Now that I’ve entertained the internet with my semi-responsible spending habits, let’s move onto how my husband and I got a home mortgage loan to buy our first house. With our savings of about $25,000 (a chunk of change that many in LA, millennial or not, can barely afford to stow away) and confidence in our job stability, we cautiously began the mortgage loan pre-qualification process.
After researching several mortgage lenders we ultimately chose a company on the trusted recommendation of a realtor family friend (who also recommended our real estate agent). We liked that our loan officer, Gian Ceretto, wasn’t pushy and that he explained to us the different loan options and financial scenarios before we decided to choose his services.
With my freelancer status and our little savings, we weren’t surprised when Ceretto suggested that a Federal Housing Authority (FHA) loan would be the best fit for us as first-time home buyers, especially since we wanted to stay under $500,000. (It’s also worth mentioning that we’re the only borrowers on the loan—not our parents.)
“FHA is a great home loan program for credit-worthy buyers without a substantial down payment, lower credit scores, and past credit challenges (like bankruptcy or foreclosure) to experience homeownership,” Ceretto notes. Though my husband and I have pretty good credit, a few late credit card payments recently on my part made a little ding on my score (Thanks, “mom brain.”)
We were approved for $480,000 (spoiler alert: We ended up buying a house for about $15,000 less), with a 30-year fixed rate loan at 3.875 percent interest. (Bankrate recently noted that the average interest rate in LA is 4.09 percent.) Our cash savings would ultimately cover the 3.5 percent down payment plus closing costs, and we’d still have leftovers to stash back into our savings account.
As mentioned, some experts I spoke to say these days 10 percent down is “the new 20.” Ceretto says that it all comes down to affordability and (surprise, surprise) the high cost of Southern California living. Echoing LA-based certified financial planner and Equalis Financial founder Leighann Miko’s previous comments, Ceretto says many people “are unable to save the coveted 20 percent down payment for a home purchase, however many [can] come up with 10 percent.”
LA-based Keller Williams realtor Gabriela Venegas, a 29-year-old agent at the Carrasco Group, tells me that’s the average percentage that local millennials are putting down. “In the last year though, I have been seeing a lot of buyers reaching out to family members for gift funds for their down payment so they can reach that elusive 20 percent down and avoid having to pay [private mortgage insurance, or PMI],” she says. “A lower down payment doesn't necessarily take you out of the running, but it often requires things like shortened escrows, removal of contingencies, and other maneuvers to get the offer accepted.”
About that dreaded PMI—it’s a requirement for loans with down payments of under 20 percent, and it adds an annual expense of up to 1 percent. On top of being tax deductible given our adjusted gross income, we reasoned that the long-term appreciation of our home would outpace the PMI cost.
And while it’s generally known that sellers prefer cash buyers, conventional financing, or larger down payments, having an FHA or VA loan won’t necessarily knock you out of the home buying game. The latter two options do have more rigorous appraisal standards (like requiring sellers to make repairs to meet loan requirements), but Ceretto adds that a common misconception is that they’ll take longer to process.
“Most mortgage lenders offer a variety of home loan programs with [lower down payments] and are able to close these transactions in the same amount of time, so the process is seamless from the seller’s perspective,” he adds.
In our case, we had no issues with our FHA loan when it came time to shop. Within two days of pre-qualifying, we’d put in an offer (and gotten a counter) on a home and passed cross-qualification. The same held true for the rest of our bids, including on the house we ended up buying.
So what do you need to apply for a home loan? We had to turn over proof of income and assets (including two years’ worth of tax returns; checking, savings, investment, and 401k account statements; copies of rent checks to show our pay history; recent pay stubs; and more) and consent to a credit check. Your loan officer will then provide estimates for the monthly payment and cash to close for a sample transaction, and it’s during this process that most buyers will identify any financial issues and readjust their budgets before they really start house shopping.
While we were given the green light to house-hunt after getting pre-qualified, some buyers may need an additional six months fix any money mishaps (like paying off debt to help repair credit or saving more funds), Ceretto says.
What’s more, getting that loan doesn’t necessarily mean you’re in the clear to shop. “Not all lenders are seen as equal by agents,” says our realtor, Berkshire Hathaway agent Trent Slatton. For instance, some experienced agents avoid “large ‘storefront’-type lenders” like Wells Fargo due to its rigorous underwriting standards and high volume which can often delay closings, he says. “It's a good idea to ask your agent if they foresee any problems with the lender you've chosen.”
Basically, the TL;DR: Per common sense, this is not to say that you should feel inspired to apply for a loan and buy a $500,000 house because Someone on The Internet did it.
“There are a lot of great resources out there, especially on the internet; however, it’s important that they are taken with a grain of salt,” says Miko.
“Just like our mothers told us growing up, we are all unique and special in our own way, and much of the advice floating around the internet is too generic or not appropriate given each person’s financial circumstances,” she says. “Always consult with a professional before making any significant financial decision.”
I am now That Person on The Internet. My house hunting adventure should by no means be considered a feel-good, “If I can do it, so can you!” tale for all. My and my husband’s situation certainly won’t apply to every reader, but in baring (almost) all of our financials the hope is that our story—cautionary or not—will give prospective LA home shoppers some insight into real-life buying options.
Stay tuned to this series to find out which neighborhoods we considered (definitely nowhere in NELA), how we closed our deal, and where we eventually ended up.