There’s nothing quite like the feeling of satisfaction you get when you buy your first home. But for many first-time buyers, the process can be quite challenging. Let’s take a look at some of the most common hurdles to home ownership, and what you can do to help overcome them.
Challenge #1: The down payment. One of the biggest challenges facing first-time buyers is having enough money for a down payment. With a traditional mortgage, borrowers are typically required to pay 20% of the home’s purchase price upfront. For many first-time home buyers, coming up with a 20% down payment can be difficult, if not impossible. The good news is that a down payment is no longer the obstacle that it used to be.
Borrowers now have many mortgage options to choose from, including low-down payment and no-down payment loans. An FHA loan for example, requires that the borrower only put down 3.5% of the purchase price. It’s important to note however, that an FHA loan typically requires the borrower to pay two separate mortgage insurance premiums (MIP); an upfront and an annual premium. The upfront premium is equal to 1.75% of your loan amount. It can be paid at closing, or it can be tacked onto your mortgage balance, thereby increasing your monthly mortgage payments. The annual premium is an ongoing charge, paid on a monthly basis. Each year, the charge will range from 0.45% to 1.05% of your loan amount.
It’s also possible to get a Conventional mortgage with a down payment as low as 3.5%. However, if you take out a Conventional mortgage with a down payment that’s less than 20% of the purchase price, you’ll typically be required to pay private mortgage insurance (PMI). Private mortgage insurance is designed to protect the lender in the event that the borrower defaults on the loan and stops making their monthly payments. The amount of PMI you’ll be required to pay will vary by lender, but it can range anywhere from 0.50% to 1.00% of your mortgage balance each year. The good news with PMI is that once you build up enough equity in your home, you’ll no longer be required to pay it. You can request that your PMI be canceled once your mortgage balance falls below 80% of your home’s original value.
There are also some home loans that don’t require a down payment all. No-down payment mortgage options include USDA loans, VA loans, and local community-based loans.
A USDA loan is available for properties located in eligible rural areas. While they do not technically require mortgage insurance, these loans do charge an upfront guarantee fee of 1.00% of the loan amount, and an annual fee equal to 0.35% of your mortgage balance. While the annual fee will be charged for the life of your loan, the amount you owe will decrease each year as you pay down your mortgage balance.
And if you’re a qualified veteran or military member, you could be eligible for a VA loan – a mortgage option that requires no down payment, and no monthly mortgage insurance premium.
Community-based initiatives such as MassHousing and RI Housing also offer loans to qualified buyers looking to purchase a home without a down payment.
Challenge #2: Finding a house you can actually afford. With home prices on the rise in both Massachusetts and Rhode Island, it can be a major challenge for first-time buyers to find a suitable property within their price range. Luckily, there are plenty of ways to find an affordable home - you just may need to think a little “outside the box”.
One option is to consider a condo instead of a single-family home. Condos are typically less expensive than a single-family home, which translates into smaller mortgage payments. What’s more, with a smaller living area, there’s less space to clean and maintain inside. And as far as outside is concerned, exterior maintenance and repairs are typically handled by the condo’s homeowner’s association.
Another alternative is purchasing a multi-family rental property instead of a single-family home. This allows you to live in one unit, while collecting rent from the other units, which can go toward paying your mortgage bill.
Another consideration is buying a property in a more affordable housing market. You might be surprised at the houses you can afford in areas with lower median home prices. And if remaining local is more your thing, there are plenty of communities in Massachusetts and Rhode Island with home prices well below the state median prices.
Challenge #3: Not having sufficient credit history. Another potential challenge for first-time buyers is credit history, or lack thereof. Borrowers with good, established credit are less risky to lenders, and that can translate into lower mortgage rates. Your credit history can also be a deciding factor in whether you’ll be approved for a mortgage or have your application declined. But the good news is that if your credit is less-than-perfect, or if you have no credit history to speak of, there are plenty of things you can do to whip things into shape.
Some things you can do to help establish a credit history include taking out a secured credit card or credit-builder loan and making on-time payments. Making student loan payments on time can also help you to build up your credit history. And you can help to repair a damaged credit score by reducing your credit card balances and making your payments on time, every time.
Don’t let the challenges of home buying stand in the way of you owning your first home. With a little preparation you can become an informed buyer and start the journey to homeownership on the right foot. And don’t go it alone! A mortgage specialist is a great resource for helping you find the home loan that’s right for you.