Buying Real Estate ~ let’s talk about money

 

Before I became a real estate broker I didn’t know anything about real estate, the process of buying property, or how much money it took. It seemed like something that was out of reach for me right out of grad school as the student loan bills starting rolling in, and then as time went by I that just kind of remained my mindset. It seemed like such a big deal that I was really intimidated by the idea of even reaching out to someone to ask about the process and get more information to even start saving or planning to be able to buy a place. I didn’t want to seem dumb not knowing anything and I felt like I would never have enough money to even buy a fixer upper, so I didn’t plan or set savings goals because I didn’t even know where to start.

In the long run I really regret not doing more research back then to learn just what it took to buy property, as one of my biggest dreams is to buy and fix up my own home, but I totally understand how intimidating it can be, I was even nervous to ask questions about the process and things I didn’t know when I first started working in real estate.

Buying property is a big investment, and if you think it’s something that’s a a long way down the road for you for any reason, it can feel like you are wasting people’s time by meeting with them for more information. Of course that’s silly, but I get why people would feel that way, I felt that way! But without information, how do you know how far away you really are from being able to move forward?

So just what does it take to be able to buy property? This is the first of several blog posts where I’m going to break down and de-mystify the buying process for you. For this post, I thought it made sense to start with the biggest deal thing that is probably the first hurdle to starting the process… money. I sat down with a fantastic lender that I work with all of the time and picked their brain, so that I can share all of the information I wish I had known years ago with you here.

You don’t need a 20% downpayment

Lots of people still think you need a 20% downpayment to be able to buy a house, but that hasn’t been true for some time now. As a first-time buyer you can get a mortgage with as little as 3% down. If you are not a first time buyer you’ll need to put a minimum of 5% down. Of course you can put as much as you like down, we’ve had buyers put 50% of their mortgage down as a down payment, but this is the minimum required.

Why might you only want to put 3% – 5% down? This might be your first purchase and you want to buy something sooner rather than later, especially in the current market where property values are rising fairly quickly. You also might want to put down a lower down payment and save some cash for improvements to the property. Loans with less than 10% down require a different type of review during underwriting, but there are many different scenarios that impact how much anyone decides to put down, there is no better or worse, or right or wrong.

  • one thing to note here, loans with less than 20% down are required to have PMI {private mortgage insurance}, to protect the loan against default. This is required until you have 20% equity in the property, so you’ll need to factor this expense into your monthly costs if applicable to your situation.

Loan types and incentives

Anyone who borrows money to buy property has a mortgage, but there are different types of loans for different types of properties and different types of borrowers. The most common loans are FHA loans and conventional loans. FHA loans can be utilized by first time homebuyers or if you have less than perfect credit. They are provided by a lender but are guaranteed by the FHA. They allow you to have a smaller downpayment {as low as 3.5%}, but some of the other associated fees are higher, and they often have slightly higher interest rates than conventional loans. Conventional loans are provided by a private lender but require a minimum of 5% downpayment. Interest rates are related to your credit and other factors dependent on each applicant’s individual financial situation.

There are also quite a few incentives for first time buyers that offer grants and other types of mortgage assistance. You can potentially get ‘free’ money that can be put toward your downpayment up to a certain percentage, or other financial incentives. These change depending on your location, where you are buying a home {some are tied to specific neighborhoods or census tracts}, or how much money you make {many have a maximum income level allowed to qualify} and sometimes come with strings like requiring buyers to live in the property as their primary residence for a minimum amount of time. They may or may not be worth trying to take advantage of, but it’s always worth asking if there are any that you might qualify for.

How does a Lender look at credit?

Have you ever had a weird aversion to something? I randomly started worrying that because I have student loans that my credit was not so good, but for some reason I was too scared to go and check to see what it was… for years! I literally had no idea and was convinced that I wouldn’t be a good candidate for any loan. One day I got a new car and the guy at the dealership told me my credit score, and it blew me away, it was great! Don’t be like me and avoid knowing where you stand financially because you’re nervous it might not be good. Know what your credit score is and know that it can be easier to adjust to get a better rate on a mortgage than you think.

Lenders look at your overall financial picture when they are qualifying you for a loan. There is no good or bad debt in their eyes {say student loans vs. credit cards}, they just look at your total income to debt ratio. When they look at your credit, of course the better your credit score the better your interest rate. But there was one thing that stood out in my talk that I wanted to share as an easy way to improve your score should it need a little TLC.

 

As far as a lender is concerned, you want to have no more than 50% of your available credit used at any one time. So if you have high balances on any credit cards, instead of agonizing over paying them down, you might want to ask for a credit line increase so that you are only using half of your available credit ~ just don’t you dare go spending any of it! Also, try to only have two credit cards if possible, no more than three at most.

Lastly, make sure all student loans are current. You won’t be able to get a loan if you are behind on student loan payments {or any other payments for that matter!}.

Factor in all of the monthly costs

There are more costs involved in owning property than just paying the mortgage. When you’re budgeting what you can afford, you need to remember to factor in for all of the following:

  • monthly mortgage payment
  • PMI {if applicable}
  • taxes
  • monthly assessments {if buying a condo or property with an association}
  • homeowner’s insurance {can’t get a loan without it!}

Often, you can get approved for a higher amount that you actually want to be spending per month. It’s important to have clarity around how much your monthly payment will be at any price point and move forward from there. A lender can easily give you a breakdown of the approximate monthly payments at several price points so that you can get an idea. You might also want to play around on mortgagecalculator.org, which is a great easy to use website where you can plug in different data and it will calculate monthly costs including taxes, homeowner’s insurance and monthly assessments, so that you can easily get a quick estimate of your total monthly outlay. It also has handy graphs breaking down the information. I like it as a helpful tool and it’s great for people who don’t want to ‘bother’ their lender if they are wanting to know monthly costs for a lot of different possible scenarios… or if you are in the very early stages of looking and want to get a better understanding of the costs at different price points.

Now, just as a reminder, I am not a lender, so keep in mind that what I’m sharing here is high level general information, and you should talk with an actual lender about specific questions and data when you are ready to start your home search, because everyone’s individual situation is different. But don’t hesitate to reach out to me with questions about anything you read here, and if I can’t answer them, I can most certainly connect you with the right person to get you the information that you need. And if you read this post and thought to yourself that it’s time to start looking for that house you’ve been dreaming about, definitely give me a call so that we can get started!

home sweet home.jpg

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