Examining Your Options
Using money you've saved up or obtaining gifts from family are wonderful ways to acquire your first home. The first thing to consider is the down payment. Most likely, you will need anywhere from 3–20 percent of what the home purchase price is for the down payment.
Scott Yonehiro, a senior board member from Burbank-based First Security Lending, says equity in a home ensures security to a lender when financing a home purchase. The more down payment a borrower brings in to purchase a home, the more instant equity is built into the property and therefore a greater chance the lender will get their investment back should the borrower default on payments.
You may qualify to use subsidized financing, like financing from the Federal Housing Authority (FHA) or a veteran's loan from the Department of Veterans' Affairs (VA), depending on the home's purchase price and loan amount required. Subsidized financing that allows you to make a lower initial investment will include more restrictions than a standard bank mortgage. These restrictions change and are updated frequently, so you should check out their respective websites or talk to your lender about what might be required.
For those who don't want to deal with the stricter obligations of the FHA or VA, a 5 percent down payment of the purchase price of the home will be the absolute minimum down payment you can make when buying. Always ask your lender what options are available to you, as they continually change. The smaller the amount you put down on your loan, the bigger the mortgage becomes. Anyone borrowing more than 80 percent of the price of their home utilizing one mortgage is required to obtain private mortgage insurance, or PMI. This insurance guarantees the lending institution will be repaid the full amount of the mortgage loan should the borrower default on payments. The PMI can add to your monthly cost. Of course, the advantage of PMI is that it allows you to buy that first home with the most amount of leverage, so it is an option worth considering.
You're much better off putting more as a down payment rather than paying PMI, which only makes it more expensive for you in the long run and takes away from your equity buildup.
In addition to making a down payment, you must have the ability to borrow money. Remember, the home you buy is only as good as the money you can borrow to buy it. There are cash buyers in the marketplace, but in this day and age, when the average starter home in most urban areas can cost $200,000–$300,000, paying cash for a house is fairly uncommon.
It's a good idea to meet with a mortgage company, your local bank, or a mortgage broker at a very early stage in the homebuying process. You need to find out specifically what is required of you, and ensure that your credit report accurately reflects you are a responsible individual with sufficient income and credit to buy a home.
Obtain a copy of your credit report — addresses and contact information can be found in Appendix B or Chapter 3 — to make sure the information reported there is correct. Your mortgage lender will rely heavily on your credit history to determine if you qualify for a loan. If you've had financial problems, you will need time to eliminate that late payment penalty on your student loan, for instance, from your credit report. Having your credit history in order when you first approach a mortgage lender will help ensure the financing you need will be available to you. The most important aspect the lender looks for is whether or not you will be able to make those monthly mortgage payments. Proving your financial capabilities needs to be the most essential step in buying your new home.
Table 2.1 Price of Homes Purchased, by Region
Source: National Association of Realtors Profile of Homebuyers and Sellers 2007
