First time home buyer loans are a growing market for banks, and a necessity for those who want to put their name on the deed of a piece of property for the first time. Now more than ever, it’s important that home buyers seek out the best first time home buyer loans to get attractive repayment terms, good interest rates, and a loan which they can afford.
Before searching around for a mortgage loan, it’s important to start thinking about your financial situation. Buying a home is certainly not an everyday experience, and the costs can quickly tally up.
Furthermore, buying a home requires a commitment that most people simply cannot make: the commitment to pay your mortgage every month without fail for the next 15-30 years. Realize that paying on a mortgage means you’ll need to be employed continuously, or have an extra stockpile of cash to provide you with necessary funds should you experience a job loss or shortage of cash.
Before you sign
Before you go to get pre-approved for a home loan, be sure “get your ducks in line,” so to speak. The lender will want to pull your credit report to verify that you are a good borrower, and will also ask for paycheck stubs, employment proof, and possibly tax returns to ensure that what you say you earn each year is true.
The first step in the process of getting a loan is to make sure you have all your documentation in perfect shape before signing onto a loan request. Use the government’s free credit report service to check your credit report for any errors, missing payments, or concerns which you can erase before you go to apply. Additionally, consider making larger than normal payments to reduce balances on credit cards and car loans. Ideally, your credit card balances should be zero before you go to apply. High credit card balances indicate to lenders that you are an unnecessary risk.
The US government is especially interested in making the mortgage market as open and competitive as possible, using the law to encourage people to purchase, maintain, and enjoy the American dream of owning a piece of property. There are many different loan types, most of which are offered as an extension of the federal government.
The Veteran’s Affairs office has a VA loan program for service people. For average Americans, the next best option is an FHA loan, one backed by the Federal Housing Authority. FHA loans are inexpensive, offer favorable financing terms, and require a down payment of only 3.5% for the purchase of real property. Most lenders will offer FHA loans as they benefit from the government guarantee as well.
First time home buyers may decide to put up more than 3.5% when purchasing a home with a mortgage. In buying your first home, you’ll have to pay for what is known as “private mortgage insurance” should you decide to put down less than 20% of the home’s value as a down payment. Private mortgage insurance protects the lender against the possibility of a loan default, and it can be very costly for risky borrowers. In general, expect to pay $100 per month in PMI for each $100,000 borrowed.
How much to borrow
Banks make money by lending out money to other people. Naturally, banks want to make as many loans as they can in a size that makes them the most money. Typically, a bank will pre-approve borrowers up to a certain amount, essentially giving them the firepower needed to purchase a home of up to a certain dollar amount.
Keep in mind that the pre-approval amount is usually equal to an amount where 30% of your gross income will go to pay the mortgage. Not only is this a very expensive home, but it is also risky in that if you lose your job it will be only a matter of months before you run out of cash, have to cut down considerably on expenses, or realign your goals to fit your home. Ideally, first time home buyers should start with a so-called starter home, and choose to finance only as much as comfortable. A monthly mortgage payment should be no more than one week’s pay in the best case scenario, thus leaving you enough money to save, pay for other costs, and have enough left over to cover any unforeseen expenditures.