Buying a home for the first time is big decision. Financially, it is likely to be the biggest decision of your life. Emotionally, it will be an exciting adventure into the American Dream. Ultimately, it needs to be a decision made in an informed and responsible way.

Should I Be a Home Buyer?

The first question you should ask when you are consider purchasing a home is, "Should I be a home buyer?" Although a mortgage lender can disqualify you, most will find you a loan at some rate. Therefore, that leaves the responsibility on you to make a good decision.

A responsible home buyer starts with good financial habits. Take this quick first-time mortgage suitability quiz:

• How do you calculate affordability--the amount of money left in your checkbook?
• Do you review loans (think of your auto loan) by monthly payment only or total cost of financing?
• Are you considering future financial objectives or just the lowest payment for the biggest loan amount?

These are some of the biggest hazards for a first-time home buyer. Narrowing your focus to only the monthly mortgage payment can set you up for disaster.

As a first-time home buyer you need to be diligent in looking at the whole mortgage process and how it changes your financial picture now and in the future.

Rent or Purchase Home?

Determining whether it is better to rent or buy a home is a classic dilemma. One that is more complex than it would seem at first. This is not simply a comparison of monthly rent versus monthly mortgage payment.

This decision really needs to be a consideration of costs and benefits. Here is a simple framework:

Favors Renting:

• Poor credit score
• Likely to upsize, move, or relocate in less than 3 years
• Little or no savings (reserves) for unforeseen expenses
• High property taxes or homeowners insurance rates
• Unable to pay down payment
• Low tax (rate) bracket

Favors Home Purchase:

• Good to excellent credit score
• Unlikely to upsize, move, or relocate
• Strong savings and emergency funds in reserve
• Reasonable property tax and homeowners insurance rates
• Able to make 20% down payment
• High tax (rate) bracket

The best rule of thumb is to look at your home purchase like a conservative financial investment. Are you willing to buy and hold that asset?

Basics Mortgage Concepts

As you consider your first home purchase take the time to learn more about these basic mortgage concepts.

Qualification - Sometimes called a pre-qualification, a qualification is simply an opinion by a real estate or mortgage broker that you can afford a home. This is a non-binding estimate that normally considers your income, assets, and debts. Two key components that are often not considered at this point in the home purchase process is your credit score and the appraised value of the home.

Pre-Approval - The pre-approval is a far more substantial step in the home buying process. It is a conditional commitment by the lender to approve you for the mortgage loan. During this process the lender will have checked your credit score and possible verified you income, assets, and monthly debt obligations. The pre-approval will normally also estimate maximum loan amount and assumed monthly payment.

Approval - An approval is a firm commitment, by the mortgage lender to make the loan. At this stage the approval will include all of the information a verifications of the pre-approval, but will now also include a specific property and the appraised value. The approval will also include an mortgage interest rate, although that rate may be floating (meaning it may change) or locked (meaning you have paid to keep that quoted rate).

Lock - Mentioned above, the process of "locking" a mortgage rate is a commitment by the mortgage lender (and the borrower) to a specific mortgage rate.

Starting your home purchase with a good understanding of what you can afford and some level of commitment by a lender to provide that loan is very valuable. A qualification or pre-approval can also give you leverage in the real estate price negotiation process.

Shop for Mortgage or House First?

Should you look for your mortgage or you dream home first? This can be a "chicken or the egg" debate, but I would recommend that you begin with at least a mortgage loan pre-qualification. This way you know where you stand in the real estate market.

Many times first-time home buyers will fall in love with more home than they can afford. This often becomes a hazardous road to creative financing and unscrupulous mortgage lenders. Getting your mortgage loan pre-approval with help you guide your real estate broker or personal home search into the best real estate market for your financial situation.

Simple Guide to Mortgage Types

The number of mortgage products has significantly exploded over the years. Here is a simple guide to the most common types of mortgages you will need to consider:

Fixed-rate mortgage - These mortgages have a mortgage rate that is amortized over a specific repayment period, in years. This typically results in a fixed monthly payment throughout the life of the mortgage loan.

Adjustable-rate mortgage - These mortgages have a mortgage rate that is based on (indexed on) some benchmark rate (i.e., prime rate, COFI, LIBOR). These rates will fluctuate based on movements in the market and may go up or down. Often these mortgage have some "fixed-rate" period, but generally you must assume that your mortgage payment will be less predictable over the repayment period.

Full-Doc - These mortgages require you to fully document and verify your income, assets, reserves, and employment.

Stated-Income - These mortgages typically require you to provide less documentation related to income. These loans are often selected by those who are self-employed and have more difficulty in documenting or verifying income.

No-Doc - These mortgages are very similar to stated-income, but usually require even less documentation of income, assets, reserves, and employment. These loans are becoming very rare given the mortgage meltdown in 2004.