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Crucial Factors First Time Home Buyers Can't Afford to Overlook

There's never been a better time for first-time home buyers to make their move, especially considering the large inventory, low interest rates, tax incentives and low home prices. Still, if you are considering the purchase of a home this year, there are a few things that you should know in order to make sure you find the best deal possible and also to ensure that you do not find yourself facing problems you had not planned upon.

First, home prices are low. In fact, they are lower than they have been in quite some time. This means that if you want to find a good deal, now is definitely the time to strike. Still, it's important to make sure you know exactly how much you can afford to spend on your first time home purchase. Be sure to take into consideration not only the monthly mortgage payment but also the cost of insurance and the cost to maintain the home. Consider getting pre-approved for your mortgage loan before you begin shopping around.

In addition, interest rates are still low as well. They have risen from the historic low where they dropped earlier in the year, but overall, they are still quite good. In order to find the best interest rate for your new mortgage, make sure you shop around.

Tax credits can also assist you in the purchase of your new home. As a first time home buyer you may be eligible to receive money from tax credits that are part of the 2009 American Recovery and Reinvestment Act. First time home buyers can receive up to $8,000 for homes that are purchased prior to December 1, 2009.

Do keep in mind the importance of credit scores in purchasing a home. The housing inventory is large, but financing is limited to those buyers with good to excellent credit. If your credit score is below 660, you should expect either a higher interest rate or being denied a mortgage. Make sure you check your credit before you apply for a mortgage. If you see that your credit score is lower than it needs to be in order to be approved for a mortgage or receive a good interest rate, consider waiting for awhile before you apply for a mortgage. This will give you time to raise your credit by paying off or paying down credit cards and other bills.

Don't overlook the need for a down payment. While there are mortgage programs available that will allow you to purchase a home with little to no down payment, this will create the need for private mortgage insurance. Often referred to as PMI, this special type of insurance is required when the loan to value ratio on a home is 80% or below and is meant to protect the lender if you default on the loan. Making a down payment of at least 20% will help you to avoid the extra expense of PMI.

Make sure you understand all of the costs associated with buying a home as well as owning a home. When you buy a home, you will not only need to make the down payment but you will also need to pay for closing costs. The amount for home closing costs can vary but you should plan on between 1% and 2% of the home's purchase price. Also, make sure you are prepared to cover the monthly mortgage payment as well as PMI if it applies, home owner's insurance and costs associated with home maintenance. Try to make sure that your total housing expenses are kept at 35% of your total income or lower to avoid getting in a financial bind.

Never make any assumptions when it comes to your income. At one time, it was fairly common for first time home buyers in their 20s and 30s to assume that their incomes would grow quickly in the foreseeable future. Unfortunately, as we now know, that is not always the case. If you are banking on being able to afford a higher mortgage at some point near in the future, you could be banking on disaster. This is precisely why you should avoid any type of mortgage in which the monthly mortgage amount starts out low and then increases after a period of time, such as three or five years. If your assumptions are wrong and your income has not increased, you could very well find yourself in a situation where your mortgage has suddenly become unaffordable.

Remember that unknown situations in the future can very well affect the purchase you make today. For example, if you do not yet have children, keep in mind that you very well may feel differently about many things once children arrive, including whether both spouses will continue to work. If that is the case, you may not want to have an unwieldy mortgage reducing your options in the future.

You may very well find it helpful to sit down and draft a proposed mortgage based on three different circumstances for the future. For example, one in which both spouses work full time, one where one spouse works part-time and one where one of you stays at home for at least a few years. This will allow you to gain a much more realistic idea of whether your mortgage will truly remain affordable. Remember that even if you do not have children now or in the future, it is still a good idea to keep this in mind as the possibility of future layoffs or early medical problems could always potentially affect the plans you make today.

Also, make sure you review your mortgage carefully and are aware if a prepayment penalty applies. A prepayment penalty is an extra charge to which homeowners are subjected if they pay off a loan early. This includes refinancing, so make sure you check on this before you accept the mortgage.

Finally, make sure you go ahead and obtain a home inspection, especially if you are purchasing a foreclosure or a handyman's delight. The small cost of the inspection will be well worth it in terms of saving you from extra costs and frustration down the road. Even if you decide to go ahead with the purchase of the home at least you will be able to move forward with the purchase with your eyes wide open and be in a better position to plan for necessary repairs and expenses.



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