Is Buying A House Right Now A Good Idea? (Plus A Step-By-Step Guide For First-Time Buyers)

Cat’s outta the bag: I’m house hunting. I’ve been renting in LA for 8 years, I love it here, and mortgage rates are so low that I figured I’d just look and see what’s out there. (Also, I became very obsessed with the @cheapoldhomes Instagram, which has fed into my frenzy and my lifelong dream of renovating something to live in. Those people are doing the lord’s work.) But AHHH. Y’all, being a first-time homebuyer is confusing. Even being a person considering buying a home for the first time is confusing. There’s a whole new vocabulary to pick up, ducks to get in a row, and a lot of my googling was fruitless (you know, seeing as we’re living in an unprecedented time and the real estate rules have changed a little bit from when most advice was written). 

Basically, I spent the last couple of months totally lost. Can I even afford a house? Is now a good time to buy? Where is the checklist for beginners?! How many questions can I text my mom before she blocks my number?! I needed a one-stop internet post that clarified all the terms and timelines — a step-by-step guide for buying real estate, explained by a normal person who didn’t have a vested interest in selling me a property or mortgage or moving service. I couldn’t find one (or, at least, I couldn’t find a centralized one that didn’t end with me opening an exponential number of tabs and overheating my laptop), so I decided to harangue my loan officer, Andy Green, and my Realtor, Francine Biton, with hours of questions on everything first-time buyers need to know. (If you’re like, “hey, but Caitlin, I don’t have a loan officer or agent to help me,” DON’T WORRY. I will also share how you, too, can find nice and generous people to harangue with your own questions!)

So if you’re also sitting at home wondering “hey, should I do this?” my answer is this: “uhh…maybe! It depends on your situation. But hopefully, I can help clarify!” (Sorry if you’ve come here from Google in the hopes that at least one person can validate your home search.) Before we jump in, I just can’t overstate enough that nobody knows what’s going to happen in the market moving forward and that yes, we are living in unprecedented times…but if you’re curious about exploring ownership right now, here’s a regular person’s guide to how things are currently going down in the time of COVID and how to figure out if now is the right time for you to take the plunge. 

i, too, hope i get the opportunity to fix up a place like emily’s glendale home



Step 1: Check Your Credit Score

Unless you’re planning to stroll in and buy a home in cash, you’re going to need to take out a mortgage. (If you are planning to stroll in and buy a home in cash, dang, please come write a guest post about that because I admire your financial acumen.) 

Simply put for my beginners: a mortgage is an IOU between you and a lender (AKA a bank with a lot of money). They’ll come in, buy your house on your behalf, and you’ll have the privilege of spending 15-30 years paying them back (with a little extra added on top every month, because hey, they did loan you a ton of money). 

So, how does your lender decide that you’re someone worth trusting? How do they know that you’re not the kind of person who will just borrow a bunch of money and never pay them back? They’ll look at your whole background, like your work history and your bank statements, but they’ll take special note of your credit score. You can check your score with sites like Credit Karma, Nerd Wallet, or Mint, but your bank or credit card provider may also be able to tell you. (I can find my FICO score in my Bank of America app, my Citi App, and my Amex app.) 

If your score is high — usually anywhere above a 720 is a great place to be — your lender will say, “oh, heck yeah, that person will definitely pay me back,” and you’ll be eligible for the lowest rates. That means that you’ll have to pay a little less every month (and if you’re buying something as big as a house, “a little less” every month can add up to thousands of dollars over the life of your loan). If your score is above a 620, you should still be able to secure a “conventional” mortgage, just with a higher rate (read: you’ll pay more every month). But if you have a lower credit score, around 580, don’t despair! There’s still hope for you. Now it’s time to…

Step 2: Learn Your Loans

OKAY. I know. I just dropped the term “conventional loan,” and WHAT EVEN IS THAT?! So let’s take a sec to clarify the main types of loans you can take out — get used to these words cause you’re gonna see them a lot on your search. 

Conventional Loan: This just means that the loan is issued by a financial institution and not insured by the government. (The rest of the loans below are insured by the government, which means that a bank or credit union will buy your house, but the government will provide a guarantee to your lender in case you stop paying.) Normally, folks in this category have a fairly strong credit score and they’ll put down around 10-20%, but you can go as low as 3% in some situations. If you’re paying less than 20% for your downpayment, you’ll pay a monthly fee called private mortgage insurance until you hit certain thresholds (this is all super dependent on your market and the house you buy.) In COVID times, these are hands down the most attractive types of loans. WHY? Well, next up is… FHA Loan: This type of loan can be easier for first-timers to qualify for, since they only require a credit score of 580 and a minimum downpayment of 3.5%. While this can offer you some financial flexibility and breathing room, some agents may encourage their sellers not to accept offers made with FHA loans. Basically, FHA loans have SUPER stringent safety rules. While you may be okay with redoing weak floors or fixing peeling paint, this loan’s requirements says that the seller has to make all these changes before FHA will sign off on you buying the house. Since this may be annoying for a seller who just wants to get out and move on ASAP, offers from those with conventional loans will often win out over their FHA equivalent. (Not to get too in the weeds, but even 203k renovation loans — like what Bowser got, where FHA will bundle in a loan for repairs with your mortgage — require that the home is safe…so drywall’s gotta be up, no visible wires waiting to shock ya, no peeling paint for your kid to pull off and eat, you get it.)VA Loans or USDA Loan: These are two more types of government-insured loans that let you buy a home with zero downpayment. VA loans are for eligible veterans or active-duty military personnel; USDA loans are for low-income rural or suburban buyers. Since I’m not a veteran or a rural buyer, I’m not a true expert on either — just note that these may be options for you, too! Here’s a page with more info on each. 

It’s important to know which type of loan makes sense for you early in the process for two reasons: some properties are extremely specific in what they’re willing to accept (“No FHA” is a super common phrase in listings), and having an idea of what sort of loan you’re shooting for will give you a better idea of how much of a downpayment you’ll need to pony up. That’ll come in handy when you start to…

we have to do all the responsible financial stuff first so i can live my dream of DIY tiling a kitchen like orlando’s



Step 3: Look At Your Budget

It’s time to take a look at your finances. (Bleh, I know, but also…important.) At the beginning of this process, I was under the impression that I just needed to have enough saved for a downpayment (and obviously a cushion for emergencies) but BOY, that was NOT CORRECT. Let’s jump into some of the standard questions, yeah?

“How much house can I afford?”

OK, the basic rule here is that you can — generally, with good credit — afford a home that’s about 3 – 5 times more than you make per year. If you live in a high cost of living area, like LA, you may be approved for more. (In my case, I have been given the green light by my loan officer to look at houses up to 6.25x my annual income. That’s higher than I’m willing to spend because I don’t want to feel overwhelmed by a mortgage that’s significantly more than my rent is now, but it’s nice to have that parameter.)

The other thing you’ll need to consider is your debt-to-income ratio. Basically, you’ve got to think about what recurring payments you have set up. What are your minimum credit card payments? (“Debt,” in this case, isn’t referring to the whole amount you’re paying off, just the required monthly payment.) Are you paying off student loans? Do you have a car payment or lease? Did you buy something with a service like Affirm or Afterpay with a long financing time frame? (Guilty as charged on that last one — I didn’t realize that those small monthly payments would be on my credit report, but THEY WERE.) And in this case, your income isn’t determined by your take-home pay. Lenders only care about your gross income, AKA what you make before taxes.

Plug everything into a calculator like this one. You’re going to want a debt-to-income ratio under 36%. Lenders may approve you if it’s higher — everything is on a case-by-case basis — but this is just a good number to have on hand. You can also play around with the tool to test out potential mortgage payments to see what monthly number makes sense for your budget. For a lot of lenders, 43% is a limit. I’ve heard anecdotal cases of people going up to 50%, and I’m not your financial advisor, but uhhhhhh…maybe try to avoid signing up for more debt if you can avoid it.

“Am I a viable candidate for a loan?”

When there’s not a pandemic, unemployment isn’t a deal-breaker — lenders would issue loans for those who experienced unemployment as a “typical part of their industry.” The go-to example in LA is production crews, who work on set for 8 months and experience stints of unemployment between gigs. But since there is a pandemic, lenders have gotten really nervous and they’ve tightened their belts. It’s still a case-by-case basis (like, if you’re just sitting on a pile of funds or if you’re earning interest on dividends or something, you’ll have a better shot), but it’ll be significantly more challenging to get approved.

“Where are my funds coming from?”

If your potential downpayment funds are in a normal bank account, great! If not, do you have a plan to get these funds into your account? In my case, the money I have saved for a downpayment is in a brokerage account. That’s great for returns, but less great for accessing funds quickly. I’ll have to work with a banker to figure out a plan to withdraw my money so I don’t get slammed with capital gains taxes, which I hadn’t fully considered. If you have something similar in place, it’s worth just thinking about now as your future taxes may cut into the amount you think you have saved.

There are also rules for gifted funds — how long they have to be in your account, verification from your gift-er that you don’t need to repay them, and more — but I did forget to ask my loan officer Andy about the specifics. I’M SORRY. I can report back if any of you have a generous family member who’d like to send me a gift