Five Tips for First Time Home Buyers

Purchasing a home for the first time is both exciting and intimidating. It is one of the most significant purchases that most people make and unfortunately, many people rush into the experience without fully researching their options. The following tips will help you prepare for your first home buying experience.

Check out your credit report

Your history and credit scores can have a great impact on your decision to buy a home. Each year, you can get a free copy of your credit report from each of the three major credit reporting agencies at AnnualCreditReport.com. Make sure that all of the information on the report is accurate. If you have any negative information such as late payments or collection accounts, work toward paying off these accounts and cleaning up your report.

Lenders will also consider your debt to income ratio. Most lenders will not provide you with a loan if your total debt to income ratio (including your mortgage) is more than 40% of your gross income. If you have any significant debts, pay those down first.

If you have a clean credit report and a reasonable debt to income ratio, you may also consider paying the additional money to view your credit score. Your credit score will help determine the type of loan and the interest rates that you will qualify for.

Save for a down payment

In the past, there have been several loan options available for people who have little or no money saved for a down payment. Due to recent increases in delinquencies and foreclosures, many lenders are eliminating these programs. There are some loan programs that will allow you to purchase a home by putting 3% to 5% down. If you are able to put 20% down, you will not need to pay PMI. You also need to consider closing costs, which are typically 3% to 5%.

Do your research

If possible, attend a seminar for first time home buyers. Sometimes these are sponsored by local banks or community agencies. Learn about different types of mortgages (fixed rate, adjustable rate or ARM, interest only, FHA/VA, and 80/20) and decide which is best for you. Find out if there are programs such as down payment assistance available for first time home buyers in your area.

Get pre-qualified and decide what you can afford

The pre-qualification process involves meeting with a lender. You can ask friends and family members for recommendations or you can make an appointment with a financial institution that you are currently affiliated with. After meeting with them and reviewing your income, credit history, and debt to income ratio, they will typically provide you with a letter that details the amount that you can invest, a projected interest rate, and projected closing costs. Many real estate agents prefer that you have this letter before they begin working with you to help you find a home.

Pre-qualification letters may be for an amount that is greater than what you can comfortably afford. Many financial experts suggest that your mortgage (including principal, interest, taxes, and insurance) should not exceed 29% to 32% of your gross monthly income. When determining a loan amount that is right for you, you should also consider any homeowner's association fees, as well as the cost of utilities, maintenance, and repairs. There are calculators available on Bankrate.com to help you make these decisions.

Start shopping for a home

Once you have determined your price range, you are ready to begin shopping for a home. Decide what features are most important to you. For example, are you looking for a one story home or a two story home? How many bedrooms and bathrooms would you like? Do you have a neighborhood in mind?

After you have decided what you are looking for, choose a realtor. They can direct you to homes in your price range that meet your criteria and can also walk you through the home buying process. Ask family and friends for references and also do research online. You may want to interview a few realtors before you make a decision. Typically, any fees or commissions involved are paid by the seller of the home.

When you find the home that you are looking for, your real estate agent will help you to negotiate an offer. Consider having a home inspection prior to closing and also shop around for home ownership.