What no one tells you about buying your first home
Buying a home is a process. Buying your first home can be downright painful. Often buyers are enticed by low interest rates and decide to buy a home without knowing what to expect.
According to a 2014 study from Redfin and conducted by Harris Poll, 25% of homeowners regret buying their home. What’s worse, a study from the Consumer Financial Protection Bureau reveals about 75% of first-time homebuyers only applied to one lender, and only about 40% reported being ‘very familiar’ with the money needed at closing.
These tips will help prepare new and experienced homebuyers alike for the buying process and the benefits of doing some homework.
Shop for a mortgage first
Before starting to seriously look at properties, you need to determine your budget for a house or condo, as well as what lenders will be willing to loan you. Often, people underestimate how much rates and loan amounts can vary between lenders.
Contact a handful of lenders and get quotes based on a ‘soft pull’ of your credit, which will not damage your credit score as an official inquiry will. Finding the best rate will have a big impact on your finances. Securing a 4% 30-year mortgage on a $400,000 condo will save you almost $120 per month compared to a mortgage with the same terms at 4.5%. Can rates really vary that much between lenders? Yes, they can.
Once you find the lender and rate that is right for you, get pre-approved. A pre-approval will help make you a more competitive buyer when the seller is faced with multiple offers.
It’s important to note that what the bank is willing to loan you – and what your budget can withstand – are not always the same thing. Work with your financial advisor before starting the process to ensure you aren’t over-extending yourself. No one wants to be house poor!
Building the right team
Having a solid team of trusted professionals will likely make or break your buying experience. You will be the quarterback, ensuring everyone has the information they need and ultimately, are on schedule for the closing date. Your team will typically involve:
- A real estate agent
- A loan officer or mortgage broker
- A closing attorney
- An insurance agency or broker
- A home inspector
Whenever possible, try and get referrals. Redfin’s study showed only 31% of homeowners aged 18-34 liked working with their agent. This is problematic, as a good agent will not only bring negotiating experience and knowledge of the market, agents with a strong network may alert you to a property before it even comes on the market which could save you a bidding war.
Having a home inspection performed by a quality provider can be one of the best ways to ensure a sound purchase. Ideally, bring a trusted friend or contractor familiar with general home repair along for the inspection to ask questions and be another set of eyes. Unfortunately, home inspectors sometimes miss things and large unexpected repairs can be a real burden for a new homeowner.
The real estate market moves fast, and sellers typically value a quick closing. If your offer is accepted, you typically have a week to do a home inspection and two weeks until the purchase and sale (P&S) is executed with the help of your attorney. Half your down payment is usually due with the P&S as well.
You’ll also be working with your lender on the application once the inspection is cleared so it is advisable to have all your bank statements, pay stubs, and other paperwork ready to go beforehand. As you can see, within two weeks of an accepted offer, you’ve already needed to engage your whole team.
Building a solid budget will help reduce some of the stress as you move through the process. Work with your team of real estate professionals to get estimates on the cash expenses. Some common costs associated with the process are attorney fees (also title and recording fees), loan application fee, a home inspector and appraisal, condo fees, taxes held in escrow and insurance.
If you are planning on getting a gift from a friend of family member, make sure your lender knows. You’ll need the donor to sign a gift letter early on in the process. This is important to remember if you’re concerned about having sufficient funds, as a last-minute gift could stall your paperwork and delay your closing date.
Before making the decision to buy, evaluate your expected holding period. If you are only planning on living in the house for a few years, it might not make sense to buy after factoring in closing costs, repairs and maintenance, and the costs of selling (the fees for real estate agents typically start at 6% of the purchase price and are paid by the seller). If you are open to being a landlord and coming up with another down payment isn’t a problem, holding onto the property as a rental could be an option.