First-time buyers's travails

The process is important in purchase


With so many variables and so much money at stake, the homebuying process can intimidate first-timers, especially in a market where prices are surging.

To get a quality home, experts recommend first-time buyers follow several key steps and take advantage of programs and grants available to help them.

First, experts suggest taking a homebuying education class, primarily to learn about loans and financial risks. Several organizations offer these classes locally; most are free and are taught by industry professionals.

"Most lenders are going to tell [first-time buyers] to get the education" anyway, said Gwenyth Padow of Tri-Churches Housing Inc., a nonprofit that offers classes in Baltimore. "Folks who have that kind of background before they buy are less likely to go into default."

Once first-time buyers feel well-informed, experts recommend that they scope out what kind of loan they can qualify for - and thus how much they can afford - by getting their credit score and/or meeting with a lender.

Make sure your credit report is accurate. Under state law, Marylanders can get a free report annually by calling the three major credit bureaus: Equifax at 800-685-1111; TransUnion at 800-888-4213; and Experian at 888-397-3742. Federal law also guarantees a free credit report; the official Web site is It's important to review a credit report thoroughly, experts say.

They "notoriously have mistakes," said Tracy Gosson, director of Live Baltimore, a nonprofit that fosters homebuying in the city. Buyers should address any mistakes immediately, she added, which could improve a credit score.

You also need to find out what your credit score, commonly known as your FICO score, is. A score above 720 usually qualifies buyers for a prime-rate loan, said Craig Watts, a spokesman for the Fair Isaac Corp., which developed the FICO score. If you draw a score in the low 600s or worse, wait until you improve your credit to buy, or ask about a higher rate sub-prime loan.

While credit reports are free, your credit score is not. A lender may tell you what it is, or you can purchase it from Fair Isaac at

Buyers can improve their score by paying off credit card debts and making rent and other payments on time.

"We all have control of our credit scores," Watts said. "You want to do that as early as you can [in the buying process] because it can take months to resolve."

Lenders rely heavily on the credit score when determining what kind and how large a mortgage a buyer qualifies for. The buyer's preferences also come into play.

While 30-year fixed-rate loans have been traditional, adjustable rate mortgages (ARMs) and interest-only loans are increasingly prevalent among first-time buyers.

Because they lower the monthly payment - either because interest payments are lower or no principal is being paid - buyers can often qualify for houses they otherwise couldn't afford.

But users of these mortgages need to be aware of the risks. After a stipulated period, the interest rates on ARMs are adjusted. At a time when rates are rising, as they are now, that would mean higher payments. And with interest-only loans, unless added principal is paid, building equity in the home is contingent on rising home prices.

If prices should fall, a buyer could end up owing more than the house could fetch if sold.

First-time buyers with little available cash but strong income can consider 100 percent financing - mortgages that require no down payment - or even mortgages that include money to cover closing costs.

There also are low down-payment programs that, for example, allow 3 percent to 5 percent down payments rather than the conventional 20 percent. An FHA loan, for instance, can require as little as 3 percent down. Be aware that private mortgage insurance might be required.

Other options, such as an 80 percent first mortgage and a higher-rate 20 percent "piggyback" loan, can finance the entire cost without requiring mortgage insurance; comparing costs is essential. Here again education is the key.

From mid-2003 to mid-2004, 42 percent of first-time buyers in the United States bought with no money down, up from 28 percent a year earlier, according to a National Association of Realtors survey. Data from 2004-2005 are not available but hasn't changed much, said Walter Molony, an association spokesman.

Riskier loans are especially popular in Maryland, which ranks 11th in the nation in its share of interest-only and option ARM loans, which allow buyers to choose among different payment options, according to the Federal Deposit Insurance Corp.

Wary of the risks of ARMs and interest-only loans, Ryan Warfel, who recently bought a three-bedroom townhouse in Middle River with his fiancee, Angela Speck, opted for a 30-year loan.

"We kept with the fixed-rate," he said. "You don't know what the interest rates will be."

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