Before figuring out if you're game to enter the housing market, assess your financial situation. Each situation will be different for each person, so it's important to determine what you're qualified to purchase. That will help narrow down your search.
"Obviously, home ownership is a good thing for most people, if you can afford it," says Alan Berry, president of Greenville Heritage Federal Credit Union. "You have to shop based on what you're willing to do, whether you have cash in hand for the closing (or) whether you have a big enough down payment."
When evaluating your finances, he recommends being more conservative than what you think you can afford.
"Borrowing your way into prosperity is not a recipe for success," Berry says.
Another factor to consider is the down payment, which is now usually required as your "skin in the game, your obligation," he says.
"Historically, it was 80-20. You put down 20 percent; they'll come up with 80," David Watson, financial advisor with Morgan Stanley, says.
And oftentimes, if you don't have that 20 percent down payment, you'll end up paying PMI (private mortgage insurance), he says. "Basically it's the bank taking an insurance policy out against you that you'll default because you're borrowing more than that 80 percent."
So now you've determined you're financially able to purchase a home. The next step is to contact a bank, lender or financial advisor. They can walk you through the process from start to finish, so you'll know what to expect.
Of course, as a first-time homebuyer, you must do your research as well.
There are plenty of resources available on the Internet, such as www.bankrate.com and www.sha.state.sc.us.
This doesn't take the place of a financial advisor, but will help you become more educated.
"Don't go into the game in the dark," Watson says. "Know the process."
The credit score
One of the first things on a first-time homebuyer's mind is the question: Is my credit score good enough to purchase a home?
You must first figure out what your credit score is. You can do this with services like Annualcreditreport.com or by contacting the three major credit reporting companies: Equifax, TransUnion and Experian.
Watson calls the credit scoring process an anomaly. "You need to take on debt to get a good credit score. So take on debt, but not too much."
In other words, you don't want to overextend yourself, because banks look at your income-to-debt ratio, which should be as low as possible.
The best way to maintain a good credit score is by paying your bills on time in full, Berry says. This is the thing that dictates your credit score. No matter what type of bill it is, whether utility or medical, if you pay your bills late, your credit score goes down.
Another way to maintain good credit is to limit the number of credit cards you open.
You want to have enough to establish a score, but not so many that it looks bad on your record.
Plus, every time you open a credit account, you get a credit check done on your score.
And each time they do a credit check, it lowers your score, Watson says.
Now here's a catch — what if you want to purchase a home, but have no credit score because you've never had a credit card before? Not a problem.
There are alternative credit programs that financial advisors and loan officers can help you with, but only if you have no credit score because of no credit activity.
The alternative programs won't work if all you have is collection accounts, says Mark Wells, of Preferred Financial.
You have to provide a rent reference plus three other sources that can be manually underwritten and connected with your social security number, he says.
These sources include the electric bill, water bill, phone bill, cable bill and auto insurance, to name a few. You must provide a 12-month history and can never have been more than 30 days late on any payment.
Check your credit
• www.annualcreditreport.com
• Equifax: 800.685.1111
• TransUnion: 800.916.8800
• Experian: 888.397.3742
Shop around for rates
Alan Berry, president of Greenville Heritage Federal Credit Union, suggests checking out two or three different places to compare and contrast rates, whether it be Web sites, newspapers or other resources.
"Rates and terms vary all over town," he says. "After you've looked at three different places, you'll know what the market is and you'll have a sense of whether you're getting a good deal or not."
And you don't need to worry if checking out different options will have a bad effect on your credit score — five to 10 points at the most, Berry says.
3 things to ask the lender or broker
• Ask for a list of current mortgage interest rates and whether the rates being quoted are the lowest for that day or week because rates change daily.
• Ask if the rate is fixed or adjustable. When interest rates for adjustable-rate mortgages go up, generally so do the monthly payments. If the rate quoted is for an adjustable-rate mortgage, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
• Ask about the loan's annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.
— Source: Federal Reserve Board, www.hud.gov/buying
For a mortgage shopping worksheet go to www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
