According to a recent study, about one in eight U.S. households devote at least half of their income to housing costs. One in three devote a third of their income to housing.
There is clear evidence that home affordability is a major problem, but the problem seems worse when you're the one dreaming of buying a home for the first time. While the home-buying boom is great for sellers, first-time buyers often end up making concessions just to get into a home of their own. While there are certain things first time homebuyers need to watch out for, there are ways to ensure you get everything you want without sacrificing too much.
The Process
If you're thinking about buying your first home, there are a few things you should do right away. The first and possibly most important step is to get your finances in order. That includes reviewing your credit report to make sure that all the information being reported is current and accurate. If it isn't, you'll need to contact the big three credit reporting agencies (Equifax, Esperian, TransUnion) and work with them to change any erroneous information. If you have credit cards that can be paid off easily, or are open but not used, close them. Add up all your monthly bills and your pay stubs and figure out your debt to income ratio. Once you have your finances in order, you can explore mortgages.
Mortgage 101
Aside from choosing the right home, the biggest challenge faced by first time homebuyers is wading through information about mortgages. Mortgages are available from banks, mortgage companies and credit unions, or mortgage brokers. Not all mortgages are the same, so you should work with a lender who can help first time homebuyers with clear, easy to understand information about the types of mortgages that will be best for you.
Question Authority
When shopping for a mortgage, you should get your information from more than one source, but get the same information from each source to make comparisons easier. What should you ask each lender? Here are a few questions to ask and why they are important to you:
- Is the offered rate fixed or adjustable? Adjustable-rate loans can be a good way for first time homebuyers to literally get their foot in the door. Adjustable-rate mortgages often allow for lower monthly payments up front.
- What is the loan's annual percentage rate (APR)? The interest rate, points, broker fees and any credit charges you may have to pay are all part of the yearly rate you'll be paying.
- What will the total points be in dollars? Points are simply the lender or broker fees on the loan. Get a quote of the dollar amount so you'll know exactly how much you'll have to pay.
- Is private mortgage insurance (PMI) required? PMI is often required if your down payment is less than 20% of the total price of the home. This is insurance that protects the lender in case you fail to pay. Find out the exact monthly amount and how long you will be required to carry PMI. This should also be spelled out in loan documents.
Years of Living Dangerously
Mortgages come in either 30-year or 15-year commitments. The longer the commitment (or life of the loan), the lower the monthly payment. So, a 30-year mortgage will have much lower payments than a 15-year mortgage. Of course, the trade off is that the longer the commitment, the higher the interest rate. A 15-year mortgage will have a higher monthly bill, but you'll pay less in interest and eventually, less for the house since you'll pay off the loan in a shorter period of time.
Help When You Need It
Many local and federal government programs directed at first time home buyers are available for first time homebuyers including HUD-funded housing. Check with your local housing office or community development office to see if there are programs available in your area and if you qualify.
