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First Home Owners Guide to Mortgages

  • Published: 2009-02-06 (Revised/Updated 2017-05-21) : Author: Disabled World : Contact: Disabled World
  • Synopsis: Things to know regarding steps a home mortgage lender uses to decide if you qualify for a home buyer loan.

When you want to buy a home, you are faced with many decisions. As a first time home buyer the first is whether you are actually ready to buy.

Finding the right first home is not always easy, and getting a first time home buyer mortgage loan can be time consuming and complicated.

To help you decide if you're ready as a first time home buyer, we'll take you through the steps a mortgage lender uses to decide if you qualify for a first time home buyer loan. When you take out a loan, you sign documents that say you promise to pay back the loan.

When a mortgage lender makes you a first time home buyer loan, it has determined that there is a good likelihood that you can keep that promise. The mortgage lender knows that it does not help you or the lending institution if you are given a loan, but then, for any reason, are unable to make the loan payments each month.

To decide if you will be able to repay a first time home buyer loan, your loan officer will look at many different pieces of information about you. This process is called underwriting. This information shows how well you have repaid your debts in the past, whether you are likely to repay your debts in the future, and your ability to repay the mortgage and your current debts.

There are first time home buyer program guidelines that help a lender in looking at these pieces of information about you. But you should also remember that there is some flexibility in these first time home buyer guidelines, because everyone's financial situation is different. If you are very strong in one area, it may help balance out another area in which you aren't quite as strong.

Go through the first time home buyer questions below and test yourself. If you aren't ready to buy a new home now, you'll find we've included information that may help you qualify in the future. When you get to the end, you will have a better idea of whether this is the right time for you to buy a home , or whether you need to work on improving your credit history, paying off existing debts, or saving more money.

Do You Pay Your Bills On Time?

How you paid your bills in the past gives a lender some indication of how you can be expected to pay them in the future.

When you apply for a first time home buyer loan, you will be asked to list all your debts, the amount of your monthly payment, and the number of months or years left to pay on the debts.

Your mortgage lender will order a credit report to verify the information that you give and to check on how well you have kept your promises to repay your debts. Credit reports are provided by credit reporting companies that make inquiries through a wide range of available sources of information: banks that may have given you a car loan, credit card companies, even gasoline companies and department stores that offer credit cards.

It's important to disclose all debts and any difficulty you may have had in the past in repaying these loans. It's also important not to leave out any information about money you owe. Credit reporting companies have access to a great deal of financial information about you, and they make it available to lenders who will be reviewing your first time home buyer mortgage loan.

If you have previously owned a home, and your mortgage loan has been foreclosed upon within the last seven years, the foreclosure will be revealed on your credit report. Having a foreclosure on your records doesn't mean you can never buy another home . Your lender will want to know the reason for the mortgage loan foreclosure, and most prefer that three years go by before you apply for a new mortgage loan.

If you have declared bankruptcy within the past ten years, that also will be revealed on your credit report, and it will be helpful for you to explain the circumstances surrounding it. Lenders usually prefer that you wait two years after discharge of the bankruptcy before assuming a new large debt like a home mortgage loan. This gives you time to re-establish credit and show that you are again able to manage your financial affairs.

Sometimes credit reports are inaccurate, or they give a misleading picture of past credit problems that have since been resolved. To check the accuracy of yours, you can obtain a copy of your credit report. For a small fee or sometimes for free, you can request a copy from a "credit reporting agency". If you find any errors, you can take steps to have the report corrected.

If your credit report shows that you do not have a good credit history, and the information reflected is correct, you should probably delay trying to buy a home and take steps to improve your credit profile.

For example, you may have too many debts, or you may pay some debts late each month. If so, you should work to bring your payments up-to-date and to payoff some of your debts. Even if your debts are current, you may not be considered a good candidate for a first time home buyer loan if you have made your monthly payment after the due date each month. After you have decreased the amount you owe and are able to show a two-year history of making payments on time, you may be ready to begin looking for a home to buy as a first time home buyer.

How Is Your Job History?

This is important.

Having a steady job as a first time home buyer helps you to keep your promise to pay back a mortgage loan. If you have been working continuously for two years or more, you are considered to have steady employment. A lender will need to know your job history, and it will be a factor in whether you qualify for a first time home buyer loan. However, you do not have to have held the same job for two years in order to be approved for the mortgage loan. Job moves that result in equal or more pay and continue to use proven skills are a plus for you. If you have been working continuously for less than two years, the mortgage lender will look for an explanation. There may be a good reason:

You may have been discharged recently from the military or just finished school. Your work may be seasonal, and you might have work gaps between seasons.

There may be other acceptable reasons why you have not been employed continuously for two years, too. For example, you may have been laid off because of a plant closing or an illness. Or you may be in a line of work in which frequent job turnover can be customary, but you have been consistently employed and have maintained a regular, consistent level of income.

If you have been fired for cause such as excessive absences, have long gaps in your employment record, or have dips in your income level that are difficult to explain, you should probably delay buying a home until you can demonstrate that you have a stable work history.

Can You Afford To Pay a Home Mortgage Each Month?

If you pay rent each month, you may be prepared to make monthly home mortgage payments.

The amount of your monthly payment depends upon the amount you borrow, the interest rate, and the repayment period or "term." The shorter the term, the higher your monthly payment. For that reason, most first time home buyers repay their mortgage over the longest term possible, usually 30 years.

Do You Have a Credit History?

If you have never had any credit cards or taken out a loan through a financial institution, the various credit reporting firms may not be able to issue a credit report on you. In that case, you may be able to use a "nontraditional" credit history. For example, you may be able to document that you pay your rent, telephone bills, or utility payments on time each month. You can put these records together yourself by making copies of canceled checks or showing copies of monthly bills that do not have any late charges. A mortgage lender may be able to help you put this information together.

Do You Have Money Saved For a Down Payment?

When you buy a home, you will need money that you have saved for a mortgage down payment and closing costs.

The amount of the mortgage down payment may vary, but generally you must make a down payment that equals at least 3 percent of the purchase price. You will also need money for closing costs. These costs can be expensive, depending upon where you live. Sometimes the property seller is willing to pay part of your closing costs on your mortgage.

The lender will want proof that you have saved the funds that you will use for a down payment and part or all of the closing costs. If the funds are in a savings account, the lender will generally ask the financial institution to verify the amount and the length of time that the funds have been in your account. The lender wants to make sure that you are not borrowing all the money you will use for the mortgage down payment and closing costs.

Some lenders have programs to help a first time buyer. With some of these programs, you may be able to accept a gift from a relative or to borrow a portion of the money you will need for the down payment and closing costs from a local non-profit organization or government agency. With others, you may be able to get a grant or other first time home buyer funds that you will not have to repay and can use to cover some of these costs.

If you do not now have at least a portion of the money saved for a down payment, this may not the right time for you to try to buy a home . Instead, it would be a good idea to open a savings account and begin putting away some funds from every paycheck. The longer you have accounts and the longer and more consistently you have been able to save money, the better you will look to lenders when you are ready to apply for a mortgage in the future. You may be eligible for a first time home buyer program grant. This may make it easier for you to get a first time home buyer loan than you normally would be able to saving for the cash on your own.

Calculating Mortgage Loan Payments

The amount of your mortgage loan payment will depend on how much you borrow, the term (repayment period) of the loan, and the interest rate. If you know how much you need to borrow (the purchase price minus your down payment), and what the interest rate will be, you can use our Mortgage Calculator to find out what your monthly payment will be with a standard 30 year, fixed rate mortgage. Note that this chart includes only principal and interest payments, not property taxes and insurance.

How Do Lenders Determine the Amount of the Loan You Receive?

When you first approach lenders about financing a first time home buyer mortgage loan for you, they will use two commonly accepted guidelines to help determine your ability to make home mortgage payments. These first time home buyer program guidelines are a starting point for evaluating your ability to make the payments on the proposed home loan. So your mortgage lender will look closely at your individual financial situation to determine if more flexible guidelines are appropriate for you.

Your monthly housing costs (including mortgage payments, property taxes, homeowner and mortgage insurance, and home owner's fees) should total no more than 29 percent of your monthly gross (before taxes) income. In addition to your regular pay, your income can include funds you receive from overtime work, a part-time job or second job; retirement, VA, and Social Security benefits;disability; welfare and unemployment benefits; alimony; and child support.

Your monthly housing costs plus other long-term debts such as payments on car loans, student loans, or other installment debt (debts with more than ten months left to repay) should total no more than 41 percent of your monthly gross income.

Now, to get an idea of the first time home buyer mortgage loan amount that you might be able to qualify for based on your annual income, you will need to know the approximate interest rate that lenders are currently are charging for a 30 year, fixed rate first time home buyer loan.

A first time home buyer should not have a difficult time qualifying because the proposed monthly housing cost and the proposed total monthly debts are lower than the maximum guidelines. If a first time home buyer has a decent credit history and some money saved for a down payment, most lenders would consider this borrower a good potential customer. The borrower is not attempting to buy a house that would strap him or her financially. This individual gives every indication of being able to follow through on the commitment to repay this mortgage.

However, if the proposed monthly housing cost and the proposed total monthly debts are higher than the maximum guidelines a first time home buyer would probably not be able to qualify for a mortgage loan at this time even if they have a good credit history. Even if the mortgage lender is very flexible and willing to use more generous program guidelines, a first time home buyer might have trouble qualifying because their proposed monthly debts are well above the range most mortgage lenders consider reasonable. In this case, the family should concentrate on paying off some of their credit cards and getting their monthly expenses to a lower level for a period of time before looking to buy a home for the first time.

Have You Been Turned Down For a Home Mortgage in the Past?

If you have tried to buy a home, but were unable to get approved for a mortgage loan, you should try to find out why the mortgage lender did not want to make the loan.

Based on the information above, you may already have figured out why you did not get a mortgage loan. Maybe you did not have a steady work history, or you tried to buy a house that was too expensive for your income, or your debt level is too high. If you are unable to figure out why you were turned down, you should ask the lending institution for an explanation. You should also ask what steps you can take so that you can qualify in the future as a first time home buyer.

What Do You Do First When Buying A House?

If you have read all the information above, you may be ready to begin the process of buying a home as a first time home buyer.

You may want a local real estate agent to show you homes in your area. You may also want to make an appointment with a mortgage lender. It will take some time working with a real estate agent to find the right home in the price range that you can afford. It will also take time to apply for the mortgage, have the lender evaluate your application, and have your loan approved. Still more time is required to do all the necessary paperwork and close on your first time home buyer mortgage loan. But in the end, you will have a home for you and your family, and you will have achieved an important part of the American dream.

Owning your own home may seem out of reach, but you can change that over time.

Even if you know you cannot qualify now for a first time home buyer loan or even six months from now there may be a way you can work toward this important goal in the future. Nobody ever said becoming a first time home owner was easy. It's difficult, but it's also rewarding. It can be worth sacrificing and planning over a long period of time to achieve it.

Special first time home buyer programs may allow you to accept a gift from a relative or to borrow a portion of the money you will need for the down payment and closing costs from a non-profit organization.

First Time Home Buyer disability mortgages and veteran loan programs help more Americans achieve home ownership. One way they do this is by providing objective information that makes the process of getting a mortgage loan less confusing.

No matter where you live or which type of house you choose, lenders will use some general guidelines to determine if you qualify for a first time home buyer mortgage loan. Before you begin house hunting, you may want to qualify with mortgage lenders to determine how big a mortgage you can afford.

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