Financing for First Time Buyers

The last few years have helped reinforce the maxim that the best real estate investment you can make (and one of the best investments of any kind) is simply buying your own home. Even for those who had to accept a higher interest rate because of credit issues, ownership has paid off. Demographics suggest that this trend should continue over the long term, making entry into the housing market a priority for most people.

 Lenders are trying to make the process easier by creating new programs and expanding the eligibility for existing ones. It is usually not a question of “can” you qualify; instead the question is “which program is best?” For most people with an average credit history, having a job and a three digit bank balance (after bills are paid) is sufficient to get a home mortgage. The question then becomes, “what is the right mortgage?”

Among the major programs available are government loans such as through the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). These loans offer a variety of low/no down payment loans for first-time and move-up buyers. The FHA mortgage insurance program is the bedrock upon which the nation’s homeownership foundation was built. The program requires a small down payment and mortgage insurance premium (MIP), but its liberal qualifying standards are responsible for its enduring appeal.

There are mortgage programs for virtually every circumstance, but you want to try to qualify for the most advantageous mortgage programs and the best rates you can. There are pitfalls that can torpedo a loan application, even after it has been approved, and possibly sink your home purchase. You should try to take the time to get your finances in order BEFORE you start the homebuying process. Addressing the following items can help improve you odds of maximizing your options and avoiding problems:

• Do see that you have a credit history. Your credit history is probably the most important single factor in determining if your loan is approved and at what interest rate. Surprisingly, paying for everything in cash or with a debit card doesn’t help improve your creditworthiness. Get credit, even if you have to apply for a secured or high interest rate card…and charge something!
   
• Do keep credit lines open to optimize your credit score. It is not true that  having lots of open credit lines hurts your credit score. It’s the relationship between your available credit and what you owe, along with how long you have been managing that credit, which determines your score. Consolidating several credit cards into one shows up as a “maxed-out” credit card. Having lots of available credit  and using little of it scores high. When accounts are closed, often they are the ones with the longest (and most valuable) credit history.
   
• Do put off buying a new car (or making any other major purchase) until after you are in your new home. Getting a new car will usually significantly (and unfavorably) alter your debt ratios.