First-time buyers: what you need to know

First-time buyers: what you need to know

For any renter, contemplating the responsibility of home ownership can thrill and invigorate, frighten and distress.

Richard Cohen, author of It’s Not About the Rate: The Right Way to Get a Mortgage (AuthorHouse, 2007), likens the lead-up to a home purchase to the fear and excitement before bungee jumping – with the deal’s consummation bringing a similar rush of intense fear, followed by a rush of sheer bliss.

Making sure that bliss lasts more than a few days after the closing can be challenging for first-time buyers, many of whom start the home-buying process from scratch, still figuring out what they want in a home, what they can afford, and how to find financing.

Todd Rissell, chairman and CEO of e2Value Inc., an online property valuation database, believes a major mistake many people make is starting at the wrong end of the transaction. Budget ultimately will dictate a home purchase, but starting at how much a person can afford can be misleading, particularly for the first-time buyer.

“A key aspect in any home purchase is to figure out what end a person is trying to achieve,” Rissell says. “Simple life goals, such as the number of children you plan to have, the ability to accommodate large family get-togethers, or whether your children are able to ride a bike in the driveway should all be part of the planning process. Envision yourself in the house as best you can over the course of years, not just months.”

Christina Diaz-Malone, who heads Freddie Mac’s CreditSmart financial literacy program, advises first-time homebuyers to start by listing their goals.

“If the goal is to have a child or to go on long vacations, for example, that will influence the kind of house a person can afford,” says Diaz-Malone.

If you plan on staying in a home for less than five years, it can significantly impact the type of neighborhood in which you look, as well as the mortgage you choose. Same if you are planning on staying for 35 years.

If you are planning on having children five years down the road, you might start in a smaller, entry-level home with the intention of buying a bigger place. And if that’s the case, “you need to buy in an area that has a proven track record for steady growth, multiple employment opportunities, good transportation and/or a demonstrated desirability,” says Rissell.

If you are planning on staying in a home for many years, then size might be more important than recent rates of appreciation. Younger on-the-go homeowners may be best suited to condos, where home upkeep is minimal (and assessments for that upkeep are consistent and budgetable, absent a major emergency repair).

The drawback is very little privacy, lack of storage space and lower rates of return in terms of appreciation. Townhouses, depending on the development, might come with as few responsibilities as condos, but with additional storage and outdoor space. Both townhomes and condos are excellent stepping-stones to single-family homes.

“Establishing a goal and a plan are the essential part of any house-buying hunt,” says Rissell.

While you are evaluating housing goals (or preferably before), finish laying the financial groundwork to buy by making sure your credit will facilitate a mortgage. Obtain a copy of your credit report and read it thoroughly.

Your credit score is a key factor in determining whether you get a mortgage and, if so, your interest rate. Credit reports have been known to contain erroneous information. Solving such errors can be as simple as writing a letter to the credit bureaus.

Legitimate credit problems also can be solved, although they can require more than a letter and may take six months to a year of reduced balances and on-time payments to really clear up.

Be wary of stories about people going to a credit agency and having their credit cleaned in one day, says Diaz-Malone. “There’s no such thing. Building a good credit score is not so much getting on your feet, but staying on your feet.”

As a rule of thumb, strive for a credit score of 650 or higher. A 650 gives consumers leverage to ask for the good interest rates and possibly some concessions on fees, since lenders are willing to work with consumers who are good credit risks. A score of 620 will earn you a mortgage, but not get the best interest rates.

&Copy; CTW Features

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