What Every First-Time Homebuyer Should Know
Buying your first home can be both exhilarating and daunting. Kelly Hesaltine returns to the show to share insights into the process that every rookie homebuyer should know.
You can shop all day long and somebody's going to beat a rate, beat a rate, beat a rate if everybody's so interest rate focused.
Welcome to Keeping it Real episode five. I'm your host, Adam Tabaka. Today we're joined once again by Kelly Hesaltine, senior mortgage consultant with Prosperity Home Mortgage. And today we're going to talk about critical information that every first time home buyer should know. So Kelly, thanks for joining us again.
Absolutely. Thanks for having me. This is such a great topic. So looking forward to touching base on some of these little points here.
Excellent. Excellent. Now, to start off real quickly here, let's start off with some fun stuff. What are some of the most common mistakes that you've seen first time home buyers make throughout the years?
You know, that is definitely a loaded question, right. But I don't know that it's really mistakes always, as it's truly just not having the knowledge of getting your feet wet or preparing ahead of time to be ready to go when the time comes. So I think a lot of things that we see, and it's pretty simple. Paying your bills on time. That's I think one of the biggest ones is little late payments here and there that just get lost in the shuffle, and those things happen. Absolutely. But it's amazing, especially for some of these first timers that probably don't have a huge credit history, what a little late payment like that will really start to have an impact on things. So, I think it's just probably keeping it really simple on that credit piece.
If you don't have any credit, I would highly recommend maybe becoming an authorized user on a parent's car. It's something that they're kind of revolving and paying off each month. Because you're going to get in on their credit history too. Or maybe opening a card and putting gas on it each month and knowing you pay it off just to get some history built up to get those scores back up. But that's generally, I think, one of the biggest things are just kind of missed payments or even collection items. But again, that happens to the best of us when we're all younger. So I think it's just kind of getting ahead of it and looking at those now to see what we might need to correct. So when they are ready, we're ready.
Okay. All right. And for those types of things, about how long does it typically take for them to kind of work their way off of the credit report and kind of have less of a negative impact?
Yeah. You know, and I think that does kind of depend too on a borrower's history, what their revolving credit does look like as a whole, how many accounts they have open. It could take four months, it could take six months to really get some of those things back up, those scores to come back up and recover from something of a late payment or a collection or something like that being reported. You know, the tricky part with the collection is digging into those ahead of time because maybe it shouldn't be on there. And if we can correct that and work with the borrower to get the documentation needed, something like removing something that's been reported in error could really help bring them up too. So we're always kind of looking at different ways that we can maybe repair or correct or keep them on track as time goes on.
Nice. So with that in mind, when would somebody want to talk to a lender? I mean, it seems like some people want to wait until the last minute. How far out would you advise that that a first time home buyer consider talking to a lender
It's never too soon. That's really the silly answer, it's never too soon to have that conversation. I think there's so much information online, a lot of folks think they need 20% down, or they're worried about private mortgage insurance, or just some of these little myths and different things that you hear out there. And when they really get in and start having that conversation with the lender, talk about some perspective. That really starts to get those wheels in motion to say, I'm going to be ready sooner than I thought, or maybe I need six months or a year to continue saving to get me to that spot of where I want to be. So it really is never too soon to get those wheels in motion and have that conversation just so you kind of know some direction.
Got it. Excellent. And then when they're looking for a mortgage consultant, they've got a lot of options. A lot of people like to go with the bank that they use or the credit union that they're with, or shop around online through Quicken. What difference does it make going with a local lender versus a bank or a credit union or an online lender?
So that's a really great question. And I think a lot of times it's comfort level for borrowers. You know, it's their first time. They're not really sure. They've been with Navy Federal. They've been with somebody who's held their assets for a very long time, and that seems like the right place to go. And in many situations, absolutely is. I'll never knock any of these other companies in what they do, but I think we all kind of have our specialty and our lane of really where we can focus and where we shine. A lot of your online lenders don't necessarily have the operations and the support behind like we do here locally with Prosperity. They're not set up to meet your financing, contingencies, periods that you're going to build into a contract, your closing date that you're going to put in. A lot of them are... A refinance is probably something that would make sense for some of those online lenders, because there isn't an agreement, there isn't a hard closing date that matters with the seller.
So I think as folks are shopping, as they're talking to different ones, I think it's important that they shop. I absolutely do. You want to make sure you're getting the right information, maybe similar information across the board which might validate one or the other. So the main thing I think is really, I'll come back to just being local. You could shop all day long and get, somebody's going to beat a rate, beat a rate, beat a rate if everybody's so interest rate focused. But at the end of the day, you've got a contract and a closing date to meet, and with Prosperity, I think we've probably been averaging around 21 days or so from ratification to closing in this crazy market. And there's a lot of lenders that just can't compete with that timeframe.
You're going to get me every time you call. I have a designated processor for all of my loans that she's the one working with. So the team aspect, and I think the customer service too, nights, weekends, all of the above just as a whole is kind of unbeatable. But I'll always fight against the others if I need to match or beat them. So...
Now, so for someone who's not familiar with the different types of financing that are out there, can you give us a brief overview of some of the more common financing options that are out there and maybe what each requires in terms of down payment or some of the other terms that they would be looking at?
Yeah, that's a good one. So we've got kind of three main loan buckets. We've got our Conventional, our FHA, and our VA. Now our VA loan, that's going to be good for our veterans only. Thank you for you and all of your service to you out there who are watching this. So VA loan is probably one of my favorites just because those interest rates are so attractive. The veterans aren't penalized with private mortgage insurance, which we can maybe even chat a little bit about on another episode or something, but that VA loan is really a beautiful loan for veteran, veterans and their spouse.
Now the next little loan there is that FHA loan, and the FHA loan, I think used to really be thought of as your first time home buyer loan. And that was because many years ago, that was the lowest down payment option, our loan program that had the lowest down payment option. So just three and a half percent down. So I think that's why that tend to be kind of that first time home buyer loan where everybody thought they needed to go. So that's that FHA product. And then we go to our conventional loan bucket, and with conventional loan bucket, depending on our loan amounts and kind of where we are, a buyer could put as little as 3% down with a conventional loan.
So the reasons we might choose one over the other, right, why would we look at FHA? Why would we look at conventional? VA is kind of its own little beast, so we'll just set that one aside for now. But yeah, between FHA and conventional, I tend to find that if we start to maybe see a credit score that is maybe under 700, your FHA loan is maybe going to start to make a little bit more sense because it's going to be not as expensive.
The conventional, when we see those scores start to drop under a 700, the rate might be impacted a little bit more, the private mortgage insurance is going to be much more expensive, where FHA is a little more lenient on those types of items if we've got a little bit lower of a credit score. So I would always compare both, it just really, I think, depends on the whole big picture of that buyer. But conventional, FHA, and VA are going to be your buckets. FHA and conventional pretty much in the same line as far as three, three and a half percent down being that minimum down payment that you would need.
Okay. And then in addition to having to have the down payment, tell us a little bit about closing costs. What should first time home buyers be saving up to cover those costs as well and what to expect in that arena?
Yeah, great question. And I know we field a lot of calls, and you get them too. First time home buyers, there's some great programs out there, especially here in Virginia with the VHDA providing grant funds or maybe another loan to help with that down payment. So there really are some fabulous ways I think, to minimize the down payment piece, but what we tend to forget about or not start to factor in of course, are those closing costs. I think generally speaking, your closing costs are probably going to be about two and a half percent of the purchase price. 3% very conservatively. Sometimes with a condo, there is a couple extra fees that they charge at closing, just some upfront fees that we have to collect on a condo that might make that one just a little bit more. But I think if you were anywhere in that two and a half to 3% range on closing costs, you would be more than safe.
And there's a few ways, I think, to look at those closing costs as well. And one of them, you're probably not even really seeing in this crazy market, would be the seller to help with a closing cost credit, right. Within the contract. That's just not even something I'm seeing right now at all because of the competition that's out there. So it sounds great that, oh, I'll just ask the seller for some money. Well you might, but you probably won't get it, or you won't get the contract. Right. They'll pick another one that's not asking for that. So really that leaves another option of maybe I raise the interest rate a little bit, so lenders can kind of raise that rate, increasing our margin, and then I give that margin back to you as a buyer in a form of a lender credit, and that could help offset some of those costs.
But of course our payment goes up. All of that is impacted when we talk about raising an interest rate too, but absolutely some options that we can look at, but closing costs are needed. That's kind of the gist of it. They are needed.
It's excellent that you've got these creative ways to deal with it though, you know, so.
I know. I had somebody today too, to break their lease, they're going to be charged. They have to pay a couple months up front, but this house is so worth it to them. So in fact, I am, I'm just going up an eight in rate, impacting their payment I think it was $25 a month, but I'm giving them that lender credit so they can keep that extra cash kind of, and allocate now that towards breaking their lease and still keep things moving forward. So, you know, everybody's comfort level's different on how they might want to structure things, whether it's a monthly payment or an out of pocket, et cetera. So anyways, those are of course all very personal preference, but we dig through them.
Sure. So for anyone who's looking at buying a condo or a home in a homeowner's association, one of the things they've got to factor in obviously is the condo dues, the homeowner's association dues, give us a sense of how much those impact what somebody would be preapproved for as opposed to buying a place that's fee simple, that's got no association whatsoever.
So I like this one. And I think that is a common comparison when I'm running figures for a buyer where I'll say, "well, let's just see." I know I want a condo, and I'm like, "Well, let's just see what it might look like if we're putting that $300, $400 a month actually towards a mortgage. How does that start to impact things?" And it's pretty substantial. So I would say a condo fee in that like maybe $350 to $400 range a month, if we were looking at a condo at 300,000, take that condo fee out of the mix, and maybe we have a small $80 HOA or something very minimal that we have to hold if we're looking at a town home. That's probably going to impact things by about 50,000. So $300 versus $350, there might be a town home out there once we up that price range a little bit, and that still keeps your monthly payment and everything in line.
So it's very important, I think, to compare both. People are shocked as to how much that condo fee really does impact things. They are what they are, but when you start to look at it as a whole, what do those options become?
Sure. Now, if you're just in the stages of kind of thinking about buying a home, maybe you're six months out, a year or more out, two years out, what kind of steps can you take for success down the road? What can you do proactively to get yourself ready so that when the time is right, you're ready to hit the ground running and find the place that you want.
Absolutely. And you don't necessarily have to go through the application process or anything right now, pulling credit, all of that. But I think hopping on the phone with a lender to kind of chat through some of your goals, maybe where you might want to be from a financing standpoint, from a purchase price, maybe even a neighborhood. If your goal is to get into this certain place and those run around 400, where do we need to be to have that make sense? And we can start kind of putting that direction kind of on that for you. So I'm trying to think. Different things to just keep it simple. You would be surprised at the people that go get a new car or take out different debt. If a home purchase truly matters, that needs to be priority. Saving 20 bucks a month, cut out your Starbucks lattes, save 20 bucks a month or whatever it's going to be. Any little bit that you can start chipping away. 3% of 300,000, we're talking nine grand. I mean, that isn't chump change, but it isn't 20% that you would think you might need to get into the game.
So I think the simple things are paying bills on time, not taking out tons of new debt, trying to save. Of course, if you can, like I said, every little penny helps and really, I think having that conversation just to know because you could be putting away 200 bucks a month, but what's your end goal? Where really is that going to get you in six months, a year? So I think having that just conversation on timing with me or with any lender to just kind of get a feel for those figures and what that looks like is really the best bet. But credit's probably the biggest piece y'all. That I think impacts your options, your rate, how much you can afford, qualify for. So I just think that is the biggest piece is keep your debt low, make those payments on time. You'll be all right.
Good advice. Kelly, I sincerely appreciate you joining us again. You have a wonderful afternoon and love to have you back again sometime soon.
Absolutely, Adam. I would really appreciate it. So thank you again for your time. These are great.
Awesome. Thanks, Kelly. Take care.
Thank you. Have a good one. Yep.