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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