It’s been a challenging few years for homebuyers. Home prices have soared. Housing supply has plunged. And 2021’s historically low mortgage interest rates have more than doubled over the past two years.
Yet there are some positive trends lately. Prices are still rising, but more slowly. Housing inventory is gradually increasing. And while mortgage rates remain high, they have begun to tick downward.
Educators who have been sitting on the sidelines waiting for the housing market to improve may decide it’s time to start exploring a home purchase. Learning about your mortgage options and getting your finances in order can allow you to act quickly once you’ve found your dream home.
Here’s how to get started:
Home-Buying Programs for Educators
It’s no secret that buying a house on a teacher’s salary can be difficult, particularly in high-demand markets.
Fortunately, there’s a variety of home-buying assistance programs geared toward educators, particularly first-time home buyers.
Among the programs:
Good Neighbor Next Door:
This U.S. Housing and Urban Development (HUD) program knocks 50% off the price of homes that the government agency has acquired through foreclosures. These homes are in revitalization areas that need economic and community development. The program is open to full-time preschool through 12th-grade teachers working in revitalization areas. Buyers must live in the home for at least three years.
Teacher Next Door:
This private, one-stop-shopping program takes teachers and other school employees through the home-buying process, from finding grants or loans for closing costs and down payments to connecting educators with real estate agents and lenders.
State and local home buyer assistance:
Many state and local housing agencies have programs that provide grants or low-cost loans to help with closing costs and down payments, potentially saving buyers thousands of dollars. Some down-payment loans are even forgiven if you remain in the house for a certain number of years. While some programs are geared toward educators, most target first-time homebuyers, often defined as people who have not owned a house in the past three years.
To learn more details about these and other programs for teachers, read What to Know About Teacher Home Buying Programs.
Navigating the Home-Buying Process
The process often starts months before you discover your dream home. To begin:
Set a budget.
You’ll need to figure out how much you can afford to pay for a house. One popular guideline is that your monthly housing expenses, including mortgage payment, property taxes, and home insurance, should not exceed 28% of your gross monthly income. Are you carrying debt? If so, many lenders prefer that your monthly housing expenses and debt payments don’t top 36% of your monthly gross pay.
Save for a down payment.
Set up a high-yield savings account dedicated to the down payment. This makes it easier to stay focused on your goal and track your progress. Make savings automatic. For instance, you can ask your employer to direct a portion of each paycheck into the down-payment account. And look for ways to cut your expenses and transfer the savings into this account.
The standard down payment on a conventional mortgage is 20% of the purchase price, but in some cases, it can be as low as 3%. The larger the down payment, the lower your mortgage interest rate.
Note: If you put less than 20% down on a conventional loan, you’ll be required to buy private mortgage insurance (PMI), which protects the lender if you default on the loan. You can cancel your PMI insurance once you’ve built up 20% equity in the home.
Check your credit score.
This number is a big factor in determining whether you qualify for a mortgage and at what rate. A credit score, usually ranging from 300 to 850, gauges the likelihood that you’ll keep up with your payments. Most lenders require a minimum score of 620 to qualify for a mortgage.
Take steps to improve your score if it needs a boost. That includes paying bills on time and keeping your combined balance on credit cards at no more than 30% of your total available credit limit.
Even small improvements to a score can save thousands of dollars in mortgage interest. For example, consider a 30-year fixed-rate mortgage for $300,000. A score of 620 to 639 would qualify for a rate of 8.08% at the end of June 2024, according to FICO, which produces a widely used credit score. By raising your score to 640, you’d qualify for a rate of 7.53%, saving $40,825 in interest over the loan’s term. Boost your score to 660, and the rate falls to about 7.1%, and the savings climb to $72,403.
Your credit score is derived from information on your credit reports, so check them to make sure there aren’t any errors dragging down your score. Get free weekly credit reports from the three major credit reporting companies at www.AnnualCreditReport.com.
Exploring Financing Options
Most mortgages are conventional, made by private lenders and not guaranteed by the federal government.
There are also mortgages made through private lenders and guaranteed by Uncle Sam. The rules differ, but these mortgages typically require smaller down payments, offer competitive interest rates, and may be available to buyers with lower credit scores.
For example, you may qualify for a Federal Housing Administration (FHA) mortgage with a minimum score of 580 and a 3.5% down payment or a score as low as 500 with a 10% down payment. A Veterans Affairs (VA) mortgage has no down payment and is available to service members, veterans, and surviving spouses. And USDA loans backed by the U.S. Department of Agriculture have no down payment and are available to low- to moderate-income buyers who are purchasing a house in an eligible town or rural area.
Whichever mortgage you choose, it’s important to get a preapproval letter. You’ll need to submit certain documents such as tax returns, pay stubs, and bank statements and undergo a credit check. If you’re preapproved, you’ll receive a letter stating the amount of loan you’ll likely qualify for along with an estimated interest rate. The letter is usually good for 30 to 90 days.
Preapproval doesn’t guarantee a mortgage. But it tells a seller that a lender has checked your finances and you’ll likely qualify for a loan. Some sellers won’t accept an offer without a preapproval letter.
Finding the Right Home
Do some pre-shopping by visiting open houses to learn what features of a home are important to you and which neighborhoods you’d like to live in.
Enlist the help of an experienced real estate agent who is familiar with those neighborhoods and who will quickly alert you to new listings that fit your criteria. A real estate agent can walk you through the entire process, from identifying houses in your price range and negotiating with the seller to seeing you through closing. Ask family, friends, or fellow educators for the names of real estate agents they would recommend. And see Housing-Hunting Tips for Educators.
Making an Offer and Closing the Deal
Buyers have a lot of competition for houses. And while you need to make your offer as attractive as possible, you don’t want to get caught up in a bidding war and pay more than you can afford.
To make your offer stand out, look for ways to be flexible that may appeal to the seller. For instance, you can allow the seller more time to remain in the house rent-free while they arrange their move. Some buyers offer to waive a home inspection, but that can backfire if the house has hidden problems that are expensive to fix.
If you’re worried about being outbid, consider adding an escalation clause to your offer that will automatically increase your bid by a set amount if someone else outbids you. You can also set a limit on how high you’re willing to go. For example, say you offer $300,000 for a house with an escalation of $3,000 over any other bid, up to $315,000. If another buyer offers $305,000, your bid will rise to $308,000 (and so on) but will never exceed $315,000.
Or make a cash offer if you can afford it. Cash appeals to sellers because they don’t have to wait for an appraisal or your financing to come through. In today’s competitive market, cash purchases have been increasing. In 2023, 38% of houses and condos sold in the U.S. were cash deals, up from 33.5% two years earlier, according to ATTOM Data, a real estate data company.
Your real estate agent will make your offer to the seller and will serve as the go-between in negotiations. Meanwhile, the house will undergo an appraisal, a title search for any claims on the property, and typically an inspection.
The final step is the closing, when you sign the mortgage loan documents and a lot of other paperwork to complete the purchase of the house. At this point, you will have closing fees (usually 2% to 6% of the loan amount) that cover costs related to getting the mortgage, such as the appraisal, title search, and loan origination. The closing ends with you getting the keys to your new home.
Read our What to Expect When Closing on a New Home for more information.
Even in today’s sellers’ market, educators wanting to buy a home can do so with some advanced financial planning. Check out the many home-buying programs that can make purchasing a house more affordable for educators and first-time home buyers.
