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6 Financial Necessities for First Time Home Buyers

6 Financial Necessities for First Time Home Buyers

Being a first-time home buyer is an exciting time and the anticipation of moving into your dream home or out of an apartment can lead to putting other financial considerations on a back burner. There are a number of financial steps to take before, during and after the home buying process to protect yourself from unplanned expenses which often arise from home ownership and life. Lets take a look at six important financial considerations for first-time home buyers.

1. Buy a Home, Not an Amount

There is a common "negotiation tactic" which car salespeople use to "get you in that new car today!" Instead of asking what you want and how you will incorporate the vehicle into your daily routine, they ask "how much can you afford?" This of course is a disservice to customers since it doesn't target the need but instead pads a salesperson's commission. Buying a home is no different. The mortgage company, looking to get as much interest on as large a balance as possible, will give you the high end for what amount you qualify. Only buy a house which meets your lifestyle and living space needs and not what you can make for a monthly payment.

2. Make a Large Down Payment

There are a variety of different mortgage options available to first-time home buyers from FHA to VA to Conventional. Each loan type has its own requirements, one of which is the amount required for a down payment on a home. It is recommended however, to put a minimum of 20% of the purchase price down which will make for smaller monthly payments but will also avoid additional financial requirements life private mortgage insurance, also known as PMI.

3. Reduce Overall Debt

Mortgage companies are tasked with determining the credit worthiness of a borrower and the borrower's ability to repay a loan. One of the criteria they use is called a debt to income ratio. This ratio normally can't be greater than 34% to 36% of total monthly income. Home ownership is an expensive proposition and if consumers are already saddled with excessive amounts of credit card or auto loan debt it makes them that much more of a risk for possible loan default and foreclosure. Reducing or eliminating personal debt will probably be required to buy a home.

4. Evaluate Job Stability

Many lenders have a minimum requirement of two years of continuous employment at a current job or a total employment time of five years or more from a combination of multiple jobs within the same field. If the company you work for has been laying off employees or your current employment situation is tenuous at best, consider holding off on purchasing a new home. Even if you qualify for a mortgage, and even though you can lose a job at any time, try waiting until you are more certain about maintaining employment.

5. Know Your FICO Score

An individual consumer's FICO score is the single most important factor when it comes to consumer lines of credit and installment loans. It not only determines whether or not you qualify for a mortgage but also at what interest rate. If you haven't already, get a free copy of your credit report from www.annualcreditreport.com or call 1-877-322-8228. Each of the three major reporting agencies are required to provide one free credit report to each consumer every 12 months. If you have black marks or other negative information on your credit report, implement a credit repair strategy as soon as possible before applying for a mortgage.

6. Create an Emergency Fund

Home ownership is an expensive proposition even in the best of times. Maintaining a property requires significant financial resources both inside and outside the home. A mortgage payment should be the first item that gets paid every single month regardless of the circumstances. As a safety net, every home owner should have a minimum of 6 to 8 months of living expenses in an emergency fund. A large emergency fund may mean the difference between weathering the storm of unemployment or medical expenses or getting foreclosed upon and becoming homeless.

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