Handy
Advice for Buying Your First Home
 According
to a recent article from Kiplinger’s, four in
10 buyers are purchasing a home for the first time.
This means a lot of inexperienced buyers involved in
real estate. If you are one of them, there are several
tips that will make your first purchase easier.
Although home prices appreciated well
during the most recent housing boom, many first-time
buyers still broke into the market. According to Kiplinger’s,
the median age of first-time homeowners is 32, and the
number of first-time homeowners that are younger than
25 rose from 11% earlier in the decade to 14% last year,
which is about 6% of all home sales. Buying your first
home no longer means getting your mortgage from the
Department of Veterans Affairs (VA) or the Federal Housing
Administration (FHA). There are now many options available
for the first-time buyer.
Although the no-money-down VA loan is
pretty much gone, the FHA loan is still a viable option
if your credit is not so good. As a first-time buyer,
you may be able to take advantage of many no-money-down
mortgages, but you will still need cash for closing
costs. Plan on 2% to 3% of the purchase price. You will
also need cash for the earnest money deposit, which
shows sellers you are serious about your offer (or a
builder, if you’re buying new construction). The
deposit can be anywhere from a few thousand dollars
to 10% of the offering price, and is applied to the
purchase.
So where do you come up with all of
this cash? One source may be your Roth IRA, from which
you can withdraw what you have contributed at any time.
Additionally, if the account has been open for five
years, you can withdraw $10,000 in earnings tax- and
penalty-free! You can also withdraw up to $10,000 out
of a traditional IRA penalty-free for the purchase of
your first home, but you will owe taxes on the money.
In today’s tougher market, you
may also be able to ask sellers to pay closing costs
and roll that amount into the cost of the home. Many
sellers may be willing to do a deal like this in order
to sell their home quickly. You can also ask for the
money as a gift from a family member. According to Ilyce
Glink, author of 10 Steps to Home Ownership, your lender
will probably require a letter stating where the money
came from and that it was not a loan.
In addition to the cash you will need
to purchase the home, you also need to know how much
money you will be able to borrow. Lenders look at three
things when you apply for a loan: credit score, debt-to-income
ratio and down payment. If you have two of three going
for you, you’re in good shape to buy, says Jim
McMillan, a senior loan officer with JP Mortgage/JPMorgan
Chase. The most important of these items is your credit
score, as all lenders are credit-score driven. FICO
scores are the most commonly used and range from 300
to 850. With a score of 700 to 750, you will be considered
a great borrower and will qualify for the best rates,
although you should always shoot for the highest score
possible.
Your debt-to-income ratio is also important. Lenders
typically follow the 28/36 rule: “No more than
28% of your monthly gross income should be dedicated
to your mortgage payment, property taxes and insurance,
with total debt payments equaling no more than 36% of
your gross income.” If you have no other debt,
however, you can dedicate the entire 36% to your home
payments, and with an FHA-backed loan, you might be
able to apply as much as 41% of your gross income to
your total debt. It is important, however, not to get
in over your head with debt, or to increase your other
debt after buying a home.
The third element in lenders’
equations is your down payment. Coming up with a large
amount of cash is often difficult for many first-time
buyers, but it can make a big difference if your credit
score is poor. Very simply, the more money you put down,
the less risk a lender has to take on. If you put 20%
down, you will be exempt from private mortgage insurance,
which can add a few hundred dollars to your monthly
payments. A new law, however, allows mortgage insurance
premiums to be fully tax-deductible if your gross income
is less than $50,000 if single and less than $100,000
if married and filing jointly and you itemize deductions.
Considering the above before you
start home shopping will ensure you are prepared and
ready to purchase your first home!
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