If you’ve been thinking about buying your first home, now could be a great time to take the plunge.
You might be ready to invest that monthly rent check in something that can appreciate in value—not to mention something that could give you a tax break come next April.
But today’s first-time home buyers can also face a number of challenges, such as—things like decreased housing inventory, increased competition, and financial barriers like student loan debt and limited credit history.
Luckily, these factors don’t always have to come between you and your first home. If you know how to navigate them, you may land a home you love without breaking the bank.
If not now, when?
Between the current economic environment and the housing market trends, this could be a great time to take the leap from renter to homeowner. Read on to find out how you can make this year your home buying year.
Rent vs. Buy
How do I know when I’m ready to buy a home?
Buying your first home is a huge investment, but that doesn’t mean it’s a purely financial decision. You may be seeking more space for your growing family, or craving the community aspect of living in a suburb, or maybe you’re just feeling ready to achieve that major milestone of being a homeowner.
That said, it can help to start with an objective framework that may help you answer the question, “Am I financially ready to buy?” before factoring in the emotional reasons. Here are five signs the answer may be yes.
Your budget is big enough to cover the down payment, mortgage payments and associated homeownership costs, including property taxes and maintenance fees. Utilizing a Mortgage Calculator can help you visualize how much you can save on your mortgage with different down payments.
You plan on staying put for a while, giving your home a chance to possibly appreciate in value.
You itemize your tax deductions and you may benefit from writing off mortgage interest.
You have good credit, which may help with better loan terms.
Rents in your area are high relative to what a house payment may be.
From this list, two important factors are: 1) How long you plan to stay in your home and; 2) The ratio of home prices to rents. So how do you know how long is long enough? Using an online rent vs. buy calculator can help you estimate the breakeven point where it might make sense to invest in a home.
For example, let’s say you’re a San Francisco renter paying $4,500/month on a 2-bedroom apartment, and you’re considering upgrading to a $1,000,000 3-bedroom home in Oakland and staying for at least seven years.
At a 3.8% mortgage rate and 2% annual appreciation rate, the calculator estimates that buying becomes cheaper than renting after 5 years.
Make sure to adjust the settings of the calculator you use to fit your situation, but remember that no calculator can predict the future of housing prices, rents, and taxes, along with other variables. But estimating your break-even time frame can be a useful data point when answering the question of whether you might be ready to buy a home.
After you’ve reviewed the input results, you hopefully have a better idea of whether buying a home makes sense from a financial perspective. Now you can consider the emotional perspective.
For example, do you crave the autonomy of owning your own place? Are you dying to have control over paint colors and tile choices? And are you willing to live without your landlord (and their midnight visits to fix your broken heater)?
Determining whether it’s time to buy a home is both an emotional and financial decision. Start by figuring out if the finances make sense, then evaluate the emotional factors.
As a first-time home buyer, checking a few boxes early on in the process can prepare you to act fast when the home you want goes on the market. Here are six essential steps for setting up your home buying experience the right way.
Downloading Your Credit Report
Since your financial history is often a determining factor in getting approved for a mortgage loan (and snagging the best loan terms possible), it’s important to know what your credit report says about you.
You can download your credit report for free on an annual basis: this annual free credit report doesn’t give you a credit score, but it allows you to catch any errors that may affect what loan terms lenders will offer you. According to FICO®, two common reporting errors are late payments and incorrect balances due on open accounts.
If you find any errors on your report, you can file a dispute with the reporting agency to get them corrected. Even when the mistakes are obvious, the process of correcting the misinformation and waiting for any related adjustment to your credit score can take time, so it helps to start on this step as early as possible.
Another advantage to starting early is that you’ll have more time to pay down outstanding balances, which may also improve your score.
Before you download your real estate app of choice and start spending every Sunday at open houses, it’s helpful at this point to explore just how much house you can afford. Utilizing a home affordability calculator can help estimate the cost of purchasing a home and the monthly payment. That’s where mortgage pre-qualification comes in.
After entering just a few pieces of information, you can get an idea of the loan amount and interest rates you’re likely to see when you eventually apply for a loan. While a pre-qualification isn’t as formal as a pre-approval (more on that below), it will help you keep your initial search confined to only homes in your estimated range (and SoFi’s mortgage pre-qualification takes only two minutes with no impact on your credit score)*.
With all the apps and information available on the web today, you might think that buying a home is as easy as picking your favorite place and extending an offer. The truth is that without an experienced real estate agent, you may soon find yourself neck-deep in confusing and time-consuming contracts, negotiations, legalities, and paperwork.
Traditionally, home buyers have employed local real estate agents referred to as “buyer’s agents”. A buyer’s agent represents the buyer and their commission is usually covered by the seller. If the home is for sale by the owner, ask the seller if they are willing to cover the buyer agent’s commission.
A good real estate agent can also help you save money.
As a first-time home buyer, it really helps to have someone who knows how to navigate the process on your side. A good real estate agent can also help you save money if they know the neighborhood and/or home well and can give you valuable negotiating advice.
Being Frugal in the Months Before Buying a Home
Plan on a little extra scrutiny regarding your finances and spending habits. Most lenders will question sharp swings in your savings account balance and increases in revolving debt can be seen as red flags —which may have a negative effect on your ability to get approved for your home of choice. It also may affect what loan programs or terms you are eligible for.
Having all your paperwork organized in advance can be a big help. Depending upon your income stream, Lenders typically ask for things like W-2s (if you receive a paycheck), 1099s, profit and loss statements (if you’re self-employed), recent pay stubs, two years of tax returns, bank statements, student loan docs and/or credit card statements.
Gathering Your Documents
Unlike pre-qualification, which gives you a rough idea of how much money you can borrow and at what rate, mortgage pre-approval is a more formal step in the process in which the lender verifies things like credit history, income and assets.
This allows you to submit an offer with confidence that you are officially credit approved for a loan. Being able to show that you are pre-approved for a loan can help put you on equal footing with competing bids from other buyers.
Taking time up front to prepare for the best outcome of your home bid by getting pre-approved can make the home buying process easier and more enjoyable.
Having your credit, income and assets reviewed by an Underwriter means you may have less surprises later in the loan process. Plus you’ll be more ready to act when you find that dream home.
In a competitive housing market, sellers typically choose the offer with the highest dollar amount and the fewest financing contingencies. This can put people at a disadvantage, because even when they’re pre-approved for the offer amount, financing contingencies (a clause which states that your offer is contingent upon you securing financing for the home) might make their offer less attractive than all-cash offers.
SoFi underwriters review our members’ credit history, income, and assets at the pre-approval stage so that our members can shop for a home with the peace of mind that the afirst part of the loan has been approved. Pre-approval allows the member to primarily concentrate on any remaining property contingencies, such as finding an eligible property that suits their needs.
Picking the Right Mortgage
Should I choose a fixed, adjustable or interest-only mortgage?
Once your search begins in earnest, one of your first decisions will be what kind of mortgage loan you want to take out—with the usual options being fixed rate, adjustable rate and adjustable rate with an interest-only payment option.
Comparing ARMs vs. Fixed Rate Mortgages will show that they both have their own unique pros and cons, but the key is to choose the best option for your particular situation.
Fixed-Rate Mortgage Loans
In a nutshell: long-term predictability
As its name suggests, a fixed-rate mortgage (FRM) is a fully amortizing loan that offers an interest rate that stays the same for the entire life or “term” of the loan, regardless of any fluctuations that might occur in the broader economy.
Because of this, fixed-rate mortgage loans offer greater stability and predictability over the long term compared to their adjustable counterparts.
That’s the upside. The downside is that, generally speaking, fixed-rate home loans have higher interest rates than most introductory rates on adjustable-rate mortgages (ARMs)—that’s the price you pay for stability and predictability.
Of course, the rate you receive from a lender will depend on several variables, including personal factors like your credit score.
Fixed-rate mortgage loans offer greater stability over the long term.
For some borrowers, the advantages offered by an FRM outweigh the potentially higher interest rate. This is especially true for home buyers who are planning to stay in a house for a longer period of time.
For example, SoFi offers fixed-rate mortgages with 10, 15, 20, and 30-year loan terms. This means the rate you receive up front will stay the same for those years, even if rates rise significantly over that time frame.
Bottom line: If you are planning to own your home for the long term and wish to avoid the uncertainty of a variable interest rate, consider choosing a fixed-rate loan.
Adjustable Rate Mortgages
In a nutshell: lower initial rates, more risk
An adjustable-rate mortgage (ARM) loan is so named because the interest rate can fluctuate over time. In many cases, the ARM loan offered may be referred to as an “Intermediate or Hybrid ARM Loan”.
These terms refers to an ARM loan that is initially fixed for a set period of time such as 10, 7, 5 or 3 years”. After this introductory fixed rate period, the loan rate can adjust on a yearly basis.
ARM loans carry certain “attributes” such as – A) a set fixed rate period in which the introductory rate cannot change. B) The rate adjustment frequency following the initial fixed rate introductory period.
How the specific ARM loan is named can help to indicate rate adjustment periods. For example, if you have a 7/1 ARM, the “7” represents 7 years of the initial fixed rate; the “1” represents the frequency of rate change after the initial 7 year fixed rate period. So in this case, the rate would change once per year after the initial 7 year fixed rate period.
ARM loans offer lower initial rates, but more risk.
So why would anyone want a mortgage loan with a rate that changes over time? Why choose an ARM over the stability of an FRM? The reason can be summed up in a single word—savings. Borrowers who choose adjustable mortgage loans tend to secure lower initial interest rates than those who use fixed-rate loans.
If you’re concerned about the risk of rising interest rates, many ARM loans have caps on how much the interest rate can increase or decrease. There is usually an annual limit as well as a lifetime limit. For example, an ARM loan may specify that the maximum interest rate adjustment is no more than 2% annually or no more than 5% over the life of the loan.
Bottom line: If you are more risk-tolerant and your priority is finding a lower initial interest rate for a more temporary living arrangement, consider choosing an adjustable rate mortgage.
In a nutshell: Initial low-interest only payments will not reduce principal balance. Rate and payment will eventually rise.
As the name suggests, interest-only mortgage loans give you the option to pay only the accrued interest on the loan each month for a period commonly ranging to 10 years. After the interest-only period expires, the loan converts to a more standard structure where both principal and interest are paid on a monthly basis.
Interest-only loans are usually ARM loans, which means the interest rate is typically lower than fixed rates during the initial fixed rate period. For example, let’s say you see a 5/1 Interest Only ARM.
This loan may be fixed for the initial 5 year period only, but may offer an interest only payment option for up to 10 years, then after 10 years the loan will likely fully amortize with both principal and interest payments for the remaining 20 years of the loan term in order to payoff the balance in full at the 30 year mark. Most interest-only mortgages come with a 30-year term.
A potential benefit of an interest-only mortgage is the lower payment option during the interest-only period. This can enable you to enjoy increased financial flexibility.
Interest-only mortgages offer lower payment options but will not reduce principal balance initially.
Because you only pay the interest that is accruing on the mortgage, the initial monthly payments are substantially lower than if you were also paying the principal. For example, on a $1 million, 30-year, 4% fixed mortgage, and 10% down, the initial monthly payment would be $5,020. On an interest-only mortgage with the same criteria, the monthly payment would be $3,000.
After the ARM and/or interest-only period ends, you’ll see your mortgage payment go up, sometimes substantially. Because of this, interest-only loans are typically better for borrowers who expect to be able to cover those higher payments in the future. For example, if you believe your income will increase before the loan payment amount adjusts higher.
Interest-only mortgages have been around for decades, but for the most part they weren’t attractive to the masses. Typical borrowers were often affluent homeowners with high credit scores and the ability to put down a large down payment. Additionally, they typically viewed their homes as part of an investment portfolio: interest-only mortgages provided the opportunity to seek better returns with the capital that would otherwise have been used to make a higher mortgage payment.
Then came the housing bubble of 2004 – 2006, when lenders started approving interest-only loans for unqualified borrowers who wanted to keep mortgage payments low while trying to flip houses as quickly as possible. After the bubble burst in 2008, the market for interest-only loans went dormant for several years—and these products were left with a less-than-favorable reputation.are
Between the current economic environment and the advent of interest-only loan products with better parameters, this type of loan is once again worth considering for some borrowers, although I/O loans are not commonly offered for first-time homebuyers.
Meaning you either expect to be able to handle the increase in payments after the initial fixed rate or interest only payment period, you are expecting to refinance into another ARM or Fixed Rate if needed because there is no prepayment penalty, or you expect to move into another property.
No matter your mortgage needs, SoFi is here to help.
Different types of home loans offer various pros and cons. Consider your financial goals and your long-term plans, then choose a mortgage option that best supports those goals.
How do I evaluate the different options out there?
Up until a few years ago, there wasn’t a lot of clarity around what different mortgage lenders were offering. Borrowers typically compared lenders on interest rate alone, then embarked on a frustrating, paperwork-heavy application process.
Luckily, today you have more tools to use and information to draw from. And with the rise of online and marketplace lenders, there’s increased competition, which fuels additional information and improvements in process, service, and cost.
If you want to avoid getting stuck with a not-so-great lender, take the time to shop around.
Does the lender offer competitive interest rates?
Does the lender offer terms and products that suit your needs?
How much of the process is online vs. on paper or in person?
How quickly can the lender close once you’re in contract?
What type of origination, lender and other fees are you responsible for?
What other benefits does the lender offer, if any?
The Finishing Touches
Tips to help with the inspection and closing processes.
Once you’ve found a home you love and the offer is accepted, it’s tempting to want to move in as quickly as possible. However, there are some crucial steps that need to happen before you get your hands on the keys, including the inspection and the closing process.
Regardless of how perfect a home may seem during a casual walk-through, it’s important to identify potential issues that could require expensive repairs down the line. Include a home inspection as a contingency clause when you present your offer.
Finding an inspector
If the sellers accept your initial offer with the inspection contingency, the next step is to hire a professional home inspector. Here, you have two options: ask your real estate agent for a referral or hire one yourself. You can do your own search for an inspector who is affiliated with either the American Society of Home Inspectors or the National Association of Home Inspectors.
A general inspection using high tech equipment may cost approximately $278-$390, but should be worth the investment if you can detect and fix problems prior to taking ownership of the home.
The inspector will typically assess the plumbing, mechanical systems, and the structural aspects of the home.
Plumbing assessments include testing to ensure that toilets flush and that there is adequate drainage from sinks, bathtubs, and showers.
Mechanical systems include things like electrical wiring, heating, cooling, and ventilation. Each system is run for a period of time to ensure proper operation.
The structural inspection covers items like the foundation, support structures, walls, attic, and roof.
When considering the inspection components, the structural assessment is the most complex and important because serious problems may not be easily visible and structural issues can be the most expensive to repair. Common problems found in this phase typically are water-related, such as roof/plumbing leaks, mold, and mildew.
Additional issues may include a cracked foundation, termites, dry rot, and roof deterioration. If there are severe structural issues, consider hiring a structural engineer for a more in-depth inspection. It’s better to know about structural problems upfront then to be surprised down the road since they can be costly to remedy and may render the home ineligible for standard financing.
It’s better to know about structural problems upfront.
If the home inspector does note any structural problems that may be serious, a notation in the report for further inspection by a “structural engineer” may be suggested. In turn, if the home inspector notes any pest issues, a separate more in depth inspection from a Pest Inspection Expert may be suggested.
Once the inspection is complete, you should receive a report within a couple of business days with a detailed account of any problems with the home. With this information in hand, you can go back to the seller for a negotiation regarding the price of the home and necessary repairs. Keep an eye on your contract contingency dates and request an extension when needed to stay in contract. Generally speaking, this negotiation will have one of four potential outcomes:
The sellers agree to make all repairs.
The parties agree to a lower selling price and depending upon the severity of the repairs needed, the home will be sold “as is.”
The sellers agree to pay for some repairs and a slightly lower selling price.
Damage is so extensive and/or costly that the purchase of the home under consideration is not considered lendable in its current state.
Unless you decide to walk away from the deal, the conditions agreed to by both parties will be added as an addendum to the final contract and the process can proceed to the final phase if the repairs needed do not raise any “health or safety” issues.
If health or safety issues are present, the lender may request that these repairs are completed before the loan closing.
If repairs are too extensive and cannot be completed by the closing date, it’s possible that a traditional home loan may not be approved for financing and if the buyer still wants the home they may have to extend the closing date by executing an addendum to the contract and locate renovation type loan financing.
Homes must meet certain criteria in order to be considered lendable, this criteria can apply to things like repairs, type of home, zoning, easements, etc. and loan standards can vary depending on the lender and type of financing.
Homes must meet certain criteria in order to be considered lendable.
The Closing Process
Generally, the closing process is relatively simple for both buyers and sellers. The paperwork is prepared by the various entities participating in the transaction:
The escrow company/closing agent will calculate legal fees, transfer taxes and closing costs, as well as coordinate the transfer of ownership via the deed.
The lender provides documentation of the loan, including the note, the mortgage, closing fees, and other disclosures.
The title company will furnish documentation of clear ownership in the form of a title insurance policy.
Prior to closing, you will need to schedule a final walkthrough to ensure that any agreed-upon repairs have been completed and the home has been left in satisfactory condition. During this period you will receive a Closing Disclosure outlining the loan terms, closing costs, etc. The Closing Disclosure is usually delivered to the borrower three or more business days before the loan closing for review of fees and terms.
This gives the borrower time to compare the final closing disclosure to the initial loan estimate and ask questions. If everything checks out, the closing documentation can be signed by the sellers and the buyers.
After the documentation and all financial transactions have been verified as complete by the escrow company or closing agent, the escrow company will record the change of ownership with the county and you will be given the house keys. Congrats! That’s when you’re officially the new owner.
Some loan programs, such as jumbo mortgages, which are basically mortgages on homes that are valued above $1M, can require a qualifying debt-to-income ratio of 43% or less. However, some conforming loan programs, which have a limit on the size of the loan, may offer a higher qualifying ratio up to 50%.
Tighter qualifying ratios can sometimes be an obstacle in the road to home ownership. It can be frustrating that investing in education helps you earn more, but at the same time may hold you back from financing your dream home.
Making Mortgages Simple
Buying your first home can be a mystifying experience, so it’s understandable that a difficult and frustrating mortgage process could be a big barrier to entry.
But when the process is transparent and designed to help even first-time home buyers understand what’s involved, buying a home can actually be a positive experience.
At SoFi, we’re all about making the hard stuff seem easy. A SoFi home loan allows our members to focus on the fun of achieving that next big milestone. Because, let’s face it, that’s really what it’s all about.
With SoFi, you make your dream home a reality with competitive rates, and as little as 10% down.
Ready to get started?
Learn more about SoFi Home Loans today.
We’ll help you discover whether this year is the year you make your dreams of homeownership a reality.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.* SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information. SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal. External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement. Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website . 130-YEAR: The payment for a 30-year term, loan amount $600,000, Rate 3.25%, LTV 80% is $2,611 for full Principal and Interest Payments with 2 points due at closing. The Annual Percentage Rate is 3.418%. No prepayment penalty. Payment shown does not include taxes and insurance. The actual payment amount will be greater. 220-YEAR: The payment for a 20-year term, loan amount $600,000, Rate 2.875%, LTV 80% is $3,290 for full Principal and Interest Payments with 2 points due at closing. The Annual Percentage Rate is 3.109%. No prepayment penalty. Payment shown does not include taxes and insurance. The actual payment amount will be greater. 315-YEAR: The payment for a 15-year term, loan amount $600,000, Rate 2.75%, LTV 80% is $4,072 for full Principal and Interest Payments with 2 points due at closing. The Annual Percentage Rate is 3.052%. No prepayment penalty. Payment shown does not include taxes and insurance. The actual payment amount will be greater. 4The payment for a 10-year term, loan amount $600,000, Rate 2.50%, LTV 80% is $5,656 for full Principal and Interest Payments with 2 points due at closing. The Annual Percentage Rate is 3.06%. No prepayment penalty. Payment shown does not include taxes and insurance. The actual payment amount will be greater.
Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status and and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, years of professional experience, income, and a variety of other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Financial Protection and Innovation under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp. or an affiliate, NMLS # 1121636. (www.nmlsconsumeraccess.org)
✝︎ To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.