First-time homebuyers have one distinct disadvantage – they don’t have any experience buying a home. The only way to get that experience is to jump in and give it a try. Before doing this, though, buyers should know what challenges lie ahead.
Low Credit Scores
First-time homebuyers often have low credit scores simply because they don’t have a long credit history. It may not necessarily be because they have late payments or high credit utilization rates. The length of their credit history and the number of accounts they have play a role in the credit score.
Lenders use the credit history as well as the credit score to determine a borrower’s eligibility. If a borrower doesn’t have a long credit history it’s hard for the lender to tell the borrower’s financial responsibility. Lenders look at a borrower’s patterns. Do they pay loans late? Do they default on their credit cards? They use this to determine if a borrower is a good risk for a mortgage.
No Housing History
Oftentimes first-time homebuyers move right from their parent’s home to their own home. This leaves them with no housing payment history. This is another factor that lenders use to figure out a buyer’s risk level. In fact, it’s one of the larger factors as it gives a lender an indication of how likely they are to pay the mortgage on time if they were to approve the loan.
A housing history also tells a lender what type of payment shock a buyer will experience. If a buyer is used to paying $500 in rent and the new mortgage will be $1,500, that’s a large increase, or as lender’s call it, payment shock. If a buyer has no housing history, the loan payment a lender may allow will likely be on the low side.
Unstable Job History
Depending on the age of the first-time homebuyer, the job history could be unstable. Lenders like to see at least a 2-year stable job history. This means 2 years at the same job making the same or higher income. Borrowers just starting out in life, though, may not have that 2-year history.
Some buyers have a rather new job as they just started their career and want to get started on homeownership. Others hop around to different jobs as they climb higher up the ladder and get the necessary experience to help them further their career.
Luckily, lenders can be flexible with the job history issue. As long as a buyer doesn’t have gaps in their employment and their income steadily increases rather than decreases, the lender may be able to make the spotty employment history work.
Low or No Down Payment
First-time homebuyers are often young adults that are burdened with a lot of debt. Whether they pay rent, credit cards, car payments, or student loans, these debts take away the ability to save for a down payment. When they hit the age that they want to own a home, they can find it hard to get approved for a standard mortgage.
The lack of a down payment combined with a large number of debts could be a recipe for loan denial. Lenders look at the likelihood of default based on how much of the buyer’s own money they have invested in combination with their current debt obligations. If the risk of default is too high, it could make it hard to find a loan.
Rising Home Prices
The final factor affecting first-time homebuyers is the rebounding housing market. While it’s good for the rest of us, especially homeowners, to see the prices bounce back, it makes homeownership harder for first-time buyers.
Higher home prices mean larger down payments and larger mortgage payments. If a buyer already has a high debt ratio or has little money to put down on the home, the higher home prices could make homeownership a real struggle.
The challenges facing first-time homebuyers can be overcome with the right steps. The most important thing any new buyer can do is prepare themselves ahead of time. Working on credit, debt, and savings at least two years before they want to purchase a home will give the buyer the best chance at securing the loan approval they need.