What home buyers should do now

Posted at 6:12 PM, Oct. 21, 2008

Surefire ways to make it happen

Clearly many buyers, even with excellent credit, are unwilling to commit to purchasing a home in our current economic environment.  It has been more than one year (November 14, 2007) since I posted a "get back to basics" entry for first time home buyers. With the recent Wall Street market collapse and the global credit crunch, it might be a good to revisit just what those basics are.

Here are a few tips for prospective home buyers:

Clean up your finances Now more than ever, your credit history will determine if you qualify for a mortgage, the loan terms and mortgage rates. You could be offered a smaller loan or charged a higher rate if a lender is concerned you might not be able to repay. Consider paying down debt, especially high-interest debt such as credit cards that might flag you as a riskier borrower. For more on this read my posting, "Your credit history" 

Keep it separate Set up a separate account for your down-payment funds, so the money doesn't get intermingled with other savings and so you can keep track of how much you save. This would probably be a taxable account at a bank, credit union or brokerage firm. Once high interest debt is repaid, bank those payments.

Aim for 20 percent down I know this is easier said than done. But, aim to save 20 percent or more of the purchase price. The risk of putting down too little: If the home falls in value and you sell at a loss, you'll owe more to the lender than you receive from the buyer. In addition, many mortgages require buyers who put down less than 20 percent to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.

Consider a FHA home mortgage  If a higher down payment is not possible, a Federal Housing Administration FHA mortgage loan might be an alternative.  FHA loans offer a loan guarantee for mortgage companies.  The FHA is not actually lending money to you, the buyer.  The FHA simply guarantees the lender in case you, the borrower, default on your mortgage payments.  You can pay as little as a 3% of the purchase price of your home for your down payment, and finance your closing costs with your mortgage loan.

Get extra help Few first-time buyers pony up the entire down payment on their own. Nearly 23 percent of first down payments come as gifts from relatives and friends, according to a recent survey by the National Association of Realtors.

If your credit is damaged, seek professional help to improve your credit score.  When you are ready to take the first leap into home ownership, contact a mortgage advisor and get pre-approved, not just prequalified. For more information, go to Century21 Mortgage.  Consult your personal financial planner regarding any specific questions that you might have.

Disclosure - Century 21 Our Town Realty is affiliated with Century 21 Mortgage