“Do I need a real estate agent?” “How will I choose the right neighborhood?” How do I make an offer that will be accepted, but not exceed my budget?” “How do I apply for a mortgage?” If you are feeling overwhelmed by any of these questions, fear no more. My partners at CT Homes and I are here to help you with any questions you have concerning your first home purchase.
Transitioning from a renter to a homeowner is a big step to take. First-time homebuyers have entered a new stage of life that comes with major changes. Perhaps you are taking the plunge for the simple fact that you are sick of renting, maybe you are looking to make your first big investment, or there’s a chance that you are planning to start a family. Whatever the reason is for purchasing your first home, it is essential that you are prepared for anything.
It is safe to say that buying your first home will be an emotional roller coaster. You might be nervous to get on the ride at first, but once it’s all over, you are happy you made the decision – even though there were plenty of ups and downs. Consequently, buying a home is riddled with the same emotions. The prospect of real estate financing might scare you, but making the jump could be the best decision you ever make. When you finally make an offer that doesn’t get accepted after the first try, you’ll be sad and disappointed. However, when you find yet another dream home, you’re fire will be reignited. The process is exhausting, but once it’s over, you will be thankful that you didn’t cut corners and ended up in a home that satisfied all of your needs.
If you are soon to be a first-time homebuyer – or just want to get ahead of the game – learn how to step into the housing market with confidence by following these 10 steps:
The First-Time Homebuyer’s 10 Step Plan
1. Check Your Credit: No one likes thinking about their credit score, but it is a reality nonetheless, especially when you apply for a home loan. Your credit score, which can range from 300 to 850, is a system that takes into account past credit history in order to determine how risky you will be as a borrower. If you have a low credit score, you are not alone. However, it may jeopardize your chances of getting a low interest rate – or any financing at all for that matter. If you feel your credit score is unusually low, it may be due to an error in the reporting. Contact the agency directly and they should be able to fix your problem. Note that it can take up to several months for a mistake to be corrected, so be sure to have it taken care of before applying for a mortgage.
- Pro Tip: If you’ve had credit problems in the past for whatever reason, there are ways to boost your score, which you should take advantage of before even considering investing in your own home. Put all of your credit cards on automatic payments so that you avoid missing any deadlines, as payment history makes up 35 percent of your credit score. If credit is still an issue, there are always alternative real estate financing options.
2. Determine A Budget: Now that you’ve calculated your credit score, it is time to set your budget. There are a number of online resources to help with the process, but for a more accurate figure, get pre-approved by a lender, which is free to do. It is important to meet with a lender before you embark on your home search because a realtor isn’t likely to take you on as a client if you haven’t disclosed how much you can afford. Your lender should look at your income, debt, and credit in order to come up with a loan that is perfect for you. A good rule to follow is to aim for a home priced at about two and a half times your gross annual salary. More specifically, however, all of your monthly home payments – including utilities – should not exceed 36 percent of your gross monthly income.
- Pro Tip: There is a difference between getting “pre-approved” and “pre-qualified.” Almost anyone, even a person with bad credit, can pre qualify for a loan, but getting pre approved will give you a more exact figure of how much you will be able to spend.
3. Liquify Your Necessary Assets And Obtain A Mortgage: The last thing you want once you’ve found the perfect house is to be held back by the down payment, closing costs and escrow deposit. Lenders typically like to see 20 percent of the home’s price as a down payment. If you are able to spend more, you may be approved for a larger loan, if you cannot put down 20 percent, you may need to shop around for other loans to compensate. There are also additional fees to keep in mind: the appraisal fee, loan fees, attorney fees, inspection fees, and the cost of a title insurance, which in total, can add up to more that $10,000.
- Pro Tip: The good news is that there are plenty of options out there for first-time homebuyers. For example, an FHA loan – if you qualify – allows to you pay as little as three percent for your down payment. First-time homebuyers can also withdraw up to $10,000 without penalty from an IRA (individual retirement account. However, you will have to pay taxes on the amount. Or, if given the opportunity, you can receive a cash gift of up to $14,000 per year from each of your parents without triggering a gift tax. The point is, if buying a home is your dream, there are ways to successfully achieve that goal.
5. Find A Realtor: Hiring a real estate agent is not required. However, their experience can come in handy when navigating through complex home buying processes. While the internet has made it possible to obtain tons of ‘do-it-yourself’ information, there is no substitute for an experienced professional. Realtors are also typically experts in their specific market, which, if you are moving to a new town, is invaluable. Remember to find an agent that you get along with and who really understands your needs, because you will end up spending a lot of time together.
- Pro Tip: Most sellers list their homes through an agent, so that agent works for the seller. A sellers agent’s commission is based on how much the home is sold for and would therefore be inclined to have you offer a higher price. Be sure to contract an “exclusive buyer agent” so that you can be confident they have your best interest in mind.
6. Begin Your Search: There are a number of steps that come before the actual home search, but now is when the fun begins. First things first, figure out what neighborhood or town you want your agent to focus on. Keep in mind the types of people who live in the neighborhood, the local activities, schools, employment rates, and anything else that you consider important. It is a good idea to create a “wish list” to give to your agent; consider your top five “non-negotiables.” If you cannot live without a pool or three car garage, your agent should not waste time showing you properties that don’t meet your qualifications. It is still important, however, to give your agent some leeway when it comes to price and location.
- Pro Tip: Even if you don’t have school-aged children, or no children at all for that matter, it is still beneficial to find a neighborhood that has a school system with a good reputation. This asset will be advantageous in the future when you sell your home, as it can add value to the property.
7. Make An Offer: Once you’ve found a home you know you want, you must move quickly and submit your bid. If you are working with an “exclusive buyer agent,” which is ideal, they can advise you on how to write the perfect offer. If you are working with a seller’s agent, you will want to devise a strategy on your own. Start by asking your agent to pull some comps that have recently sold in the same area to get your initial figure. There is no one way to negotiate an offer, but getting a little creative might set you apart from competitors. Ask the seller to throw in some extra benefits, like new appliances or one month’s mortgage covered, for meeting their full price. Or, suggest that they don’t include added assistance in exchange for offering something a little lower.
- Pro Tip: If you really want a specific home – as much as you may want to – it is best not to lowball your offer. It may insult the seller so much that he or she won’t sell you the home even if you make a higher counter offer. Remember, your leverage depends on the market.
8. Crunch The Numbers One More Time And Enter Contract: Once you ready to sign a contract, you should crunch your numbers one last time. Factor in closing costs, moving expenses, and any immediate repairs or appliances that are essential before moving in. There is often a “good faith” deposit that needs to be deposited into an escrow account which the seller will receive after the deal closes. Finally, have your lawyer or buyer agent review the document to make sure it has all of the necessary contingencies.
- Pro Tip: There are three contingencies that should be included in every contract: That you are able to obtain the proper finances, the home inspection reveals no significant problems, and that it t is guaranteed that you can conduct a walk-through inspection 24-hours before closing.
9. Don’t Forget An Inspection: While an inspection adds yet another fee, it is necessary that you conduct one prior to closing in order to ensure you are getting what you pay for with your new home. An inspection fee is usually around $300; which isn’t bad considering the findings that might be revealed during the process. If the inspector unearths major damages, you will want to reach out to either your lawyer or agent who will have consult with the seller. Either the seller will have to repair the damages, or reduce the price of the time. If the seller refuses to do so, you can walk away from the deal as long as you have the contingency written into the contract.
- Pro Tip: Ask to be present during the inspection. You will learn a lot about your new home, including its general condition, construction materials, electrical set up, etc.
10. Close The Deal: You are days away from becoming a first-time homebuyer and you are excited, but there is still important paperwork to take care of. Approximately two days before closing, you should receive a HUD Settlement Statement, which is the standard form used in the U.S. to itemize services and fees charged to the borrower by the lender. Be sure to review the document carefully. Your lender might also require you to establish an escrow account, which they have permission to take from if you fall behind on mortgage or property tax payments.
- Pro Tip: You are officially a first-time homebuyer. As an expert, I advise you to celebrate.
