Monday, June 26, 2006

First time buyers don't beware

ARM loans. FHA loans. VA loans. PMI. WHEDA. Buying a house can be an exercise in muddling through alphabet soup.

And if you’re a first-time home buyer, that soup doesn’t look real appetizing.

A home is likely the largest single purchase a person or couple ever makes, and the task can be daunting. But armed (not ARMed) with the right information, a home purchase can be a reality for many.

As it is with a home, though, a home purchase is going to be better if built on a solid foundation.

"There are three things that are really important for first-time home buyers," said Greg Mc-Bride, senior financial analyst with "First, months in advance buyers should check their credit reports and clear up any errors. You don’t want to let someone say something about you that isn’t true."

Clearing up errors can im-prove your credit score, and the higher your score the more likely you are to get a favorable interest rate.

"Second, you need to understand how much house you can afford and how much money you can afford to borrow," McBride said.

(Mortgage calculators are available at, or type "mortgage calculators" in your browser’s search engine.)

"Finally, you want to get preapproved," McBride said. "Do these things before you’ve even stepped out to start looking."

A visit to your loan officer is a wise, early course of action.

"Probably one of the biggest things is to be comfortable with your loan officer," said Dennis DeGrave, personal mortgage consultant with First Choice bank. "We can help them understand what kind of loan program is best for them, but it’s easiest to do face-to-face."

A preapproval letter also makes you more attractive to sellers who have another offer, aside from yours, to consider.

"The seller wants preliminary assurances that the buyer can afford the home," said Debbi Conrad, director of legal affairs with the Wisconsin Realtors Association.

"It’s the person who has preapproval who will have the advantage," McBride said. "It really gives you a leg-up."

Down payments

The days of a 20 percent down payment on a home are a thing of the past, mostly.

"Probably 90 percent or more of my clients have had less than 20 percent down on their home purchase," DeGrave said.

"Twenty percent just isn’t the norm anymore," Conrad said.

In fact, many lenders offer 100-percent financing to qualified individuals.

"The fact that someone doesn’t have any down payment shouldn’t deter them from looking into a home purchase," DeGrave said. "It’s nice to start with a starter home and build equity in it. Then, a few years down the line, they’ll have the equity and can use it as a down payment for their future home."

But McBride cautioned against accepting 100-percent financing blindly.

"A lot of people don’t have money in savings," he said, noting that last year, 42 percent of first-time home buyers didn’t have any down payment. "Yeah, you should try to come up with some kind of down payment, but don’t erase your savings. (Home buying) will take cash, one way or another. You need a cash cushion and the ability to squirrel away money, because you will need it."

Loan products

When deciding among the many loan products out there, experts suggest looking at the amount of time you expect to be in the home. Those who expect to set up shop for a while in one home may consider different products than those who expect to turn around and sell in the near future.

"For some people, it may be beneficial to avoid PMI (private mortgage insurance required of those whose loans exceed 80 percent of the home value)," DeGrave said. "They can do that with two loans. But keep in mind that PMI eventually can and will drop."

McBride suggests those hoping to be in their homes 10 years or longer will benefit best from a 30-year fixed mortgage, while anyone looking at less than 10 years in a home would be better off with a loan product that has a low fixed rate for a period of time - generally three, five, seven or 10 years, depending on the product - but will adjust annually after that initial time period is over. For example, a 7/1 loan will have a fixed interest rate for the first seven years, but that rate will adjust annually thereafter, depending on market conditions.

"If you plan to sell before the initial term is up, it’s tantamount to a fixed-rate loan, but the rate is less than the rate on a 30-year fixed loan," McBride said.

Other considerations

Do you need a Realtor? Conrad says yes.

"They can steer you through the legal documents and all the forms, disclosure and hazards," she pointed out.

What about an attorney?

"An attorney can be of most help once you’re ready to write the offer," Conrad said.

Is an inspection necessary?

"It’s an absolute must," Conrad said. "Even if the seller is honest on all the disclosures, they just may not be aware of all the problems. It’s also necessary for the buyer to understand that the home won’t be perfect. None are."

This story appeared in the West Bend Daily News on June 26, 2006

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