Homeownership has been shown to improve the financial stability, health and wellbeing of individuals. Bremer strives to be a leader in meeting affordable housing needs of its communities and works to break down barriers to homeownership through its strategic partnership with organizations like the Twin Cities Habitat for Humanity and the Greater Minnesota Housing Fund. Bremer’s commitment to providing affordable housing and homeownership is a dedication of mine too. I am passionate about providing education, guidance, and tools to support individuals in their long-term financial health.
I recently helped a family closed on a house and their homebuying experience is why I’m passionate about assisting new homebuyers in securing a place they can call home. The daughter in the family has special needs and for years, they lived in a rental property that was not set up to accommodate the daughter’s needs. The family finally found a house in their price-range that they really liked. They knew that being able to retrofit the house to suit the daughter’s needs would be life changing and a dream come true. As they were a first-time homebuyer, I introduced them to various state programs and credits to minimize the cash amount on their down payment. The cash they saved from paying a small down payment went directly into retrofitting the house, and they were deeply grateful for the savings.
The story of this family is one I am familiar with. The family found their perfect house in a hot housing market and was able to quickly make an offer on their ideal home because they knew their budget. Not everyone is so lucky. This is a piece of advice I give to my customers – you need to know how much you can afford before you start shopping for a new home or going to open houses. My philosophy is - when you are touring a house, you should not be thinking about financing. You should be focused on the layout and the neighborhood, and whether it is right for you and your family. In a competitive housing marketing like we are in right now, you do not have a lot of time to think about whether you can afford payments on the house. You should already know the answer with absolute certainty when you are walking through the door.
For first-time homebuyers, the homebuying process can be daunting, especially when it comes to figuring out how much you can afford.
Minimum down payment
There is a wide array of programs to assist first-time homebuyers with their down payment. Some of these programs have slightly lower than average market interest rates and the mortgage insurance is typically a little lower for first-time homebuyers too. For instance, if you live in Wisconsin, the Wisconsin Housing and Economic Development Authority (WHEDA) is a good resource for first-time homebuyers. It is a state sponsored program that offers lower interest rates home loans. And if you meet WHEDA’s income requirements and other qualifications, it is possible to have zero down payment on your first home, although this is something you should determine with your lender.
There are also other government-sponsored loan programs such as the Federal Housing Administration (FHA), Minnesota Housing, and housing assistance programs for veterans. Overall, these programs can make housing more affordable for first-time homebuyers.
Education is key
It is common for people to be overwhelmed by something they do not know. As such, I prioritize providing education and advice to guide first-time homebuyers through the homebuying process, and to ease their concerns. I often go into more details because first-time homebuyers may not be familiar with mortgage terminology. A goal of mine is for first-time homebuyers to feel like they have come out of the conversation further ahead than where they started.
There are many free homebuyer education courses available online to provide information and tools to help first-time homebuyers with their first purchase. Some of my colleagues at Bremer offer Home Stretch workshops designed to prepare first-time homebuyers for a successful homebuying experience. Although it is not necessary, knowing the definitions of common mortgage terms such as closing costs, escrow, debt-to-income ratio, annual percentage rate (APR), fixed-rate mortgage and adjustable rate mortgage (ARM) can help you in the homebuying process. Websites such as Readiness.com has a lot of resources to assist first-time homebuyers.
Tips for first-time homebuyer
If you are a first-time homebuyer and meeting a lender for the first time, be prepared to answer questions about your income, savings, and credit history. This information helps the lender determine the loan amount you can qualify, which will help you determine how much you can realistically afford.
Knowing what a good credit report looks like is important because it helps you decide whether you need to work on improving your score before shopping for a house. I often provide advice on financial habits and behavior that can contribute to a good credit score, which is generally around 690. Some common habits to building a good credit score are:
- Pay your bills on time, which includes not just credit accounts but utility bills.
- Main a low utilization rate, which is a balance-to-limit ratio, on your credit accounts. A typical recommendation is to keep the percentage of your credit limit below 30% on all your cards.
- Avoid applying to multiple credit accounts within a short period of time because multiple applications can cause significant damage to your score. Spacing out your credit applications by at least six months is a good practice.
Avoid closing credit card accounts unless you have a good reason to do so. Closing an account can reduce your average account age, which is a factor in how credit scores are calculated.
Another thing to consider is your debt-to-income ratio. A general recommendation is not exceeding 43 percent debt-to-income ratio because the higher the ratio, the more difficult it is to make monthly payments. If you know you are planning to purchase a house in the near future, which will increase your debt-to-income ratio, consider having a personal budget early on.
As an example, if you think you can afford $1,200 per month for a house payment but you are only paying $700 in rent right now, I recommend setting aside an extra $500 every month. Put that extra amount into a separate bank account and don’t touch it until you are ready to purchase the house. That way, you are training yourself to live within the means of someone who has to pay $1,200 a month for a house payment. In addition, you will also have a little extra savings for when it comes time to make monthly house payments. I recommend practicing this for a couple of months.
Lastly, choose a lender who is familiar working with first-time homebuyers. Lenders with a track record of successfully working with first-time homebuyers will likely be more patient, understanding and have in-depth knowledge of with resources and materials to support first-time homebuyers. Another factor to consider is whether the lender’s bank underwrites their mortgage loans, and if the bank partners with programs that support the diverse needs of first-time homebuyers. For instance, Bremer underwrites their mortgage loans, which means the loan process will be smoother and more flexible. Bremer also partners with many government-sponsored programs to assist first-time homebuyers, and lenders at Bremer will be able to find a program that best fits your life situation.
Just like the family whose daughter has special needs, I am deeply honored to share in their special moment when they found out they were going to be homeowners. At the end of the day, people are not going to remember information I told them or even the little details I did for them, but they will always remember the emotions of walking into their first home. For many first-time homebuyers, it is a lifelong aspiration of theirs to own a home. And to share that heartfelt moment with them when they realized their goal of homeownership is becoming a reality, is truly special and is one that I do not take for granted!