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Save + Simplify When You Buy A House
(Jenn W., Host) Thank you for joining us, everyone! My name is Jenn and I'm excited to introduce our speaker this evening, Christina Kredit. Christina is Copper State Credit Union's financial wellness program manager. She's been with the credit union for four years and loves her current position. Christina has lived in the Valley for nine years since moving from Pittsburgh. She loves listening to audio books and enjoys camping with family and friends as well as working in her garden. A financial fun fact about Christina, back in 2013, when she and her husband bought their first house, they had no idea what they were doing. It's a good thing they had some trusted partners working with them. And she's definitely learned a lot since then. Christina, I'll turn it over to you.
(Christina K., Speaker) Thank you, Jenn, for that introduction. Welcome, everybody. Excited to talk about home buying. First though, if you are new here, I want to make sure that you know who we are as Copper State Credit Union. I am coming to you this evening from Copper State Credit Union's operation center. And we are a local Arizona credit union that was built from the merger of two equally healthy and thriving credit unions, Canyon State Credit Union and Deer Valley Credit Union. That happened back in 2019. And then Southwest Healthcare Credit Union joined us in 2020. At that point, we rebranded as Copper State Credit Union. And our membership, with its many benefits, is open to most Arizona residents. If you live, work, or worship in any of these 6 counties, you are eligible for membership. We have seven branch locations right now, plus a location at GCU on their college campus in the Lopes Shop. We have over 40,000 members who trust us to do their banking, and we offer a variety of accounts and loans. We've got online banking, mobile app, pretty much anything that you would need from a financial institution.
So, one of the reasons we're here today is because of our core values. We care a lot about these four core values that you see on the screen: family, empowerment, excitement, and discovery. They aren't necessarily words that you would think of when you're talking about your finances. But in reality, making financial wellness and financial education easy, free, available to everyone as a benefit of membership, and even to the community who are not members with us, that's so important because it is key to the health of Arizona families going forward, and making sure that you have that knowledge leads to financial prosperity. And that means something different for everybody, but we want every single member of ours, and community member, to achieve that financial prosperity. And with that tends to come a lot of excitement and discovery of what you can make your money do for you.
Now, as promised, we are going to talk about some ways to save and simplify when you buy a house. When you think about buying a house, the first thing you probably think of is it's going to cost a ton of money. And the second thing is it's super complicated. And there are definitely some truth to that. But there are some really interesting ways to save and to simplify that process. So I want to share those with you now.
Save When Buying a House Tip 1: Maximize Your Credit Score
Now, some of this you can absolutely do ahead of time. If you caught my session on Facebook Live with Russ, our VP of lending, he went real deep into credit score and what you can do to improve it and to grow and keep it strong. But really, ahead of time before you're going and buying that home, you can start to pay down your balances on your revolving credit such as credit cards. For example, if you have a credit limit of $10,000 on all of your credit cards combined, we're talking Lowe's, Macy's, all of the credit cards that you have, if you had $10,000, try to keep the balances under $1500 that are rolling over from a month to month basis. Because this contributes to a section of your credit score called credit utilization, and that's about 30% of your score right there is being able to not max out all the credit you have. And continue to make your payments on time for any loan that you do have because that's another 35%. Just in those two things add up to make 65% of your credit score.
Also, be sure to check your credit report for errors. It's shocking to me, but 20% (one in five) Americans, have an error on their credit report. Five percent of Americans had that error negatively affect their rate in borrowing money from a lender. So you could be one of those people that has an error. And if you get it corrected, you could actually get a better rate. A lot of times, it's just one of the companies who send reports to the credit bureaus messed up. And you have the right to review that report and to submit when there are issues and get those resolved. Typically every 30 to 60 point bump in score can earn you a better rate.
The other thing that I want to mention is that once you’re pre-approved and you're actively looking for a home, avoid applying for any new loan or new credit line. It not only affects your credit score to have multiple inquiries at once, but it can also halt the process of closing on your home loan.
To summarize – increasing your credit score can actually save you money because it can get you a lower rate as you bump that score higher and higher. So if you're thinking, "Oh, I'm not going to buy my house for a couple years yet” you have this amazing opportunity right now to get yourself into prime credit score range to get the lowest rate available at the time!
Save When Buying a House Tip #2: Avoid PMI
To clarify, private mortgage insurance is different than homeowner's insurance. Please make sure you have homeowner's insurance! That's going to protect you from things like fire or theft. But, PMI, private mortgage insurance, protects the lender in situations where there's not very much of a down payment. Houses are huge purchases. At least in Arizona right now, I know it's absolutely crazy, and it's not unheard of for someone to be spending $300,000, $400,000, $500,000 on a home or more. That is a huge loan, and those loans are a big risk to the lenders. So, the private mortgage insurance is kind of a rule that all lenders have. PMI costs .5% to 1% of the loan amount on a yearly basis. Here’s how to avoid it: have the 20% down payment! Of course, that's easier said than done because with a huge mortgage, that's $50,000 or $60,000, that's a lot of money. But, if you can't get all the way there to that 20%, that's okay, you can always contact your lender and have it removed when you've reached that 20% point if you have a conventional loan. And when I say 20% equity, what I mean is the amount of the house that you own, that you've paid off so far or the value has gone up. if you get to that point where you own 20% essentially of the home, that's when you're able to drop that PMI or that mortgage insurance if you have a conventional loan. If you have an FHA loan, you'll have to refinance in order to drop that mortgage insurance.
Save When Buying a House Tip #3: Get Preapproval Quotes from Multiple Lenders
Next up, get multiple quotes from lenders. So, different lenders will give you different rates and they have different fees. Take a look when you go to get pre-approved, you're ready to buy a house and you're getting a pre-approval, which is a very good idea, by the way, especially if you're buying a house in Arizona, you want to have that pre-approval ready to go so that when you actually find the house, you can immediately start that process instead of having to wait and go back and get approved after the fact. Different lenders will have different numbers. And when you get that pre-approval, put them side by side. Get two or three and see what the difference is in the fees, in those closing costs. See if you can negotiate any of them.
Just make sure to do all of those hard inquiries, those pre-approvals, within a 30-day limit so that it doesn't negatively affect your credit. The rule is you can do multiple of the same type of inquiry, like a pre-approval, just do it within that 30-day mark. Pre-approvals are typically going to be good for about 90 days, three months. You'll just have to provide a pay stub and bank account information to get that pre-approval so that the lender can verify those down payment funds and that you have the employment verification to back it up.
Save When Buying a House Tip #4: Buy along the outer borders of a popular neighborhood instead of in one.
Interesting! if you're someone who's looking for a house right now, think about the dream place that you want to live, think about the name of that city or town or whatever it is. Now, if you are able to find a house just outside the border of that area or city or town, a couple of nice things can happen. You won't be paying the premium for a house inside that amazing area, but you'll be close enough to enjoy some of the benefits. So maybe you really like that area because of the parks or because of all the restaurants, the shopping, or the schools or whatever it is. You're close enough that you could probably still take advantage of some of those, but you aren't paying the absolute premium for being inside that neighborhood. And if you want to be in that neighborhood, more power to you, but if you want to save a little bit, that's one way.
The other thing that's cool about it is there's a chance that the property you buy is likely to increase in value because of that proximity. So it's in a nice area, it may end up increasing in value because of that.
Save When Buying a House Tip #5: Buy Less
This one, probably not as fun, is to buy a less-expensive home. Well, obviously that's a way to save money. But I want to take a moment here to talk about just because you're approved for $600,000 mortgage does not mean that you should buy a $600,000 house. It’s really more about you and your budget and your situation, and that should determine how much house you buy. You're the only one that knows you and your situation the best. The people who are doing the pre-approvals are going to give you all the information and what you qualify for on paper, but you're going to know your own financial situation best.
One way to calculate what you should pay for a house is to take what you have as your down payment and multiply that by five. Why would you do that? Well, because that would be the house you could buy and still put 20% down. Now, of course, that may not be a realistic number. If you're buying a $500,000 house, that's $100,000 for a down payment! So it may not be realistic to have that saved up. But, if it's not, wait a year, save up some more. Get to that point where you have that money saved. Or, get as close as you can and know, "Okay, I'm going to have to have that PMI, but you know what? I'm going to try to build up my equity to 20% so that I can drop the mortgage insurance later, as soon as I can.”
Simplify When Buying a House Tip #1: Use a recommended local real estate agent.
Yes, it has costs associated with it. But, finding an agent, specifically a buyer's agent, will be invaluable. Don't make the mistake of going with the seller's agent. There are two real estate agents in any home buying transaction. The seller has an agent, the buyer also needs an agent. And you don't want, as the buyer, to be using the seller's agent because they have the seller's best interest in mind. So you want your own person. And know that typically, the seller is going to be the one paying the buyer's agent commission in the contract. Now, of course, every contract is different.
A good buyer's agent can negotiate items for you to save you money that you never would have known about. They can give you really good advice on making an offer, what to put in as a contingency or what to make sure you leave out, whether to bid a little bit low or bid a little bit high. And that kind of information changes on a regular basis, so even if I spent all of my time to become an expert in the real estate market tomorrow, all of that information could change in a week or two. It’s their job to know all of that, and it can be really helpful when looking and when going through the buying process to have a recommended local real estate agent. It’s definitely going to make your life a little bit easier.
Simplify When Buying a House Tip #2: Know the Types of Mortgage Loans Available
This is our mortgage comparison tool. This tool is really nice because it gives you the mortgage types here on the left-hand side. It gives you a definition. It gives you pros and cons for each mortgage type. And, it says who it's best for. Honestly, I like this part the most because I just go to the best for and see if I fit that description. That's an easy way to start by narrowing down what I'm looking for. If you go into the process knowing what type of mortgage loan you're going to need, that's going to simplify things for you. You're going to know what you need ahead of time, the type of down payment, the type of lender. It's just going to make everything a lot easier.
Simplify When Buying a House Tip #3: Buy in the Off-Season
For those of us in Arizona, we actually have very different buying times that are considered prime or the best time to buy. They're different than everywhere else. In basically the rest of the United States, it's cheaper to buy a home in winter. Kind of, obviously, who wants to be moving their entire house or apartment or whatever stuff in the dead of winter when there's six inches of snow on the ground? I'm from Pittsburgh, I know that I would not be signing up for that. But it's really funny because in Arizona, everybody wants to move in winter because we certainly don't want to be moving when it's 120 degrees outside. The month of May in Arizona, is going to save you up to six percent on the purchase price, and that was as of 2019 to 2020, so of course that may not be the case going forward. But isn't that an incredible difference? That you can actually save money on a house if you're buying May versus January. May can be pretty hot. Maybe people just don't want to be moving in May because they assume it's going to be very hot and summery already!
There are other things that make it simpler for you buying in the off season as well – it’s less crowded, less traffic, moving companies and trucks can be cheaper in the off-season, May, June, July, August. It's definitely cheaper to rent a hotel in the summer. If you're moving, sometimes you need a night or two in between your two places, and if you need to stay in a hotel, it's going to be cheaper to do in the summer or in the Arizona off season. I just thought that was so funny and unique that we tend to be different than the rest of the United States in that.
Arizona Homebuyers Case Study: David and Julita
These guys currently live in an apartment in Phoenix. They want to buy a house in Glendale, reason being, they want to be close to her parents, it’s a good school district, and they've done a lot of research over the past year or so to figure out the neighborhood they want to be in. And they've been saving up a down payment for several years. They've gotten to the point where they have $15,000 saved for a down payment, plus, they were gifted some inheritance money of about $25,000. So, with that, they're getting ready to go out and buy their first house.
1. First, they are finding a realtor. They need a buyer’s agent who's local, recommended, and trustworthy. Luckily, Julita's parents have a realtor they've been using for buying and selling investment properties for years. They trust her and they begin that relationship by sharing, "Hey, we’re looking for a 3 bedroom, 2 bath, house with a garage in Glendale” and setting up that relationship, making sure the realtor's available, and getting that first appointment on the books. So, that process for them takes about one week to find that realtor. Of course, it's going to be different for everybody. They already knew someone, it was like a family friend. So that makes it a little bit easier than it would have been otherwise. So for other people, it might take a little bit longer to find that really good realtor.
2. Next up, they're going to find a lender and get pre-approved. So remember, within a 30-day period, you can get multiple pre-approvals, and you can put those loan estimates side by side and compare them. In order to get that pre-approval, they had to provide two months' worth of bank statements to verify they had funds for the down payment. I know it sounds weird handing over your bank statements, but the lender needs to know, oh, they actually have $40,000 to put down on this house. They also had to provide one month of pay stubs that verified their employment, knowing, okay, these guys have jobs and they’re going to be able to pay for a mortgage going forward.
3. David and Julita compared with a few different lenders, and they decided to go with their local credit union. They were quoted the same rate as the bigger bank they applied to, but the credit union’s fees were lower and they had a nice personal touch from the employees. And that is something that you will notice about credit unions. Credit unions will tend to have lower and less fees than banks, just because of our nature of being a not-for-profit organization. David and Julita were approved, for a loan amount up to just about $395,000. It took two weeks to get those pre-approvals from several different lenders and provide all the documentation needed.
4. Next, and I would venture to say that this might be the most important step, is they have to sit down and crunch the numbers. They use a mortgage calculator and play with some different figures. They find that they are comfortable with a home that costs up to about $300,000. They chose this because they want their overall payment to be about $1,600 total per month for a 30 year term at 3.6%. Notice that loan amount! They are not going to go above $300,000 because they know what their budget can manager. When they ran the numbers on $400k (what they were preapproved for) they said "Wow, We don't want to pay that. We don't have the room in our budget right now to be paying $2100 a month."
If you’re saying to yourself right now "Well, I don't really know how much I can afford on a mortgage," you may want to take a step back and take a look at some of our budgeting resources. And if you go to the resource center on our website, you will find a ton of budgeting resources - we have an e-book, we have a webinar, we have an actual budget template that you can download and edit. So please check those out!
5. David and Julita start browsing and attending open houses. Many of them are virtual, but that’s the way of things nowadays! It takes about six weeks before they find their house.
6. Yay! They’ve found a house. It fits pretty well what they wanted. It's a three bedroom, two bath, with a nice little backyard. But, they didn't get the corner lot they wanted. They wanted a den and a nicely landscaped yard as well, but it didn't have those things. But you know what? Nothing's perfect, and the way things are in Phoenix & Glendale right now, there’s a high demand for houses and not a ton of supply. They decided that it was worth it. The seller is asking $295,000, but their realtor suggests that they offer $305,000 because of the competitiveness of the market. This is another reason why you always want to have a trusted realtor to help you, because it could be the difference between getting the house or not getting it.
7. Next, they make an offer via their agent. Then, the seller responds to the purchase agreement by accepting, countering, or declining. A decline could be somebody offered them a cash offer, which is a very easy way to get rid of your house, not have to go through the lending process. Or it could be they got an offer for more money. But if they counter, that means that there's certain items in the agreement that they want to change before moving forward. And you can discuss these contingencies with your agent to see what you're willing to live with. But theirs was accepted!
8. They move on to providing their good faith deposit or earnest money, which I think is a funny term, but it's accurate. Definitely shows that you are serious because you're putting down about one percent of the loan amount at this point. So on their $305,000 home, it's just over $3,000 that they're putting down, and this is considered the first chunk of their down payment.
9. Now things start to move really quickly. They see communications from the lender with disclosures for them to review. There will be another itemization of the closing costs. This is where you have to provide a ton of documentation, two years of tax returns, another month of pay stubs, two years of W-2s, two more months of bank statements. And anything on there that looks weird or different requires more documentation. So compiling all of this and having the lending team process their mortgage takes a few weeks. It’s vitally important to have everything ready to go on your end documentation-wise, as the buyer.
10. In the meantime, the appraisal and the inspection are scheduled for the property. The appraisal establishes the value of the home, whereas the inspection looks at the condition of the home. So both of them are necessary! Inspection, if something came back like termites or mold or something that was a deal breaker, there is time when you can back out of the sale. And that's another contingency that goes in. If something's seriously wrong, you're still able to back out. But that's another reason why it's helpful to have a realtor because they know what contingencies to ask for. But their appraisal came in at around $290,000, which is close enough to the purchase price. It can be an issue if the appraisal comes back very differently than the purchase price, but in this case, it's fine. The inspection revealed some little issues with the external paint and fascia, but nothing that was really a deal breaker for them.
11. Time to get homeowner's insurance. David and Julita go with their current carrier for auto so that everything's in the same place and it's easy, but you don't have to do that, you can shop around for rates if you want.
12. At the same time, the mortgage lender is working with a title company to do title search and title insurance. And once these are done, the closing can be scheduled.
13. Right before the closing, they do a final walk through to make sure all as is agreed upon in the purchase agreement contract.
14. Time to close! David and Julita have to sign their names about 500 times, and have the rest of the down payment funds wired to the title company in order to finalize everything.
Congratulations to David and Julita on buying their first home, and we want to thank everyone who joined us today for tuning in for our webinar: Save and Simplify When you Buy a House. Please make sure to take the survey and let us know how we did, and get your free eBook on how to buy a house in Arizona.
All of us from Copper State Credit Union wish you the best of luck in your home search!
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This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.