First Time Home Buyers

IF YOU WANT TO buy your first home, you can take some steps to prepare for a mortgage. This checklist can help you move toward this major purchase. The list has eight items:

Pay Down Your Debt

Paying off or paying down debts is first on the list of what to do if you want to buy your first home. And while you’re at it, checking your credit score and credit report are musts.

“Before you start the process, you should make sure your credit score is OK,” says Michael Eisenberg, certified public accountant, personal financial specialist and principal of Squar Milner Financial Services in Encino, California. “If you don’t have a good credit score, you may not get the best (interest) rate. In fact, you may not get a loan, period.”

Before you do anything else, focus on paying down your credit cards, paying your bills on time and raising your credit score.

You could get a mortgage with a FICO credit score as low as 500, and 620 is typically the minimum for a conventional mortgage. But the higher your score, the more likely you are to get the best interest rate and terms for your mortgage.

Know Your Budget, and Get Preapproved for a Mortgage

Look at your income and budget, including how much house you can afford, before you choose a down payment, type of mortgage or house, or anything else.

A mortgage preapproval can give you a solid idea of your mortgage eligibility and how much money you could borrow. This letter also signals to sellers that your lender is on board and you’re ready to buy.

Still, keep in mind that the maximum amount you are approved for by a mortgage lender isn’t necessarily what you can afford.

Understand the Homebuying Process

Being aware of the steps in the mortgage process can be helpful. That way, you can prepare for what’s ahead.

Generally, the steps are:

Have Money in the Bank

You’ll need funds not only for your down payment but also for closing costs, maintenance and repairs, and emergencies.

How much money do you really need to put down on your first home? It depends.

Most experts suggest that you have at least 20% of the house’s purchase price saved as a down payment. You can buy a house without that much down – and many people do – but there are good reasons to fork over at least 20%.

Doing so almost certainly means you’ll avoid paying for private mortgage insurance, or PMI. A bigger down payment also reduces the amount you will need to finance and pay interest on.

If a 20% down payment is out of reach or would prevent you from paying closing costs or expenses after the sale, you have options. Some government agencies and lenders offer first-time homebuyer programs that can help with down payments and closing costs.

Budget for Expenses Beyond Your Mortgage

A home loan is a long-term, monthly expense you’re taking on, and having a financial cushion after closing is key. Be prepared to make payments after a job loss or another hardship.

Good and bad times lie ahead, and you want to be covered on your mortgage either way.

“The first thing I would say to anyone buying a home is, ‘Let’s see how much you can afford to spend,'” Eisenberg says. “Everyone thinks about the mortgage and interest, but there’s more to it than that.”

Figuring out what you can afford, Eisenberg says, means adding:

Decide What Type of Mortgage Is Right for You

Even as a first-time homebuyer, you have an array of mortgage options to choose from. Do you want a government-backed or conventional mortgage? Do you prefer adjustable or fixed interest rates?

A government-backed mortgage guarantees your loan, protecting the mortgage lender from losses if you default on it. The Federal Housing Administration, U.S. Department of Veterans Affairs and U.S. Department of Agriculture typically offer these programs.

For those who qualify, this type of loan can offer lower approval requirements than conventional mortgages and low or no minimum down payment. But conventional loans may have lower interest rates compared with government-backed mortgages.

Another big choice is between adjustable- and fixed-rate mortgages.

An adjustable-rate mortgage, or ARM, has an interest rate that can fluctuate over the life of the loan along with benchmark rates. A fixed-rate mortgage, on the other hand, has an interest rate that never changes, even if rates fall.

Some homebuyers are wary of ARMs and for good reason. The rate for your ARM could adjust – and with it, your monthly mortgage payment – to well beyond what you can afford.

But ARMS can make sense for some borrowers. If the interest rate is low and you won’t live in your house for long, an ARM might be a good fit for you.

Limits on how often ARMs can adjust may make them more appealing to some buyers. But overall, a fixed-rate mortgage can be a safer, more predictable choice for first-time buyers.

Consider the Length of Your Home Loan

Most homeowners choose between a 15- or 30-year mortgage, though other durations may be available depending on the lender.

Both have pros and cons. “The immediate benefit of a 15-year loan is that it’s a shorter-term loan, and you typically get a much lower rate than a 30-year loan,” says Doug Leever, a mortgage sales manager at Tropical Financial Credit Union, which services South Florida.

A 30-year mortgage may offer a more affordable monthly payment, but a 15-year mortgage may reduce long-term interest and help you pay off the loan much earlier. Still, the monthly payment on a 15-year mortgage can be a barrier for some homebuyers.

“The payment will be higher, and you need to make sure you’re comfortable with the higher payment,” Leever says.

Start Gathering Paperwork

Applying for and closing on a mortgage requires a lot of documents, and working to get ahead can’t hurt.

Here are some documents needed for a mortgage:

Also, you’ll want to gather any other documents a mortgage lender might want to see, such as credit card and student loan account statements.

By Geoff Williams, Chris Kissell, and Jessica Merritt