Updated: Mar 22, 2019
Buying our first house almost happened by accident. In July 2018, we were in the middle of a one year lease renting a 1500 square foot home in the suburbs for $995 per month. We had plans to buy a house the following fall, but as newlyweds we still needed to save up for a downpayment. Yet, both my wife and I impatiently dreamed of the day we could move out to the country, buy some land, and start homesteading. We frequently shared homes we found on online with each other, discussing the features we liked and disliked. One afternoon, I found a 2000 square foot rancher on 5 acres. It was a 3-bed, 2-bath with hardwood floors throughout, granite countertops in the kitchen, crown molding, a 2-car garage, a barn, concrete driveway, large garden, and impeccable landscaping. The asking price of $285,000 was also in our price range. Unfortunately we had no money for a downpayment, and therefore couldn’t qualify for the low rates of a conventional mortgage or meet the 3% down payment requirement for most lenders.
After viewing the property, my wife and I instantly fell in love with it. Accepting the fact that we wouldn’t be buying it, we still set up a viewing so we could see the house in person. However, this only made matters worse, as we ended up loving it even more. As we drove away, we agreed that the property was perfect for us, but lamented that we didn’t have a downpayment. However, my wife suggested that we should apply for financing just to see what kind of rates we could get. Which we did. The next morning, I applied for financing, first through a local credit union, which offered a rate of 5.5% (but subject to approval), which was much too high for our liking since most mortgages at the time could be obtained for 4.5%. Then we discovered the United States Department of Agriculture (USDA) Rural Development home loan. This is a program that encourages and assists first-time homebuyers to move to rural areas. Being in a designated rural area, the property met the program’s location requirements, as since I was still in graduate school, we easily met the income requirements. So we applied for a USDA home loan through a local mortgage lender and found a buyer’s agent, just in case. Within a couple hours, we were notified that we were pre-approved for a 30-year mortgage totaling $285,000 at an interest rate of 4.0% with 0% down! Our final monthly payment came out to $1650/month, which included escrowed property taxes, homeowners insurance, and fees. We suddenly realized that we could afford to buy the house!
With the help of our newly found realtor, we put in an offer of $295,000 with the seller’s covering all closing costs (totaling about $10,000). A day later, we were notified that our offer was accepted. Interestingly, the seller’s had already countered on another offer, but those buyers took three days to return the paperwork with their response to the counter. In the meantime, we submitted our offer, which ended up being better than the original one, so the seller’s accepted our offer instead without even countering!
In the whirlwind of buying our first home, we had viewed it, found a realtor, obtained pre-approval, and submitted an offer all within a 24 hour period. The inspection and appraisal went well, and we closed 45 days later. We now live in our beautiful new home with space to breath and grow our homestead. Our first-time home-buyer process taught us several lessons, which we hope to pass along to you.
1. Research all your financing options. Many financing options exist on top of conventional mortgage programs, including FHA, VA, and USDA loans. There are pros and cons to each, so check them all out to see which ones you qualify for and are best for your situation.
2. Shop around (without hurting your credit score). Apply for pre-approval with several different lenders to compare rates. If done within a 14 day window, multiple hard inquiries on your credit report aren’t as damaging. So it doesn’t hurt to look at several options. You can also ask your realtor for lender recommendations.
3. Get a buyer’s agent who specializes in first-time homebuyers. The commission for buyer’s agents are typically covered by the seller, so there’s no cost to you. We initially floated the idea of buying a house without an agent, but would have been quickly out of our league if we had done so. Our realtor specialized in first-time homebuyers and farm real estate, which was perfect for us. She was extremely knowledgeable and was a life-saver when it came to the paperwork. She even stayed late at her office on a Friday night until 8:30pm in order to help us get our offer in as soon as possible, and was on the job as late as 10pm on a Saturday communicating with the seller’s agents about our offer.
4. Obtain financing from a mortgage lender rather than a bank or credit union. Mortgage lenders get paid on commission. Bankers are salaried. By choosing a mortgage lender, you’ll get better response and turnaround times for all of your financing needs. We applied through both our credit union where we had our bank accounts and a mortgage lender that regularly worked with our realtor. It took the credit union 4 days to respond to our mortgage application, whereas it took the mortgage lender 4 hours. We applied through the mortgage lender and were pre-approved in the same day, allowing us to make an offer on the house much sooner and not miss out on the home of our dreams.
5. Avoid Private Mortgage Insurance (PMI) if possible. Our USDA home loan has a service fee but no PMI, saving us thousands over the life of the loan. The service fee is only 1.01%, which is much less than PMI on a conventional or FHA loan and can even be rolled into the loan. If you don’t qualify for a USDA mortgage and want to avoid PMI, you’ll need to save for a larger down payment. For most loans, you stop paying PMI once you have 20% equity in your home.
If you have any insights from buying your home, let us know in the comments!