My D and her fiance just purchased a house. They started by determining the monthly payment they felt they could afford, and they focused on areas with good school districts. They used Zillow to determine what the likely “all in” cost would be (payment and taxes) to figure out what price range they should be considering. They used a realtor FSIL’s coworker had used & highly recommended - they had several people recommend realtors, they talked to them briefly, and they settled on the one because they felt they could work well with him. They selected the mortgage company based on online reviews and email conversations … D quickly dismissed the ones that didn’t respond to her questions well enough or quickly enough. They chose a company that shopped around for the best rate for them. Overall, they had a really good experience (other than being beaten out on several houses by people who could pay in cash … a LOT of cash).
I’m hoping that the Ohio Heroes program provides good alternatives for lower down payment.
Also, they may qualify for a FHA low down payment loan. These loans have stricter appraisal guidelines and the house purchased has to be in good condition.
Are they intending to stay in the same area for a while, or would they move if a great job came along? How long does it take to sell a house in that market? Can they afford a mortgage if they decided to have kids and one parent planned to go PT/be at home? Can they swing the mortgage if one of them loses a job or becomes seriously ill and is unable to work? My personal feeling is to buy less house than you think you can afford because life happens. The old rule was 2.5 x salary as the maximum price for a house. Also makes getting a 20% down payment easier.
We kept the RE agent and the mortgage process separate. We talked to USAA first about what we would qualify for, and then I looked at houses online. This was a really radical idea in 1998. 
Get an independent inspector.
We escrowed taxes, but because USAA carries the mortgage and our property insurance, we just have the insurance pulled from our checking account monthly. Some lenders will require insurance to be held in escrow.
If they qualify for USAA membership, we highly recommend them for a mortgage.
I bought my house through an FHA loan. There was virtually no closing fees and it allowed us to put down less than 20%. (I think we put down ~15%? I can’t remember now to be honest.)
The rates were lower through FHA and no one was going to finance us without the FHA.
When my D was looking they considered both FHA and VA loan financing but on the advise of their realtor they didn’t go that route. The market in the price point they were looking was very hot and FHA loans take longer to get approved and have more stringent requirements. Buyers who had multiple offers had no reason to take the FHA offer as it meant a longer escrow and possibly more repairs that needed to be made.
D and her fiancé escrow both homeowners insurance and property tax. Both the mortgage broker who was a Mom herself and my H advised them to go that route as young first time buyers it is nice to just have the property tax as part of your monthly payment. H and I who own multiple properties don’t impound but we have more experience paying mortgages. We also gifted D the amount they needed to get from 15% to 20% to avoid PMI.
My 25 year old shopped his rate around and got pre-approved. His starter home was valued slightly more than the asking price so it all went quickly. His taxes are escrowed and part of his mortgage and his mortgage payment is around $850 I think. His rent was $900 a month plus heat and electric. He now has to pay water/sewer and garbage but it is all working for him. The equity he has now plus the credit are great for a young person. He wanted to do a 15 yr but I told him to do a 30 year to keep his payments par with rent and I told him he can pay down principle if he feels flush.
After the buyer determines his own comfort level of spending, contact a mortgage broker. I called about 8. Half couldn’t be bothered to return a call, even with the preliminary information. The ones who called back all had different costs. I need those costs broken down dollar to dollar, so I can compare; do not let them just throw overall costs at you. I also make a column for interest rates, 30 years, zero points. Then I just went with the most responsive one with the best deal. If there are two that are close to equal, I see who can do the deal the fastest and is willing to meet the best price.
The guy I have now is amazing. He stepped into a transaction that had to close in less than 3 weeks and got it done and at the best price (I assumed someone else’s contract when he couldn’t go through with it).
Have at least 20 percent down and avoid PMI. Avoid points and avoid junk fees. All of this is easy to find online to get an overview.
Get a 15 year if you can afford it.
“My advice- don’t skimp on inspections.” It gets boring and seems like wasting money sometimes but between the asbestos, buried oil tank, and a gorgeous renovated house with an extremely questionable foundation that my D ran into, it’s worth it to avoid a potential money pit.
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As they are evaluating what they can/want to pay, tell them to keep in mind that property taxes and insurance will increase over time. They need to be sure that they will be able to endure the increases. Don’t stretch to buy a home. Under buy if possible.
They should save beyond the down payment before buying a house, so that they money for the immediate repair surprises and for basic furnishings. People forget blinds for privacy and refrigerator/washer/dryer. A fixer needing paint can be a great first home.
Tell them to Google “down payment assistance programs” or call the city/county where they are interest in living. It is early in the year and there may be bond money if they choose to live in the right area.
I’m torn. We’ve always purchased under what we could supposedly afford, and enjoyed the sweat equity (and pride) in upgrading. It has both positive and negative results. We never felt too stretched, but our investment never grew as high either. All homes in our area have increased in value, and at approximately the same percentages. The more expensive homes are now worth A LOT more. Ours is only worth marginally more – just by the math.
I also advise to consider any purchase a longer term investment, that can grow and change with you. Unless you are gifted at real estate investing (or lucky), continually trading up over time is still an expensive proposition, when factoring in realtor costs, inspections, finance fees, moving,etc. You may feel you can be fine in a vertical townhouse for now, but a first floor bedroom/bath can be a guest room, office, media room, or serve well if you break a leg, or want to host someone with a handicap. I knew a young millennial who needed leg surgery from an accident, and had a lot of difficulty for about 2 months in their home.
For a young couple that plans to stay in the same area, it sometimes makes sense to buy a house that could be at the top of their comfort price point range but will not bring any regrets later. If their incomes are expected to go up, they will be better off with a house that can last them 20 years or more. We quickly realized that our first house was not exactly what we wanted and traded up, moved about 10 miles, but that round trip cost us some RE commissions $$ and excise taxes. We did not even consider homes in a more expensive area so bought conservatively. Stayed in the second home for 18 years and really wished we “overbought” back then.
Our son, also a teacher, bought his first house 2 years ago, in a town 10 miles from us and an easy commute to his schools.
He bought what he could afford in our HCOL region and is very happy with his 2 BR, 1.5 bath home.
He was able to make a 10% down payment and still avoid PMI through a special first time buyer loan offered to teachers and police/firemen. Low interest rate too.
Maybe the Ohio Heroes loan offers something similar?
Back in the Stone Age, when we were buying our first house, we went with 80-10 loans, meaning we put 10% down, got a first mortgage at 7% (pretty decent rate back then!) in the amount of 80% of the purchase price and a second loan at about 8.5% in the amount of 10% of the purchase price. That way, the lender did not require the evil PMI, and we could pay off the higher percentage second loan any time without a penalty to be left with just one loan. I wonder if something like this program is still being offered.
Depending on jobs stability, savings habits and income compared to prices in their area, they may be able to get a house they would mind staying in, rather than a starter house.
DH and I rented a townhome and saved money during an economic down turn. We found our one and only house. It was well priced and had enough bedrooms for future children. We had savings, a down payment to get the payment where we wanted it and liked the neighborhood. By staying put, we have a paid off house we like and good neighbors we have know for more than 20 years.
Also known as piggyback mortgages, 80/10 and 75/15 (for condos) loans were popular before the housing crash, fell out of vogue, but are becoming more common again. I think it’s a great approach to avoiding PMI.
My best advice: Do what lets you sleep at night.
Don’t get in over your head.
Consider taxes, maintenance. Some places have taxes that make even the cheapest homes expensive. One area my D looked–on a 175K house the taxes were over 10K a year. Townhouses are notorious for rising maintenance fees.
Do a 15 rather than 30 year mortgage.
It’s okay to rent. Being able to move easily or test out a location is smart, not a waste of money. Not being able to sell your house later can be a money trap.
Consider school districts. It’s a great market.
Make a budget. A REAL one that includes the needed renovations to make you happy --the ones you CAN’T live without–you can live without granite counter tops. If you can’t, you should’ve married better…
Include new appliances if needed. Furniture. Painting. Flooring. It adds up quick. If you can say, I can live with this right now until I got the money to change it then fine.
Consider Home Owner Assoc fees if applicable.
Do the home inspections Ugh.
. I mentioned D’s inspections earlier. To have the buried oil tank removed was a cool 10K to the seller (who woulda thunk?) but then the asbestos showed up too so that was a no go., (The seller really couldn’t have sold without getting rid of the oil tank BTW)
The asbestos was prevalent in many homes and maybe not a problem but might have been on a re-sale market.
The foundation problem was a cement block in the basement holding up a support beam (I still shudder).
Have savings upfront to decrease payments (like that PMI). If you can’t buy now comfortably then wait and save. Look at location carefully.
When you do find something you love–after all your research–jump on it.
Each state is different when it comes to closing costs. As an example, in NYC we have flip tax to pay and sometimes we have pay to the board for selling/buying. Your son should get an estimate from a bank on PMI, escrow, and various closing costs.
I am not in the camp of getting 15 yr mortgage or even fixed. This is going to be their cheapest source of fund. They should try to have as low of mortgage payments as possible, use the extra cash (if any) to pay down their loans or invest. Their house is going to worth the same when they want to sell whether they have paid down 30% or 10%.
To be pre-approved for a loan would give your kid a leg up when making an offer. In NYC seller won’t even want to see you if you are not pre-approved.
I would buy a place where they could stay for 5+ years, that may mean buying a bigger home at the top of their price range.
My philosophy is to buy way less house than you need. You can live in less space. Less space means less stuff to buy, less space to heat, less taxes to pay, more freedom to travel, less pressure to stick with a job you can’t stand just so you can pay that high payment!
We also did an 80/10/10 mortgage to avoid PMI. Paid off the 10% in a couple years. We really liked our low payment while we were paying college costs, and the financial freedom that offers has helped us through big medical bills and my resulting intermittent employment. It also enables us to make good use of DH’s FF miles. OTOH, we have not had the higher ceiling of appreciation because there is a pretty firm limit on what people will pay for a 50 yo starter house, even in the DC area. Makes over-improving for the neighborhood an issue. However, we bought the house when the guys were 6 and 7 years old, with the intention of staying in it long term, so we had a good idea of how much house we needed. If you plan to be in the house for a while, make sure it will accommodate any future plans, whether it’s setting up a home office, getting large dogs or having children.