First Time Home Buyer

Many potential first time home buyers are wondering what to expect when they approach a lender given the latest developments in the whole mortgage mess we are in.  Will the required down payment be more than 5 – 10%?  Are there any 0% down payment programs out there for first time homebuyers anymore?  How does the first time homebuyer sort through all the changes that are taking place anyway?

Many first time home buyers have these questions as well as other pertinent questions on their minds.  This is in part because of the current credit crunch that the United States is experiencing.  The answers?  Yes, there are 0% down payment programs available for the first time homebuyer still; however, many have stricter qualifying regulations.  Being aware of the changes in the rules can help avoid stress and confusion during the buying process. 

One of the first and most important things to consider is that credit scores are more important today then they ever have been.  Chances are if you have any blemishes on your credit score at all a lender will not want to extend a 0% down payment loan to you.  Therefore, before even beginning the process of pre-approval or shopping for homes and or lenders you will want to pull your own credit report.  You can actually do this once a year for free from each of the three main credit agencies.  Look at the report to see if there are any items listed that need your attention.  Dispute anything that is not correct, if something has been paid in full but is not reported as such you can have that changed before a lender looks at the report.

You are likely to find that lenders are getting rather restrictive on a whole and particularly with the ratios that they use when qualifying for a loan.  For instance, if you need private mortgage insurance, which is generally required for people who put less than 20% down, then the private mortgage insurance company might require a larger down payment.  They may simply allow a smaller ratio as well; this will end up lowering the total amount that you are able to borrow.  It is competitive today and despite the fact that people want and need to move the huge number of available homes off the market lenders want to make sure they will not be foreclosing on a home because of defaulted loans too.  Fully understanding all the rules and doing the foot work first is very important in this tougher mortgage environment; however, doing so will put you ahead of the game and help to secure your mortgage and your first home.

It is the opinion of many people that the government, despite what the President may say, will in fact bail out mortgage high players Fannie Mae and Freddie Mac. For these companies to fold would be detrimental to the economy. But what exactly are Fannie Mae and Freddie Mac and what do they do? Simply put, a home buyer achieves a mortgage from a lending institute and Fannie Mae or Freddie Mac purchase the mortgage to then resell it again to investors. They receive money from the sale to the first lender to continue lending. In the last decade Freddie Mac handled nearly $164 billion in New York mortgages alone; serving over 1,325,000 families. If Freddie Mac and Fannie Mae have serious financial problems then credit will tighten and it will become increasingly difficult for any consumer to get a mortgage; but particularly for the first time home buyer. At this point it is unknown how much money these companies will need to borrow from the Federal Reserve, the government or the public treasury; however, the government has stated that if they do need it they can come for it. With the potential for government bailouts confidence is building.

When push comes to shove, impact from national news or news on a local level does not change the rules in applying for a first mortgage; make sure you have your finances in order before shopping for a home, make sure your credit is in line and be aware of your credit score. The first time home buyer needs to educate themselves more than ever as lenders begin to tighten their belts. Knowing what your credit score is, how to increase that score and look favorable to the lenders will increase your chances of obtaining a mortgage regardless of what is happening in the financial world; these are basic rules.

Before a lender will grant a loan for a home he will first run a credit report on the buyer to help them get a picture of the buyer’s ability to pay the loan. The last thing a lending institute wants is for a buyer to get in over their head and default on their mortgage. It is therefore recommended that before shopping for a home or showing up at the lending institute to apply for a first mortgage you run a credit report of your own. You can do this for free once per year by going to annualcreditreport.com. This will help you figure out any areas that need to be corrected and what areas could be improved. Once you are satisfied and your lender runs the report he will be able to help you understand what you can afford. If you have discovered your credit is in shambles or your credit score is low there are ways to bring up your credit score and you will have the time to do so.

Freddie Mac and Fannie Mae having financial problems is just the reflection of what is happening in the economy today; we are all feeling the pinch. This is a time, more than any to tighten our own belts, avoid using credit excessively and manage your credit well; doing these things will allow you to be among the few people that the lenders extend a first time home buyers loan to.

Before first time home buyers can positively affect your credit score you must first be able to understand what the report it and how the score is appointed. A credit score is given to you based on your credit report obtained from one of the 3 major credit reporting agencies. Your credit score is intended to reveal the likelihood you will default on your loan or declare bankruptcy. To obtain the credit score, a borrower is compared to other consumers that are similar to them. A borrower who has two late payments over 30 days is scored against comparable delinquent-payers. The borrower is graded according to risk variables used by the scoring model and will is ranked within the group of comparable borrowers. Credit scores generally range from 300 to 850 with the average credit score in the United States being 698. FICO is the most widely used credit scoring model and basis its scores on 5 criteria:

• Payment History: 35%
• Amount Owed: 30%
• Credit History Length: 15%
• Amount of New Credit: 10%
• Mix of Credit: 10%

To maximize your positive credit on your credit report you will want to make sure you pay all of your bills on time every month. You will also want a healthy mix of credit such as a car loan, student loan and credit cards. Credit of just credit cards does no make a sound credit score. Pay down your bills so that you have 30% of the credit limit in use. A lender does not want to see your credit cards maxed out, nor do they want to see them never used.

Essentially after running your credit report you will want to look for items that are incorrect and dispute these immediately. If there are items on the report that have been paid off call the institute and inform them that they need to have the credit agency mark this as paid-in-full. Strive for a mix of credit and pay down your bills. If you have a lot of medical issues on your credit report make sure you are at least making regular payments will help the lender see you are responsible in paying your debts.

Allow at least 6 months to start seeing a difference in your credit score when you are working to positively affect it. Note that disputing an issue will immediately remove it and will have a good impact on your credit score quickly. Your credit report and work on your credit score should be your first step in any large purchase such as an auto loan or a mortgage. The last thing you want to do is find that perfect house, fall in love with it and find that your credit report has issues that need to be addressed first. Get your report; find out your score and work to improve it first. The better your credit score is the better loan and interest rate you will be able to get making your overall mortgage payments lower.