Advice from a first-time home buyer
I bought my first house recently. As a mortgage writer at Bankrate, I felt better prepared than most for the real estate journey. But the process was not without setbacks, and even some surprises. The biggest lesson? No matter how much you read and research, you don’t know what you don’t know. Here’s what I (accidentally) learned and my advice for other first-time homebuyers.
1. Find a lender who “gets it”
When I set out to find a mortgage lender, I did all the right things – compared different providers, evaluated rates, read reviews and testimonials. I knew what I could afford (this calculator helped), how much I would probably be okay with, and what I was comfortable spending.
Once I had a short list, I contacted each lender to get pre-approved. I soon had my first nasty surprise: I wasn’t being offered the amount of money I needed to buy an entry-level home in my area, even with a great FICO score, a $20 down payment % and a minimum debt.
The reason? I haven’t earned enough income, according to Desktop Underwriter (DU), Fannie Mae’s automated program that many lenders rely on to determine whether to approve a mortgage and for how much.
After several tries with different lenders, I finally joined a local store – a community lender affiliated with a local bank. In person, my loan officer showed me DU in action. We have entered factors such as higher or lower property price, ideal and maximum debt ratios, larger or smaller down payment and points or no points. By experimenting with these scenarios, I finally got the amount I wanted at an affordable monthly payment.
While it’s crucial to get the lowest rate possible, it’s also important to work with a lender who takes the time to understand you beyond the first DU results. When comparing lenders, try to meet with a loan officer or mortgage broker in person to discuss your needs, ask questions, and explore options.
2. Debt isn’t always a bad thing
Like many borrowers, I have other loans in addition to the mortgage I was hoping to get. This was factored into my debt-to-income ratio or DTI, a measure of your debt payments relative to your gross income. Lenders generally like to see this at 43% or less, although some allow up to 50%. If you have a monthly student loan payment of, say, $260, with an expected monthly mortgage payment of about $1,900 and an income of $5,625 per month, your DTI ratio would be about 38%.
What I didn’t know: If you have a installment loan with 10 or fewer payments remaining, this will not count towards your DTI ratio. Coincidentally, at the time I applied for a mortgage, I was at that time with a car loan – a loan that I had considered paying off to help my DTI ratio. Luckily I didn’t!
Take stock of your other debts before taking out a mortgage. While going into debt isn’t ideal, in this case it was better for me to focus my funds on a down payment and closing costs, rather than using them to pay off or pay off the car loan. It gave me about $3,500 more to spend on buying my house.
3. Beware of special rates for first-time buyers
I got pre-approved for a first-time homebuyer loan with a lower rate. But that rate was reserved for buyers in certain cities and towns, a common parameter for these types of programs. It turned out that the house I bought was just outside the “special rate” areas. And so, to keep the rate low, I had to pay mortgage points, which cost me 1% of the loan principal.
For me, depending on my expenses, my future plans and my savings, it was better to pay the points in order to keep this lower monthly payment. It’s not the right strategy for everyone, however. In fact, with rates rising, it may be better to accept a higher rate now and potentially refinance later.
“Now that rates are at these high levels, it wouldn’t make sense to pay points to buy out the rate,” says Joe Petrowsky, president of Right Trac Financial Group, a mortgage broker based in Manchester, Connecticut. . “Since it normally takes more than five years to get a return on the buyout, it just doesn’t make sense. Over the next few years, rates will drop, and most people who end up with these current rates will want to refinance, so it’s just not profitable right now.
4. A homeownership class doesn’t have to cost you
If you are getting a mortgage through a first-time buyer program, you will likely need to complete a first-time buyer category before closing. There are many organizations that offer courses, some of which can cost up to $100 or more.
Here’s a secret, though: Fannie Mae offers its own course for first-time buyers, HomeSee, it’s absolutely free. It is 100% online and available in English and Spanish, and you can keep following it until you succeed. It is also acceptable to almost all lenders as it is endorsed by Fannie Mae.
The downside to this course, however, is the lack of interactivity. You will meet the requirement, but you may not learn much beyond the basic steps of the home buying process.
To this end, it might also be helpful to attend a free seminar for first-time buyers. These are hosted by real estate agents, mortgage lenders, home inspectors and other parties involved in home buying, and offered in person or via Zoom. It gives you the ability to ask questions, which I couldn’t do in the online course I took.
“A well-organized seminar should offer a lot of value for a first-time buyer,” says Nicole Beauchamp, associate broker at Engel & Völkers in New York. “It’s a low-impact way to gather information and ask questions. And sometimes making that connection with the person hosting the seminar can really be key, because you can schedule a follow-up conversation. »
5. Offering “sweeteners” can really work
Although there are signs that the housing market is cooling, when I was looking the conditions were definitely not in my favor. It’s always difficult for first-time buyers.
When I found a house that I liked, my real estate agent warned me that there would probably be other offers. I wasn’t comfortable with an escalating situation — and neither was my budget — so we opted for another strategy to make my offering stand out: sweetener.
We learned that the sale of this house was dependent on the sellers finding another home. So to sweeten the deal, instead of outbidding others up to a certain price, we offered 3% above demand and allowed sellers to take up to three months to move. Three percent more kept me in the game, but not at an absurdly overinflated price – at the time, sales in the region averaged 12 percent more – and that sweetener helped my offer attract attention. Two days later, he was accepted.
Being flexible isn’t the only way to compete, however. Your mortgage lender and real estate agent can be invaluable allies on this front.
“We recommend that the buyer work with a lender who is willing to call the listing agent and explain the loan and financial history,” says realtor Eli Fletcher of Red Oak Realty in Oakland, Calif. “Having that open line of communication can really help.”
“Long before we make an offer, we contact the listing agent to establish in his mind that we are real people,” adds Bill Fletcher, Eli’s father, who works with his son on a real estate team. “So when the offers come in, we already have a little foot in the door.”
At the end of the line
As a first-time homebuyer, although I had a good idea of the steps in the buying process, I wasn’t prepared for the unexpected. Despite my knowledge and research, I found myself relying on my loan officer and realtor to guide and reassure me through the journey. My last piece of advice to other first-time buyers? Make sure you take the necessary steps to build the right team around you. It can make all the difference – it did for me.