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If you want to buy a home, it’s incredibly likely you’ll need a mortgage

But the mortgage industry is notoriously complicated and full of nuance depending on your specific circumstances.

Today –– we bring in the experts.

In this episode, Tori is joined by NerdWallet’s Kate Wood to talk about all things mortgages. Kate answers some of our community’s biggest questions about the mortgage industry, helping to demystify this integral part of the home-buying process.

What you’ll learn:

• The different types of mortgages and the qualification requirements

• What you need to have in order before you start looking for a home seriously

• Pre-qualification vs. Pre-approval

Kate’s Links:

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Transcript:

Tori Dunlap:

Financial feminists, welcome back. We’re almost to the end of the year. How did that fucking even happen? I have no idea how it’s already December, but hoping you’re having a beautiful holiday season, and finally adjusting to that time change. Here in Seattle, it gets dark at 4:30 and I’m not into it, but I am into Charlie Brown Christmas, which is always what I listen to first. I listened to it actually yesterday for the first time. We’re recording this in November. And yes, I listened to it. I associate Charlie Brown Christmas more with cold weather than I do actually with the holidays because it’s some smooth jazz. We have toddlers walking to smooth jazz. And if that doesn’t do it, I don’t know. I don’t know what’s going to do it.

All right, today’s episode. Highly requested topic and even more relevant as we face an ever-changing housing market. I mean, I learned a lot in this episode. I have gone back and forth on whether home ownership is right for me, what time I’m going to own a home, if I can own a home. It’s just crazy. So we’re talking mortgages today with NerdWallet’s Kate Wood. Kate Wood joined NerdWallet in 2019 as a writer on the Homes and Mortgages team. With an educational background in sociology, Kate feels strongly about issues like housing inequality, and relishes any opportunity to demystify the home buying process. Prior to joining NerdWallet, she wrote about home remodeling, décor, and maintenance for This Old House magazine. You guys remember This Old House on PBs? It’s my dad’s Saturday morning show. Despite having learned just how difficult old houses can be, Kate purchased and is slowly renovating an 18th century home in Eastern Connecticut, and it is so fucking cute. Oh my gosh. We get into it. It’s so adorable. We spend time diving into the different kinds of mortgages and who might qualify for them, what the difference is between pre-approval and pre-qualifying for a house, and what to do about the looming recession. Kate was so great at breaking down a sometimes complex topic and we’re thrilled to have her here. So let’s go ahead and get into it.

I grew up dancing competitively. So when I was eight years old, I started wearing false eyelashes. Not on the regular obviously, but that was something for me that was borderline traumatic, was my mom having to basically hold me down and put eyelashes on me. But it did make me feel very sophisticated. So that was fun.

Kate Wood:

No. See yeah, I didn’t discover false lashes until much later in life and for me it was this revelation of, “Wait, everyone on TV doesn’t just look like that.” You can just pop these on.

Tori Dunlap:

Yeah, yeah. That is the funny thing you start realizing.

Kate Wood:

Because literally nature cannot compete with this. Mascara cannot compete with this. Yeah. It’s something that’s attached to your face. So once you know, you can attach to your face …

Tori Dunlap:

And even if you don’t do the full line of false eyelashes, or you got the little tiny ones that are individual lashes or the groups of two. So we were going back and forth on whether we were going to do that yesterday and then I was like, “Can we just not do them?” And she was like, “Actually, I think it’ll look better.” And I was like, “Great. Yes.” So I got away with not doing them. We’re so excited to have you. Can you tell us a little about yourself and what drew you to working for NerdWallet as a mortgage specialist?

Kate Wood:

Sure. I was really excited to work for NerdWallet in general, just because it’s a mission-driven company and really focused around demystifying personal finance for all people. I will readily admit that I know mortgages inside and out. But other stuff, when people here for NerdWallet and start asking you about question cards, it’s like, “Oh my gosh, I have a colleague that you can talk to who’s terrific, but not me.”

I was really interested in focusing on mortgages and home buying because my educational background is in sociology, undergrad and graduate. So I’d spent a lot of time learning about housing inequality and how housing policy in the United States is really a big driver of the wealth gap and of racial inequality. And I feel really strongly about providing information and tools that empower all kinds of people. Whether you are a first time home buyer, whether you’d be the first in your family to be a homeowner, whether you’re from a home owning family. To understand the different parts of the process and the inns and outs of both home buying and home ownership.

Tori Dunlap:

So I hear home ownership as someone who lives in a major city. And I’m like, “Cool, that’s for my parents. That is for somebody else who has enough money to easily pay for a million dollar house that’s only two bedrooms.” Is that something you hear still for people all the time? I imagine if you live anywhere in a major city, that’s probably the immediate feedback is like okay, home ownership. Cool pipe dream, not even for me.

Kate Wood:

I mean that’s definitely the case, but being a homeowner is different from owning a house. In a lot of places, particularly major metro areas. Yes, owning a detached single family home, forget that it’s absurdly expensive. It’s literally not even an option. That’s not what the housing stock is like. But if you’ve bought a condo, you’re still a homeowner. If you’ve bought a townhouse, you’re still a homeowner. Just because you share walls with people, that doesn’t make you less of a homeowner.

That said, housing affordability, particularly in major cities, it’s really difficult. It’s a tremendous hurdle for a lot of people. And so if the idea of owning rather than renting is something that really strongly appeals to you, that’s kind of one of those things that you’re going to have to weigh. How important is it to me that I’m tied to the city, that I remain in this city, versus moving somewhere else. If geography is really the thing that’s holding you back.

Tori Dunlap:

Yeah. So let’s talk about if you are interested in being a homeowner, what your mortgage options are. So can you break down different types of mortgages a listener may get, and then a brief summation of what they are and why someone would maybe choose one over the other?

Kate Wood:

Sure. There are a lot of different mortgage types, but TLDR, almost everyone gets a conventional loan. Conventional 30 year mortgage is by far the most common home loan type in the United States. It’s something like 97% of the purchase loan market. So conventional loans are really common. They’re of hard to explain because they’re just like, it’s the boring regular one. You can say what it’s not, but it’s hard to say kind of what it is. These are loans that mortgage lenders make. They’re packaged in resold to Fannie Mae and Freddie Mac, who set standards around lending. And so t
hey can have potentially stricter qualifications because of that need to be resold to these government sponsored enterprises. But if you do qualify, down payment amounts are as low as 3%, and they tend to have attractive interest rates. And so there are a lot of reasons why conventional loans are the most popular in addition to just they’re sort of default. If a lender offers mortgages, they definitely offer conventional loans. That’s kind of how it is.

There are a bunch of different options of government backed loans though that depending on your priorities and your background and where you’re looking to buy might work for you. FHA loans are backed by the Federal Housing Administration. So because they have that assurance of this government agency backing them up, the lending standards can be potentially a little bit more lenient. It’s not always the case since. Even though HUD sets the guidelines, individual mortgage lenders get to say, “We’ll lend to you or not.” But in theory, you can qualify for an FHA loan with a lower credit score. And depending on your credit score you can potentially make a down payment as low as 3.5%.

VA loans are backed by the Department of Veterans Affairs. So these loans have excellent terms. There’s no down payment required, there’s no mortgage insurance required. But they are not open to everybody. You need to be a current or former service member or a spouse. So if you have a military affiliation, these could be a really good option. But if you don’t, no one’s probably going to enlist just to get a VA loan. There are other choices out there.

Another one that’s pretty uncommon, but I think mostly because a lot of people don’t know about it and they can be a little bit harder to find, not a ton of lenders offer them. The USDA, the US Department of Agriculture also does home loans. So they insure some home loans, and then they actually give some home loans that are made directly by them. And they generally have geographic requirements that it needs to be in a rural area. But if you use the zip code lookup on their site, you might be surprised what qualifies as a rural area. You can be pretty suburban or exburban and it’ll be like, “Yeah, it’s a rural area. That counts.” They can also have income restrictions depending on the type of loan that you’re looking for.

And then I would say the other of biggest type to know about just that are out there are jumbo loans. They’re pretty much what they sound like. So Fannie Mae and Freddie Mac set limits on conventional loan sizes. If for whatever reason you need a larger loan than that either because you are just purchasing a really expensive property or you are in a place where purchasing a really expensive property is your option regardless of its size, you might need a loan that is bigger than their underwriting standards. And so then you need to look for a lender who will do a jumbo loan. There’s stricter lending standards for that just because it’s a lot of money to deal with. And they usually ask for a bigger down payment. It varies. There’s not a rule, but it’s generally more like a 10% down payment.

Tori Dunlap:

Okay. So can we break down even further for a listener who’s like, “I’ve heard what a conventional loan means.” But when we say a conventional loan, you and I know 30 years, but can we break down what that means? So if you buy a house today, what does that process look like with a conventional loan?

Kate Wood:

So one thing to know, so 30 year convention loan is the most common. But it doesn’t have to be a 30 year loan to be a conventional loan. 30 year is the most common term just because it’s generally a loan for a very large amount of money. You’re buying a house. And so splitting it out over the longest possible period of time, right now in the United States, 30 years is the longest term you can get and that’s what most people go for. But you can, depending on the lender and depending on what you need, you’ll see 20, or you’ll see 15 year, you’ll even see 10 year.

Tori Dunlap:

My parents did 15 on their house. I remember them telling me that because they tried to pay it off sooner. They either I think started with a 30 and then refinanced I think to 15 or they started right off the bat at 15 and were just like, “You know what, we’re going to try to pay this off as soon as we can.”

Kate Wood:

Yeah. I mean depending on your priorities, particularly also if you’re older and you’re looking toward retirement, you might really be prioritizing not having a mortgage once you’re retired, which I totally get that. That makes sense. So there are different reasons that you might want to do different things in terms of choosing your loan’s term. But in general, 30 year conventional is by far the most common.

In terms of steps to getting a mortgage, so for me, the first thing would be really backtracking to you’ve decided that you want to become a homeowner. You’ve decided that that’s in your future, that’s part of your plan. And it’s not necessarily right now. It’s in a year or two, or even five. That’s a really good place to get started. Because before you are taking it to that level of, “I’m looking at houses, and I’m talking to lenders, and this and that.”

You want to make sure that your financial house is in order, your metaphorical financial house. So if you’ve got anything going on, your credit reports, if there’s something incorrect in your credit reports that you need to fix, if there’s something that you can improve, do it. Go ahead and do it. If you’ve got debts that you can pay down, go for it if that’s possible. Try not to take on new debt. If you finish paying off your car, just keep driving it maybe instead of getting a new one. Try to avoid opening new lines of credit. Really just get yourself in shape where then when you’re actually going to a lender, you are a really well qualified candidate. And you’re someone where they’re like, “I want to lend her money.” So that’s sort of your ideal scenario. Because when you are ready to start looking at homes, your first step… I’m sorry, because I know looking at homes is really fun. Not even in person, just recreational online home browsing.

Tori Dunlap:

That’s been my hobby/activity during quarantine for the past two years is my best friend and I have sent Zillow listings back and forth to each other. And especially for the $10 million houses we cannot afford, it’s just very exciting.

Kate Wood:

Oh yeah, no. It’s fun to creep on people’s houses. So I am sorry that this is not the next step. The next step when you are really serious and you’re actually going to buy a home, is to start talking to lenders and look into mortgage preapproval. And that hasn’t always been the case. Once upon a time, yes you would go and look at a house and be like, “I like this. Now I’m going to figure out the money.” These days, all the money stuff really needs to be kind of sorted and settled before you even start looking. A lot of times real estate agents won’t take you to a few houses if you don’t have a preapproval in hand. Sometimes sellers and sellers agents will ask for that as well if you’re a financed buyer as opposed to a cash buyer. They want to see proof that you could be able to buy their home.

Tori Dunlap:

Well that’s happening so quickly now too. That’s the other thing, because I’ve started to tiptoe into talking to a realtor. And he’s sending me listings and I haven’t done any of the paperwork yet because I’m not super serious yet. But in that conversation he’s like, because I live in Seattle. “You need to have your stuff together. Because if you like a house, you have to make an offer on it the moment you like it, and then you’ll have to fight six other people for it. But that’s the idea. So if you don’t have all your paperwork together and you’re spending at least another I guess week or so week, in the best case scenario, getting all of that together, you’ve lost the house easily.”

Kate Wood:

Yeah. You want to have that preapproval in hand ready to go to say, “Yes. Hello home seller, I am making you this offer and I am good for it. Should you accept my offer, this sale would close. I am qualified to borrow at least this much money.” And you can get a preapproval from more than one lender. It often makes sense to get pre-approvals from more than one lender because you’re not seeing the interest rate that you will be offered or that you will get when you actually apply. But you’ll have an idea kind of relative to one another, what the interest rates might be. And also, different lenders might qualify you to borrow different amounts with that preapproval. So some of them might be like, “You look a little risky to me. Here’s what you can borrow.” And another one might be like, “Oh no, I understand what’s going on with you. Here. Here’s this. You can borrow more.” So it’s worthwhile to do that.

And also another thing that’s important to know with preapproval is that you are giving the lender not free rein to kind of go through your stuff. But you are giving them some permission to look through your finances and actually verify the things that you’re telling them. So this is different than if you see mortgage prequalification where it’s like pre-qualifying in minutes. Yes, you can pre-qualify in minutes because you’re just typing in some numbers and then they’re spitting a number back at you, but you could have put in whatever numbers you want. No one’s checking. So pre-qualification is really meaningful.

With a pre-approval, you’re actually showing proof of income. They’ve got your social security number. They’re going to do a hard credit poll, and so that is going to ding your credit score. But if you do all of them within 14 to on the outside 45 days, but really once you’re on a roll with doing it’s like, “Bing, bang, boom.” Just keep doing preapproval applications. The credit bureaus can tell that you’re shopping, and so they’ll just count it as one inquiry instead of five inquiries. So clump it together, and that’s helpful for you.

Tori Dunlap:

So you were mentioning, and I think the average person knows, that 20% down payment, that’s what the goal is, right? A 20% down payment. But when we were doing research, the average down payment for new buyers is only 6% or 16% if you’re a repeat buyer. So let’s talk about private mortgage insurance PMI, because it sounds like for the average person, they’re going to have to take on PMI because they don’t have that 20% down payment. So what are our options if we can’t get to that 20%?

Kate Wood:

So the whole you need a 20% down payment, that is a myth. There is no loan type that actually requires you to have a 20% down payment. That 20% figure comes from again, conventional loans being the most common. And that if you put down less than 20% on a conventional loan, then you have to pay private mortgage insurance or PMI. And that’s basically you paying a little extra to the lender to reassure them that they aren’t taking a big risk by lending you that large of a percentage of the home’s value. Because that’s what they’re really concerned about. What percentage of the house do you own? What percentage of the house do they own? When you own 20%, they’re like, “Okay, we feel good about this. We trust you. You’re going to pay us back.” But even if it’s at 19%, “Now you’re going to pay private mortgage insurance.”

So for a lot of people, this is something to consider. When you’re thinking about your home buying budget and all the different things that go into it, you may need to factor in private mortgage insurance. Private mortgage insurance again though is only on conventional loans. And so if you’re using one of the other loan types of different VA and USDA loans actually don’t have any type of mortgage insurance, but they do have upfront fees that can be fairly significant.

FHA loans, that’s kind of the real downside. Confusingly, they have MIP as opposed to PMI. So they have mortgage insurance premiums. But with an FHA loan, you have to pay an upfront mortgage insurance premium at closing. And then if you put down less than 10%, you have to pay FHA mortgage insurance premiums for the life of the loan. So until you sell, refinance, or actually finish out the 30 years, you are paying that forever. The only way out is to refinance into a different loan type. If you put down 10% or more, your mortgage insurance premiums are canceled after 11 years, which is less than 30, but still a pretty long time. Whereas with a conventional loan, you’re only paying PMI until you get to that point of 20% equity. And now your lender has to automatically cancel it when you hit 22%. So it’s worth keeping an eye on. Because when you hit 20%, you can ask them to get rid of it. You don’t have to wait for them to be like, “We see you’ve reached that point.”

And if you’re in an area where home values are going up really quickly and so you’ve actually got more equity than you might have thought, you’ve got more equity than the amount you would seem to have just based on your down payment, you can potentially use that and leverage that to get your PMI canceled sooner. But you might have to pay for an appraisal to show that this is the actual value of this home. You can’t just be like, “Well I saw in an app it looks like my home’s value has increased.” Yeah. So you might have to pay. I mean it’s a few hundred bucks to get an appraisal done, but particularly in the last couple years in a lot of markets where we were seeing just-

Tori Dunlap:

If I bought a house in Seattle four years ago or five years ago, suddenly it’s worth a lot more.

Kate Wood:

It’s worth a ton of money. So that new value, even though you didn’t put money toward it, you own it. You own that value above and beyond what was lent to you. So you might have a ton of equity and then you don’t need private mortgage insurance.

Tori Dunlap:

So beyond doing home repairs that you want to do and any upkeep of the house after it’s yours, when you originally buy, can we just do a quick laundry list of all of the potential things you’re going to have to manage financially? So I’m thinking a mortgage, potential PMI property taxes. Are there in addition to that? Because I think a lot of times we’ve talked a lot on this podcast… because I don’t own a home. I probably could financially, but I choose not to for many different reasons. And one of them is a lot of people are like, “But owning a home is less expensive than renti
ng.” And sometimes not because you have all of these things as a homeowner that you don’t have to deal with if you’re a renter. So yeah, your mortgage, potential private mortgage insurance if you can’t make that 20% down payment, property taxes. What are some of the other ones?

Kate Wood:

So your actual mortgage payment is just your principal and interest. So that’s only part of it. When you’re looking at your budget of you as a renter, as a non homeowner and thinking, “Okay, what can I afford?” Your principal and interest and rent are not going to be strictly equivalent numbers because there are-

Tori Dunlap:

Right. So if I’m paying $1,500 in rent, I’m trying to find a mortgage that’s $1,500, it’s not equivalent.

Kate Wood:

It’s not the same thing. You probably are going to want to be aiming for a principal and interest amount that’s under that, because also going into your mortgage payment will be property taxes. Which depending on where you live in the country can be really big. I mean it can also be really minimal, but that’s something that’s really important to research. If you’re looking at a specific town, if you’re looking at a specific neighborhood, zip code, whatever. Looking at what are the property taxes for homes of a comparable size to what you’re looking for or a comparable lot size to what you’re looking for. Because that can really take up a big chunk if you’re not careful or if you’re not ready for it. Homeowner’s insurance, which usually isn’t a wild amount of money, but it’s still something that you’re going to want to have. And if you opt to have other forms of insurance, like if you opt to have umbrella insurance where it’s covering your home and some other stuff as well, that will be part of that payment.

And then also, if you are part of a homeowner’s association, that can sometimes be part of your mortgage payment. And homeowner’s associations are everywhere. This is not just a, “I live in a co-op kind of thing.” You can be in a neighborhood of single family homes and it’s like that developer was like, “It’s a homeowners association.” And now you’re paying a fee. So knowing what that is and what you’re going to pay for.

So those are all the things that go into your mortgage payment. The other things that I do think are really important to think about when you’re comparing your current budget to your home ownership budget are… so say you’re moving from an apartment, to a house, to a detached single family home. Some of your bills will be totally the same. Right? Getting wifi to a studio apartment and getting wifi to a house, that’s the same bill. No big deal, right? Heating and cooling a house versus heating and cooling a studio apartment, that’s probably going to be a pretty big difference.

Also, as a renter, there might be stuff that was included in your rent. Whether it’s utilities or services, trash and recycling pickup, something like that. So that might be new bills that you would be adding on as a homeowner. And that’s something to kind of think through as well. Because you want to have your budget be ready for your life as a homeowner. You definitely don’t want to be in the position where you’ve bought a house, you’ve gone through all this stuff, it’s amazing, you’ve made it through. And now oh my gosh, you are putting a bunch of money toward this house, and you’re strapped and having trouble doing the other things that you need to do. Forget even things that you enjoy to do. And then if something happens-

Tori Dunlap:

Or the basement floods.

Kate Wood:

You’re the person who has to deal with it. That might be the one time where you’re like, “Actually an HOA would be really handy.” Because if you’re in an HOA, there’s a higher chance that there’s someone else you can call and make it their problem instead of yours.

Tori Dunlap:

Yeah, that’s one of the biggest reasons I haven’t purchased a house is because I travel a lot. I am at the point, I’m a single woman. I’m not very handy. I have a lot of other strengths, but being handy dandy around the house is not one of them. And it’s really nice. My downstairs toilet overflowed two months ago and I got to call my landlord, and he paid the $800 for the plumber to come fix it. So that was very nice. At this point in my life, that makes a lot more sense.

Kate Wood:

As a homeowner, I very much envy that. I think that’s something that I did not put enough value on, that peace of mind value when I was renting and when I was in other types of living situations where it’s like that was really nice, just not having to be the person who does all of the things.

Tori Dunlap:

Totally. So actually from our research, we know that you bought a house, which congratulations.

Kate Wood:

Thank you.

Tori Dunlap:

We’re seeing studies that are showing that single women home buyers are on the rise, when most advice still is given to couples or families on home buying. So is there anything that someone, specifically a woman might do differently as a single potential home buyer over purchasing with a partner? I think immediately offhand, you probably have dual income versus one income. And that’s tricky already. So what are some things if you’re a single woman especially, you’re going to have to navigate that maybe you and a partner wouldn’t?

Kate Wood:

I mean, income is really the biggest hurdle, right? Because you are a single earner household because you are the single earner. And so that can be difficult. You don’t necessarily have the purchasing power of a multi-income household.

That said, it’s worth looking into whether you would qualify for any kind of income based first time home buyer assistance program, or honestly, even not income based. Every state has a housing finance authority. Some cities and counties have them as well. So if you are on your own, this is your first time doing this, you can look into down payment assistance programs that they have. And those are often in the form of a low interest loan, or sometimes even just an outright grant. So just here is free money to help you buy a house, which is very, very nice. And those can be really, really helpful. And I feel like not enough people know about them and are aware of them.

Something else that’s worth noting about state programs is that a lot of times they define first time home buyer as someone who hasn’t had an ownership stake in a home in three or more years. So if you are someone who your situation has changed, maybe you used to own a house with a spouse or partner you don’t now, you could still potentially qualify as a first timer and take advantage of those benefits. So that’s something that I think is really worth looking into.

One thing that I will say I feel like is actually an adva
ntage of being a single woman buying a home is that if there’s anything going on financially, you can just fix it. It’s you. I mean, it might not be fun. But you don’t have to motivate someone else to deal with their debt. You just have to motivate yourself. You cab check your own credit reports.

And currently, you can get a free report from all three bureaus once a week. That is still going. It keeps being extended and it’s kind of just been extended ad infinitum as far as I can tell. And those are annoying. They’re kind of a pain to set up the first time. But once you’ve gone through it, you get that credit report. It’s like, “Okay, here’s what I need to do. Here are some things I need to fix.” When I did it, that was something I did pretty early when I had decided I was going to buy a home. And I couldn’t believe what the credit bureaus knew about me and also how different they were between the three, that there was significant differences in each of the reports. But being able to just be like, “Okay, here’s this and I’m going to deal with it.” Instead of being like, “Did you fix that thing yet? Did you call that thing yet? Did you get that built out yet?” You just do it.

Tori Dunlap:

I talk all the time that you can either view money, especially if you’re managing it as a single woman as, “Oh fuck it’s all me. Oh my God, it’s all me and I can’t handle this. And what if I fuck up? What if I screw up? What if something happens?” Versus, “It’s all me. Wow. I am in complete control of my decisions. I don’t have to counsel anybody. I can spend money the way”… for me, it’s going to an art museum. When I go to an art museum with somebody else, I am so conscious of like, “Okay, do they want to stand and look at this exhibit? Are they bored? Do they want to go somewhere else? Okay, I want to stand and look at this painting for 15 minutes, but I don’t want to hold them up.”

Versus when I go to an art museum by myself, I’m like, “I’m not interested in this exhibit. Hard pass. I’m just going to skip it.” Versus if there’s a Jackson Pollock, I’m going to stand there for 25 minutes, fully 25 minutes, and stand there, and look, and I don’t have to apologize for it. And so that’s how I feel with buying a house as a single person or just managing your money of just, “I get to call all the shots.” And it’s sometimes a little terrifying. That’s why you hopefully listen to this podcast and go to NerdWallet. But it’s such a freeing option as well because you’re in complete control of all of that.

Kate Wood:

And I mean that’s sort of the other side of that. Going off of the museum example, that can be why for some people, going through underwriting. So once you’ve made an offer on a house, had it accepted, you’ve applied for a mortgage, you’re conditionally approved, but you’re waiting for that final approval. So you’re in closing. And that can be a very long time. 30 days is short in terms of closing. It can go longer.

But while you’re in underwriting, people at your lender are going through all of the money that came in, all of the money that came out. And it can easily feel like they’re judging you. They’re judging how you chose to live, or how you chose to spend your money, or make your money. And that can be really uncomfortable. And it’s sort something too when they’re asking you for things and you’re like, “Why would you want this?” Or, “I know I sent this to you already. What’s going on?” You just have to take a deep breath and just be like, “You know what? This is terrible, and it’s so much paperwork, and it sucks, but I just have to get through it.” I just have to do this and try to not take it personally.

Because really, they’re just doing CYA work. They do not want your mortgage to be the thing that comes back to haunt them. And you don’t want that either. No one’s out there looking to default on their loan. It’s nothing personal, but it can feel really invasive, and it’s not always something that people are expecting.

Tori Dunlap:

Right. And to your point, it’s potentially you feel like you’re being judged. You’re having to put all of this personal information probably to a total stranger. And hopefully their job is to make sure that your metaphorical house is in order so you can purchase this home. So I think even just the mindset shift of, “Okay, hopefully this person’s on my side,” and they’re doing all of these things and asking all of these questions. So actually, I can enter into this purchase, which is probably the biggest, if not one of the biggest of my life, knowing that I’m good. That should actually give you some peace of mind of this person who doesn’t know anything about me has looked at my hard numbers and has said that I’m good. Okay, amazing.

Kate Wood:

Yeah, right. But I mean in the moment when they’re like, “This $10 check, where did it come from?” And you’re like, “My aunt. She is 90.” But that you actually have to show it. You absolutely have to show it. Anything that comes in that is not your paycheck. They’re like, “What is this? Where is this money from?” And it’s like, “I used to have an Etsy store and I kind of forgot, but then it made a sale. Now I’ve got this $5 or whatever.” Because they’ll just find stuff and you’re like oh my gosh you really want to see. But you’re showing them you did not get this money through a criminal or illicit means. It was literally a birthday check.

Tori Dunlap:

Which let’s talk about income, because I am a self-employed person. I think a lot of people who listen to our podcast are self-employed or 1099s. I think generally, mortgage lenders have seen W2 income as quote unquote “more reliable.” But if I want to buy a house, what are the sort of hoops you have to jump through as a self-employed person? Is there a different kind of preparation? What options do we have as self-employed people?

Kate Wood:

So it’s not incredibly different if you’re working with 1099 income versus W2’s. It’s not like, “There’s a different type of mortgage for you or there’s something else you need to go for.” The exception would be if you were someone who’s really just starting out, you’re 19, 20 and so you don’t have a long credit history. Or if maybe you just came to the US and so you have a really thin credit file. That would kind of be the exception. And that’s really a different situation than just, “I’m self-employed rather than employed by someone else.”

Generally if you are looking to buy a home as a self-employed borrower, you want to have been steadily for at least two years. Lenders can put different minimums on that. Usually the bare minimum is 12 consecutive months, but having two years of solid reliable income is better.

But more broadly, I’m just making jokes about birthday checks and stuff like that. If you are self-employed you want to document everything. Every single aspect of your business, all your business expenses. Because that can affect every part of your application. So to whatever extent that you can keep your business expenses separate, that can be helpful because it makes underwriting easier that they can see okay, this is you doing something versus this is the business doing something. So maybe having a credit card that you only use for business expenses and all the business expense
s are the ones from that card. That can be helpful. Because then the lender’s not like, “What’s this versus what’s that?”

Tori Dunlap:

You’re spending $30,000 a month. I’m like, “No, the business is.”

Kate Wood:

Right. Yeah, no, the business is spending it, right? But I mean they’re looking at things like your credit utilization, and so you want to be really clear about that.

And so it’s really being assiduous about having not just your 1099s, but paperwork for everything, whether it’s profit and loss statements, your business license, business insurance. They might want if you have a CPA or anyone who helps you manage your business finances, they might want something as simple as a letter from them, which you then have to go get. But basically if you have documentation of it, say that you are probably going to need to share it with your lender.

Tori Dunlap:

I’ve heard about the three year rule. Is that a myth that you have to have been self-employed for three years in order to qualify for a mortgage?

Kate Wood:

So usually two, having two continuous profitable is helpful. Where it gets trickier is if they start asking you to try to predict the future. So if they start being like, “Well you’ve had solid employment these past two years, but is there going to continue to be a market for this?”

Tori Dunlap:

I hope so.

Kate Wood:

Right? Yeah, you obviously hope so. But that can get extremely subjective. And in that kind of case, that might be why… So if you are self-employed, look for lenders who specialize in helping self-employed borrowers. Once who actually go to the trouble to advertise that fact.

Or if you’re looking… depending on the lender, sometimes you just get thrown onto whoever. But sometimes you can choose your loan officers. Loan officers will often specify if they have any kind of expertise or experience working with self-employed borrowers. So being on the lookout for that, because that means that it can potentially go faster, not just because they’ve seen this stuff before. But also because they can look at what you have and alert you to, “Oh you know what. If you want to get approved, you should probably get this thing too.” And that can be really helpful.

Tori Dunlap:

Okay. The elephant in the room, which is a looming recession. And the question we get all the time, which is, “Is now a good time to buy a house.” And we get that when things are great, and we get that when things are terrible. So interest rates are on the rise. We want this episode to be as evergreen as possible. So regardless of when you’re tuning in, but is there ever a quote unquote “bad” time to buy a house or a good time to buy a house? And is there a housing crash coming? Because that’s the question we get all the time.

Kate Wood:

Sure. So it’s kind of a multi-part question.

Tori Dunlap:

I asked you about six questions in that one question, but it’s-

Kate Wood:

It’s okay. It’s okay. This is stuff that I spend a lot of time talking about in my job and also if I go to a bar and that’s someone finds out this is what I do for a living. And I’m like, “I don’t know. I’m not an investing nerd.” But I’m also not a financial advisor. So this is not financial advice. But if you want to ask me, “Do you think there’s going to be a housing crash? Why or why not? Yeah, I can give you an answer. Ready? Sit down. It’s going to take a minute. It’s not going to be a quick chit chat.”

I mean, I think your point that people ask you this when the housing market is really quote unquote “good” and when it is bad already kind of gives you the answer. Whether or not it’s a good time to buy a home isn’t about what is the housing market doing or what is the stock market doing? Or what’s inventory? Or whatever.

Is it a good time for you to buy a home? Is this a time in your life where you’re like, “I am ready to set down some routes. I am planning to stay in this place for,” a lot of people will say five years is a rule of thumb, but whatever. I’m willing to be settled for a while because sure yes, you can sell a home. But it is much more complex and expensive than breaking a lease. So if you are at a point in your life where you’re more like, “I might do this, but I might go back to grad school or I might want to travel. Or I might want to switch careers completely.” Being a renter and having that flexibility is probably great for you. Whereas if you’re like, “I’m really digging into my career. I’m really happy with the place that I live.” I could see myself living in this community in the future. It’s probably a good time for you to buy a house.

So it’s worthwhile to look at all of these softer, more emotional just life stage things than just like, “Do I have a down payment saved or can I afford it financially?” That’s a relatively straightforward question. You can use calculators to figure that stuff out. And I don’t just mean the one on your phone. On NerdWallet, we have tons of different, very specific calculators for how much house can I afford? What kind of mortgage payment would I be looking at? Comparing different loan terms, stuff like that. So you can see really specifically, is it a good time for me to buy in terms of my financial situation?

But also, is it a good time for you to buy in terms of where your life is, right? Because it is. Even though I was saying earlier that yes, the most common loan term is 30 years. Most people don’t keep the same loan for 30 years. They sell, they refi, different things happen, whatever. But that doesn’t mean it’s not a commitment. That doesn’t mean that it’s not a really big deal, a really big change to your life in a lot of ways. And just something that you shouldn’t take lightly.

Being like, “The housing market’s really hot right now. Interest rates are really hot right now.” This isn’t a prime day sale. It’s not like, “I got to get this now. I’m going to miss it.” Being like, “Oh my gosh, all my friends are going to be homeowners and I’m going to be renting.” That’s not a great reason. Or my mom keeps reminding me that my cousins bought houses and had babies and whatever. Who cares?

Tori Dunlap:

Or even now is a quote unquote “good time” to buy a house. We’ve talked about this in previous episodes. I almost bought a house when I was 22, and it would’ve been the worst decision I ever made. I was a day from closing, and it was a condo an hour outside of Seattle 20 minutes from my parents because that’s all I could afford. But my parents had told me, “Renting is thrown away money. You need to buy a house, you need to buy property.” And my entire life would’ve been different and probably for the worst. I love my parents. I would’ve been hanging with them every week
end. Would’ve been awful. I would’ve been an hour away from anything. I wouldn’t have made friends because I would’ve had to commute two hours to work and two hours back from work every day. My company probably wouldn’t have been founded in the same way because I didn’t have the connections of the city. And also that commute four hours a day would’ve been rough. So yeah, 100% it was the quote unquote “financially” right thing to do. It was emotionally, psychologically, from a point of where am I at in my life? 100% a bad decision. Thousand percent a bad decision.

Kate Wood:

So it’s not just about like, “Well do the finances work out,” right? Cause it’s like, they don’t. And honestly sometimes, they never will. So we have a rent versus buy calculator on our site among many calculators. And so you can look at, “Okay, when do you reach the point where your investment has paid off?” And it costs you less to own a home than it does to rent. If you’re in a really high cost city, those are just two parallel lines that go up forever. It never gets cheaper. It’s just very expensive. But people still do buy homes in those markets. Yeah, it’s probably not a single family home. It’s a condo. But regardless, people still do it. And it’s not because they’re like, “Here’s how my investment’s going to go and here’s the return I’m going to get.” It’s because they’re like, “I love living here and I want to stay living here. And I am able and willing to make that commitment.” So it’s not just like, “Here’s when I’m going to start getting this ROI. And so let’s all add this up.”

Tori Dunlap:

So speaking of that commitment, I want to know everything. You bought an 18th century home in Eastern Connecticut. Oh my gosh. I just got tingly. Oh my goodness. Okay. Tell me everything. Tell us about the process, both the financial process and also the emotional process. What do you wish you’d known? What is your favorite thing you’ve done to the house? What does the house look like? Give me the HD TV version of you buying your house.

Kate Wood:

Oh my goodness. So, I would say I did not practice what I preach. I had been in this job for considerably less time when I bought my home. I bought in 2020. And I very much decided I was ready to buy a home based on the math. I was like, “I’ve got this much saved for down payment. I’ve got this much save for closing costs, I’ve got cash reserves.”

Tori Dunlap:

Was it pandemic fueled? Was it like I’m getting antsy and I want a place to be?

Kate Wood:

So there was a bit of that. I was living back home with my mother, which I’m really grateful for. That’s exactly how I saved a down payment in closing costs and cash reserves, because I wasn’t paying rent, or food, or utilities or a lot of… so I was in an extremely privileged position to have that kind of family support. But I’d also been in my childhood bedroom in lockdown as a full grown adult. And that was getting really old.

So I don’t know that I necessarily was emotionally 110% ready to buy a home. But I just sort of hit a point where it was like there are only so many puzzles we can do together. I got to move. Got to move.

So I knew going in, I was like, “I definitely want to buy an older home.” I thought, because I have a lot of mid-century furniture, mid 20th century furniture, I was like, “I would really like to buy a home from the 1950s or ’60s.” But, so this is spring 2020. At the time everyone’s like, “This real estate market is unprecedented. I can’t believe what’s going on. This is wild.” We had no idea how much more intense it was going to get. I cannot. I feel so much for people who bought or tried to buy in 2021 and 2022, because everything that I was seeing as a buyer myself in 2020 only intensified from then. So I only even saw my house because it was like I’d already been looking for a while. I was on my second real estate agent. The first one was just like, “Oof no good. Do not hit the tour with agent button,” because they just give whoever needs a lead. You’re not getting someone who’s necessarily interested in helping you. They might be more interested, at least in my case, in showing you properties that they are selling, which is dual agency. And that’s straight up illegal in some states. So you don’t want that.

So I’ve got the good agent. I’m all ready. I’d taken the day off, we planned a whole day of looking at houses. So we had a bunch of showings lined up. Over that night, all four went into contracts. But I’d already taken the day off, whatever. So she’s like, “Okay, I’m going to find you some other properties to look at.” And so she found me the home that I ended up buying.

And it sounds like so weird and improbable, but when I was driving up the road to come to this property, which I had not seen, I felt like, “I’m driving to my house.” And then I fell in love with the house. It was like a home buying romcom basically, where of course it was like I was instantly smitten. But it was actually much more complicated because it turned out the house was already under contract and the selling agent was just like, “Well it’s under contract but it hasn’t gone through yet. So we can keep showing it.” The house is older than the United States as a country, That’s very, very old. Which in a lot of places is like, “Oh my gosh, how is that even possible?”

Tori Dunlap:

Did you want a project? Because in 2020 I started getting the nesting bug. Because I was living in a 650 square foot apartment that I was in for four years, running my business out of that apartment too. And I loved it until I outgrew it and until I was just there by myself in the pandemic for years. And I was just like, “I just want my own place. I just want projects. I want to paint things. I want to buy pretty furniture.” That’s all I wanted to do for those two years.

Kate Wood:

So I was definitely confident about my old house abilities. My childhood best friend lived in an 18th century home, one of my close relatives did. I was like, “I know what this is. This will be fine.” So spoiler alert, has not been fine at all. I spend an unconscionable amount on trying to heat this place. And the actual temperature that I achieve is 60 degrees. So physically, it’s a bit like living in a cabin. I wouldn’t highly recommend it, but-

Tori Dunlap:

Winterize it. Have you spent a winter there yet?

Kate Wood:

I have. And I was like, “Never again.” And yet, here I am about to spend another winter. Yeah, it’s pretty brutal. But it has a lot of things that are like… it’s really distinctive. There are not other houses like it. I mean there are other houses that are similar. It’s a cape. There are a lot of them around this area. But there are a lot of things that you wouldn’t find in a modern home that I absolutely love where it’s like things are not built this anymore. Things weren’t even built like this in the 1900s. I mean, I have floorboards that are more than 18 inches wide, and are just unbelievable old growth oak. So there’s stuff like that where I just am-

Tori Dunlap:

I’m literally so tingly. That makes me so happy. My little HD TV heart is just like, “This sounds lovely,” but also really challenging. Yeah. How did NerdWallet give you a show where you renovate the New England country home? Where is that show? I would watch that show.

Kate Wood:

It’s so much, so much, so much harder than it looks on TV. And it’s almost also so much more expensive when people aren’t sponsoring you. I’m just buying paint. I don’t have a paint brand sponsoring my walls. Going in, I was like I had a bunch saved up for repairing the home and doing stuff to it. And I burnt through that really quickly. I’ve done a lot of really big projects that are like this is why I haven’t gotten around to some of this other stuff. Like ripping off the siding, adding insulation, probably doing new siding is because I’ve been spending money doing all this other stuff. Everything that buying it, I was like okay, I know this is for the end of its service life. But I’m hoping they’ll last one more year. Was like, “No, I’m ready. Replace me.” So I replaced the furnace right off the bat. I replaced the roof right off the bat. Projects that were very expensive, and that also couldn’t wait. If I just kept letting moisture come into the house through the leaking roof, it’s not going to get better with time. So you don’t really have an option.

And so fortunately working at NerdWallet, I have learned a lot of different ways to pay for these things and deal with them as they come up. But it is challenging as I said, of when I’m like, “I do envy renters,” that it’s very challenging that I am the person who has to deal with all of these things. And especially when I first bought the house, I was very like, “Well, this was a choice I made and I did this, so I have to deal with it.” And that wasn’t a really helpful attitude. It mostly just made me very upset and frustrated. I made a mistake, and now I need to fix it.

When really it was just like I needed to ask for help. I needed to be honest with people and be like, “Can you help me do this thing?” Or, “If this happened to you, who would you call?” That kind of thing. And I’ve been really fortunate to have friends and family members who have been really supportive. And when it is something that is DIY-able have stepped up and helped me with stuff. And also over time, I’ve found tradespeople that I’m comfortable working with and who are good and I trust. But dealing with tradespeople as a single woman homeowner is another episode.

Tori Dunlap:

What is it? Oh my gosh, I think Gilmore Girls, that episode where she’s doing repairs on her house and she’s changing in front of them and she’s just like, “Yeah, they’re like friends.” And Luke is like, “What are you doing? What are you doing?” Kate, thank you for being here. If you could leave people listening with just one last piece of advice, or if you could tell somebody who is listening who is anxious about the home buying process, what would you tell them?

Kate Wood:

I would really say as I just said, I didn’t do this, but you should do it. Don’t be ashamed to ask for help. The home buying process is really complex and really confusing. And again, because the market has been so intense and so irregular, just so out of the sort norms that people expect from real estate for the last couple of years, even if your parents bought a home or friends who are homeowners, that kind of thing, they can tell you their stories and they can give you advice, but it might not necessarily be relevant or helpful in the market that’s going on right now. And there are so many resources out there that can help you understand what’s going on right now. And there’s nothing that you should feel embarrassed that you have to ask it. Whether it’s understanding the different steps, what order to do them and how they work, even just what the different terms mean. There’s so much stuff.

And it can feel overwhelming because the amount of information that’s out there is really vast. But if you break it down to the simplest question you can, like what’s the difference between pre-qualification and pre-approval? Or do I have to get a home inspection and an appraisal? That is very look up able that is very find out able. And you can really empower yourself to learn the stuff and be able to make a well-informed decision. And it’s really, especially in this kind of fast-paced market where you might be in a situation where you do have to make these huge choices on very short notice, going into them already knowing all of these things about what you want, what you can afford, what works for you, what is the right thing to do, what is something that is a concession that you’re willing to make to a seller? And what is something that no, you’re going to hold firm on that? Having all of that and being in control of the process is really important. So just arm yourself with that information. It’s like don’t be afraid to ask for help.

Tori Dunlap:

That’s amazing advice. Kate, thank you for being here. Where can people find you?

Kate Wood:

Thank you for having me. They can find me on nerdwallet.com. And if you want to see my semi crumbling home, you can find me on Instagram as @mid18thcenturymodern. So the 18th is 1-8, but mid 18th century modern.

Tori Dunlap:

Oh my gosh. I’m so excited. Thank you so much Kate, for being here.

Kate Wood:

Thank you.

Tori Dunlap:

Thank you once again to Kate for joining us. Such a great resources episode. So please feel free to share it with your friends and family and make sure to check out Kate on NerdWallet. We’ll make sure to link in the show notes.

Another great episode to check out if you’re interested in learning more about real estate is our interview with selling sunsets Maya Vander, and our conversation with Ramit Sethi. These are episodes 39 and 41, so listen to your heart’s content. Thank you as always, for your support of the show, for your support of this movement. Don’t forget to rate, review, subscribe wherever you listen. Have a great day, Financial Feminist. And I’ll catch you later.

Thank you for listening to Financial Feminist, a Her First $100K podcast. Financial Feminist is hosted by me, Tori Dunlap, produced by Kristen Fields, Marketing and Administration by Karina Patel, Olivia Coning, Cherise Wade, Alena Helzer, Paulina Isaac, Sophia Cohen, Valerie Oresko, Jack Coning, and Ana Alexandra.

Research by Ariel Johnson, audio engineering by Austin Fields, promotional graphics by Mary Stratton, photography by Sarah Wolfe, and theme music by Jonah Cohen Sound. A huge thanks to the entire Her First $100K team and community for supporting the show. For more information about Financial Feminist, Her First $100K, our guests, episode show notes, and our upcoming book also titled Financial Feminist, visit herfirst100k.com.