First Time Home Buyers

Renting vs. Buying

Purchasing a home is a big decision and one that should not be taken lightly. There are many financial factors to consider before buying a home. While there are advantages to purchasing a home, for some renting may be the best financial option. If you plan to stay in your home for several years and homes are appreciating in your area, it can be beneficial to own. Home ownership also provides tax advantages and the opportunity to build equity.

Renting offers the advantage of flexibility, being able to move on short notice (depending on your lease agreement) while a mortgage does not. A foreclosure on a mortgage loan is a far worse problem than being evicted from an apartment as well. There are additional costs when you own your own home, such as maintenance and repair costs.

Consider your lifestyle, potential changes in your employment and the financial responsibilities of owning a home before making this important decision.

To learn more about whether you should continue renting or buy a home, use this calculator:
Renting vs. Buying Calculator

(Colorado home price appreciation continues to lag the nation—5.6 percent versus 12 percent nationally in third quarter 2005, placing the state 45th nationwide.)

It’s Time to Buy a Home

Oftentimes the decision to consider buying a home is followed by finding a realtor and going shopping for a home. When you do this, you are taking a risk of purchasing much more home than you can afford. There is also the potential for complete discouragement if you find a home that you really want and cannot afford it. When this happens, it is difficult to “settle” for something smaller.

Therefore, we recommend taking the following steps before you ever start shopping for your first home:

  1. Make certain your credit is the best it can be.
  2. Save money for your down payment.
  3. Know exactly what you can afford.
  4. Obtain pre-approval for a mortgage loan.

The following websites have step-by-step tools to help you:

Homebuying Tips from HUD

Credit Union Consumer Facts: Homebuying

Fannie Mae

Getting Credit-Ready

The three major credit bureaus have recently decided to utilize a uniform credit scoring system, which will take effect later this year.

As the system operates today, credit scores run from 300-850 (under the new system, scores will range from 501-990). Lenders base the percentage rate they will offer you for your mortgage on your credit score. The higher your score, the better mortgage rate you can obtain.

You can obtain copies of your credit report to find out your credit score. If your credit score is over 720 you don’t need to work on it to get the best rates. The difference in the interest rates offered to a person with a score of 520 and a person with a 720 score is 3.45 percentage points, according to Fair Isaac’s Web site. On a $100,000, 30-year mortgage, that difference would cost more than $85,000 extra in interest charges, according to Bankrate.com’s mortgage calculator. The difference in the monthly payment alone would be about $235. This could impact the type, size and price of a home you can afford to buy in addition to the high cost of having poor credit. Therefore, it is well worth your time and money to improve your credit rating.

Some ways you can improve your credit score include:

  1. Fix errors on your credit report.
  2. Pay down credit cards that are at the limit. If you have only one at the maximum and others with no balance, it can help to spread that debt out among your cards.
  3. Make all payments on time. If you have a bad payment history, commit to making payments on time for 1-2 years to improve your score.
  4. Do not close all accounts, especially those with which you have established a good credit history
  5. Don’t apply for a lot of new credit.

If you are willing to pay for a comprehensive evaluation of your credit report and how to improve it, visit www.myfico.com (an excellent product for this purpose). You will receive a detailed report showing the negatives on your own credit report and how you can increase your score.

If you have more time to improve your credit score, these are some tips to doing that:
Improve Your Score

If you need to develop a plan to pay down your debt in a certain period of time, this free tool from BankRate will help you to find the best way to do that:

You can obtain copies of your credit reports for free if you live in Colorado:

Saving for your down payment

Lenders often require a down payment ranging from 0-20%. Saving for a down payment can sometimes be a daunting task. The best way to do this is to first learn where all of your money is going. Track all of your spending for several weeks. Don’t forget the small purchases like designer coffee, vending machine purchases and lunch out. Examine other things in your budget such as cable T.V., a storage unit, cell phone, etc. and ask yourself if they are as important to you as buying your own home.

Once you have learned where your money is going, you can develop a plan that will enable you to cut some unnecessary spending and save that money for your down payment.

For creative ideas on how to find the money to save, use these links:

There are also special programs in your community that offer down payment assistance for first-time homebuyers:

Credit Union First Time Homebuyer Program

Home Loan Payment Relief (“Helper” Program)
(For people with incomes at or below the median in their market)
Credit Unions offering this program:

Housing Counseling Agencies
These agencies offer first-time homebuyer programs:

For people with disabilities who want to buy a home:

How much home can you afford?

Your mortgage and associated costs should not exceed 28 percent of your gross monthly income. This includes mortgage principal and interest, real estate taxes and homeowner’s insurance, the usual items included in a monthly mortgage payment. Your total debt should not exceed 36 percent.

For more information on the 28/36 Guide

Worksheets and calculators for figuring out how much home you can afford:

Pre-qualifying or getting pre-approval for a mortgage

When you are shopping for a home, one advantage you can have over others interested in the same home is a pre-approved loan. Having pre-approval means the seller doesn’t have to wait for you to get qualified, as opposed to other buyers who still need to go through the process. This could even give you room to negotiate the price of the home.

To get pre-approval, you will first need to find a lender. If you are a first-time homebuyer, a good option is to use one of the first-time homebuyer programs mentioned above to get direction and access to programs. If you don’t use a homebuyer program, then you will need to shop for the best rates and lenders.

We urge you to use caution as you move through this process and work only with reputable lenders. If you belong to a credit union, talk to them first. If you don’t belong to one, you can become a member by joining Consumers United Association.

These links will provide you with more information about how to make a decision on a lender:

Avoid Predatory Mortgage Loans

Lenders who try to get you to borrow more money than you can afford are lenders you need to avoid. Others add costs to your loan, balloon payments, have a higher interest rate than you qualify for and more. Learn all you can about mortgage loans and predatory lending before you choose a lender.

Tips for Avoiding Predatory Loans