Now that I’ve entertained the internet with my semi-responsible spending habits, let’s move onto how my husband and I got a home mortgage loan to buy our first house. With our savings of about $25,000 (a chunk of change that many in LA, millennial or not, can barely afford to stow away) and confidence in our job stability, we cautiously began the mortgage loan pre-qualification process.
After researching several mortgage lenders we ultimately chose a company on the trusted recommendation of a realtor family friend (who also recommended our real estate agent). We liked that our loan officer, Gian Ceretto, wasn’t pushy and that he explained to us the different loan options and financial scenarios before we decided to choose his services.
With my freelancer status and our little savings, we weren’t surprised when Ceretto suggested that a Federal Housing Authority (FHA) loan would be the best fit for us as first-time home buyers, especially since we wanted to stay under $500,000. (It’s also worth mentioning that we’re the only borrowers on the loan—not our parents.)
“FHA is a great home loan program for credit-worthy buyers without a substantial down payment, lower credit scores, and past credit challenges (like bankruptcy or foreclosure) to experience homeownership,” Ceretto notes. Though my husband and I have pretty good credit, a few late credit card payments recently on my part made a little ding on my score (Thanks, “mom brain.”)
We were approved for $480,000 (spoiler alert: We ended up buying a house for about $15,000 less), with a 30-year fixed rate loan at 3.875 percent interest. (Bankrate recently noted that the average interest rate in LA is 4.09 percent.) Our cash savings would ultimately cover the 3.5 percent down payment plus closing costs, and we’d still have leftovers to stash back into our savings account.
As mentioned, some experts I spoke to say these days 10 percent down is “the new 20.” Ceretto says that it all comes down to affordability and (surprise, surprise) the high cost of Southern California living. Echoing LA-based certified financial planner and Equalis Financial founder Leighann Miko’s previous comments, Ceretto says many people “are unable to save the coveted 20 percent down payment for a home purchase, however many [can] come up with 10 percent.”
LA-based Keller Williams realtor Gabriela Venegas, a 29-year-old agent at the Carrasco Group, tells me that’s the average percentage that local millennials are putting down. “In the last year though, I have been seeing a lot of buyers reaching out to family members for gift funds for their down payment so they can reach that elusive 20 percent down and avoid having to pay [private mortgage insurance, or PMI],” she says. “A lower down payment doesn’t necessarily take you out of the running, but it often requires things like shortened escrows, removal of contingencies, and other maneuvers to get the offer accepted.”
About that dreaded PMI—it’s a requirement for loans with down payments of under 20 percent, and it adds an annual expense of up to 1 percent. On top of being tax deductible given our adjusted gross income, we reasoned that the long-term appreciation of our home would outpace the PMI cost.
And while it’s generally known that sellers prefer cash buyers, conventional financing, or larger down payments, having an FHA or VA loan won’t necessarily knock you out of the home buying game. The latter two options do have more rigorous appraisal standards (like requiring sellers to make repairs to meet loan requirements), but Ceretto adds that a common misconception is that they’ll take longer to process.