Historically, the proportion of homebuyers who are purchasing their first home in any given month is around 40%. Unfortunately, for some time the share has been well below that – approximately 29% for the last three months running, according to Bloomberg.
The combined effects of slow job growth, flat wages, and tougher lending standards in the wake of the financial crisis have been hard on all potential homebuyers, but especially so on first-timers. Millennials are having a difficult time saving up for the necessary down payment and qualifying for mortgage loans.
Prior to the housing crisis, it was possible to acquire a deal with 0% down through piggyback loans and other mechanisms – but those days are gone. 20% is the standard amount required to avoid PMI (private mortgage insurance), and 5% is typically the lowest amount of down payment banks will accept without FHA backing (standard FHA loans are available at 3.5% down).
While it may be a challenge to buy your first home, it can still be done. Here are a few hints to help you in your quest.
- Target the Right-Sized Home – Do not be tempted to buy a larger home than you need. Realistically assess your needs and capability to handle not only mortgage payments but also the auxiliary costs that come with home ownership.
If you really want or need a larger house than you can afford right now, set the savings goal that you need to buy the larger house and establish a plan to reach it within a given time. Setting savings goals and a target date can be a great motivator to control spending.
- Keep Credit Score High – Credit scores are still one of the main gateways to mortgage credit. Minimum credit scores for loans to avoid the high-risk classification have historically been around 620, but currently, banks are drawing a much higher line, typically around 660. The average credit score for an approved loan is now 743.
If you want to improve your chances of approval, verify that there are no mistakes on your credit report that lower the value and take cautious action with your credit.
Make sure all bills are paid on time, and avoid opening any other credit accounts or taking on any other debt that will further dilute your credit capability. Greater debt will increase your debt-to-income ratio (DTI), another major factor that lenders review. The lower your DTI, the better your chances of approval.
- Check Assistance Programs – The Department of Housing and Urban Development (HUD) is the place to start for assistance programs and information on low down payment FHA-backed loans. However, you should also consider state programs.
While the federal first-time homebuyer tax credit expired several years ago, some states have programs that can help first-time homebuyers with down payments and other assistance. Check with your state housing authority to find out what options are available.
State programs are often funded annually and are on a first-come, first-served basis – so do not delay in checking your options.
- Keep Current on New Programs – The poor housing recovery has drawn the attention of leaders in Washington who are trying to establish means of loosening credit. It has been reported that Fannie Mae and Freddie Mac will accept loans with down payments as low as 3% in the near future, so it is possible that banks will be more open to making these loans. Stay tuned.
It can be frustrating to want to own your first home and not be able to do so, especially given the long run of historically low interest rates. However, with a good plan, the diligence to stick with it – and maybe a bit of luck in home shopping – you can swing a deal for your first house.
Hang in there. It should be worth the effort and patience in the end.