Great Tips for the First Time Home Buyer

So what if, after crunching the numbers, you decide it's time to buy your piece of the American Dream? Here's my look at some smart strategies for first-time home buyers.

First: Pay Off Your Debt

It's a common mistake for home-buyers-to-be: They focus on saving as much money as possible for a down payment instead of paying off other debts. A better approach is to use extra cash to eliminate credit-card and other high-interest consumer debt — even if that means you can put down less on your future home.

Why? First, credit-card debt is expensive and limits your ability to save. The average interest rate on credit cards now stands at 13.8%, or more than double the 5.33% national average for a 30-year fixed-rate mortgage, according to Bankrate.com.

Second, credit-card debt will limit how much you can borrow. That's because lenders won't allow your total monthly debt service — which includes payments for credit cards, student loans and car loans, as well as homeowner's insurance, property taxes and a mortgage — to exceed 40% of your gross income.

How Much Can You Afford?

The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and homeowner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home).

Types of Loans

Now you're ready to start shopping around for the right loan. As I said, a first-time home buyer with a steady job and good credit can qualify for 100% financing. These loans are more available, and more reasonably priced, now that they're acceptable to Fannie Mae. (The government-sponsored agency purchases mortgages worth up to $417,000 on the secondary market — absorbing the original lenders' financial risk.

But the more money you can muster for a down payment, the more options you will have. For example, Fannie Mae's new "start-up mortgage" allows borrowers who can put down 5% to qualify for a loan on a smaller salary than with a 3% down payment. You will need to find a Fannie Mae-approved lender to take advantage of this program. Click on Home Financing Center for product information.


Questionable Credit

Worried you don't have perfect credit? Thanks to Fannie Mae's "expanded approval" program, consumers with slightly blemished credit can also qualify for mortgages at competitive rates that are as much as two percentage points lower than alternative financing. "These are people who might not qualify for fair-market value rates from traditional lenders," says Liz Bayless, director of single family product development at Fannie Mae.

Down-Payment Assistance Programs

Still having trouble coming up with that down payment? Each year HUD gives states and municipalities money to distribute to low- and moderate-income families for housing. Much of it is put toward down-payment assistance programs. Many young prospective home buyers may qualify for a $3,000 to $80,000 grant (or in some cases a loan that's forgiven if a home buyer stays in the home for at least three years) to put toward their down payment or closing costs.

To learn more about a down-payment assistance program contact one of our mortgage specialists at Home Financing Center.