Important Advice for First Time Mortgage Seekers
This article will cover advice for first time mortgages that prospective home buyers can refer to for guidance. The American dream has been defined and redefined several times throughout our nation's history. After World War II the American dream took on the connotation of home ownership and a solid family life. Living in a suburban neighborhood with a home of your own was the goal of many GIs returning from the war. Banks were willing to lend, builders were ready to build, and cities were prepared to embrace suburban sprawl.
After the building spree of the 50s and 60s, the housing market began to slow in many parts of the country. The economic downturn of the 70s and early 80s only exacerbated the issue, and home ownership began to dwindle. But then, during the Clinton years the U.S. Congress revitalized a plan first laid out by the Carter administration aimed at getting lower income buyers into their own homes. This revitalized plan resulted in increased mortgage lending and home ownership from the mid-90s right up to the housing crash of 2008.
Just ten years ago it was possible to obtain a first time buyer mortgage with no money down, a less than stellar credit rating, and a value-to-loan ratio of 90% or higher. Some banks even allowed rolling the closing costs into the mortgage, making the total amount of the loan more than the house was purchased for.
Today, thanks to the aforementioned housing crash, mortgages for first time home buyers are no longer so easy to obtain under such lax conditions. We now find ourselves back in a position where substantial down payments are required as is a fairly good credit rating - and rightly so. Financial institutions that took a bath in the housing collapse are now operating on a shoestring. They don't need a second housing collapse that could drive them out of business.
If you're new to the housing market and seeking one of those first time mortgages, though it may be difficult, it is possible to get one. The following paragraphs contain important tips that should increase your chances of obtaining financing. However, these tips are no guarantee of a successful mortgage application. They are just a means of helping to increase your chances.
Credit Score is Everything
When you apply for any type of credit, the lending institution checks your credit rating with one or more nationally known credit rating agencies. What they're looking for is a number; a number that can be anywhere from 0 to 850. Credit rating agencies base this score on your history of obtaining credit and paying your bills. The higher the credit scores the better your opportunities to borrow money, and the lower the interest rates you pay. Obviously, a low credit score will limit your borrowing ability and increase your interest rates.
With the credit crunch as it currently is, it will be nigh to impossible to obtain a mortgage with a credit score lower than 650. Even if you have a substantial down payment, banks are unwilling to lend money to people. And to a bank, a score of 650 or lower is too great a risk. So, lesson number one is to make sure you have good credit rating before you apply for a mortgage.
According to U.S. law every American consumer is allowed one free credit report annually. Simply do an Internet search on the term “free credit report” and you'll be able to find out what your current score is. If it's 650 or lower, it might not even be worth trying to obtain a mortgage. Instead, work on rebuilding your credit by paying your bills in a timely manner. If you have high interest credit cards, making monthly payments on time, which are slightly more than the balance due, goes a long way in repairing your credit. Conversely, every late payment on a credit card or utility bill counts against your score. Lesson number two is paying your bills on time.
If you're young and don't have a credit score, obtaining a secured credit card is a good way to start. A secured credit card requires the borrower to set aside a certain amount of money, in savings, against the credit card balance. As long as monthly payments are made that savings continues to earn interest and is left alone. The money is only touched by the bank if payments are late or missed.
After a year or so with a secured credit card, the borrower who is faithful to make his payments on time will generally be accepted for a standard credit card. Continuing your good credit habits with a standard credit card over the next two or three years should build sufficient credit to give you a score greater than 650. Now you're ready for a mortgage. That's lesson number three.
Down Payment is Very Important
The next thing a mortgage lender will look for is a substantial down payment. Gone are the days when you could get by with a few thousand dollars and expect the seller to pay closing costs. Banks have returned to the practice of asking for 10% to 20% down before they'll even look at a first time buyer mortgage application.
Banks do not necessarily care where your down payment comes from, but it's suggested that the money be in your possession before you apply for a mortgage. In other words, if parents are going to donate a substantial amount for a down payment, yet they don't give you that money until you're ready to apply for a mortgage, the bank may look on that as a gift and question your ability to pay. Your parents are better off putting that money in a savings account in your name before you began looking at houses. That way, the bank doesn't need to know it was a gift and won't count it against you.
Be Careful About Work History
While it's common these days to frequently change jobs, the number of jobs you've held and the reasons for your changes often affect the bank's perception of the risk you pose. You may work in a volatile industry in which frequent lay-offs are the norm, for instance. In that case, the longer you can hold on to a position the better you look in the eyes of your mortgage lender.
Obviously, there are times when layoffs and firings are unavoidable. The bank will take these into consideration if you can document your reason for switching jobs. Therefore, any renter who plans on eventually purchasing a house must be careful to document employment and the reasons for changing jobs. That documentation could make the difference in securing a mortgage.
Be Realistic About How Much You Can Afford
The last tip for securing first time mortgages is for buyers to be realistic about the amount they can afford. Understand that the realtors are in the business of selling houses, and they work on commission. They want to sell a house for as high a price as can be had because it increases their paycheck. This is not to say realtors are crooked, but rather just as a word of caution that they're more willing to go to the top end of your budget then you should be.
A standard rule of thumb is that buyers should be able to pay the monthly mortgage with one week's pay check. Obviously this is flexible, especially for families who do not have car loans or other outstanding debt. But regardless of your debt load, you should by no means exceed a ceiling of 35% of your monthly income for your mortgage payment. Emergencies arise which can destroy your financial situation if your mortgage payment is too high.
Understand also that most first time mortgages are intended for starter houses that owners will not live in forever. If you must buy a smaller and less comfortable house in order to stay within your budget, that's the wise thing to do. In 10-12 years you can always sell that house and upgrade to something bigger and nicer.
On the other hand, if you try to buy the house of your dreams the first time around, and the mortgage payment pushes you to your limit, something as simple as a rise in your property taxes could put that house out of reach. And those of us who already own a house know that property taxes can go up as much as 3% to 7% per year.
In conclusion, these tips for acquiring a first time mortgage are not intended to scare you away. Rather, they are intended to give you a realistic view of today's mortgage market. Mortgages are available if your credit score is high enough, your income is suitable, your work history is solid, and you have reasonable expectations. If you don't meet these conditions right now nothing is preventing you from getting started working on them. If you get your house in order you'll be able to secure a mortgage sometime in the future.
