Your First Home Loan: What You Need To Know
By Joe Kenny
So you’ve decided to buy a home. Perhaps you’re a newlywed, and you and your spouse are starry-eyed and off to pursue the American dream. Maybe you’re a disgruntled renter, tired of throwing away your hard-earned money every month. Perhaps you’re a savvy investor looking to turn a buck off the white-hot housing market.
Whatever your reason, you’re ready to buy, and you’re ready to buy now. Purchasing a home can be a wonderful, weird, and intimidating experience—sometimes all at once. But by following a few simple steps, your transition from renter to buyer can be a smooth one.
Give Credit Its' Due
It can be pretty tempting to pick up the Sunday newspaper and search for the home of your dreams, but before you even take the rubber band off of that edition, you’ve got to get your credit in order. There are three major credit agencies who keep track of your credit record—Experian, TransUnion and Equifax. Each of them have a credit rating for you on file, and when averaged out, you’ll get your credit score. Check each of these resources independently—there are several online resources where you can purchase all three credit reports at once—and make sure to correct any inaccuracies and check for identity theft. If there are errors in any of your reports, it could take a couple of months to fix them.
Know Your Limits
If you’re a young, first-time homebuyer, chances are pretty good that that 5,000 square foot, eight bedroom villa on the river bluff is out of your range financially. What you need to know before moving on is exactly how much house you can afford. The general rule is to look within a price range of about 2.5 times your gross household income. For a more accurate range, you can get pre-approved by a lender. They’ll give you a better idea of the right figure by measuring your income, debt and credit.
Get Down With The Down Payment
Here’s the tough part: finding enough cash for a down payment along with costs associated with buying like loan fees, appraisal fees, inspection fees, legal fees and title search fees. Ouch. As a first time homebuyer, that’s no walk in the park, especially when most lenders ask for 20 percent down. Double ouch. There is hope, though. Several private and public agencies offer programs where you can pay as little as 3 percent down on a home.
You might have to pay a private mortgage insurance (PMI) fee if you go this route; it protects the bank if you default on your loan. It can also add about half a percent of the loan to your yearly payments. But if you’re chomping at the bit to get into the market, it’s really not a bad deal. There are also
such things called “piggyback loans” that can help you avoid PMI. These are similar to home equity loans or lines of credit for around 10 to 15 percent of the home’s price.
Get The Cash. Someway, Somehow
If you’re tapped out of dough, and you need some to cover a down payment or closing costs, you still have options. If you’re a first-time homebuyer, you can take up to $10,000 out of an IRA without penalty, though you will have to pay taxes on it. There’s also the old trick of begging your parents. You can receive up to $12,000 in cash from each of your parents per year without them having to pay a gift tax.
Some companies will even help their employees with a down payment or with securing a low-interest loan. If you work at one of these companies, consider yourself blessed.