you begin your research, and what should you be doing right now to ensure success later on?
In this lesson, I'm going to share some first-time home buyer mortgage tips that will help you choose the right loan for your particular needs. We will talk about the different types of mortgage loans, programs that are tailored to fist-time buyers, and just about everything else you need to make smart decisions.
How Mortgage Marketing Creates Confusion
A lot of first-time buyers become confused and overwhelmed when they start researching mortgage loans. This partly has to do with marketing and advertising. A lot of banks and lenders will promote first-time home buyer mortgage programs as a way of attracting new business. But when you begin to peel away the layers and analyze the loan itself, you realize it's just like any other mortgage loan. So what makes it unique as a first-time buyer mortgage loan? To answer this question, we must discuss the qualities of a home loan that would appeal to a first-timer.
So, the question is, what do first-time buyers have in common?
For one thing, they usually don't have a lot of money for a down payment. This is the number-one characteristic that most first-time home buyers have in common. Compare this to a person who already owns a home and plans to sell it. Most people who sell their homes walk away with some money they can put toward the down payment on the second home. But this is obviously not the case for a first-time buyer. So the down payment is a major consideration. How will you come up with that kind of cash?
This is why so many first-time home buyers choose FHA mortgage loans as their financing tool. The down payment for an FHA loan is generally much lower than the down payment for a traditional mortgage. Most lenders will require a down payment of at least 10% for a traditional loan (that is not backed by the FHA), and sometimes up to 20%. But with an FHA mortgage, a first-time home buyer could pay as little as 3.5% down. This is the primary benefit of this particular loan program.
Homework Assignment #1 - Research FHA Loans
Our website offers plenty of information about FHA home loans, the requirements for the program, how to apply, etc. You can also apply for an FHA mortgage through our website.
We can sum up this section by saying this: Don't take things at face value. Many lenders offer first-time home buyer mortgage loans that are like any other loan. But at the same time, there are certain home loan programs that are ideally suited for first-timers (like the FHA program). You need to do a little digging to find out which programs offer real benefits, and which ones are simply marketing hype. Common sense will guide you.
Incentives for First-Time Home Buyers
First-time home buyers can also take advantage of programs designed to help them purchase a home. For example, right now in 2009, first-timers who purchase a house can qualify for a tax credit up to $8,000. This program is part of a stimulus plan designed to reignite the economy, following the recession 2008 - 2009. This is not necessarily a mortgage program, but rather a tax incentive designed to help first-time home buyers.
These kinds of programs come and go all the time. The tax program I just mentioned is set to expire at the end of 2009, but could be renewed for another year or so. What does this mean to you? It means you need to educate yourself about current programs such as the one described above. This is why research is so important for first-time buyers. You need to know what the economy is doing, what's happening in your local real estate market, and what kinds of programs are available to home buyers.
Homework Assignment #2 - Research Current Incentives
Do a Google search for things like "first time buyer tax credit" and similar phrases. See what you can find out. Pay attention to the dates of the articles, as these programs change often. Do a similar search for first-time home buyer grants within your state.
Start following real estate news websites a few months before you plan to buy. MarketWatch is a good website with real estate updates, and there are many others to choose from. This will help you keep abreast of first-time home buyer mortgage programs, tax incentive, economic developments, etc.
Choosing the Right Type of Home Loan
Choosing the wrong type of mortgage loan is another common mistake among first-time buyers. For example, let's assume that a buyer who plans to live in a home for many years ends up choosing an adjustable-rate mortgage. The interest rate on such a mortgage will adjust or "reset" after three to five years, and it may continue to adjust every year after that. If it resets to a higher rate, which is usually the case, it will increase the size of the homeowner's mortgage payment. This is what happened to a lot of people leading up to the housing crisis of 2008. They opted for adjustable-rate mortgage loans in order to reduce their monthly payments for the first few years, but after that they experienced payment shock when the rates increased significantly.
Tip: Are you ready to move forward with the mortgage process? .
This should be a key part of your first-time home buyer mortgage research. You need to understand the pros and cons of different types of home loans, and then choose accordingly. If you plan on staying in the home for many years, you are almost always better off with a fixed-rate mortgage. However, if you are only going to be in the home for a few years, you might be able to save money with an adjustable-rate mortgage loan. But you have to know (A) what your long-term plans are, and (B) how the different types of mortgage loans work.
Homework Assignment #3 - Research the Types of Mortgages
Start with the primary differences between fixed and adjustable-rate mortgages. How do they work? What are the pros and cons of each one? Which one seems better suited for your long-term plans? Learn more here
Mortgage Preparations for First-Time Home Buyers
We've talked about several important mortgage topics for first-time home buyers, such as down payments, incentive programs, and the various types of home loans. But these are all factors that come into play when you're actually ready to apply for a loan. In reality, though, the mortgage process starts long before you submit your first application.
This is another area where first-time home buyers often make mistakes, usually by skipping important steps in the process. Long before you start talking to mortgage lenders and submitting applications, there are certain things you should do. Here's a checklist to get you started:
- First, you need to determine your home-buying budget. Before you apply for a loan, you need to have a firm idea of what you can afford to pay each month.
- You need to check your credit reports for accuracy, and the sooner you do this the better. Having mistakes on your credit reports can drag down your credit score, and this can hurt your chances of getting approved for a mortgage loan.
- You also need to check your FICO credit score, which is the one lenders look at when considering you for a loan. If your score is too low, you probably won't get approved for a loan. And even if you do, you'll get charged a higher interest rate on the loan. On the other hand, a high score will increase your chances of being approved.
- We just talked about the importance of your credit score, as it applies to the mortgage approval process. So if you find out that your score is low, you need to take certain steps to raise it. This can take time, so you need to start the process long before you submit your first loan application.
Many first-time home buyers skip these preliminary mortgage steps, and as a result they are ill-prepared for the process. In some cases, the buyer will take on more of a mortgage loan than they can realistically afford. Some people don't think this is possible, but it happens all the time. So let me set the record straight. Yes, it's possible to get approved for a mortgage loan that is too big for you. This is the number-one reason people end up in foreclosure. Being approved for a loan, and being able to afford the monthly payments for years to come, are two different things.
You can easily avoid such problems by establishing a budget for yourself. You should do this early on in the first-time home buyer mortgage process, before you apply for any loans.
Homework Assignment #4 - Establish Your Budget
Start by adding up all of your monthly expenses, and then subtract this amount from your net monthly income (i.e., your "take-home" pay). You should spend less than this amount on your mortgage payment each month. Learn more here
The same goes for checking your credit score, and improving it if necessary. You should do this early on in the process as well. There's really no point in applying for a home loan if your credit score is terrible. Bad credit mortgage loans are practically extinct these days, as a result of the economic recession we just endured. Lenders are stricter today than they have been for many years, so you need to make sure you are well qualified in every aspect -- and that includes your credit score.
Homework Assignment #5 - Check Your Credit
Do this as soon as possible. If your score it too low for mortgage-qualification purposes, it might take months to improve it. Or maybe you don't even need to improve it. The point is, you need to find out where you stand. The sooner the better. Learn more here
Conclusion and Going Forward
I hope this lesson on first-time home buyer mortgage loans has prepared you for the process. At the very least, I hope it gives you some topics for further research, and some "homework" assignments to tackle. If you have questions about anything discussed in this article, you can send it to us through this page.
About the Author Brandon Cornett is a real estate writer and the publisher of Home Buying Institute. He has been educating consumers on housing-related topics since 2004.
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