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15 Steps for First Time Home Buyers
Meet with a local lender early in the process, maybe even six months or a year before you think you are ready to buy. That may seem like you are jumping the gun, but a lender can look at your credit report and tell you what you need to work on to put yourself in the best position possible. If you just start paying off debt, you may pay off things that won’t have as much of an impact on your credit score. There may also be seasonal grants or opportunities they can help you watch for.
Another step in meeting with the lender is to find out how much of a down payment and closing costs you need. There are still opportunities for 100% financing (so don’t think you need to wait until you have a 20% down payment) but those vary depending on the area in which you want to buy, your credit, your income and your previous home ownership. First time home buyer products can include those who haven’t owned a home for several years.
Find a REALTOR® to work with early in the process. Although you shouldn’t start viewing homes in person until you are ready to buy, your agent can help you begin to understand the market, and you can also do your own research. It helps if you have looked a bit online to be more familiar with the market and local prices. Don’t ask to view properties until you are ready to buy as this is an inconvenience to the seller - and you also set yourself up for disappointment as you are sure to find “the one” that you can’t buy at the time and that will be the home you compare all the other options to months down the road.
Maintain your credit. This means that if you are a year away from starting to look for a home, it is possible that you should not open credit card accounts (even the store ones) unless your lender gives you the green light. Buying a car or changing jobs can also adversely affect your ability to purchase. That’s why it is important to have a lender as a resource even before you are ready to buy. Once you are under contract, be sure not to open new lines of credit or start maxing out your credit cards with purchases for your new home. Ask your lender for guidance on this.
If you live in an area where there are a lot of open houses, this can be a way to get familiar with the market. Just make sure you stay in touch with the REALTOR® you have selected and keep their card in your wallet to give their information to the open house hosts. This will also keep you from getting calls on Monday from all the open house hosts you met on Sunday. Follow up with your agent periodically so they can keep notes about areas and homes you like so they will be better prepared when you begin your search. As REALTORs®, we view our relationship with you as a process, and we want to develop a relationship that supports you in your search.
Once you are ready to start looking, make sure you get preapproved or prequalified for a loan. This comes with a letter from the lender, stating the maximum that you can pay and the terms of the loan. Be sure to ask the lender about the advantages of certain loan types over the others. Some (like FHA) require an upfront mortgage premium and mortgage insurance for the life of the loan, whereas others have the possibility of no mortgage insurance or a shorter term of mortgage insurance. A letter of preapproval also helps you make a stronger offer - and your offer may not be competitive without one in some markets.
Make sure you are prepared for closing costs. These vary by area, but they are typically 3-6% of the purchase price of the home. The lower priced the home is, the higher the percentage of closing costs is likely to be. Ask your REALTOR® if it is possible to increase the purchase price to include these. Whether or not this is possible totally depends on your local market and what the house is likely to appraise for.
Many first-time home buyers shop at lower price points. Make sure that you are realistic about your DIY skills and whether or not you can live with a house if you have to save money before paying someone else to make improvements. Calculate the ongoing costs of home maintenance in your budget, including items like lawn care.
Make a list of your wants and must-haves. If there are two or more of you, compare the lists to make sure you are on the same page. Show the list to your agent and ask them to tell you if these wants and needs are in line with your budget and preferred area. You should have the type of relationship with your agent that you feel comfortable asking these questions and accepting that their honest responses are valuable to help you avoid disappointment from unrealistic expectations. If they tell you that your expectations are not in line with your budget, accept this with a willingness to compromise on the area, amenities, features and/or budget.
Read the contract carefully. In fact, ask your agent to schedule an appointment to explain it to you BEFORE you start writing offers. In a fast moving market, you may not have time to look at it carefully when you have to meet an offer deadline. It’s good to have already had conversations about it with your agent so you understand what you are signing. Ask your agent to prepare a market analysis that gives you confidence that your offer is in line with the value of the home.
Ask your agent to explain the process, using simple steps. This even applies if you are coming from another state as a “non” first time home buyer. Some states and regions hold the transaction at an escrow company, some use attorneys and some close with title companies. In some places it is common for the buyer to get the keys at the closing table and in some there is a delay to give the Seller time to move out. It is good to know what to expect before you write an offer and at each step of the process once you are under contract. If your agent won’t take the time for these conversations, you probably have the wrong agent.
Get a home inspection - always. A home inspection may seem like an optional item since the lender doesn’t generally require it, but it is a very important step in the process to make sure you aren’t buying a home that will need immediate and costly repairs. Keep in mind that a home inspection is designed to show major issues with the home and you shouldn’t expect the negotiation following the home inspection to replace ugly carpet or tarnished faucets. Don’t go into a contract with the intention that you can find things on the home inspection to reduce the price or ask for closing costs. While this can be a result of home inspections, you should be comfortable with the price you are willing to pay regardless of the home inspection results. Make sure you also get an inspection for wood destroying insects too. Your lender may require this.
Understand some of the contingencies like an appraisal and survey. If you are getting a loan you will be required to have an appraisal. Make sure you understand how your agent has written the contract to protect you if the appraisal is lower than the sales price you are under contract for.
If you purchase a home warranty plan, shop around. You may ask your agent for recommendations, but it is also good to do your own research and read the fine print. Are there limits on certain expensive repairs (like HVAC) or do those warranties not kick in until after a period of time? If you do purchase a home warranty, make sure you consider this as a way to OFFSET the expenses of home ownership, not to pay for every maintenance issue that might pop up.
Ask your agent to review the closing statement with you before you get to closing and ask questions. Mistakes can be made and they are much easier to handle before you close. If you are wiring funds for closing, go through extreme security measures to make sure to prevent wire fraud. If you are given wiring instructions by email, call the closing company to verify them personally. Keep all of your paperwork. You may need your settlement statement for your taxes.
Have fun! This can be a stressful time, but it is also one of the biggest steps you will ever take personally and it should be celebrated. Document your journey with photos and celebrate your success in becoming a homeowner!