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I bought my first home recently. As a mortgage editor at Bankrate, I felt more prepared for the real estate journey than most. But the process wasn’t 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, rate-shopped, read reviews and testimonials. I knew what I could afford (this calculator helped), what amount I would likely get OK’d for and what I was comfortable spending.
Once I had a short list, I contacted each lender to get preapproved. I quickly got my first unpleasant surprise: I wasn’t being offered the amount of money I needed to buy an entry-level home in my area, even with an excellent FICO score, 20 percent down payment and minimal debt.
The reason? I didn’t earn enough income, according to Desktop Underwriter (DU), the automated Fannie Mae program many lenders rely on to determine whether to approve a mortgage, and for how much.
After several tries with different lenders, I finally hooked up with a local shop — a community lender affiliated with a bank in the region. In person, my loan officer showed me DU in action. We entered factors like a higher or lower home price, ideal and maximum debt-to-income ratios, more or less down payment and points or no points. Experimenting with these scenarios, I finally ended up with the amount I wanted at an affordable monthly payment.
While it’s crucial to get the lowest rate you can, it’s also important to work with a lender who takes the time to understand you beyond DU’s initial 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 obtain. This factored into my debt-to-income or DTI ratio, a measure of your debt payments against your gross income. Lenders typically like to see this at 43 percent or less, although some allow up to 50 percent. If you have a $260 monthly student loan payment, for example, with an expected monthly mortgage payment of about $1,900 and an income of $5,625 a month, your DTI ratio would be around 38 percent.
What I didn’t know: If you have an installment loan with 10 payments or fewer left, it won’t count in your DTI ratio. Coincidentally, at the time I applied for a mortgage, I was at that point with a car loan — one I had been considering paying off to help my DTI ratio. Glad I didn’t!
Take stock of your other debt before getting a mortgage. While carrying debt isn’t ideal, in this case, it was better for me to focus my funds toward a down payment and closing costs, rather than using them to pay down or pay off the car loan. This gave me roughly $3,500 more to put toward my home purchase.
3. Be wary of special first-time buyer rates
I got preapproved for a first-time homebuyer loan that came with a lower rate. But that rate was reserved for buyers in certain cities and towns, a common parameter with these types of programs. As it turned out, the home I bought fell just outside the “special rate” areas. And so, to keep the low rate, I had to pay mortgage points, which cost me 1 percent of the loan principal.
For me, based on my expenses, future plans and savings, it was better to pay the points in order to keep that lower monthly payment. This isn’t the right strategy for everyone, however. In fact, with rates rising, you might be better off accepting a higher rate now and potentially refinancing later.
“Now that rates are at these high levels, it would not make sense to pay points to buy down 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 buy-down, it just doesn’t make sense. Over the next few years rates will get lower, and most folks that end up with these current rates will want to refinance, so it is just not cost-effective at this time.”
4. A homebuyer class doesn’t have to cost you
If you’re getting a mortgage through a first-time buyer program, you’ll likely be required to take a first-time buyer class before closing. There are many organizations that offer classes, 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, HomeView, that’s absolutely free. It’s 100-percent online and available in English and Spanish, and you can keep taking it until you pass. It’s acceptable to almost every lender, too, since it’s endorsed by Fannie Mae.
The drawback of this course, however, is the lack of interactivity. You’ll satisfy the requirement, but you might not learn very much beyond the basic steps of the homebuying process.
To that end, it might be worth also attending a free first-time buyer seminar. These are hosted by real estate agents, mortgage lenders, home inspectors and other parties involved in home purchases, and offered in-person or over Zoom. This gives you the opportunity to ask questions — something I couldn’t do in the online course I took.
“A well-put together seminar should deliver a lot of value for a first-time buyer,” says Nicole Beauchamp, an associate broker with Engel & Völkers in New York City. “They’re a low-impact way to gather information and ask questions. And sometimes making that connection with whomever is hosting the seminar can really be key, because you can schedule a follow-up conversation.”
5. Offer ‘sweeteners’ really can work
Although some signs point to a cooling housing market, when I was on the hunt, conditions were very much not in my favor. It’s still tough out there for first-time buyers.
When I found a home I liked, my real estate agent cautioned me that there would likely be other bids. I wasn’t comfortable with an escalation situation — and neither was my budget — so we went with another strategy to make my bid stand out: the sweetener.
We learned that this home’s sale was dependent on the sellers finding another place to live. So to sweeten the deal, instead of outbidding others up to a certain price, we offered 3 percent over asking and allowed the sellers to take as long as three months to move. Three percent over kept me in the game, but not at an absurdly overinflated price — at the time, sales in the area were averaging 12 percent over — and that sweetener helped my offer get attention. Two days later, it was accepted.
Being flexible isn’t the only way to compete, though. Both your mortgage lender and your real estate agent can be valuable allies on this front.
“We recommend that the buyer work with a lender who’s willing to call the listing agent and explain the loan and financial background,” says Realtor Eli Fletcher of Red Oak Realty in Oakland, California. “Having that open line of communication can really help.”
“Well before we make an offer, we make contact with the listing agent to establish in their minds that we’re real people,” adds Bill Fletcher, Eli’s father, who works with his son as a real estate team. “So when, offers come in, we’ve already got a little foot in the door.”
As a first-time homebuyer, even though I had a good sense of the steps in the buying process, I wasn’t prepared for the unexpected. Despite my knowledge and research, I found myself leaning on my loan officer and real estate agent for guidance and reassurance throughout the journey. My final piece of advice to other first-time buyers? Make sure you do the legwork it takes to assemble the right team around you. It can make all the difference — it did for me.