Home ownership is something that we all aspire to in our lives. Whether it’s a desire to put a nail in any wall you want or to begin to build a foundation of wealth you can hand down for generations, buying a home is a bucket list goal for everyone. And while the concept seems to make sense to us all, the process can be daunting for a first-time homebuyer. After having helped thousands of people buy their first home, here is some advice for the first-time (or even second or third) home buyer to take some of the mystery out of the process.
1. Get Pre-Approve for a Mortgage
If you know you’re going to be financing a home within the next year, your best first step is to get a pre-approval for the mortgage. If you’re like me, you will disregard this advice completely. You will hit the internet and start looking at homes in your area. And why look at small homes when you can look at big homes? And why look at big homes when you can look at mansions? Did you see the pool on this one? And…what was I doing again?
Getting pre-approved will do five things for you:
- Establish your price range.
- Know what your monthly payment will be before you even see the house.
- Know your total estimated cash to close (down payment plus closing costs).
- Know you are approved going in, and allow you to bid with confidence.
- Understand your available mortgage program options (Conventional, FHA, VA, USDA, Non-QM), the pros and cons of each, and which is best for you.
Pre-approval serves two different purposes for two different types of buyers. For the home buyer who is ready right now, getting pre-approved establishes your buying power, breaks down your costs and allows you to prepare your finances and adjust any credit situations that you may (or may not) be aware of. For the home buyer who is either not quite ready or doesn’t even know what being ready means, we will make sure you are comfortable with the process, connect you with the people you need to make your home buying journey a smooth one, and give you the confidence that you can and will be able to make offers that will be taken seriously and accepted.
2. Hire One of Our Real Estate Partners to Aid in Your Home Search
I can’t stress enough the importance of working with a professional realtor. And how can you tell a professional realtor? When people decide to make a call to their realtor the first step, a professional realtor will always lead them back to “Step 1: Get Pre-Approved” before embarking on your home search with you. That’s because they look at the transaction from all angles, including that of the seller, and know your best bet to getting an offer approved is to come in armed with a pre-approval letter.
A real estate agent will help you by:
- Establishing a strategy for buying based on your budget, your needs and your wants.
- Saving you COUNTLESS HOURS of searching by making sure you know about new listings the second they come up (although we all know you’re going to do your own searches anyway).
- Attend showings with you and learn more about your priorities as a buyer.
- Assist you with how much you should offer on a property.
- Submit an offer letter on your behalf.
- Assist you with negotiations with the seller and/or seller’s agent after the initial offer is submitted and accepted.
- Attending the pre-closing walk through and closing with you to make sure everything is in order with the sale.
A buyer’s agent represents you and your interests, and best of all they usually get paid by the seller. Going directly to the seller’s agent thinking you will get a better deal will result in you relying on the seller’s agent to represent your interests. Having your own agent to represent you is an easy fail-safe to make sure nothing slips through the cracks.
3. Maintain Your Credit
One of the most frequent questions I get asked is “How long is this pre-approval good for?” Your credit report is good for 120 days, so if there are no negative changes to your credit you can have your credit re-pulled and you’re good for another 120. If you go 120 days and miss 2 credit cards payments and a car payment, you can have your credit re-pulled after 120 days and no longer qualify for a mortgage. See what I mean about maintaining your credit?
Like just about everything these days, your credit score is based on an algorithm utilized by Experian, Equifax, and TransUnion. This algorithm factors in your credit history, account balances, derogatory credit incidents, credit usage, etc., and comes up with a score. Some of these factors are intuitive (like if I pay down my credit card balance my score should go up) and some are not intuitive (like how you can pay off an old collection and watch your credit score drop 40 points). Because of how fickle credit can be, PLEASE PLEASE PLEASE for the love of God, don’t do anything without talking to your mortgage professional after you are pre-approved. Don’t do ANYTHING, you say? Yes, don’t even get out of bed. Okay, not that extreme, but don’t get put on the following list of things that people did to make buying a home after pre-approval difficult for themselves:
- Buy a NEW CAR ON CREDIT! (New debt payment = less mortgage)
- Buy NEW FURNITURE FOR THE NEW HOUSE ON CREDIT! (See above about new debt)
- Stop paying on your car or student loans to save up quicker for your purchase
- Decide to quit your job (changing jobs is okay, but still please give me a call and let’s discuss)—this isn’t about credit but don’t do it anyway
- And my personal favorite…BUY A $300,000 RV with a $2,400 per month payment!
These will make your process difficult and will make my hair gray. When in doubt, ask!
4. Save For Down Payment and Closing Costs
This one is self-explanatory. Once you’re pre-approved, you will have a very good estimate of how much you will need for your home purchase. It is important to keep in mind that your lender will need to provide proof that you have the funds required to buy the house, to include closing costs and down payment. Sounds simple, right? Well, it’s not always that simple. The requirements are stringent when it comes to verifying assets for buying a home, and the reason for this is because the lender must make sure none of the funds you are using for the purchase are borrowed without the lender knowing about it. So, with this in mind, if you’re saving up in cash under your pillow, get that cash into a bank account right now so we can count it toward what you need to close, where it will need to sit for at least one full month, possibly two, depending on the loan program. Or if you’re going to take a 401K loan for your purchase, check up front to make sure you know how much you can borrow, what the terms are, and how it will impact your qualifications. Or if you’re going to get a gift from a family member to help with the purchase, make sure they aren’t giving you the cash out of their pillow and that they will be willing to provide their own bank statement showing the gift came from their personal funds. While none of these scenarios will kill your approval, handling them properly will save you from pulling your hair out trying to get everything in order. ALWAYS provide a full accounting of where the funds for your down payment will be coming from, even if the answer is that you still have some saving to do.
5. Be Confident When You Submit an Offer
You should never submit an offer on a home unless you are 100% committed to the purchase. Pulling out of a home purchase contract after it is accepted can be a good way to lose your earnest money deposit. Generally, when an offer is accepted a good faith deposit will be made by the buyer to show the seller you are serious about buying their property. This deposit is typically 1% – 3% of the purchase price of the house. Withdrawing from the contract without cause (cause being bad home inspection, undervaluation on appraisal, or any other reason not listed in your offer letter) will result in the seller deciding whether to give you back your money. If you can’t 100% see yourself living in that home, don’t make an offer on it.
6. Hire an Inspector
Once you are under contract, you need to hire a professional inspector for your home. If you don’t have one of your own, your realtor will be a great resource for you in choosing a good inspector. An inspection is different from the appraisal required by your lender:
- Appraisal – The appraisal will give you and your lender a professional opinion of the value of your home based on comparable properties (comps) in the area that have sold recently.
- Home Inspection – During a home inspection the inspector identifies specific issues with the property you are buying and can help with estimated costs to fix anything that might need it. This inspection is not shared with the lender and is for your own personal knowledge.
As we discussed, in most purchase contracts there is an earnest money deposit put down with the accepted offer. This often comes with a contingency that if anything is found during the home inspection that causes you to no longer want to purchase the property, you can cancel the contract without forfeiting your deposit.
7. Close the Sale
At closing you will sign all the paperwork required to complete the purchase, including your loan documents. The title company will arrange for all funds to be disbursed properly and record your documentation at the County Court House to ensure there is a record that you are the new owner of your property. While you may risk a brief bout of carpel tunnel syndrome after signing the closing package, you can look on the bright side that you will walk away with a set of keys and a new home!
Hopefully this list of steps can help you take some of the mystery out of buying a home. The process does not need to be scary or stressful. While big decisions like buying a home always have some added energy to them because of their impact on our lives, the truth is that with the right team of professionals helping you, your home buying journey can and should be a rewarding experience!