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For first-time homebuyers, there are many financial considerations that will influence their purchase. These include the type of loan that’s right for them, ways to appeal to lenders, and steps for setting a solid budget. The following is an overview of these considerations and how first-time homebuyers can sufficiently prepare for their next move.
Different Types of Loans
There are a variety of loan types available when buying a home, depending on a homebuyer’s specific needs. These include:
These loans are a type of mortgage that isn’t insured, nor does the federal government guarantee it. In most cases, they are fixed-rate mortgages that are a challenge to qualify for due to their stringent requirements. Specifically, to qualify for these loans, individuals need to make a bigger down payment, have low income-to-debt ratios, and a good to great credit score. They may also require private mortgage insurance. On the other hand, these loans can cost less than government-guaranteed loans if homebuyers qualify.
Federal Housing Administration (FHA) Loans
The U.S. Department of Housing and Urban Development (HUD) provides mortgage programs for homebuyers in the U.S. through FHA loans. These loans come with reduced down payment requirements, making them somewhat easier to qualify for compared to conventional loans. They’re particularly appealing to first-time homeowners because of their ease of qualification and lower down payment requirements.
The federal government guarantees these loans through the U.S. Department of Veterans Affairs (VA). While the VA isn’t responsible for paying the loans, it guarantees them through qualified lenders. Oftentimes, veterans can get these loans with minimal to no down payment. They’re also considerably easier to qualify for compared to conventional loans, but individuals will need to determine if they qualify for them by consulting the VA.
If none of these loans appeal to homebuyers, they may also be able to apply for assistance programs from state or local governments or agencies.
Steps for Appealing to Lenders
Depending on the type of loan that homebuyers choose, they will need to do what they can to be attractive to lenders. Mortgage lenders and banks want proof from the borrower that they’re financially secure and capable of meeting the loan’s specific terms. The following are some steps that loan applicants can take to appeal to lenders:
Boost Their Credit Score
One of the best ways for people to effectively secure a loan from a lender is to work to increase their credit score. Typically, loan terms will be more favorable with a higher credit score. However, some people may be uncertain about what qualifies as a good credit score. In most cases, 750 or higher is considered the ideal score for prospective borrowers.
If buyers want to boost their credit score, one of the easiest ways to do so is to reduce their debt-to-credit limit ratio. To achieve this, debtholders can work to pay off the balance owed on credit cards while remaining under their credit lines. However, it’s important for buyers to avoid closing credit card accounts, as this can actually hurt a person’s credit score. Instead, it’s best to try to rely on credit cards less and work to mitigate debt.
Reduce Their Debt-to-Income Ratio
In addition to credit card debt, lenders often scrutinize a person’s debt-to-income ratio, i.e. the ratio of how much debt a household or person carries compared to their income level. A majority of lenders look for a ratio that’s lower than 38% but ideally between 25% to 35%. The lower the ratio, the better the borrower will look in the eyes of lenders.
Setting a Budget for First-Time Buyers
When setting a budget to purchase their first home, first-time buyers need to take the necessary steps to set aside sufficient funds.
Following the 28% Rule
Homebuyers can begin setting their budget based on the 28% rule, which states that a person’s mortgage shouldn’t be higher than 28% of their gross monthly income. The FHA is an exception, as this administration can sometimes allow borrowers to spend up to 31% of their income on a mortgage. Regardless, homebuyers should also consider other debts along with their mortgage to gauge what they can actually afford to spend.
Following the 28% rule can ultimately help homebuyers maintain a lower debt-to-income ratio, which will further appeal to lenders.
Accounting for Other Expenses in Addition to the Mortgage
While the mortgage is a huge consideration when it comes to setting a budget, it’s important for buyers to remember that there are other costs associated with a home. Many of these costs will be ongoing as homeowners need to make regular payments. For example, some budgetary considerations may include the cost of property taxes, homeowners’ insurance, maintenance, repairs, and utilities.
All of these costs can accumulate quickly and become overwhelming if homebuyers aren’t anticipating them. This is why it’s important for first-time homebuyers to account for these expenses along with a mortgage as they establish their initial budget.
Determining Whether a Property Is Truly Worth the Purchase
Additionally, homebuyers need to consider the overall size and condition of the home they intend to buy. Large properties may seem appealing on the surface, but with these larger sizes often come more expenses for energy and maintenance. Larger properties with spacious yards will also require more time to maintain, or the homeowner may need to account for the cost of hiring landscapers and other professionals.
If a property requires too much maintenance, this could also lead to extraordinary costs to repair it. Sometimes properties in poor condition may come with a deceptively cheap price tag, but they can come at a much higher cost after the initial purchase is made. A house that’s a big fixer-upper may also be unpleasant to live in until the necessary repairs are made and renovations are performed.
Taking all of these aspects into consideration can help first-time homebuyers ensure that they’re prepared to make their final purchase. Well-prepared homebuyers will be able to save more money on their purchases, avoid bad deals, and secure the loans they need for financial assistance along the way.