Are You Ready to Buy Your First Home?by Alden Smith
Owning your own home is probably the one biggest thing couples work for today. Although renting has advantages, the thoughts of "one man's ceiling is another man's floor" do not appeal to many people. In the final analysis people want the stability of owning their own home. When careers are stable, children are coming along, and you want security in knowing you own your own property, then home ownership becomes very desirable. The focus of this article will discuss the considerations you need to make in order to own your own home.
First, Your Credit History
In today's unstable market, lenders are getting very choosy about who they lend money too. They consider credit card debt, timeliness of payment, and other factors that affect your credit. The current average annual percentage rate on most credit cards is 13.8%, according to Bankrate.com. With the current rate of home loan interest on the average of 6.26%, it is easy to see that credit card holders are paying twice as much in interest on credit card debt than on a home mortgage. Paying off credit card debt instead of putting extra money away for a down payment makes more sense in this case.
Down Payment and Closing Costs
First and foremost is the ability to pay. A down payment of at least 10% is essential, and bankers prefer that you pay 20% or more. Some lending institutions may not make the loan for you if you cannot come up with a certain percentage, based on your current financial situation. Paying more than the required 10% is not only to your advantage in keeping mortgage payments at an acceptable level, but helps you avoid the necessity for private mortgage insurance (PMI). PMI is nothing more than insurance for the lending institution to protect itself if you face foreclosure.
Closing costs are the fees you pay for the processing of the loan. They include banker fees, cost of appraisals and inspections, payment to escrow to be used towards taxes and insurance, and title searches. An ethical lender will give you the costs of these fees in what is called a Good Faith Estimate, which should be accurate with no surprises when you go to the closing table. The lender will also notify you in the off chance that changes need to be made to the GFE. Plan to pay around 6% of the initial loan for the cost of closing.
Consider the Costs
Owning a home versus renting means that there are additional expenses involved. Utilities need to be paid, and services that are generally covered when you rent now must be taken care of by you. The most obvious are gas and electric, but plan on paying telephone, cable, internet access and other amenities. Trash removal and snow removal are now your responsibility. When ever you are planning a budget for a new home and consider these expenses, always be aware that these are not fixed prices. Plan on them increasing in upcoming years.
Housing experts agree that for a home owner to be secure, they should bank 5% of gross income to cover expenses such as wind and flood damage, and routine maintenance on the home. If you are buying an older home, there is no guarantee that the roof won't start to leak 2 years after you move in. Expect to pay at least $5,000.00 for a new roof. Wind damage can destroy siding and landscaping. Borrowing money for these expenses is not always the best option. It's better to plan and to save.
What Does the Lender See?
Today's lenders look at debt to income ratio. The current ratio is 28/36. Always calculate what this ratio will be before considering a home loan. Many calculators are available today on the internet that will help you to get a realistic overview of your current financial situation. Use these to advantage before approaching a lender.
If after considering these facts and determining your financial outlook is not what you expected it to be, don't despair. Fannie Mae has a program called "expanded approval" that allows people with less than perfect credit to own their own home. Their rates are competitive, and can even be as much as 2 percentage points lower than national average.
The Department of Housing and Urban Development (HUD) assists people that wish to buy their own home. HUD helps buyers raise $3,000 to $5,000 for the initial down payment. The Federal Housing Authority (FHA), a branch of HUD, also works with people with blemished credit.
Buying a home should not be a daunting task. Although there are a lot of things that need to be taken into account when purchasing a home, following these simple guidelines will help you go a long way in making home buying an easy task. There is no lack of information available today on the internet. Use these resources to your own advantage.