So you’ve decided to take the plunge and purchase your own place. Buying a home is an exciting period in your life, but also a scary and stressful period. Seasoned home buyers know what to expect from the process and typically plan accordingly. But if you’re a first time home buyer, buying property and securing a mortgage can be challenging tasks.
With home prices decreasing and interest rates today at an all-time low, now has never been a better time to leap into homeownership. However, mortgage standards are tougher nowadays, which can stop a home loan approval. But despite the challenges, first time home buyer loans are available and there are several ways to help smooth the process.
1. Credit Scores. As a first time home buyer, you need to check your credit prior to applying for a mortgage. Credit scores and credit reports play a major role in the approval process. A low score, late payments, a recent bankruptcy or any other negative items can kill a mortgage deal.
The minimum credit score for a home loan approval varies by loan program. FHA mortgage lenders require a minimum score of 620, whereas conventional mortgage lenders prefer scores around 680 or higher. Dispute errors on your credit report, pay off your existing debts and pay your bills on time to build and maintain a high FICO score.
2. Documentation. Be prepared to show proof of your income. As a first time home buyer, you might mistakenly think that the lender only needs copies of your most recent paychecks. But in most cases, the lender will request two year’s worth of tax information. This verifies that you’ve been employed for 24 consecutive months and that your income has been consistent throughout this period. Your lender will also request information about your personal savings, investments and other assets.
3. Cash Reserve. Buying a property is especially challenging for the first time home buyer due to down payment and closing cost requirements. While a current homeowner can sell an existing property and use the proceeds as down payment on his or her next property, this isn’t an option for first-timers. The minimum down payment to purchase a home is between 3.5% and 5%, though 20% is strongly recommended, and closing costs can be as high as 5% of the mortgage loan.
Understandably, a large number of first time home buyers do not have a stockpile of cash for a down payment and closing costs. However, there are many programs that offer first time home buyer grants and other financial assistance.
First time home buyer programs vary by state. For example, Virginia offers affordable home buying programs, as well as down payment and closing costs assistance. Similar programs are available in other states, such as California, North Carolina and Florida. For a complete statewide list of first time home buyer programs, contact the U.S. Department of Housing and Urban Development’s website (www.hud.gov).
The first time home buyer tax credit is no longer available. However, you may be eligible to take the first time home buyer credit if you purchased a primary residence between April 1, 2008 and May 1, 2010. The tax credit can reduce your tax liability by up to $8,000. The specific rules regarding the first time home buyer tax credit, as well as repayment of the credit, vary by year. For more information on the various rules, visit the IRS’s official website or consult a tax professional.
If you’ve already filed your taxes for 2008, 2009 or 2010, but forget to take advantage of the first time home buyer credit, you can file an amended tax return and take the credit.