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First Time Home Buyer RulesWithout the dead weight of a house to sell, first time home buyers have enjoyed optimal conditions for purchasing in the depressed housing market…until recently. A new series of rules, regulations and policies have shifted the landscape, making buying a home a more challenging and costly endeavor than ever before.

Rising costs for first time home buyers

In March 2013, the cost of mortgage insurance for an FHA mortgage loan (a typical loan for first time buyers) increased by as much as .50%. Fees on small down payment mortgages are also set to increase, making affordable first time home buyer programs even more scarce. In the meantime, an increasing number of lenders are requiring larger down payments.

The rising cost of new mortgages is a reflection of banks’ need to recoup the money lost in the collapse of the mortgage market. The new regulations are designed to minimize borrower and lender risk, but may unintentionally be discouraging many first time borrowers from applying for a mortgage.

Here are several First Time Home Buyer Rules to consider when making a purchase:

Rule #1 - Put More Money Down

While it’s still possible to make a first time down payment of less than 5 percent, insurance fees on government-insured mortgages have doubled over the past year. What this means: a 30-year, $300,000 mortgage will cost a buyer $30,000 more in fees over the life of the loan than in September 2012. However, first time home buyers should consider whether they plan to stay in their first home for 30 years, as this will influence whether the fees are paid in full.

In higher priced markets like New York and San Francisco, saving up 20% or more for a down payment can be difficult. Instead, First Time Buyers should consider alternative options, such as grants offered by the state, or cash gifts from a family member, or co-ownership of the home.

Rule #2 – Stay Put for 10 Years

In order to make a profit or even just break even, buyers are discovering that in many cases, it is necessary to stay in a home for ten years or more. Although buying a home is still a smart financial move, buyers should focus more on building equity instead of counting on rising home prices to do the work.

For First Time Buyers, it is advisable to avoid buying a home that requires major renovations. Recouping the costs of a major renovation will take longer than ever before. Instead, focus on purchasing a home that does not require major renovations but will build equity as time passes.

Rule #3 - Expect Competition

During the housing downturn, desperate sellers often accepted just about any offer. But home buyers expecting to score a deal may be disappointed as recent market developments have seen cash buyers make a significant impact. Recent data shows 32% of purchases were made with cash, up 6% from a year earlier, reported NAR. Sellers favor cash payments because there is no need to wait for a lender to approve loan financing.

In order to stand out from the competition, first time buyers can make an offer with few contingencies. Sellers may opt for a buyer who doesn’t demand repairs or ask that closing costs be covered. If a buyer asks for the standard contingencies of a home inspection and appraisal and nothing more, they are more likely to be accepted than an all-cash bid with an extensive list of requirements. First time home buyers and their Realtor should work with an experienced mortgage originator in order to structure the most competitive home purchase offer.

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