the go-go days of real estate and mortgages - 2003 to 2005 -
many first time home buyers got themselves into mortgage
loans that they shouldn't have because they took into
consideration only the possible future upside. Rising market
prices and falling interest rates led many first time home
buyers to overlook the possible downside of the mortgage
loans that they were committing themselves to - and that was
a major mistake.
market has done a u-turn since 2005 that has caught many
first time home buyers by surprise. Prices in many areas
have fallen since 2005 although that seems to be
stabilizing. Interest rates have steadily risen from the
middle of 2004 until the middle of 2006. Since July of 2006,
interest rates have held steady. There is even a possibility
of rates dropping depending on how much negative effect the
subprime meltdown has on the overall market. Minimum credit
requirements for most loan programs have also risen
dramatically since the beginning of the subprime meltdown in
January of 2007.
first time home buyers purchased homes between 2003 and 2005
using subprime loans (loans with high rates for people with
low credit scores). These first time home buyers had
expected to improve their credit to the point where they
could refinance their subprime mortgage into a prime
mortgage with a much lower interest rate.
obstacles have prevented many of these first time home
buyers from refinancing out of their subprime loans:
did not improve their credit sufficiently to qualify for a
Interest rates went up to the point that a prime loan would
not provide the reduction in monthly payment that was
Credit requirements have been tightened up so much due to
the subprime meltdown that only first time home buyers with
good credit are now qualifying for loans with good rates,
first time home buyers made only interest-only payments and
paid nothing toward principal,
prices in some areas have dropped leaving some first time
home buyers owing more than the home's market value.
estate market has a lot of short-term volatility in it. When
evaluating loan possibilities, error on the side of safety.
Try to avoid the follow mistakes that many other first time
home buyers made between 2003 and 2005 when purchasing their
your credit in order before purchasing a home. Get your
credit to the point that you can obtain a good rate during
your initial purchase. Check your credit early on and fix
Determine what is the maximum total housing payment you can
afford and stick with that number. Inform your loan officer
and Realtor right away. The total housing payment should
include mortgage payment, monthly property taxes, monthly
HOA dues (if a condo) or hazard insurance (if a detached
house), and PMI if applicable. Don't forget to take into
account the tax advantage that you will receive right away
as a new homeowner. This can provide you with several
hundred extra dollars of after-tax take-home pay each month
that can be applied directly toward the mortgage.
out what your maximum price range is. This will be based
entirely on the maximum monthly payment you've established
and the amount of down payment that you have available.
Don't let your Realtor show you homes that exceed your price
range. You'll fall in love with something you can't afford.
stretch yourself. Establish your maximum monthly payment at
a point where you have an income cushion in case anything
unexpected happens. It is best to use the old debt ratios.
This was a 36 percent debt ratio. That meant that the total
anticipated housing debt and other debt showing up on the
credit report would not exceed 36 percent of the gross
income. Not stretching yourself is one of the most important
rules for the first time home buyer.
up as much down payment as possible. Your down payment and
the resulting equity in your home is your cushion against
any possible drop in home prices. Try to have a 5 to 10
percent down payment on your own. This is first time home
buyer's cushion against a price drop.
down principal as much as possible. If possible, pay your
mortgage through a bi-weekly payment plan. This alone will
reduce a 30-year mortgage down to abort 23 years.
- If you
take an adjustable rate mortgage, make sure that the fixed
period exceeds the length of time that you intend to stay in
your first home by at least two years. Two and three-year
fixed mortgages are dangerous. You will probably be in your
first home longer than that and you will be hit by an
interest rate adjustment. A general rule for first time home
buyers is to only purchase a home if they plan to live in it
for at least five years.
- Make sure
that you can pay the fully amortizes (principal and
interest) payment and not just the interest-only payment. If
you are only paying the interest-only payment, you are not
building equity if prices don't rise.
- Save a
large cash cushion in case something unexpected happens. The
first time home buyer should never go into a real estate
transaction with the possibility of being just one paycheck
away from missing the mortgage payment. You will definitely
not sleep well if that is the case.
- Try to
avoid prepayment penalties unless you know that you will be
living in a property for at least five years. A prepayment
penalty can benefit a buyer in the long term between a
lender will be able to offer a lower rate if a prepayment
penalty is accepted.
- Try to
get the seller to buy your rate down. If your buyer's agent
can convince the seller to contribute an extra one point (1%
of the purchase price or loan amount) toward buying your
rate down, you might be able to get between 0.25% and 0.5%
lower rate. This will lower your permanent monthly payment
in a big way.
- See if
you can qualify for any first time home buyer assistance
programs in San Diego County. If your loan officer is not
expert on first time home buyer assistance programs, you
need to find a loan officer who is. You could be losing
thousands of dollars of free money if you are not dealing
with a loan officer who can provide first time home buyer
- Try to
avoid buying in areas that are currently seeing major price
drops. If a current area that you are considering has had a
lot of recent short sales happening, be wary of that area.
Short sales occur when homeowners have to sell their
properties at market values less than is owed on the
mortgage. Short sales occur more often in areas that have
had big price drops. Be wary of purchasing in such areas
until prices there have stabilized.
time home buyers who follow the above advice will purchase
in safety, enjoy their homes, and be able to sleep at night.