First-Time Homebuyers Face Hurdles That Most Can Overcome
Buying a home can be a challenging process. So it’s best to be prepared for what you’ll be getting in to before you can move into that new place of your dreams.
First off, figure out some financial basics. How much debt do you have? How much is your gross monthly income? How much money have you saved for a down payment? What’s your credit score? All these are critical in determining whether you can get a traditional mortgage and how much it’ll cost.
Your credit score helps lenders determine what interest rate to offer you on a mortgage. If your score is too low, finding a willing lender may be difficult. Improving a low score takes considerable time.
Debt vs. income
Next, estimate your debts and income. Many lenders won’t give you a mortgage if you’re paying more than a certain amount each month on loans and other debts. All together, your loan and home-related monthly expenses, including taxes and insurance, can’t top 36% to 43% of your pretax income.
If your current debt-to-income ratio is too high, you might still find a lender, but it may cost more. Alternatively, you could try to reduce or restructure your debt, or seek a smaller mortgage. For instance, if you borrowed to buy a new car, consider selling it to pay off the loan.
Before you begin house hunting, start shopping for financing. Finding a lender like Community 1st Credit Union that will work with you and offers competitive costs will help ease and accelerate the process.
Check out mortgage rates offered and related charges. Combined, fees alone can amount to thousands of dollars, so it’s important to get a detailed breakdown along with an estimated total cost from each lender you’re considering. Compare them to see which best meets your needs. Don’t forget to negotiate — some lenders are more flexible on fees and other charges. So you may cut your costs.
Down payments can vary, but remember the amount you put into the deal affects monthly costs. Usually, less than 20% means paying private mortgage insurance, or PMI, which can add hundreds of dollars a month to your bill.
Once you’ve picked a lender, find out how much house you can afford by prequalifying for a mortgage. It’s like applying for a loan and can make it much quicker to obtain the financing you need once you’ve found the home you want. It can also save you from the frustration of learning that your favorite place is priced beyond your reach.
Lenders are required to determine your ability to repay a loan before they give it to you. So expect to document income, employment, assets and credit history. You’ll also have to detail your current debts and related obligations.
Affordability and financing
A home’s affordability partly depends on financing, as types of mortgages can affect monthly payments. The trade-offs usually involve risk levels and total interest costs.
Fixed-rate mortgages are popular as they provide the borrower with the certainty of a specific monthly payment. With rates still near historic lows, this can be the best choice for those who intend to stay put for more than 10 years. Remember that usually mortgage interest can be deducted from taxable income, lowering the monthly expense.
Variable rate loans, known as ARMs, often initially cost less per month, but can leave the borrower exposed to paying more interest should rates rise. In such a scenario, you can find yourself owing a much higher monthly amount in just a few years. So that lower initial cost comes with considerable payment risk.
Hybrid loans mix both, with fixed rates that eventually switch to variable. Hybrids can reduce the monthly cost at first, but predicting rates years in advance is virtually impossible, so there’s still considerable risk involved. These products are often most popular with buyers who expect to move within the fixed-rate period.
There’s a lot to learn for first-time homebuyers, but your lender can help you through it. So don’t let the complexity hold you back.
Ted Bunker, NerdWallet