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Top 8 Things to Consider When Getting a First Time Homebuyer Loan

Written by James Swift

People who are considering a first-time home purchase have some homework to do before they can get a homebuyer loan. As interest rates continue to hover at the lowest levels in history, there is certainly a strong case to be mad for renters to become homeowners. In many cases first time home buyers can reduce their housing expenses monthly. You must get qualified to buy the house and there is process involved that you need to follow before making such a major commitment.

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Read on to learn the key considerations when getting your first home mortgage:

#1 Check Your Credit Score
Having substandard credit can not only greatly increase your mortgage costs: It can entirely prevent you from qualifying for a first-time home loan. That is why it pays big dividends to check out your credit score very early in your home buying process.

To qualify for the best mortgage rates – around 4% these days, you will want a credit score above 700. Generally, the minimum FICO score that will be considered for a mortgage in 2016 is in the 640 range.
As you are tuning up your credit score, be sure to get a free credit report online – Bank Rate offers a free score with no obligation.

As you are checking your credit score, remember these tips and tricks to give it a boost:

  • Keep your credit card balances under 30%.
  • Reduce the balances on all your credit cards. Also, reduce the number of cards that have balances; it is better to have one card with larger balances than five with smaller balances.
  • Use one or two credit cards each month as your 'go to' cards and pay them off monthly, rather than using a handful of cards.
  • Keep old debt on your credit report. Some people think that having an old, paid off debt on your credit report is bad. It isn't. Proof that you handled your old debts well is good for your report.
  • Leave old accounts open that are in good standing. If you have a credit line of $10,000 that is at 0% utilization and has been open for five years, you are wise to leave that line open and available.
  • Apply for loans within a 30-day period. If you are applying for a home loan, you can apply for loans in several places within a month and it will only have a limited effect on your credit rating.

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#2 Collect All Documentation
Getting a mortgage is easier now than just after the last crash, but mortgage lenders still will want to see that you can pay back your loan. Collect the following documents to present to your mortgage lender or broker:

  • Pay stubs
  • Bank statements
  • W-2s
  • Tax returns for the last two years
  • Profit and loss statement for the year if you are self-employed
  • Names and addresses of your last two landlords

#3 Save Down Payment
The good news is that these days, you can once again get a mortgage with as little as 3% down. The bad news is that your interest rate will be higher and you will have little equity in your new house. It is best to put down at least 10% and ideally, 20% on your new home purchase.

#4 Get a Mortgage Pre-Approval
When you are shopping for your first house, having a pre-approved mortgage gives you leverage. Some of the places where you can start your 1st time home loan hunt includes your own bank and a local credit union. There are many incentives available for first time home buyers, so do your homework before making a commitment to a seller.

If you have so-so credit, consider an FHA, government-backed mortgage, which offers low interest rates and down payments. FHA also has programs that are made for first-time home buyers, and can be a great choice if you have subpar credit and little down payment. Not every lender offers FHA loans, so you must shop around. FHA loan rates continue to be competitively advertised so it makes sense to consider this government financing option.

#5 Work Out Your Budget
Your monthly mortgage payment will be just one of many expenses you will have as a new homeowner. You also need to pay:

  • Homeowner's insurance
  • Property taxes
  • Maintenance costs
  • Homeowner's association fees

We recommend using a home affordability calculator to give you a good idea of your new monthly budget.

#6 Research Different Types of Loans
The 30-year fixed mortgage is the standard in the industry, but it is not right for everyone. An adjustable rate mortgage is not for all buyers either. It really depends upon your unique circumstances. If you are planning to move within 10 years or less, an adjustable mortgage could be the best fit. Most lenders offer "hybrid loans" that offer a fixed interest rate for 1, 3, 5, 7 or 10-years. This helps new home buyers set a budget for their housing expenses and offers a discounted rate as well.  There are many popular options to consider.

  • Fannie Mae loans for 1st time home buyers
  • Freddie Mac offers a program with a low down-payment
  • FHA offers competitive programs for people with below average credit
  • VA offers loan programs for military borrowers
  • USDA home loans for people buying in rural regions of the U.S.
  • Subprime lenders offer an alternative for people that don't qualify for traditional loans
  • Consider several government backed $0 down home loans.

#7 Remember Closing Costs
Closing costs are all the fees associated with buying a property and taking out a home buyer mortgage. Closing costs will vary widely depending upon the size of the mortgage and your state. Common closing cost fees include:

  • Attorney's fees
  • Inspection fees
  • Appraisal fee
  • Survey fee
  • Title insurance
  • Title search fee
  • Underwriting fee
  • Credit report fee
  • Origination fee (AKA "points")
  • Discount points – paid in exchange for lower rate

Expect to pay somewhere between 2-5% of the purchase price of your home in closing costs.

#8 Do Not Overspend After Mortgage Approval
After you are approved for your first-time homebuyer loan it is not the time to go on a shopping spree. The first thing that most lenders will do before loan closing is to pull a new credit report to make sure your financial situation has not deteriorated.

No credit check home loans are nearly impossible to find since the Dodd-Frank laws were introduced, but there are a few financial lending institutions that will help you shop house financing options without pulling your credit report.

Many first-time homebuyers learn this the hard way. It is understandable to want to go out and buy new furniture for the house, but you should not be opening new credit accounts to pay for it.

Keep these seven tips in mind to make your first homebuyer loan go smoothly.


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