This post was sponsored, and paid for, by SunTrust. All opinions are my own.
“We are pre-approved for WHAT?!?!” I will never forget nearly falling out of my chair when my husband (then boyfriend) and I went to get our mortgage pre-approval to buy our first home over a decade ago. We still had student loans, car payments, and a love of travel we wanted to afford… we didn’t want our mortgage to leave us living paycheck to paycheck and eating PB&J every night. But as two finance majors, we had insights many first time home buyers do not. Understanding a few nuanced secrets to the home buying process based on my experience can help you be more confident in your purchase, and more certain that your first home mortgage is a successful fit for your family’s finances.
7 Secrets to a Successful First Home Mortgage
As two finance majors, my husband and I had a significant advantage many first time home buyers may not – an intimate understanding of the numbers. We had a general idea of what we could afford, and the monthly payment and total mortgage value the broker came back with was more than double the number we had in our heads based on our personal lifestyle preferences and financial goals. We were also buying our first home together before we were even engaged (though we were a short time later) – but a first home mortgage was in many ways more legally and financially binding than marriage!
Since buying that first home, we have had two kids, sold it, built another home, added a third child, and undertaken several refinancings along the way. With each mortgage process, we rely on our understanding of the numbers, but also gain great understanding of the process. Buying your first home is such an exciting personal and financial milestone – you want to celebrate it, not allow it to cause years of stress in your life. To achieve that, these are the 7 inside tips I wish I had understood before taking on my first home mortgage.
Understand the players in the mortgage process
In your first time home buying process, you will engage with several different financial service professionals who you may have never worked with before. Realtors. Mortgage Brokers. Mortgage Loan Originators. Underwriters. Understanding the role each one plays in the process, including how they get PAID as part of the process, can help you weigh their advice more appropriately and understand where their interests lie.
First, your realtor. Your realtor (and the seller’s realtor) get paid a commission when the home transaction closes. It is a percentage based on the price of the house. Bigger price, bigger commission, though they won’t get paid if the deal doesn’t actually happen.
Next, your mortgage broker. Your realtor will likely refer you to a mortgage broker to get a pre-approval letter to assess what you can afford before taking you out to see homes. Once you find the home you want to buy, a mortgage broker will help you evaluate different lenders and loans to get you the best rate possible. Your mortgage broker is paid a percentage of the final loan value by the lender at closing. Again, bigger loan, bigger commission, paid at closing.
You can also opt to skip a broker and work with a trusted mortgage lender directly to obtain your pre-approval for your first home mortgage, cutting out the middle man. In both our home purchases, we skipped a mortgage broker entirely. Both were new construction situations, requiring project diligence beyond just our personal credit approval. In these less traditional, more complex mortgage situations it is often better (and even necessary) to work directly with a trusted mortgage lender, who can also provide you a pre-qualification or pre-approval letter.
The Mortgage Loan Originator and Underwriters work for the lender directly. They are typically salaried employees looking out for the best interests of their employer, the bank or lending institution. The Originator may have loan volume targets that incentivize him to bring in your loan, but they also want to insure you are a solid credit who can pay your mortgage as well. The lender is compensated through the interest you pay on your mortgage every month, making them the only partner in the process who sticks around past closing. Given this, a solid mortgage lender will want to help you understand all your mortgage options available at their institution, at as competitive a rate as they can provide, and at a total loan value that you can actually afford. SunTrust Mortgage provides a downloadable guide to home buying that includes more on your home buying dream team.
Home ownership costs more than your monthly mortgage payment
Unlike renting where you may just write one check a month to your landlord, there are a lot more costs than just your monthly mortgage payment. As a home owner, you are now solely responsible for all your taxes, insurance, utilities, fees and maintenance costs – from a leaky roof to winter snow removal. You want to have a firm understanding on all the expenses you will be taking on before you can truly assess how much home you can actually afford.
- Property taxes
- Home insurance
- Utilities – water, gas, electric, garbage
- HOA fees (if applicable)
- Maintenance costs
Your realtor can help you get estimates for many of these on specific homes.
Determine how much you can actually afford
With a better understanding of all the costs of home ownership, determine how much per month you can afford for your home. A mortgage broker or originator granting a pre-approval letter for your first home mortgage will assess this by formula based on your current income and outstanding debts, but what you are comfortable spending may be far less.
Deduct the additional monthly expenses outlined above to back into what you can afford as your monthly first home mortgage payment. SunTrust Mortgage has a great mortgage payment calculator. Use the advanced version to include additional costs, like property taxes and home insurance.
Aside from your monthly payments, you will also need a down payment which can range from 0-20%. Most traditional mortgages require 20% of the home value as down payment. The down payment amount will depend on the mortgage program that you qualify for. Be sure not to wipe out the entirety of your savings on your down payment. There are other big expenses associated with your first home – moving, furniture, unexpected maintenance – that you will need to pay for too.
Weigh your first home mortgage options
A knowledgeable mortgage lender can outline and help you weigh different mortgage options based on your family’s financial needs. While traditional mortgages are typically fixed rate for 30 years, there are an array of other possibilities you can evaluate to meet your time horizon, budget and financial risk appetite. Some of these include fixed rate mortgages of different terms (15 or 10 years), 5/1 or 10/1 ARMs (adjustable rate mortgages), and more.
Closing costs are negotiable
In addition to your down payment, you will also have to pay closing costs on closing day. Your mortgage lender will provide you a Good Faith Estimate of all these costs, including a detailed explanation of what each of them are. A few things to know about these costs.
First, some of them are negotiable. Your realtor’s commission percentage, your attorney’s closing fee, the mortgage origination fee are all open for negotiation. Though you’ll want to do your negotiating early in the relationship – not as you near your closing date. Others are not-negotiable and based on a fixed fee or fixed percentage of your transaction costs. Filing fees with your town are fixed fees. Title insurance is a percentage of your total transaction, and not negotiable.
Finally, some closing costs are moving targets which will vary slightly with your closing date. Property taxes and interest costs paid at closing will be determined pro rata based on your exact closing date.
Write the biggest check of your life on closing day
Prepare yourself. Once your final closing costs are determined, you will have to write a large lump sum check to cover those costs and your down payment on closing day. A professional mortgage lender should provide your attorney a final closing statement with the total due a few days prior to your closing.
You should obtain a cashier’s check for the amount owed from your bank so your personal financial account information is protected to bring to your closing. And be prepared to take some deep breaths – it’s probably the biggest check you have ever written in your life.
Remember – your mortgage lender is the only party to your mortgage transaction who sticks around post closing day. A trusted partner will help you reassess your mortgage and the mortgage market regularly. They will alert you to large changes in rates and help you decide when and if refinancing makes sense.
We recently refinanced our home – we had a higher rate construction loan originally because our home was new construction. The mortgage originator at our lending institution was great about monitoring and keeping us apprised of changes in mortgage rates to help us refinance at the optimal time to greatly reduce our interest rate.
How long did you save to for your first home mortgage down payment? What would you add to this list of things you wish you knew before buying your first home? You can find all of my Family Financial Savvy tips here and on my Family Finance board on Pinterest.
At SunTrust Mortgage, we make it a priority to learn all about your unique circumstances. Confidence starts with a conversation.