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Things a First-Time Buyer Should Know Before Buying a Home

For most first-time home buyers, buying a home means obtaining a mortgage. Applying for a mortgage can be a complicated process, so it pays to do some research before taking the plunge.

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Read on to learn 10 basic things you should know before buying a home.

1. Find out how much you can afford.

Many experts recommend buying a house that costs no more than two-and-one-half times your annual income. Banks offer favorable rates if your mortgage, property taxes and insurance equal no more than 28 percent of your income. Online calculators will show how debts, income and expenses affect the amount of house you can afford.

2. Address any problems with your credit rating.

Buyers with high credit scores will get the lowest interest rates. Lenders usually consult the three major credit bureaus when evaluating your credit history. Get a free copy of all three reports at AnnualCreditReport.com, and dispute any inaccurate information.

3. Know the difference between fixed- and adjustable-rate mortgages.

Most first-time buyers opt for a fixed-rate mortgage, which has an interest rate that stays constant for the term of the loan. An adjustable-rate mortgage, or ARM, offers lower rates during the early portion of the loan. While an ARM lets you take advantage of falling rates, it also exposes you to higher payments when interest rates rise.

4. Realize that prequalification is only the first step.

Prequalification means that you are qualified for to be approved for a mortgage. Preapproval is a more rigorous process that will make sellers and real estate agents take you seriously.

5. Understand that you may qualify for a mortgage with a small down payment.

A smaller down payment and good credit rating will qualify you for a mortgage in many markets. Banks often extend mortgages to buyers who can put down only 5 or 10 percent.

6. Learn about private mortgage insurance.

You must buy this insurance when you make a down payment of less than 20 percent. Find out how much this insurance will cost and whether additional fees are required. Ask your lender what conditions must be met before you can stop making insurance payments.

7. Shore up your savings account.

Your lender will like to see four or five months' worth of mortgage payments in your savings account. The money will come in handy if you are hit with large repair bills.

8. Consider paying points.

You may have the option to pay extra points in exchange for a lower interest rate. Experts recommend that you pay the points if you plan to own your home for at least three to five years.

9. Negotiate for a more favorable rate.

Understand that mortgage rates are negotiable. If you have assets and good credit, you are in a good position to bargain for a better rate.

10. Look carefully at closing costs.

Examine the Good Faith Estimate put together by your mortgage provider to help you predict closing expenses. Ask about fees that seem unusual.

Dylan Clegg

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