First-Time Homebuyers: What Challenges Can You Expect?
Buying a home is an important milestone for many people. Along with buying a first car, graduating college, and even getting married, people often reflect on the purchase of their first home as memorable moment.
But while it should be enjoyable, many people have problems when they purchase their first home. Fortunately, with a little knowledge, your first purchase can be smooth and simple.
Most Common Problems for First-Time Homebuyer
Short Credit History
According to MyFICO, “length of credit history” makes up 15% of your credit score, making it the third-most important category behind “payment history” (35%) and “amounts owed” (30%). Length of credit history can include many factors, such as how long your accounts have been open, which includes the age of your oldest and newest accounts.
For this category, the longer you have had a history of debt payments, the better your score will be, but many first-time buyers only have a short history, especially if you are purchasing a home straight out of college. When your credit history is short, your credit score may be low, which means you could have difficulty getting the best possible terms or interest rates for your loan.
A High Debt-to-Income Ratio
As we alluded to earlier, lots of first-time home buyers are coming right out of college into the ranks of homeownership. Many are starting their post-college lives with a huge amount of student-loan debt. These loans are excellent for advancing education, but they can be a handcuffing problem when it comes time to shop for a loan.
According to an article from Pew Research, roughly 37% of adults under the age of 30 have student loan debt, and the average bachelor’s degree graduate holds about $25,000 in student loans. If you have a postgraduate degree, this number jumps to an average of $45,000, creating a barrier to purchasing a home, leading many graduates to delay homeownership.
Lack of a Down Payment
Directly tied to the student-loan crisis is the fact that homeowners, even if their DTI is decent, have difficulty saving for a down payment. After all, if you are paying $280 a month towards your student loans, on top of food, rent, car payments, and other costs of living, saving for even a small down payment can be extremely tough.
But you don’t have to be a former student to struggle with a down payment. Many first-time homebuyers with no educational debt still struggle to find quality financing. Fortunately, there are 100%-financing options, including an option from the USDA and VA, as well as other sources.
Short Employment History
Lenders will look at a wide variety of information when helping you get approved for a mortgage loan, including your employment history. While lenders understand that employees no longer stay with a single company for an entire career, they still like to see that you have a history of steady employment, if not for a single company, then at least in the industry.
In most cases, lenders prefer to see that someone has worked for a certain company, or at east stayed in a certain industry, for two years or more. Many first-time buyers, however, don’t have this luxury. The fact that you haven’t worked in your profession for a decade, like many other buyers, will lead to trouble with your first home purchase.
High Interest Rates on their First Mortgage Loan
All of the factors we outlined above can lead to one unfortunate result: a high interest rate on a first-time home loan. Low credit scores, high DTI, and a small down payment all signify risk to lenders, and the best way to compensate for risk is to charge a higher interest rate.
Because many first-time homebuyers don’t have the profile of a “perfect” borrower (whatever that means), they are often forced to pay a higher interest rate, which means larger payments on their mortgage loan. Even a few tenths of a percentage point can mean a major increase in the total cost of borrowing money, especially when purchasing a home worth hundreds of thousands of dollars.
Not Understanding the Mortgage-Application Process
This is another hangup that often affects first-time buyers. By no fault of their own, they simply don’t understand the details involved with purchasing a house, especially the complex mortgage process.
While we try to keep the application process as simple as possible, there are many variable that some people simply don’t understand because they have never gone through it before. Concepts like DTI and LTV are terms that you rarely come across in the real world, but are used when you apply for a mortgage. Having the experience of going through the mortgage and purchase process is an advantage, but it’s an advantage you don’t have your first time around.
Not Understanding How to Effectively Shop for Homes
This is another issue of simply not knowing; in this case, not knowing how to shop for a home. Many first-time buyers forget that purchasing a home should be a fun and engaging process; stressing will only make you desperate, and desperation often leads to poor decisions.
First-time homebuyers, for example, may not focus on the right aspects of the home, and instead focus on trivial or easily-fixed issues. For example, a first-time homebuyer might avoid purchasing a specific home because it doesn’t have the exact wall color they prefer. However, interior paint is one of the easiest things to replace, and it shouldn’t hold up an otherwise smart purchase. Adjusting how you shop can be essential to finding the right home, but many first-time buyers may not understand this concept.
Proudly Serving First-Time Homebuyers
At San Diego Purchase Loans, we believe that homeownership is one of the pillars for financial stability. With that in mind, we take pride in serving first-time homebuyers who need affordable terms on a top-quality mortgage.
From starter homes to condos to jumbo loans, we are ready to serve your needs! Contact our staff and we’ll use a common-sense approach to underwriting so you can get a fantastic first mortgage.