Tips for First-Time Home Buyers

By: Robert Woods..

It's a common mistake for home-buyers-to-be: They focus on saving as much money as possible for a down payment instead of paying off other debts. A better approach is to use extra cash to eliminate credit-card and other high-interest consumer debt even if that means you can put down less on your future home, says Lori Vella, senior vice president of national lending for Washington Mutual.

How Much Can You Afford? The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and home owner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home).

But the more money you can muster for a down payment, the more options you will have. For example, Fannie Mae's new "start-up mortgage" allows borrowers who can put down 5% to qualify for a loan on a smaller salary than with a 3% down payment. You will need to find a Fannie Mae-approved lender to take advantage of this program.

Private lenders are also coming up with their own programs to tap into the first-time home buyers' market. Washington Mutual, for example, offers a program for buyers with a 10% down payment: Instead of charging for mortgage insurance, the savings-and-loan builds the cost into the interest rate, making it tax-deductible (which mortgage-insurance premiums aren't).

Worried you don't have perfect credit? Thanks to Fannie Mae's "expanded approval" program, consumers with slightly blemished credit can also qualify for mortgages at competitive rates that are as much as two percentage points lower than alternative financing. "These are people who might not qualify for fair-market value rates from traditional lenders," says Liz Bay, director of single family product development at Fannie Mae.

Consider Paying Points Points are fees lenders charge in exchange for lowering the interest rate, says Ken Markson, senior director of the Mortgage Bankers Association of America, a trade organization. A point is equivalent to 1% of the total loan amount, so by paying them you'll lower your monthly payments, but you'll increase your upfront costs substantially.

Pay Close Attention to Fees Fees can easily account for 2% of the total amount borrowed, according to a 2004 report by Consumer Reports. Unfortunately, you can't avoid many of them outright, but you can save money by choosing a lender that's competitive. The tough part? Fees are hardly standard. Not all lenders charge the same fees, or even call them by the same names. Or they might roll a few fees " say, your credit report and upfront appraisal " into a larger umbrella fee, like an application charge. (See the chart below for common fees and costs.)

Article Source: Loan Info Center

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