What Kind of Mortgage Rates Should a First Time Home Buyer Expect?

First time buyers do not necessarily get worse mortgage rates than seasoned home owners. It is very possible a first time buyer has a higher credit score and higher income than many homeowners who have had mortgages in the past. However, there are several factors that will generally make a first-time buyer's rate much higher.

Lack of Large Installment Loans

The main reason new home buyers will have higher rates is because they do not have large installment loans on their credit reports. Mortgage loans are typically the largest loans most people will take in their life time. It can be difficult to get the highest credit scores possible without at least one large installment loan. Your performance on large installment loans is an indicator for how you will perform on similar loans in the future.

You can partially overcome this rate-hike factor by taking out multiple installment loans early in life. Examples of other large installment loans include car loans, student loans and personal loans. Instead of purchasing a vehicle out-right, consider taking an auto loan in order to build your credit. While you will have to pay a bit for financing, you may recognize this added expense back in savings on your future mortgage.

Lower Down Payments

Most home buyers will use the profit from the sale of another home for a down payment on a new home. This is similar to trading in a vehicle for the down payment on a new car. When you have equity in a similar asset, you can trade in that equity, or sell it, in order to achieve immediate liquidity.

Individuals who are not selling a home in order to purchase a new home may have lower down payments. Lower down payments work to increase mortgage rates in two primary ways. First, they necessitate a larger mortgage. Larger mortgages typically have higher rates. Second, they make the loan more risky for the lender. Borrowers with high down payments and a lot of cash to spend appear to be less risky. Lenders charge interest rate partially according to the estimated risk a loan presents.

Lack of Mortgage Experience

Mortgage rates depend on your negotiation skills as well as your credit rating. First time buyers often make the mistake of accepting the first mortgage offer that comes their way. When a borrower takes the first offer, the borrower misses a key opportunity to shop around and find a better rate.

There are a number of tools you can use to lower the rate on your mortgage if you are wiling to negotiate. You can elect different loan terms, such as a shorter loan option or higher fees on delinquent or early payments. In this way, you are locking in your terms more solidly with a lender, reducing the risk of the loan. You may also provide additional collateral on the loan, such as stock certificates or savings accounts, in order to further secure the loan against default. Finally, it is worth your time to look for FHA guaranty options that will allow you to get a lower rate as a first time home buyer.