Mortgage Rates, Home Prices Now Favor Prepared First-Time Homebuyers

September 21 2008 - For the past few years it has been tough to be a first-time home buyer. Yes, banks often fell all over themselves lending money to potential buyers. But it did not mean that homes were affordable.

Now that may be changing.

For one, property values have come down significantly. For the two years through June, home prices in 20 U.S. metro areas fell by an average of 19 percent, according to the S&P/Case-Shiller home price index. In some cities, the drop has been more dramatic. For example, since 2007 home prices in Miami declined by an average of 28 percent.

The second change is in mortgage rates.

After the federal government took over mortgage giants Fannie Mae and Freddie Mac this month, rates on home loans fell about a third of a percentage point, on average, according to HSH Associates, which tracks the industry.

Rates also have been pushed down as spooked investors buy Treasury bonds, pushing down yields. Mortgage rates generally track movements in Treasuries.

Cheaper homes and low interest rates make for a good buying opportunity. It may not be easy to become a homeowner in the current environment, with unemployment up and banks nervous about lending to anyone but the most creditworthy. But make these moves and you could obtain something positive out of a gloomy and uncertain time:

Improve your credit. To take advantage of low interest rates, you need stellar credit, typically a credit score of 720 or higher (of a potential 850). Many first-time buyers, who often have a limited credit history, don’t have that kind of a score.

If that’s the case for you, now is the time to focus on improving your credit history. Open a credit card, pay your bill on time every month and don’t carry a balance. Your score will improve.

Shop mortgage lenders. Not all banks are suffering the same level of losses. Many small banks and credit unions, for example, never made risky subprime loans. These institutions may be in better shape to lend.

“Credit unions aren’t throwing money out the door,” said Bill Hampel, chief economist for the Credit Union National Association. But they’re not under the same pressures as larger institutions.

As a result, they also are more likely to work with a young couple still building a credit history, Hampel said.

Save, save, save. The other obstacle to obtaining a mortgage is the down payment. During the housing boom, you could easily finance 100 percent of a home’s value. Now that’s close to impossible.

Even Federal Housing Administration-insured loans, which are guaranteed by the government, soon will require a bigger down payment. Starting Oct. 1, borrowers will need to put down 3.5 percent, up from 3 percent.

Get a tax break. In addition to bigger FHA down payments, other home-lending rules have changed. One new benefit: First-time home buyers (anyone who has not owned a home in three years) can claim a tax credit worth as much as $7,500.

The credit is really an interest-free loan because it has to be repaid over 15 years, and you have to buy your home by July 1, 2009, to qualify.

But it will offer some initial relief.

Rates, Prices Now Favor Prepared First-Time Buyers
by CAROLYN BIGDA