First Time Home Buyer

As a first time home buyer, the process as a whole can seem very overwhelming. This article is intended to make this process easier on you and provide as much information and resources necessary for you to make that first home purchase. The more you know, the better the decisions you make will be. For example, the largest obstacle first time home buyers face is being able to come up with the funds necessary for a down payment. It may seem impossible to save that kind of money with all the other monthly expenses you already have.

Down Payment Assistance & Available Loan Programs

Coming up with the traditional 20% down payment is often the largest hurdle for first time home buyers. Alabama fortunately has many programs set up to assist you with the payments. The agency that handles all these programs is called the Alabama Housing Finance Authority (AHFA).

Nearly every state has first time home buyer programs. They are essentially one variation or another of low-interest mortgage loans. The programs allow first time home buyers to afford a mortgage where they could not the conventional way alone. In most cases the savings in interest costs is in the 10s of thousands. Here is a summary of current programs Alabama offers.

First Step: This is a tax-exempt Mortgage Revenue Bond (MRB) program that offers lower-than-market mortgage interest rates. AHFA has added several options to this program for first time home buyers who need extra help with down payments, who live in rural areas without access to many lenders, or who have disabilities or family disabilities.

Step Up: Program designed specifically for moderate-income home buyers; those whose incomes can sustain a market-rate mortgage but whose savings fall short of the amount needed for entry costs like down payment, closing costs, and prepaid items.

USDA: With this program you are not required to put any money down. It also provides 100% financing if the property location qualifies as a rural development area. The program also does not have a monthly MI which equates to money in your pocket.

FHA: This program is a government backed program. It helps by offsetting the large cost of home buying by requiring a lower down payment of 3.5%. FHA is also a credit friendly program.

First Time Home Buyer Loans

Getting pre-qualified for a mortgage before making an offer on a home is highly recommended. This has two important advantages: first, you will know exactly how much you can afford to pay on your first home, and second, it will give you strong negotiating powers for the best price on that home. This will let the seller know that you are a serious buyer, and in turn, the loan will probably close faster. Generally, this makes the seller want to reduce the price of the house in order to close the deal faster.

It is common for the loan approval process to take 2-3 days up to a week; it just depends on the lender. This then adds to the period of time the seller has to wait for a closing to go through. A pre-approval would eliminate this delay and would eliminate the risk to the seller that you may not qualify at all. So again, a pre-approval is definitely in your best interest as a first time home buyer.

First Time home Buyers Guide

This guide will walk you through the home buying process in 15 steps, which have information to make each step achievable.

1. Establish Good Credit: Banks and lenders will not lend to first time buyers unless you have a history of borrowing money and paying it back in a timely manner. If you do not have any credit references, then you would need to establish some. The easiest way to do this would be to go through a local bank, deposit a small amount of money, say $500. Then go back and apply for a $500 loan, using the money you deposited as security. This is one of the easiest, quickest ways to establish a good credit report.

If the loan term is for 6 months, make payments for the first 3 months, then pay off the entire loan. Repeat this process with larger and larger amounts. This will establish a good track record. Do this enough times and then you won’t need to deposit any money for security; your track record will be enough so you can get a signature loan. Along with this you will also want to be using credit cards responsibly, paying off the entire balance every month.

2. Raise Your Credit Score: Home buyers with high credit scores are able to get the lowest interest rates. A high credit score is a very important element for first time home buyers. Some basic tactics are:

• always pay bills on time
• keep credit card balances at 0, or very low
• make more than the minimum monthly payments
• negotiate to remove negative items from credit report
• borrow great credit from relative or close friend

3. Save for Down Payment & Closing Costs: When buying your first home, you must have the down payment and closing costs. Start saving immediately. Set aside a certain amount every time you get paid and stick to it. Learn to adjust your living expenses around that saved money. Open a separate account for the money and discipline yourself to set aside any amount you can every week.

4. Keep Detailed Records of Money Spent: First time home buyers should develop a sound budget. Keep track of every single purchase for a period of one month. At the end of this month, categorize the information to see exactly how your money spent breaks down. This way you can easily see where you have room for improvement. More importantly, just live within your means. The faster you can save money, the closer you will be to purchasing your first home.

5. Develop Financial Plan: To be able to buy a house, you should set a goal of saving 20% of the purchase price to use as a down payment. There are programs that will allow you to put less than 20% down. Some programs even allow you to put down as little as 5% or less. In any case, for a first time buyer, it is extremely important to develop a financial plan and stick to it.

6. Establish a Relationship with an Agent: Try to find an agent that specializes in first time purchases. Find out what each agents strengths and weaknesses are. Shop around until you find the one that fits your every need. Tell them up front that you are a first time buyer so you wont be wasting any time with them if that is not in their area of expertise. Once you have found the right agent for you, they can be your link to all the available local properties you would be interested in. They will also be able to provide you with valuable information and details on the buying and selling process. It is strongly encouraged to seek the professional help of an agent when buying your first home.

7. Study Market Value: You already know that you don’t want to pay more than a house is worth and you want to get the best deals. Overtime, you will develop better skills and have a mental database of comparable properties to be able to see the best deals and values. As a first time buyer, you will benefit the most from purchasing a home for less than what its worth. The instant equity from this will boost the profit and money in your pocket when it comes time for you to sell the house later on.

8. Get Pre-Approved for Mortgage: For a first time home buyer, getting pre-approved for a mortgage is an important step in the process. Your offer will hold more weight to the seller, and the purchase will most likely close faster. Being able to offer a quick close is an excellent tactic in getting the seller to come down on the purchase price.

9. Decide Your Needs/Wants Within Budget: First time buyers have the tendency to be overly enthusiastic. You need to be aware of this temptation and focus on making choices that stay inside your budget. There will most likely be a lot of incidental expenditures you will not have expected, so be careful not to overspend on the house that you do choose. Once you know your budget and find some houses that fall into it, you can be confident in choosing the right house in your price range.

10. Shop for the Right Home: With the budget you have worked out, you and your agent can begin visiting homes in that price range. Make sure you have discussed all the amenities you desire and what area of town you would like to live, if specified. The more information you give your agent in the beginning, the faster you will find the house you want.

11. Learn Elements/Terms of Sales Contract: Here is a short list of the basic elements of a real estate contract.

• Acceptance- time seller has to accept offer or provide counter-offer
• Closing- future date closing will take place
• Description- legal description of property and street address
• Deposit- how much initial money is included with the contract and who will hold it
• Financing Contingency- clause stating that the entire contract is subject to purchaser being able to obtain mortgage loan of X amount, by certain date; first time buyer’s need this included in the contract
• Home Inspection- contract can be contingent upon a satisfactory home inspection being done by a qualified professional within X number of days
• Inclusions/Exclusions- clause should state exactly what is and is not included in the sale
• Insurance- who insures property until closing
• Price- amount of money buyer will pay seller
• Possession Date- date buyer will receive possession of property

12. Choose the Right Neighborhood: Some things a first time buyers should look for are:

• Located in good school district
• Is area improving or in decline
• Is area close to many popular attractions
• Choose your neighbors carefully

All of this has importance towards the value of the house for when it comes time for you to sell.

13. Submit Your Offer: basic negotiation guidelines are:

• Know the Seller: find out as many details as possible as to exactly what the seller wants and it will put you in a better position to negotiate a win/win situation.
• Best/Worst Case Scenarios: weigh all the pros and cons of the deal and make the decision that’s best for you.
• Be Professional At All Times: stay emotionally neutral as best you can. Being professional will help you succeed in your negotiations.

14. Arrange a Home Inspection: It is highly recommended that every first time buyer consult with a qualified inspector. You should make your offer contingent upon a satisfactory report.

15. Arrange Homeowners Insurance: All real estate owners should have homeowners insurance, especially soon-to-be first time home buyers.

First Time Buyer Tips

It is better to buy a home rather than rent because a home is a great investment. It will increase in value, provide you with more privacy, and give you more enjoyment and freedom. Also a mortgage interest is tax deductible and will result in substantial yearly tax savings.

It is not a good idea to try and wait for the price of housing to come down even though it might seem like that. Prices could come down, but prices are directly related to interest rates and you could end up paying a higher monthly rate. For example, a home that’s listed at $200,000 with an interest rate running about 6.5% will have a monthly payment of $1,264.14. If the interest rate rises (which is very likely), the price of the house might fall to $150,000. With an interest rate of 10% the $150,000 loan would have payments of $1,316.36. As you can see from this example any savings in cost of the home would be offset by an increase in interest cost because of interest rate. From this example you can see there would be no reason to wait.

You would be better off to take about 6 months and get your credit repaired before applying for a mortgage. Six months spent repairing credit and building your credit score will provide years of benefits. The benefits will be twofold- you will save tens of thousands of dollars over the life of the loan, and you will be able to afford more houses at purchase. Having bad credit makes it nearly impossible to get the lowest available interest rate. To lenders having bad credit equals higher risk. Generally the interest rate with bad credit will be at least 2% higher than good credit borrowers. Here is an example of good and bad credit with a loan of $150,000. With good credit you would have an interest rate of 6%. Your monthly payments would be $899.33, and for a 30 year loan you would pay $173,757.28 in interest. With bad credit you would have an interest rate of 8%. Your monthly payments would be $1,100.65, and for a 30 year loan you would pay $246,232.87. As you can see from this example, with good credit you save over $200 a month and more than $72,000 over the life of the loan. For a first time buyer it would be worth the 6 month wait in order to repair your credit.

Sue Nguyen – Loan Officer/Branch Manager

sue.nguyen@htmortgage.net
Phone: 251.445.2282
Cell: 251.259.0868