When it comes time to think about buying a home, most take to the internet to begin their research. In most cases, this can be a great resource but we’ve also found that a lot of the information available is very basic, redundant, and doesn't quite take the perspective of a first-time homebuyer.
With that said, we have provided some of our own information on what we feel is important when thinking about the home buying process. We hope these 7 points will help you better prepare as you make your way through the homebuying journey.
1. Understand What's On Your Credit Report
Unfortunately, your credit score plays a big part in homeownership so it’s good to know where you stand at least 6 months ahead of buying. I’ve had a lot of clients who have never actually pulled their own credit report and rather just based their credit rating on a score that’s tied to their credit card’s mobile app for example. Using a platform like CreditKarma.com or asking your mortgage broker to pull your credit will give you the opportunity to walk through each section and understand how your score and credit history play a role. Sometimes opinions can differ on this topic but if you’re just starting in on your home buying research, I recommend clearing up any small collections that show on your report. Note, this may not have a positive effect right away but ultimately it will help your score from falling in the long-term. Mortgage lenders like to see “seasoned” credit history so for example, a credit card that has regular on-time payments that's 6 months or older will be helpful. If you have any defaulted student loans, make sure you get onto a rehabilitation plan with them in order to get those into good standings as well. Note, some rehabilitation programs may require up to 9 consecutive on-time payments before they report back to the credit bureau. Your credit score/history will be a key driver in the interest rate you qualify for a home loan. Just because rates are hitting “all-time lows” doesn’t mean everyone will qualify. And lastly, if you’re buying a home with more than one person, just note that the lender will base their lending decisions off the person with the lowest score. So knowing where you stand ahead of buying can give you the time necessary to boost your score.
2. Think About What You’re Comfortable Spending On A House, Not Just The Amount You’ve Been Approved. When making the jump from renting to buying, I urge my clients to work through a few exercises that will help them better determine what they’re comfortable spending on a home. Because buying a house is probably one of the most important financial decisions you’ll make, it should be taken seriously and understanding your budget ahead of time will help hone in on what you’re really comfortable spending. When you’re going through the pre-approval process, your mortgage specialist is normally just looking over your debt to income ratio and credit history to calculate your borrowing power. This does not mean you need to be shopping at this price point. For example, if you and your partner are approved for a $900,000 home loan based on your debit/income, it doesn’t take into consideration what you feel comfortable with actually paying. Only once you work through the exercise of putting all your income, expenses, personal travel, shopping, dining, fitness, etc into an excel sheet, you might be surprised how much other “stuff” you may need to cut back on in order to pay that monthly mortgage payment on $900K. It’s not necessary to tap yourself out in order to get the most amount of house possible. Really take a look at what you’re comfortable paying each month and work backward and that could either mean paying more or less than what you’re currently paying in rent but just don’t live above your means!
3. Understand The Rough Timeline For Purchasing A Home. The general timeline for buying your first home can be different depending on a couple of factors, but we’ll break it down very high-level to give you an example. In most cases where you’re obtaining a mortgage for a property using an FHA or conventional loan, the closing can usually be between 30-45 or 60-days from the acceptance of the offer to purchase. The reason we show between 90-120 days start to finish is because physically shopping for a property can take the bulk of the time, and in some markets, you may not always get the first property you offer on.
Start to finish: 90-120 days
1. Talk to a lender and get your pre-approval
2. Find an agent/broker, discuss your purchase criteria and price point
3. Go shopping
4. Review comps and make an offer
5. Offer acceptance, counter, or rejection
6. Schedule an inspection, and apply for a mortgage
7. Signing and funding of P&S (purchase and sale agreement)
8. Appraisal
9. Mortgage commitment
10. Closing
If you’re interested in a more detailed write up on each individual step of the timeline, click here.
4. Consider Your Personal Life and Timing When Buying A House. At the start, this is all very exciting. You do some research to educate yourself, you get pre-approved, you draw a big circle on Zillow around the area you’re looking to buy in, and you’re off to the races! However, for some, this journey can quickly consume a lot of your time and can be quite stressful depending on the time of year you’re shopping, the market you’re looking in, and so on. So I try to reiterate the notion that it’s okay if life gets a little chaotic and you need to put on the brakes. First-time home buying, and real estate investing as a whole, isn’t something you rush into or settle for. If you’ve got six weddings to attend, your own to plan, and you just started a new job two months ago, maybe the timing isn’t quite right. It might be worth the wait to be able to better focus on this important financial decision.
5. Understand The True Cost Of Buying A Home. It’s a common misconception that in order to buy a house you’re going to need between 3.5 and 5% as a down payment. However, that’s not the entire picture so it’s good to understand what costs are actually involved in order to close on your first home. If you would like to learn more about the individual line items costs you can expect to see and what fees are negotiable on your loan estimate, click here. We'll also discuss what strategies you can take to reduce the amount of cash you need to come up with in order to close on a home.
As a quick example, here is a look at what closing on a $600,000 home could look like.
Example: Purchase price: $600,000
Downpayment: 3.5% FHA Loan ($21,000 total of which $1,000 is due when you make the offer and the remaining $20,000 at the signing of the Purchase and Sale Agreement or P&S)
Closing costs: $15,000 (or approx. 2.5% of the purchase price)
Total cost to close: $36,000
6. Creating Your Search Criteria. This step will likely evolve along the way as you start to visit properties in person, learn more about the neighborhoods/towns you like, and doing test runs to determine commute times. It’s perfectly normal that you enter into this journey thinking you may want a 2-bed condo in the South End and ultimately end up with a single-family 3-bedroom with parking just outside the city. A lot more thought goes into homeownership then it does when looking for a rental, so if you come to some realizations along the way it's perfectly healthy. We recommend communicating these shifts in criteria with your agent/broker as well to keep everyone on the same page.
With that said, part of your search criteria will also be to determine whether you’re looking for a fixer-upper, a turnkey property, or new construction. Again, you may bounce back and forth on this key decision as well which is perfectly normal. To learn more about determining the various property types/conditions to choose from, click here.
7. Find A Reputable Broker/Agent. Last but not least, working with a broker/agent you trust is very important for a number of reasons. First, using a “buyer's agent” is no cost to you and will only help protect your interests as you go through the home buying journey, negotiating terms, providing strategy, setting expectations, etc. The term “buyer's agent” is quite simply the agent that will represent only you in the transaction and protect your best interests through the entire process. The buyer’s agent is paid a percentage of the overall commission that the seller pays the seller’s agent when the property is sold. A lot of the time, buyers will just get pre-approved and head over to Zillow where they’ll start sending inquiries on houses they like. Zillow doesn’t normally connect you with the listing agent and rather syncs you with some random agent who has paid to advertise on Zillow. Best practices here would be to have your broker/agent set up these showings and inquire about properties you like which leads me to my next point. Brokers/agents will help speed up the process of getting you physically into these properties. In some cases, you may not even hear back from these agents when reaching out on Zillow because you aren’t represented. In other cases, we as your buyer’s agent, may even know these listing agents and have relationships with them making it easy to discuss interest levels and set up showings. And lastly, agents/brokers are in tune with the market and know how to navigate it like a pro. As we’ve said before, buying your first home is a huge commitment and one of the biggest financial decisions you’re going to make so it’s best to have a professional in your court.
If you have any questions or comments, feel free to email us at hello@jrassociates.co or leave a comment below!
The Spring market awaits, happy house hunting!!
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