For most, purchasing a home is the largest financial transaction of their lifetime. And it comes with lots of questions! We sat down with Senior Mortgage Loan Officer Ian Bennett to get the inside scoop on the most common questions first-time homebuyers ask the Mortgage Team at Elevations Credit Union.
Common homebuyer questions cover topics ranging from what down payment options are available and what mortgage insurance is. The overall takeaway is: Each buyer and transaction is unique, so it’s best to have an open, honest chat with your lender before attending open houses.
Here, Ian helps answer some of your homebuying questions on mortgage options.
What is a cash offer? Do sellers like them?
While cash is appealing to sellers, a cash offer isn’t always the golden ticket to getting a property, Ian explains. When a cash offer is on the table, terms change and contingencies disappear. As a buyer, it’s critical to read the fine print and have a lender and real estate agent on your side who can make sense of what you’re giving up by not having the structure of a loan behind you.
“The reality is the majority of folks in the entire State of Colorado aren’t purchasing with cash. Even in really strong wealthy areas, it’s not greater than 50%. So, I think it’s more about understanding the finances. A good local lender is just as good as cash,” Ian adds.
What is mortgage insurance? Do all first-time homebuyers need it?
Mortgage insurance is required by all lenders (local, national and online) when you have less than a 20% down payment for the property you’re purchasing. Ian says it’s not uncommon for first-time homebuyers to come to the table with less than 20%, so mortgage insurance will likely be part of your loan estimate.
Mortgage insurance isn’t a bad thing. It protects your lender in case you default on the loan, it’s tax deductible for most people (as of the writing of this article in October 2021), and most importantly, it allows you to become a homeowner with less cash upfront. Even if you can afford 20% down, you may want to re-think where you want your money to go. Could it be better used for home remodeling projects? Do you want to update major systems, like an aging HVAC or roof? Or, could it be better used in a high-interest savings account or investment? Your lender can help you crunch the numbers and decide where your money will work the hardest for you.
“With less of a down payment, you have a higher loan amount, and you have monthly mortgage insurance, possibly. However, what you purchase the home for and how it appreciates over the next decade is not directly proportional to your mortgage balance. It’s the market, and your interest, equity and wealth-building doesn’t start until you own that piece of property. So, I would argue that mortgage insurance is a necessity for those who want to get into the market sooner than saving their 20% down,” Ian explains.
How much of a down payment should a first-time homebuyer have ready?
The down payment amount will vary based on how the buyer wants to spend their money. Ian says the sweet spot is about 5% because it moves the needle and gets you into homeownership while having flexibility with your finances.
“Growing up, I remember the most important thing you could do was buy yourself a home. That was how you’d make it in life. And when I started studying real estate 22 years ago, when I moved to Boulder, I looked at all the folks who are very successful in every business, and all of them had a piece, or many pieces of real estate, as part of their portfolio,” Ian explains.
So, the takeaway? Think beyond the usual first-time homebuyer information you may have heard. You don’t have to put 20% down, and easing up on a down payment can leave more cash in the bank for managing the home’s needs after the purchase, as well as other life expenses.
What is an FHA loan? Is it the best option for first-time homebuyers?
“FHA is the Federal Housing Authority. An FHA loan is often thought of as the first-time homebuyer loan. For many reasons, the minimum down payment required is 3.5%, and the mortgage insurance is more static and not as credit score driven, as well as the interest rates,” Ian says.
As far as getting qualified for a mortgage, some first-time homebuyers are attracted to an FHA loan because you can have a larger debt-to-income ratio, which is common among college grads starting their careers and venturing into homeownership. It’s also a good option for someone who has had a bankruptcy two or more years ago, or someone who is working to rebuild their credit.
“It’s really a program that the federal government put into effect to help folks that might not have A+ credit ratings, may not have 20% down or may have had some bumps, bruises or blemishes on their credit in the past,” Ian says. FHA loans are available to both first-time and seasoned homebuyers.
Do you have questions about buying your first home or investment property? You can contact Ian (NMLS# 300599) or any of our other Mortgage Loan Officers here. Find answers to more first-time homebuyer questions in our second part of Answer to Your First-Time Homebuyer Questions. Also, browse the Elevations Credit Union upcoming free online webinars and in-person seminars related to homebuying.