Buying your first home can be a daunting venture. Being prepared for every step is one of the best ways to increase your confidence and chances of finding a home you love that also fits your budget.

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Here’s the recap of today’s 15-minute episode: 

• How to start saving for your down payment with Payactiv
• The first steps you should take if you’re interested in going from being a renter to a buyer
• The basics of a FHA Loan, USDA Loan, and other financing options
• How your credit score impacts your loan and mortgage
• The importance of paying your bills on time and and lowering your credit utilization ratio
• How automated savings can set you up for success when buying your first home
• How to identify the type of home you can afford
• How to talk to a lender to ask your initial questions
• Wholistically looking at your mortgage amount and what feels good to you
• The costs to consider when buying a home
• What is house hacking and is it the right strategy for you

* The Payactiv Visa Prepaid Card is issued by Central Bank of Kansas City, Member FDIC, pursuant to a license from Visa U.S.A. Inc. Certain fees, terms, and conditions are associated with the approval, maintenance, and use of the Card. You should consult your Cardholder Agreement and the Fee Schedule at payactiv.com/card411. If you have questions regarding the Card or such fees, terms, and conditions, you can contact us toll free at 1 (877) 747-5862, 24 hours a day, 7 days a week.

Listen below or read the transcript that follows. 

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Eric Rosenberg:

Hello and welcome to the Payactiv Podcast. Here’s a friendly reminder that today’s episode is intended for education and entertainment purposes only and should not be considered financial or legal advice.

Hello, Payactiv family. Welcome back to the Payactiv Podcast. Today we’re very excited to talk to you about a very important topic to many of us, and that is how to transition from being a renter to a buyer. We have a good friend on today, Mindy Jensen. She is a real estate agent and finance expert who has in-depth knowledge on everything you need to do to make that leap to owning your first home. Remember, you can save up that down payment using the Payactiv app². If you get your direct deposit to the Payactiv Visa ® Card, you can automatically funnel a portion of your paycheck right into a dedicated savings fund to help you move into your first home as a homeowner. Without any further ado, let’s jump into this wonderful interview with Mindy. All right, ladies and gentlemen, I am so excited to be here with today’s guest who is not only a real estate expert, she is also a personal finance expert, and that is my good friend Mindy from BiggerPockets. Say hello. Welcome to the show.

Mindy Jensen:

I’m so excited to talk to you today. Thanks for having me.

Eric Rosenberg:

Thank you for being here. It’s so great to have you on the show. So, as we mentioned briefly in the intro, it’s not easy to save up to buy your first home. I remember when I bought my first home, it was a little condo in Denver and I scraped together every possible dollar I could to get the biggest down payment I could together because that would make it easier to get approved, and it would give me a lower monthly payment, which was one of my big goals. But everybody isn’t ready to start scraping that down payment together just now. So, lets kind of take a step back and Mindy, what would you say are the first steps someone should take when they’re interested in going from being a renter to a buyer?

Mindy Jensen:

The FHA Loan can be acquired with as little as 3.5% down. The conventional loan can be as low as 3% down. The USDA Loan can be 0% down and that doesn’t come with the veteran requirement. So, there are a lot of options available without having the 20% down. Of course, the caveat for the FHA and the conventional loan is if you don’t put that much money down, if you don’t put 20% down, you’ll be paying PMI or Private Mortgage Insurance. And this is a monthly payment, it can be several hundred dollars a month that you’re paying to kind of reassure the lender that you are in fact going to be making your payments.

So, that’s something to keep in mind, there’s a trade off. You don’t have to save as much upfront, but then you’re paying more with the conventional loan, until you pay off the equivalent of the 20% down. So, it allows you to get in earlier, and still work on having a great credit score. And your credit score is going to get you the best interest rate, so lower than 580, and you’re going to have a very difficult, almost impossible time finding a loan. I think the VA Loan will go lower, but again, you have to be a vet in order to qualify for the VA Loan. The best interest rates go to people with a 740 or higher credit score. And you may be thinking to yourself, well, how do I get a 740 or higher credit score?

Rule number one, pay your bills on time. That is going to be key. Your credit score is kind of a resume for how you pay your bills. If your credit score is really low, chances are good you’re not very on time with your payments. So first off, make your payments on time. Second off, don’t have a lot of outstanding debt. So, let’s say you have a credit card with a $1,000 limit. If you have a balance of a $100, you’re using 10% of your credit. If you have a balance of $900, you’re using 90% of your available credit. And while you have a $1,000 available, it’s still to lenders, it looks desperate like you’re using all the money you can possibly borrow and they don’t like that. So, try to keep your credit utilization low.

Eric Rosenberg:

That’s really great advice. Credit scores and there’s such a huge value for your whole life of having good credit. So, I like that you mentioned that’s a good starting place and that you can get started there. Even if you don’t have any savings ready to go, you can always get started on building that good credit score and good credit history.

Mindy Jensen:

Yes, and having a way to automate your savings once you have decided I am going to start saving for my first house. Having a way to automate your savings can be so helpful because especially if you’re not even seeing it to begin with.

Eric Rosenberg:

Yeah, so I’m glad you mentioned that because in the Payactiv app, if you’re a Payactiv user, you can set up an automatic savings plan. So every payday, a certain dollar amount or a certain percentage of your paycheck will go right into a dedicated savings fund. And you can call that your down payment fund. And with the Payactiv app, you can save up to $10,000 there, which for many homes, that is a great way to get started and build up that down payment so you can get to that 3% or 3.5%, or maybe even get on your way to 20% down depending on where you live and what your finances look like.

So, that is such a great strategy and I’ve been automating my finances for years and years now. I don’t want to say how many, because it’ll make me sound old, but I have always been automating a little bit of savings, a little bit of investing. So, that was actually a big part of how I put my down payment together. It’s a great tip. Let’s say somebody is fast forwarded a few months, a few years, they have that down payment underway. Maybe they have 3.5%, 5% they’re ready to apply for an FHA Loan or a VA Loan or similar. What would the first steps be then to start trying to understand what kind of home you can afford and how you’re going to get in?

Mindy Jensen:

That is a really great question and it’s kind of a chicken and egg, do I talk to my lender first? Do I find an agent first? I would suggest talking to a lender and you can even talk to a lender now. Hello Mr. Lender, this is my financial situation. What would I be able to qualify for in a mortgage? And they could look at your financial situation and say, at this time you don’t qualify, but here are steps you can take, so that you would qualify. Or at this time you would qualify for X, but if you pay off these debts or if you increase your income, or if you have more of a down payment, you could qualify for more. A lot of lenders are running your credit. It will count as a hard pull. You don’t need a hard pull if you’re not ready to buy right now, you just want to know what I could qualify for? So, the key here is a pre-qualification, or you speak to the lender and you say, point-blank “I do not want you to pull my credit.”

I went on a free credit site like Credit Karma, and they said that I have a 600 credit score. Now your credit through the lender will be different than your credit through one of the free credit scores like Credit Sesame or Credit Karma. But your credit on Credit Karma isn’t going to be 600 and it comes back through the lender at like 300. They’ll be similar. If you think that you want to buy a house, I would start with a lender, talk to them. And then I would find a real estate agent to start sending you listings. What does a house in your area look like? What does it cost? Are you trying to save up for a $300,000 house or a $100,000 house? What does $100,000 get you in your area? It could get you nothing. It could only get you a condo. It could get you a really great house depending on what part of the world you’re in. So, having an understanding of what houses in a certain price range look like in your area is really key to understanding what you can afford.

Eric Rosenberg:

And I like that you said to start with the lender and see what you could be approved for today because you might have a pleasant surprise and find out you’re already in a good position to find an affordable home in your area. But you might find on the flip side, you go talk to that real estate agent and you find the home you want is maybe I’ll just throw out a random number, $200,000 in your city. If you find it from the lender, you can get partway there, that also gives you a really clear goal. So, that can help you come back to that savings goal and your automated savings plan, and come back to your credit score and what you can do to improve it. Because those are going to be your two biggest levers that you can pull to increase how much you could borrow or increase how much home you can afford.

Mindy Jensen:

And something that I see a lot of people doing is, oh, the lender said I could afford a $250,000 mortgage, therefore I’m going to look in the $250,000 price range. That’s the most you can afford, that shouldn’t really be what you’re targeting. You don’t want to be house poor where every dime that’s coming in is going to paying your mortgage and if you lose your job, you could be losing your house too. So, look at the most you can afford and then bump it down a little bit, and also ask your lender, what is the mortgage payment for this amount? And see how that feels.

If the mortgage payment, and I haven’t run this through a mortgage calculator, so. But you’re currently paying a $1,000 a month in rent, how does that feel? Can you easily afford $2,000 a month or does that feel like way too much and give you kind of heart palpitations and Ooh, I don’t want to do that? Then don’t, look for not only the amount of the mortgage, but also what the payment is. And find a lender who is willing to talk, there are lots of lenders out there who have the time to talk and who want to help educate you, so you can make an informed decision.

Eric Rosenberg:

Yeah, that’s great advice there. So, one other area that some people I know get tripped up on. Let’s say somebody finds their mortgage payment, might even be less than their current rent, but then they move into their house and they have all of these new bills they’ve never had before. What kinds of costs do homeowners have to deal with that renters don’t typically have to pay for?

Mindy Jensen:

Ooh, so it’s been a minute since I’ve been a renter, but when you are a renter, you typically pay your rent and that’s it. You’re not paying your property taxes, you’re not paying homeowner’s insurance, although you might be paying [inaudible 00:11:49], you aren’t paying for repairs, things break. I have a rule of thumb that when you buy a house, something will break almost immediately. I guarantee it, and I don’t say this to scare you, I say this to make sure that you’re prepared. The cost of that repair is inversely proportionate to how much money you have in the bank. So, if you have saved up your down payment and that’s all the money you have in the bank, and then you give it to somebody to buy a house and now you have nothing in the bank, something’s going to break and it’s going to be very expensive. So, you should save for your down payment and a little bit more. Another way to kind of mitigate this is to have a home inspection and make sure that the property’s in good condition.

Explain to your real estate agent that you do want to buy a good house. You are not handy or you are handy. You’re not looking for a fixer upper or you are. Be very honest with your agent as to your abilities to pay for repairs and to do those repairs yourself, and make sure that you’re not buying something that has a broken foundation or a furnace that is about to die because furnaces are expensive. They’re like $8,000 to $12,000 and in some areas unit with the furnace at the same time because… This is where I know it, but I can’t really explain it. Like the air conditioner doesn’t work, the old air conditioner won’t work with the new furnace, so you have to get a new one too. So, that’s even more money. Or you’re just hot in the summer and if I don’t ever been to Alabama in the summer, but it is not pleasant without air conditioning, Eric.

Eric Rosenberg:

I have been to Alabama in the summer and I enjoyed my air conditioning when I was inside for sure.

Mindy Jensen:

Yes, so.

Eric Rosenberg:

And I like that you mentioned some of these specific things that can break in your house. It’s funny, after I moved into my house, well, it didn’t feel funny at the time we had exactly what you described. We’ve had to in the six or so years we’ve had this house, we’ve had to have our air conditioner not replaced thankfully, we’ve had to have repaired one time. We had to have our furnace repaired twice again, not replaced. But then a couple months later, of course it was on New Year’s Eve, our hot water heater blew up in our garage and there was a river of water coming out of our garage and we had to have hot water in the house. So, that was a big surprise and it was definitely not cheap. And then just last week, I came home and my fridge was broken. The food doesn’t stay cold, and if you’re a renter, that’s usually included with your rent. The landlord will get you a new refrigerator and freezer, but I don’t have a landlord, so I had to go out to the store and buy one, and they’re not cheap.

Mindy Jensen:

No, they’re not. I’ve purchased a lot of them in my day because I purposely am looking for kind of cruddy houses that aren’t so nice. I come in, I rehab them, I make them look lovely, and then I sell them to somebody who has no interest in doing that. And then I go and find another cruddy house and redo it again. And I lived there for two years. I rehab the house, and then I sell it. If you own it for two of the last five years and live in it as your primary residence for two of the last five years, you pay no gains, no taxes on the gains when you go to sell it. So, if you buy it at a $100,000, you pay, you sell it for $150,000 that’s $50,000 in capital gains. If you do it for less than two years, you could make $50,000 just free and clear if you do it right, if you live there for at least two years.

Eric Rosenberg:

I’ll say that’s a great strategy you’re sharing, some people call it house hacking or fixing and flipping as they live in the house, but I think that one might have to wait for another episode. But I do like that you pointed out that home values can increase, but they could also decrease. So, not only should you think about what you’re going to pay for the house today, you should think about the area it’s in and what the home value could be in the future. And there’s never a guarantee. Home prices in the US have traditionally gone up over time, as long as you keep it long enough. But in some areas that’s not true.

And if you remember back to 2007 and 2008, if you were old enough to be in the real estate world then, almost everyone’s house value went down for a little while. So, home values can fluctuate a lot, and that is something also to talk to your real estate agent about because they can help you understand the trajectory of your area and what you might expect down the road. So, this was really, really great advice. Thank you so much, Mindy, for taking the time to talk to us today. If somebody wants to connect with you and learn more, where should they go?

Mindy Jensen:

I am all over social media at Mindy at BP. That’s M-I-N-D-Y A-T B-P, or you can email me [email protected]. I do have one more piece of advice that I’d like to share, never fall in love with the house because there’s always going to be another one.

Eric Rosenberg:

That’s true. It’s fun to think about people staying in their homes forever, but that doesn’t always work for everybody. So, sometimes your family grows or your financial situation changes, and you’re ready to upgrade or make a change, and that’s always okay. Your personal finances are personal. They’re always going to be different. No matter whatever you do and your next door neighbor and your best friend and your coworker who does the same job, all of your money’s going to look different. All of your credit scores are going to look different. So, you have to think about your own personal situation and your own finances as you move forward. Now, thank you so much again, Mindy. I’m so glad you were able to be here with us today, and hopefully we’ll talk to you again in the future. Maybe about that house hacking you were describing where you can move in and make money from the house you live in. That’s a great way to grow your finances and grow your wealth. Thank you again so much.

Mindy Jensen:

Thank you, Eric.

Eric Rosenberg:

Wow, that was a knowledge packed, actionable interview with Mindy. She gave us so much advice on credit scores and how to save up for that down payment and what you need to do to get approved for your first home loan. And remember, if you want to save up a big down payment, download the Payactiv app and get started today. That’s P-A-Y-A-C-T-I-V in whatever app store you use to download apps to your phone. As always, if you found this helpful, please take a moment to share it with a friend, so they can learn also what to do to get moved into their first home as a homeowner. Thank you so much. We’ll talk to you next time. Bye-bye.

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