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Starting in 2014, there are tighter restrictions in home mortgage lending standards. These changes are likely to affect one group more than most others; first time homebuyers. If you are planning on buying your first house in 2014, follow these important steps to ensure that you are successful.
Build and Maintain your Credit Score: First time homebuyers are often at a disadvantage in qualifying for a mortgage because they tend not to have a lot of credit established. This can have almost as negative an impact on your credit score as bad credit. First, go to www.annualcreditreport.com and get a free copy of your credit report. You are entitled to one free copy of your report annually, no strings attached.
Review your report for any errors and notify the credit reporting agencies immediately through the dispute process. Of course, if you have legitimate negative information, you will probably not be able to get that removed. Instead, try to offset whatever negatives you have by establishing positive credit, such as secured credit cards or an auto loan. Finally, make all your current payments on time. This is extremely important for maintaining good credit, more important than most people realize.
If your credit is in poor shape and it will clearly take some time to rebuild, you may want to consider waiting before purchasing your first home.
Find out what you can afford: Before jumping into the buying process, it is important to know how much house you can afford. This will be determined by the monthly mortgage payment (principal, interest, taxes, & insurance) and the rest of your monthly obligations. The total of all your monthly obligations with your new mortgage payment cannot exceed 43% of your monthly income. To be safe, it is better to shoot for 35% to 40% debt to income ratio. This will increase your chances of approval.
Determine the down payment you are comfortable with: For a conventional mortgage, your down payment can range from 5% to 20%. FHA loans can be approved with 3% down, and veterans can often qualify for zero-down loans through the VA. Of course, the more you can come up with, the better your chance of being approved. If you are able to put 20% down, you can avoid PMI (private mortgage insurance). Make sure, however, that you do not exhaust all your savings on the down payment and closing costs. It is always best to have something put aside for a rainy day.
Get Pre-Approved: One common mistake first time homebuyers make is shopping for their home without being pre-approved for the mortgage. In a competitive real estate market with multiple offers on many of the available properties out there, this mistake can cost you the home of your dreams. With today’s stricter lending standards, home sellers will be putting a much higher weight on pre-approved offers. Therefore, if you are serious about buying your first home this year, speak with a mortgage broker and find out what you need to do to get the approval process started.