Buying Your First Home
Buying your first home can be a scary process. Most inexperienced home buyers don’t know what they don’t know when they are getting started, and it’s understandable to be afraid of making mistakes when it comes to such a huge purchase. While this fear may be holding you back from taking that big first step, there is no reason it needs to! I’m here to tell you just what to expect, how to play your cards right, and how to be prepared for the process as it unfolds.
The first thing you need to know is, there are a lot of big scary words getting thrown around, but nothing is too complicated to understand. The next thing you need to know is, there are several steps in the process, and each one needs to be completed before the rest can be begun. Think of it like college prerequisite courses. There are classes you must pass before you can take others. Real estate works similar to this.
Why It’s So Great
One of the best parts of owning your own home is the incredible sense of accomplishment you will feel. Nothing beats driving your car into the garage of your very own home, cooking dinner on your very own stove, or cutting the grass of your own home. Owning a home can do wonders for people’s confidence, and it’s true that you may feel like once you’ve done this, you can do anything.
When you rent, you always worry about the rent being increased at the end of your lease, or the owner selling the home while you’re living in it. If you don’t have the best landlord, you may have to worry about big ticket items breaking and not being replaced on time. There are rules on what color you can paint the walls, how the yard needs to look, etc. When you own a home, you determine the quality of the contents of the home. You decide how to style it, design it, or what to build. You can custom design it to be exactly what you want-that’s a great feeling. You also don’t need to worry about the rent going up or the home being sold out from under you. Hard to put a price on that kind of peace of mind.
There is a also a wonderful sense of security of owning a home. Once it’s yours, no one can take it from you (unless you don’t make the payment of course)! You can know your family and friends will always have somewhere safe to stay, regardless of the storms life may bring. While owning a home can lead to wealth, it can also lead to security for your family.
Getting pre-approved for a loan will be the first step in your process. That is, unless you are paying all cash. If you don’t have a couple hundred grand lying around, you’ll more than likely need a loan from a lender to be able to afford the house.
What you need to know about loan pre-approvals:
A loan pre-approval is a letter from a lender saying they have done a preliminary check of your ability to make a mortgage payment and have given you the green light. The pre-approval letter will usually tell you how much you are pre-approved for, and what interest rate you are looking at. There is a good reason this is the first step.
When you want to make an offer on a house, the first thing the seller wants to know (even before looking at your offer price) is if you have the ability to actually get a loan for a house. Every agent will tell you, issues with the home loan are what torpedo more deals than anything else. If you want someone to take your offer seriously (read, consider it at all) you need to have a pre-approval letter.
What you need to do to get one:
While every lender is a little different, in general you will need to provide the lender with:
- Your last two years tax returns
- Your last two years W-2’s
- Your last two bank statements (all pages)
- Your last two pay stubs
- A list of your current debt (car payments, credit cards, etc)
- Permission for the lender to run your credit
If you can provide that information, you can get pre-approved. Easy right?
You’ll find that once you complete this step, the whole thing really gets exciting. Imagine that feeling you get when you’re approved to buy a new car. The excitement that builds as you start researching the different models, colors, years, and features. Pretty fun right? Well this is like that, except, it’s your home. It’s SO much more fun than buying a new car.
Finding Homes You Want To See
Once you’re pre-approved, it’s time to find a real estate agent to help find you homes available for purchase. When looking for an agent, you want to find someone you’re comfortable with and who communicates in a style that works for you. Once of the most difficult parts in the process is understanding everything that’s going on. Clients don’t understand how much work an agent is doing behind the scenes. Agents forget how new all this is to people who have never done it before and use terms clients are unfamiliar with. If you’re looking for an agent who can help you, regardless of where you live, feel free to email me and I can put you in touch with someone (DavidGreene@kw.com). Once you find an agent, they will more than likely start sending you lists of homes available for sale that meet your price point and budget plans.
What you need to know about buyer’s agents:
Buyers agents do not get paid unless you actually close on a house. They don’t get reimbursed for their gas, or the time they spend on the phone, or the birthday parties they miss. They don’t get compensated for the vacations they can’t take or the weird hours they have to work. If you want a good relationship with your buyer’s agent, don’t treat them like an employee. Treat them like a partner. The two of you will work together to find a home that works for you.
Looking At Homes
More than likely, your agent will set you up on a list of homes that meet your criteria. You will communicate to your agent which homes you are interested in, and your agent will contact the listing agent to find out if the home is still available and any other pertinent facts they can gather.
Once you’ve found homes you want to see, the next step is the fun part-going to see the homes! Please keep in mind that no home is perfect, and there will be things with every home you like and don’t like.
The good news is, once you reach this stage, it gets fun. Try to envision where your furniture will go, what it will be like to commute from this home to your job, and if there is ample space for your children to play. Keep in mind that the homes that really wow you with their upgrades and pop will also be wow’ing all the other home buyers out there. More competition is a bad thing when shopping for a home, and sometimes the best course of action is to focus on homes others won’t like to get the best deal. It’s usually cheaper to do the upgrades yourself than to pay for work that’s already done.
Once you find a home that you can see yourself living in and are excited about, the time has come to make your effort to buy it.
Making An Offer
Your offer to buy a home is an important step in the process. While purchase price is always an important step to consider, you should know that there are several other factors that may be just as important. Sometimes as a buyer you will need to sell your own house before you can buy the one you want. This is a type of contingency that often causes deals to fall apart, and sellers prefer not to deal with this.
Sometimes, the seller isn’t ready to move out of their house right away. Offering to let them stay in the property, or allowing them to pay you rent for the right to stay are both options you can present in your offer to make it more attractive.
When an offer is accepted, your bank will order an appraisal of the home to make sure your offer is within reason and comparable to the prices that other homes in the area sold for. More often than not, the bank will not let you borrow more money than the house appraises for. This means you will either have to come out of pocket for the extra money, or the seller will have to reduce their price. If neither of these options works, the deal will fall apart. Houses appraising for less than the asking price are one of the number one deal killers in real estate.
If you really love a house, one of the things you can do is agree to pay the price in your offer regardless of what the house appraises for. If you’re not comfortable with this, you can agree to pay a certain amount (i.e., $10,000) over the appraisal price. Conditions like these make your offer more attractive to the seller, and can sometimes be even more powerful than a higher asking price.
Once your offer is accepted, the “escrow period” begins. The escrow period is a time when all the work is done to ensure both sides are able to complete their end of the bargain. During this time, you will usually deposit your “earnest money” in the escrow account. The earnest money is a small deposit you make in good faith to show the sellers you are serious about buying their property. If you cancel the deal, you may lose this money. Now, don’t be too worried about this. There are lots of protections offered in the contract to make sure you get your money back if the deal falls apart due to no fault of your own.
While the house is “under escrow”, the title company will be working hard to make sure the sellers owns complete title to the property they are transferring to your name. They will make sure there are no liens against the home that would become your responsibility after closing.
While this is happening, the bank who wrote you the pre-approval letter will be doing a deeper analysis of your finances to make sure you can afford your monthly mortgage payment. They will call your employer to make sure you work where you said you did, verify how long you’ve been employed, check your credit score to make sure it’s what they thought, and do other due diligence to make sure you meet the guidelines of the loan they are giving you.
Don’t worry about some black marks on your record. Most problems that arise have solutions that the lenders, title company, or real estate agents have seen before. You don’t have to be perfect, just reasonable!
If the buyer is able to perform on their end, and the seller is able to perform on theirs, title to the property is transferred at “closing” and a whole bunch of papers are signed! Once this is completed, you should receive the keys to your very own new home and begin the next step on your awesome journey!
Be sure to take pictures of this day so you can remember it for a looooong time!
Putting Yourself In A Position To Succeed
There are several things you can do to prepare for this process that will give you can advantage. Once you’re in the middle of the process and emotions are running high, you will be very glad you took the steps necessary to put yourself in a situation to succeed.
One of these factors is the amount of money you have saved. The more you have saved up, the bigger down payment you can make, and the more attractive your loan factors will be. Lower interest rates, lower closing costs, and lower (or non existent) mortgage insurance. If you want more competitive mortgage terms, saving up more money can help.
In addition to the money you have saved up, the better your credit score, the better your interest rate. Now, in real estate, anything above a 720 will most likely not help you. 720 is your goal. If your score is low, ask your lender how you can increase it. Sometimes paying off even one credit card can make a big difference. Sometimes some cards are more influential to pay off than others. Get pro-active about your credit health and reap the rewards.
Many lenders want you to be working at the same place of employment for a year or two. If you’re thinking about switching jobs, it might be a good idea to buy your house first.
There you have it, everything you need to know about what to expect when buying your first home. While there is a lot more detail to the whole process, I hope you can see how easy it can be and why you don’t need to be intimidated.