Introducing our latest video series: Turning Tenants into Buyers.

This series breaks down the core mortgage fundamentals every DRE licensee needs to master when guiding first-time buyers toward homeownership. Throughout the series, we illustrate the distinct financial advantages of purchasing a home with a 20% down payment.

In this first episode, we explore the vital financial guidance a buyer agent provides to first-time buyers. Agents trained in the mechanics and math of mortgage-funded transactions are uniquely positioned — and bound by their fiduciary duty — to deliver this critical advice and help their buyer-clients make informed decisions.

Educating on the value of ownership

Most first-time buyers start out as tenants, signing rental agreements and paying rent for their occupancy.

These first-time buyers are keenly aware long-term wealth is built by monthly savings brought about by mortgage principal reduction. This wealth accumulation only accrues for property owners — not tenants.

However, first-time homebuyers are intimidated by:

  • a stifling rise in their debt obligations brought on by a mortgage;
  • their uncertain feelings about a commitment to upfront and long-term mortgage costs; and
  • restraints of their seemingly stagnant wages.

However, these buyers have a financial blind spot.

They have not yet been educated about managing capital, the money gathered from different sources to fuel their acquisition of a home.

Critical advice from the gatekeeper

Agents and brokers need to lean directly into this discussion with their buyers as today’s clients tend to rely heavily on advisors to make decisions. Remember: agents are the sole gatekeepers representing buyers in real estate transactions.

Thus, agents owe a duty to their buyer-clients to advise them on the material facts related to acquiring ownership. Specifically, buyers need education in order to make informed financial decisions, and this information best comes in the form of advice from their agent about mortgage debt.

Editor’s note – Recall that no one else owes any duty to advise the buyer on financing an acquisition, and other industry actors have profit objectives which are adverse to homebuyers.

An agent with a handle on mortgage debt arrangements, opportunity costs and ownership operating costs is able to advise and set their buyer-client’s expectations for ownership. Only with an agent’s advice is a first-time buyer sufficiently informed to consider a property available for sale.

Editor’s note – In this series, the purchase terms will always include mortgage financing, which is nearly always the case for first-time buyers.

When purchase terms include mortgage financing, whether the down payment is more or less than 20% of the price, the buyer of a property needs to consider:

  • savings used to fund the down payment, noting the loss of future interest on their savings invested is an opportunity cost;
  • interest charges on the amount borrowed, amortized over a 30-year period;
  • cash reserves set aside for payment of property taxes, insurance premiums, any HOA or improvement district payments, and maintenance of the improvements;
  • emergency funds saved to cover six months of mortgage payments for unforeseen difficulties with a job, health care, emergency charges or other losses; and
  • mortgage insurance premiums paid when the down payment is less than 20% to cover the mortgage holder’s risk of loss, provided by either:
    • the Federal Housing Administration (FHA), with government mortgage insurance premiums (MIP); or
    • private insurers, with private mortgage insurance (PMI).

Expectations for long-term ownership

Critically, mortgaged homeownership is only compatible with a buyer’s financial stability when they are able to meet mortgage payment obligations and other recurring costs typically experienced by homeowners now — and into the future.

To this end, since the goal of mortgaged ownership is to build up equity in real estate through monthly payments, a first-time buyer needs a monthly savings program as well as other sources to set aside a 20% down payment to acquire a property.

Simply, a 20% down payment is the optimal financial strategy to acquire ownership an agent discusses with a tenant while bonding as their buyer agent for a future home purchase.

Editor’s note — Stay tuned! The remainder of this series illustrates how an agent or broker fully and effectively communicates the costs of a worthwhile mortgage-leveraged homeownership to their prospective buyers, and the long-term financial security a 20% down payment provides.