First Time Home Buyers: Financing

One of, if not the most, important parts of buying a home is financing. But what does that mean? How much money should you have saved up? What’s the first step? How do you know if you’re ready? This is a vast topic, and I am no expert, but I can touch on a few points:

A brief overview of financing
How to start the process
Loan options: Conventional vs FHA

First things first, I would like to debunk the common misconception that you need 20% saved up for a down payment. If you’re looking in the Seattle market, that’s easily $140K for an averagely priced home. I don’t know about you, but I definitely don’t have that type of cash floating around. And that is perfectly fine.

You can put as little as 3% down turning that $140K into $21K – a slightly more achievable goal.

Now, you may be wondering, “ok so I have some cash saved up, but how do I know if I’m truly financially ready and capable?”

Step 1: Find a lender you trust. Talk to your agent for recommendations or ask anyone in the industry. I can give you two options right now. (talk to me for more info)

Janelle and Alex Steinberg, Evergreen Home Loans
Ron Howard, Caliber Home Loans

It’s up to you to shop around, have an initial conversation with several different lenders and see who you feel the most comfortable with. Can they help you achieve your financial goals? They are there to be your resource. And ideally, if it’s a good fit, help you through all your property finances for years to come.

Things to consider when finding a lender:

Trust. Do you feel comfortable and supported?
Local. You want your lenders to intimately know the area and the players in the industry. Who is going to go the extra mile to call the listing agents and be another line of advocacy for you?
Communication and reachable. When it’s crunch time and your offer is under contract, make sure you can text or call your lender to get an immediate response.

Step 2: Get pre-approved. This is crucial for multiple reasons. In this market, if you find something you love, having a pre-approval ready to go will show the sellers that you’re serious, and make you competitive (everyone else will have one).

Also, knowing your realistic budget. There is no reason to look at places that are above your price range – that just leads to heartbreak.

A few key things that are taken into consideration when you’re getting pre-approved:

Employment verification
Credit
Gross Income
Your income-to-debt ratio

Again, don’t be discouraged if you are carrying any debts (student loans? No problem. Lenders are here to help!)

Ok, so once you find a lender you like, they will help you get pre-approved and they will talk to you about loan options. There are several different types of loans.

Conventional/conforming loan (as little as 3% down)
FHA (as little as 3.5% down)
VA (Veterans eligible only, as little as 0% down)
USDA (Rural housing, as little as 0% down)

I’m going to briefly summarize conventional and FHA:

Conventional (conforming loan) is going to be the most commonly used today. These are the loans that are backed by private lenders rather than the government. You may have heard of Freddie Mac and Fannie Mae. These are two government-supported entities, who will buy loans from private lenders to keep money flowing, and ultimately support the housing and rental markets. They are what dictate the loan limits and qualification requirements.

With a conventional loan, you have the option of putting as low as 3% down. The caveat? You do have to pay mortgage insurance until you reach 20% equity in the home. The positive? In a quickly appreciating market like Seattle, it’s possible to hit that 20% in ~12-18 months. There is truly no reason to spend every dime on your down payment. There are plenty of reasons to keep some cash on hand (including ways to make your offer even more competitive – that’s a conversation with your real estate agent).

FHA loan (federal housing administration), a government backed loan. This used to be the most common loan for first time home buyers, as it allows a 3.5% down. But it’s no longer the first choice because of steeper mortgage insurance. The beauty of the FHA loan is you can qualify with a lower credit score or higher debts.

So, in conclusion, yes this market can be scary for first time homebuyers. Making a large financial decision like buying a home is stressful. But, I hope I was able to alleviate some of that daunting stress by showing you there are a number of resources and tools in place to make it more achievable.

Action Items

Are you feeling inspired? If so, here are some steps you can take.

Shop around to find a lender that is right for you. Have preliminary conversations with several different people.
Get pre-approved. Don’t start looking for a home without that pre-approval. It does not mean you have to buy anything. It just gives you an accurate amount of what you can afford.
Pay attention to your credit. There are many programs that show you what your credit score is, and what you can do to improve it, if necessary.

I hope some of you find this information helpful. Lots of information, and yet this just the tippiest top of the financing iceberg. So, please, as always, reach out with any comments or questions.

See you next time!

Additional resources:

Dos and Donts (1)

.pdf

PDF • 1.10MB

Loan Process (1)

.pdf

PDF • 10.38MB