10 Home Loan Tips for 1st Time Home Buyers

After years of declining home values, there are many new affordable opportunities for first time homebuyers to finance a new home.  If you are looking to make the move from a rented apartment to a home of your own, you are not alone. The convergence of low home prices, still-low mortgage rates and appealing tax incentives makes 2009 a good time to buy a home for many people. If you are looking to buy, here is what you need to know:

Home prices are low. Home prices dropped at a record annual pace of 18.7% this past March. That means discerning buyers can find real bargains. Mortgage interest rates are still good. While interest rates have risen from their historic lows earlier this year, they still are appealing. In mid-June, rates hovered around 5.70% for a 30-year fixed-rate mortgage.

Tax credits will help. 1^st time homebuyers can get money back from tax credits implemented as part of the 2009 American Recovery and Reinvestment Act. An $8,000 credit is available to first-time buyers for homes purchased before December 1, 2009. Home financing legislators are considering increasing the credit to $15,000 and expanding it to include other home buyers

Credit scores matter. While houses are widely available, home financing is limited to those with good credit. Credit scores range from 300 to 850, with the median U.S. credit score about 725. A score below 680 usually results in a higher interest rate or denial of credit. Check your credit score before you make any home buying decisions. If your score is lagging, wait a few months and work to improve the score by paying every bill on time, paying down as much debt as possible and disputing any erroneous information on your report. Note that it can pay to do your homework researching FHA mortgage rates and lenders — credit scores do not decline if multiple similar credit report requests are submitted within a close time period (usually a few weeks).

You must have savings. A down payment is essential today. Ideally, you can put down 20% of the purchase price (see #7 regarding PMI). If not, talk to your mortgage lender about your options.  Do not stretch too far. Standard underwriting guidelines call for keeping housing expenses below 35% of total income. Breathing room in your budget will help you keep your home even if something unplanned does occur. If you are uncertain, wait to buy.

Understand private mortgage insurance (PMI). Home mortgages with less than 20% home equity (which means a 20% down payment for those purchasing a home) require PMI in case the owner defaults on the home loan. When the home owner pays a conventional home mortgage down to 80% or less of the home’s value, the home owner can request the home lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.

Know the real costs of buying. The principal and interest on a mortgage payment are only the beginning of home-related costs. Escrow payments - the funds withdrawn to cover home insurance and taxes - and PMI can add a few hundred dollars per month to a mortgage payment. In addition, home owners must pay for repairs and maintenance. A rule of thumb is to budget 1% of the home’s purchase price per year for upkeep.

Know whether you can pay off early. If the mortgage loan has a prepayment penalty, borrowers face hefty charges if they pay it off early. This provision also can apply to future mortgage refinancing, so be forewarned. Review Truth in Lending disclosures to find out.

Buyer beware. Some of the lowest prices on homes today are “fixer-uppers” or homes sold “as is” because of foreclosure. Invest in a home inspection before agreeing to purchase any home. The inspection will inform you of any faults in the home and help you determine the approximate cost to remedy those problems.

For many Americans, the time is right to take advantage of today’s excellent home buying opportunities. If you are among