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Home Loan Tips for First-Time Home Buyers

Why would anyone want to own their home? Here are just a few reasons: owning offers a sense of security; it allows you the freedom to do things to make your life richer such as redecorating, planting trees, digging up the garden, or maybe adding on a den. Owning your own home can both save you money, and in a good market, provide the capital for your next home.

Buying a home is an investment, not only in the financial aspect, but also in time and emotional commitment. For many of us, buying a home is the largest investment we will ever make.

Putting aside the attachment that grows within us as we walk through the rooms of our own home, here are the three biggest reasons to buy if you can, rather than continue to rent.

The mortgage loan deduction is one of the few remaining IRS deductions. The interest you pay on your home loan can save you a significant amount of money. When you make monthly mortgage payments, the interest is deductible for the life of the home loan. For the first ten years or so, most of your home loan payment goes to interest, and can truly lower the amount of tax you owe.

The future prospect of selling your home for a profit is another advantage. In some markets, people can make thousands of dollars when they sell their homes. This creates an opportunity to buy a nicer, newer, or bigger home.

Building equity by keeping your home for a long time and paying down the mortgage loan equates into valuable equity. Equity is the value of your home minus the mortgage loan balance. If your home is worth $150,000 and you owe $70,000, your equity is $80,000.

Prepare before you begin looking at houses

The best advice is to resist the urge. Buy smaller or cheaper, and you can work your way up

If you take the time to prepare, your house buying experience will go far more smoothly. Good preparations won't take months out of your life, and can mean the difference between getting the home loan for the house you've set your sights on and being refused.

Resolving to purchase your own home takes more than going out with a real estate agent and looking at prospective houses. You should study your financial dossier and ask yourself:

  • What are your assets?
  • What are your debts?
  • Do you have investments?
  • What are you worth?
  • What is your employment situation?
  • What is your credit standing?

These are all important factors in obtaining a mortgage loan for the home you want to buy. A lender wants to see that you have a full-time job, but more than that, the lender wants to see that you have worked regularly for a significant length of time. The lender of your home loan wants to feel that you are a steady, reliable person who will pay back the mortgage loan.

If you can show that you have been employed regularly and are capable of supporting yourself, you will be one step ahead. Now the lender looks at your assets versus your debts. How much money do you make? How much do you have in the bank and in investments? Without much trouble, the lender will be able to determine your financial worthiness.

Here are some general percentages set forth by Fannie Mae and Freddie Mac, companies that purchase home loans. These figures, though not cast in stone, will help you plan and prepare:

A maximum of about 28% of your total income should go toward the mortgage loan payment, which includes taxes and insurance. Less would be better.

When it comes to debt, you should not pay out more than a maximum of 36% of your income. This includes your mortgage loan as well as credit card debt and other debts, like car loans.

You should try not to purchase a home that takes more than two times your annual salary. You may find yourself struggling to make ends meet if you do.

One of the problems when buying a home is that sometimes, when a lender is actively trying to generate more mortgage loans, you will find yourself magically qualifying for a house that is too expensive for your income. The best advice is to resist the urge. Buy smaller or cheaper, and you can work your way up gradually, with less financial strain.

Know your credit standing

Finally we come to credit standing. Before you ever look at a single house, you should acquire a copy of your credit report. The first step in your quest is to gather copies of your credit reports from the three major credit bureaus. Each agency might be listing different information in your file, so if you suspect trouble, you'd better review all three. Here they are:

Equifax P.O. Box 740241, Atlanta, GA 30374-0241 – (800) 685-1111 http://www.equifax.com/

Experian P.O. Box 2002, Allen, TX 75013 – (888) EXPERIAN – (800) 916-8800 http://www.experian.com/

Trans Union P.O. Box 1000, Chester, PA 19022 (888-397-3742) http://www.transunion.com/

Consumers can now request one free annual credit report from each of the three major consumer reporting agencies, thanks to revisions in federal law that took effect December 1, 2004.

You can visit: www.annualcreditreport.com, or call 877-322-8228, or you can mail a standardized form to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. For more information and answers to questions you may have, see http://www.ftc.gov/bcp/menus/consumer/credit/rights.shtm

There's only one authorized central website approved to offer the real, free credit report: www.annualcreditreport.com

Additionally, find out what your FICO score is at http://www.myfico.com. This important figure can not only contribute to approval or rejection, it can qualify you for a lower interest home loan, which can save you thousands of dollars over the next thirty years.

Is your credit report clean, or are there questionable marks concerning late payments or defaults? If there are problems, put some serious work into credit repair before you apply for a home loan.

Perform the necessary credit report repair before looking at houses or applying for a home loan

Don't be surprised if you find that there are a number of inaccurate questionable marks on your credit reports. These will needlessly hinder your ability to garner a home loan. In these cases, make credit repair a priority. If you have the time and energy, you can dispute these inaccurate listings yourself, by writing letters and contacting the parties who submitted the inaccuracies to the credit bureaus, or you can get professional assistance from a reputable credit repair company.

Questionable notations in your credit report will either contribute to an outright refusal for a home loan or end up sticking you with a much higher interest rate. You don't want either of these scenarios, so perform the necessary credit report repair before looking at houses or applying for a home loan.

Know your options

It's important to note that this mortgage loan process is not completely one-sided. Many real estate experts advise shopping around for the best interest rate before you commit yourself to purchasing a home. You must evaluate the lender as much as the lender evaluates you. Interest rates can vary widely, and you definitely want the lowest possible rate.

You cannot control every aspect of the interest rate, as it is manipulated by the general rates at the time you apply. But your credit rating can and does contribute significantly to the rate you'll pay. There is real power in a good credit history and score. With a good credit rating, you can negotiate a better interest rate.

For instance, on a home mortgage of $125,000, the difference between a six percent rate and a twelve percent rate would be over $500 a month.

The second phase of preparation

Applying for and acquiring a home loan is not your only concern. You will probably need cash to finalize the deal.

The down payment: This generally runs 10% to 20% of the actual purchase price of the home.

Closing costs: These costs can derail you if you aren't prepared for them. Closing costs generally run about 2% to 5% of the amount of the mortgage loan. They must be paid in cash and you are not allowed to borrow this money.

Investing to acquire your down payment and closing costs

You could begin laboriously saving money in a savings account. Depending on how much you put in every week, you could eventually save your goal amount. A faster way may be to invest your money.

You might consider taking half of your investment funds and putting that part into stock investing and mutual funds. Put the other half into interest-earning investments, like CD's, that will be set to mature when you think you'll need the down payment.

The important thing is to earn the money you will use for your down payment and closing costs. This in itself will score points with your lender.

Other items to consider

Did you know that it is still more difficult to negotiate a home loan if you are single rather than married? And yes, some experts contend that women are still turned down more often than men. However, if you have exemplary credit, you probably don't have to worry about either of these situations.

If you work for a company that is associated with a credit union, you might consider setting up accounts there and applying for your home loan from them. Traditionally, credit unions are easier to work with than banks or mortgage loan companies.

You can check out many homes for sale on the Internet before you ever talk to a real estate agent. This will help you determine what sort of house you need, want, or qualify for.

The more you know...

As you can see from this general article on buying a home, the more you know starting out, the better the experience you will probably have. There are many books available that will lead you step-by-step through every aspect of home buying and Home Loan qualifying, plus there are numerous websites where you can read about specific definitions and explanations. Arm yourself with knowledge and acquire the best deal possible. Then sit back and enjoy your new home and all the money you saved.

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