My first encounter with residential real estate was back in 2005. I was living in Chapel Hill, NC, after graduating from Duke a couple months earlier. I was engaged to my college sweetheart, Suzy, who had finished school a year prior and was working in Research Triangle Park as a Business Analyst for GlaxoSmithKline. I had recently started my first corporate job which had me commuting 60 miles to Greensboro each way. But as much as I didn’t love the job or the commute, I felt like an adult. I was a working professional and that made me proud. Suzy and I were renting separate apartments since we weren’t married yet, but as we started planning the wedding, we naturally started looking into where we’d live. We realized that, as a dual income household, our options became better together. And since Suzy had already worked for a year and had already received her first bonus, she had some savings in the bank.
Even back then, we were both runners and happened to be training for our first marathon in 2005. One afternoon, we happened to run by a new townhome development being erected not too far from my apartment. They were in the final stages of building the last three story units and only a few remained. We decided to pause our run and stop in at the model showroom to get more info. I’m sure we were way out of our element -- two recent college grads wide-eyed in a new home showroom. I’m sure we looked super young as we fumbled our way through questions. We soon found out that we could buy a 3BR, 3.5BA home for $279,000 which we initially assumed was out of our league. But the showroom manager gave us information to contact a mortgage broker to find out how much we could afford. We figured, what the heck.
We quickly learned that Suzy was the stronger candidate for getting the mortgage. For starters, she actually had credit. Since I had never owned a credit card before, I had not illustrated that I was capable of paying on-time… a prerequisite to establishing credit in your name. Further, Suzy was more established in her career with over 12 months of steady income to point to, whereas I only had a couple months under my belt. So Suzy naturally became the primary applicant for our mortgage.
Turns out, in order to be pre-approved for a mortgage, you need the following five things:
The big question mark for us was the final requirement, proof of assets, since we didn’t know how much would be required for the down payment. The mortgage broker that the builder recommended was actually a subsidiary company of the builder itself -- they even offered a $3K discount for using their mortgage company. They were a traditional lender and the main option they offered to us was to put 20% down which would have meant $55,800 on the house we were interested in. We didn’t have anything close to that amount of money and figured that was the end of the conversation. We’d just have to wait a few years to save enough money for a downpayment. In hindsight, it’s important to remember that this was three years before the housing crisis, which meant banks were notoriously creative with approving applicants for mortgages. Before giving up, we decided to approach Wachovia, where we had been banking at the time. We shared our situation and, much to our surprise, learned that we don’t actually have to put 20% down. According to our Senior Loan Specialist at Wachovia, Suzy and I were eligible for a 80-15-5 mortgage, sometimes referred to as a piggyback loan. This meant we’d only needed to commit 5% of the home value for the down payment and take out 2 separate mortgages -- the primary one for 80% of the loan amount and the secondary one for 15% of the loan amount. So we were able to buy a house with a downpayment of under $14K and a total monthly payment that was lower than our combined rent payments. It was a no brainer. Fortunately, Suzy and I had just enough saved to cover the down payment. Within a couple of months, we were homeowners!
This first-time home buying experience was incredibly valuable to me at the time, and is now something I reflect upon as I’m building a startup in the real estate space. Since we were buying new construction, we were buying direct from the builder with no real estate agents involved in the transaction. So my learnings in this transaction were limited to the mortgage process which I got a lot out of. First off, I wish high schools and universities required a course in personal finance to all students. The miniscule amount Suzy and I knew about lending at the time is incredible, and since we continue to learn fundamental financial concepts to this day, we think it would be great if these fundamentals were more hard coded by the time we entered the professional world. Second, I doubt the piggyback loan we were able to get approved for back in 2005 is even a possibility after the housing crisis of 2008 -- it’s amazing how quickly mortgage financing changes. Third, I’m realizing just how much Suzy and I relied on other people to point us in the right direction. Since there was no real estate agent, we were fully dependent upon the homebuilder rep to guide us through the process. Luckily this didn’t happen, but these people could have totally taken advantage of us as first-time homebuyers who knew practically nothing.
As my team builds Trusty and thinks about different value propositions we can deliver to home buyers, offering guidance to help them navigate the process of financing a home feels like an obvious need. We could easily apply the same “pressure-free” approach we’ve taken when connecting buyers with real estate agents to mortgage professionals. Perhaps lenders would be willing to share their opinions and perspectives on various financing products to give buyers a sense for how they think about different offerings, similar to how our agents review homes and neighborhoods. Trusty has already been approached by mortgage brokers who would gladly offer their expertise and help guide buyers through the process of applying for and obtaining a mortgage. It’s natural to think that Trusty could vet and connect buyers with qualified mortgage professionals and it’s something we’re actively working on. Besides this more traditional home financing path, there are now a number of less traditional services that offer creative ways for prospective home buyers to finance their home. Which sounds like the perfect opportunity for a separate blog post (which I’ll link to later).