First-Time Buyers: Avoid Headaches With These Tips

Here’s a startling fact, reported as part of an ongoing USA Today and ABC News series: Young Americans are the fastest-growing group of homeowners.

Nearly 26 percent of people under 25 own their homes, up from just under 20 percent in 1982. In the 25-to-29 age group, nearly 41 percent are owners, up from 39 percent.

Yet the median price has more than tripled in the past 24 years. That’s made buying a home increasingly hard for adults who are still renting or living with their parents.

Throughout much of the U.S., though, the 7.4-month supply of homes on the market is giving buyers more bargaining power. Average mortgage rates, declining again, are the lowest since January.

Several state and local governments have stepped in to try to help working-class people, especially nurses, teachers and emergency service personnel, find affordable housing in the most expensive areas of the country.

To cut down on your number of headaches, here are a few tips:

CONSIDER CREDIT COUNSELING

The Department of Housing and Urban Development (HUD) supports a network of (usually) free counselors who can help you determine how much house you can afford. They can also explain how different mortgages work and how much to set aside for closing costs, taxes and insurance.

KNOW YOUR CREDIT HISTORY

Three credit agencies track your credit history based on whether you pay your bills on time, the amount you owe, the types of credit you have and the length of your history. You’re entitled to a free copy of your credit report annually from each of the agencies (visit annualcreditreport.com).

Fair Isaac takes that information and calculates your FICO credit score. If your score is 620 or more, you’re probably in good shape and should be able to get the best mortgage rates, depending on your income and how much you want to borrow. If it’s below 620, you might think about how you can raise it, perhaps by paying off old bills or reducing your debt.

There’s also the possibility of a debt consolidation mortgage to combine and reduce your debts through the single umbrella of your home loan.

CHOOSE A GOOD MORTGAGE LENDER

Go to a bank, credit union and a mortgage broker. Compare terms and fees of similar types of loans, such as two 30-year loans with fixed rates.

Be careful of adjustable-rate loans or loans with penalty fees for paying the loan off early, usually by refinancing. Make sure you understand how often, and by how much, your rate can rise.

If you don’t have enough for a 20 percent down payment, you’ll probably have to pay what is known as mortgage insurance. Or you can take out a second mortgage loan, known as a piggyback loan, with a higher rate.

It’s crucial to find a lender and be pre-approved (not just prequalified) for the loan amount you’ll need to borrow. That ensures that a seller will take your offer seriously.

Use a mortgage calculator to determine what the payments are going to be like. A credit counselor should also be able to point you to home loan and down payment assistance programs for first-time buyers.

Unfortunately, the Federal Housing Administration (FHA) program, which allows first-time home buyers to put down as little as 3 percent of the price, is useless in many coastal cities. The problem is the maximum loan: $362,790, for example, is the limit for California, where the median single-family home costs $548,680.

“If you live in the Midwest or South, you’re in luck, because FHA is alive and well,” says Brian Montgomery, assistant secretary for housing at HUD. “Unfortunately, if you happen to be in California, the most populous state, it’s not an option.”

FIND A REPUTABLE SALES AGENT / LAWYER

The buyer’s agent is typically paid a 3 percent commission by the seller. But that figure is negotiable, and some agencies offer to share that commission with the buyer. So why not ask?

Still, experienced real estate agents provide valuable help in the process, especially if you’re moving from another area. They should know the area and schools, zoning changes, and the prices of recently sold homes.

BE SURE TO GET A HOME INSPECTION

Even if the seller has already paid for a home inspection, it will provide information on the condition of the home; the electrical and heating, ventilating and air-conditioning systems and the lifespan of key components.

SHOP FOR TITLE INSURANCE & HOMEOWNER’S INSURANCE

It can save you hundreds of dollars. While your lender will require you to buy a policy for each, you may need more than the minimum coverage. Close the deal and set up a savings account.

The funds set aside can pay for repairs and maintenance that will help protect your home’s value. With closing costs, which can add up to $5,000-$20,000, knowing which fees are negotiable can save you money.