First Time Home Buyers - Advantages to owning your own
The biggest challenge for most first-time home buyers is saving up enough money
for a down payment. But thanks to a growing assortment of financing options,
it's increasingly possible to find mortgages for as much as 97% of a home's
value. In other words, you could put down as little as $5,514 for a home that
costs $183,800, the national median in 2004, according to the National
Association of Realtors.
Sounds great, doesn't it? And for some cash-strapped home buyers, these deals
could make financial sense. But they can also be expensive. For starters, you
get stuck with a higher interest rate on a loan with a teeny down payment. And
because lenders figure the odds are higher that you'll walk away from your loan
if you have almost no equity in your home, you'll have to buy private mortgage
insurance, which covers the bank if you default. That usually adds a 0.5% to
0.75% premium on top of your interest rate. So on a $178,286 loan (or 97% of the
median home price) you could end up paying an extra $75 to $110 a month.
But even with these higher costs, there are still plenty of reasons it makes
sense to own your own home. Besides the intangible benefits, homeownership lets
you build equity, and is the single biggest tax break available to most
So what if, after crunching the numbers, you decide it's time to buy your piece
of the American Dream? Here's our look at some smart strategies for first-time
First Time Home Buyers Have Options
First: Pay Off Your Debt
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.
Why? First, credit-card debt is expensive and limits your ability to
save. The average interest rate on credit cards now stands at 13.8%, or more
than double the 5.33% national average for a 30-year fixed-rate mortgage.
Second, credit-card debt will limit how much you can borrow. That's because
lenders won't allow your total monthly debt service — which includes payments
for credit cards, student loans and car loans, as well as homeowner's insurance,
property taxes and a mortgage — to exceed 40% of your gross income.
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 homeowner'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).
Types of Loans
Now you're ready to start shopping around for the right loan. As we said, a
first-time home buyer with a steady job and good credit can get a loan for 100%
of the cost of the home, or as little as 3% down these days. These loans are more available, and more reasonably priced,
now that they're acceptable to Fannie Mae and Freddie Mac. (The two so-called
government-sponsored agencies purchase mortgages worth up to $333,700 on the
secondary market — $500,550 in Alaska and Hawaii — absorbing the original
lenders' financial risk. And both will now buy 97% mortgages.) While rates vary,
such a low-down-payment mortgage will run a half-point higher than a
conventional loan. On our hypothetical 97% mortgage of $178,286, that
extra half-point of interest adds $57 to the monthly payment.
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. Click on Fannie Mae's Web site for a list of all of its products
and approved lenders.
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).
And if you really want to get creative and avoid paying mortgage insurance
altogether, you can take out two piggybacked loans.
These are also referred to as 80-10-10s, 80-15-5, or 80-20s First, you need to put down
between 0 to 10% of the
home's value. Then, you take out a primary loan, usually a 30-year fixed-rate
mortgage, for 80% of the home's value. This interest rate should be competitive.
For the remaining percentage, you'll need to take out a 15-20 year fixed-rate mortgage at
a far less competitive rate — as much as two points higher than the market.
Combine the two monthly costs to come up with your total mortgage payment. Due
to the complexity, a piggybacked loan is a bit more expensive than a traditional
mortgage and carries higher closing costs. Still, they tend to be cheaper than
paying private mortgage insurance.
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.
If your credit's still not good enough for one of Fannie Mae's loans, you may
yet qualify for a loan insured by the Federal Housing Authority, or FHA. These
government-insured loans are issued with even more lenient credit criteria. You
can also put down as little as 3% for an FHA loan, and can wrap your closing
costs and fees into the mortgage. Interest rates are typically less than a
quarter of a point higher than those in the conventional market. To get a
government-insured loan, make sure you find a HUD-approved lender or a mortgage
broker who works with one.
There's no income limit to qualify for an FHA-insured loan. However, since these
loans are geared toward helping first-time home buyers and low- to
moderate-income families, there's a limit to how much you can borrow. The amount
varies from region to region, but it's capped at $290,319 in high-cost areas
($403,750 in Hawaii). Click here for Dallas Homes For
Dallas Area Foreclosures on the Upsurge
Dallas real estate residential foreclosures increased 30% from
this same time a year ago. As recently as last summer Dallas posted a
foreclosure rate higher than Washington, New York, Los Angeles, Philadelphia,
Phoenix, Chicago, Houston and Atlanta. Rockwall County reported one new
foreclosure filing for every 152 households, making it the highest foreclosure
rate in the metroplex. Increasing foreclosure activity was reported in most
counties in the metroplex in August, but Collin County reported a 7 percent
decrease. Despite the decrease, the county’s foreclosure rate of one new
foreclosure filing for every 292 households still ranks it at more than three
times the national average. The foreclosure rate in the Dallas real estate
residential markets remains well above the national average and highest among
the nation’s largest cities. With the changing market we can provide the
experience you need to help you purchase one of the great deals on foreclosed
For immediate assistance in helping you find a foreclosed property
Contact Us today!