First-time homebuyers face numerous challenges when buying a home, such as getting approved for a mortgage and finding the perfect property. However, these obstacles should not stop new homebuyers. In 2019, 33% of homebuyers were first-time homebuyers, according to the National Association of REALTORS® report.
First-Time Homebuyers Need a Mortgage
Are you a first-time homebuyer thinking about starting the process of finding a home? Take a moment to learn about the mortgage challenges facing first-time homebuyers to better prepare yourself.
Saving for the Down Payment
According to the NAR report, 13% of buyers said the most challenging step in preparing to buy a home was saving the down payment. It’s not surprising. While home prices can vary drastically, they are on the rise across the country.
Historically low mortgage rates spur more people to buy homes, causing a shortage in inventory as the number of buyers increases. This phenomenon is pushing up prices, making it more difficult to save a percentage of the purchase price for the down payment.
For example, the Texas average home value is $213,036, New Jersey’s is $346,368, and California’s is an astonishing $579,332. To save 10% for a down payment, a buyer would need $21,000, $35,000, or $58,000 respectively. Correspondingly, buyers looking to put down 20% would need $42,000, $70,000, and $116,000. Remember, the down payment does not include the money needed to pay closing costs.
Many loan programs require a lower down payment and can be good options for first-time homebuyers struggling to save. Conventional loans exist with down payments as little as 3.5%, though the borrower will be obligated to pay private mortgage insurance (PMI).
PMI ranges from between 0.5% and 1% of the mortgage balance each year. Once the balance falls below 80% of the home’s original value, borrowers can request it’s removal in some circumstances.
USDA loans, VA loans, and local community-based loans may also be an option for many first-time homebuyers.
Building a Solid Credit History to Apply for a Mortgage
Another mortgage challenge for first-time homebuyers is building a solid credit history. Most conventional loans require a minimum credit score of 620 to qualify for a loan. Buyers looking for more favorable terms, such as lower interest rates, need higher scores.
Credit history length makes up 15% of the credit score. A longer (good) credit history often translates to a higher score. Young homebuyers without years of credit history may find this problematic, but there are other credit score criteria that first-time homebuyers can work on to raise their credit score.
For example, credit cards count toward credit history, so having a card and using it, while making on-time payments is an excellent way to raise your credit score.
Building a Solid Employment History
Another challenge for many first-time homebuyers is stable employment history. Since first-timers tend to be younger, they are working to establish their careers and may frequently change jobs.
Lenders want borrowers with steady income because they are less likely to stop making their mortgage payments. Therefore, lenders like to see a 2-year job history, which can be difficult for first-time homebuyers. Fortunately, lenders understand this and have rules to help applicants who are starting a new job.
Finding an Affordable Home for First-Time Homebuyers
Finding an affordable home is a growing challenge as home prices rise across the country, but not impossible. Buyers may need to be flexible about their home-buying aspirations to make their dream a reality.
For example, instead of the typical single-family home, first-time homebuyers might consider buying a condo. In particular, city dwellers love this option as condos are usually close to shopping, entertainment, and perhaps their place of employment. Condos typically have no yard work either.
Another option to consider is purchasing a multi-family unit, such as a duplex. Buyers can live in one unit while renting out the other(s) and put the renter’s payment toward the monthly mortgage.
Finally, buyers who work from home or are otherwise flexible on location can choose neighborhoods in a more affordable market.
To find out how much you can afford to pay for a home, start by getting pre-approved for a mortgage. By going through this process, you typically learn about your options to finance a home purchase, in addition to how much you can borrow to buy a home.
Related: First-Time Homebuyers Mortgage Tips
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, FHA, VA, USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.