First Time Homebuyers Guide Part 1

For a first time homebuyer the whole process of purchasing a home can be a bit daunting at first thought.  It doesn’t need to be if you have the right people you are working with.  That also goes for any person purchasing a home in the ever evolving real estate and mortgage market.  Here’s a guide to approaching the process of buying a home in 10 steps:

1. ARE YOU READY?

Knowledge and experience are the keys to successful real estate transactions. One of the keys to making the home buying process easier and more understandable is planning. In doing so, you’ll be able to anticipate requests from lenders, agents and a host of other professionals. Furthermore, planning will help you discover valuable shortcuts in the home buying process.

Do You Know What You Want?

Whether you are a first-time homebuyer or entering the current market as a repeat buyer, you need to ask why you want to buy. Are you planning to move to a new community due to a lifestyle change or is buying an option and not a requirement? What would you like in terms of real estate that you do not have now? Do you have a purchasing timeframe?   Whatever your answers, the more you know about the real estate marketplace, the more likely you are to effectively define your goals. As an interesting exercise, it would be worthwhile to look at the questions above and to then discuss them in detail when meeting with an agent so you both can work towards achieving your goals.

Do You Have The Money?

Homes and the financing of them are almost always intertwined.  Financing is the difference between the purchase price and the down payment, commonly referred to as the loan or mortgage.  Down payment amounts have varied over the years as we witnessed the coming and going of many no down payment loan programs over the last 5 years.  As of now, if you’re looking at a Conventional Loan you’ll have to put 20% of the purchase price down to avoid having to pay PMI (Private Mortgage Insurance).  Although if you are willing to pay PMI you can put as little as 5% down depending on your credit scores and the type of property you’re looking for.  Condominiums require larger down payment percentages than single family houses.  There are also government lending programs that offer even lower down payment options.  The FHA Loan program requires only a 3.5% down payment and can be used on most houses.  Both the VA Loan program for veterans or current military and the USDA Guaranteed Rural program allow for no down payment purchases if the borrower and property qualify. 

Not everyone, however, elects to purchase with little or no money down. Less money down means higher monthly mortgage payments, so most homebuyers choose to buy with as much down payment as they can afford.  In addition to a down payment, purchasers also need cash for closing costs (the final costs associated with closing the loan).  In markets where buyers have leverage, such as our current buyers market, it may be possible to negotiate an offer for a home that requires the owner to pay some or all of your settlement expenses. Speak with your realtor for details or ways to set that up as part of your purchase agreement.

Is Your Financial House in Order?

The loans that are currently available do require one thing that the subprime loans available during the past several years did not : You need fairly good credit. In general a minimum credit score of 620 is needed for the Government loan programs and Conventional loan programs need higher scores than 680 to get good interest rates for them.  For at least one year prior to purchasing a home, you should assure that every credit card bill, rent check, car payment and other debt is paid in full and on time.   In order to make sure you have the highest possible scores when your credit report is pulled, you should have your credit card balances as low as possible in relation to your available credit.  You should also review your credit report when it is pulled by the loan originator to make sure that it is accurate and if there are any mistakes they can be corrected.  Some loan originators also offer credit improvement information with their credit reports which can be very helpful if you need to improve your score in order to qualify for a mortgage. 

2. GET A REALTOR

More than 2 million people in the United States have real estate licenses. However, real estate is a tough business with a steep dropout rate, and the result is that only a small percentage of those with licenses actively help buyers and sellers. The National Association of Realtors (NAR) includes 1 million brokers and salespeople, individuals bound together with a strong Code of Ethics, extensive training opportunities and a wealth of community information.

Why?

Buying and selling real estate is a complex matter. At first it might seem that by checking online sites you could quickly find the right home at the right price and go after it by yourself. But a basic rule in real estate is that all properties are unique. No two properties — even two identical models on the same street — are precisely and exactly alike. Homes differ; neighborhoods differ and so do contract terms, financing options, inspection requirements and closing costs. Also, no two real estate transactions are alike. In this maze of forms, financing, inspections, marketing, pricing and negotiating, it makes sense to work with a professional who knows all the aspects of the real estate business.

What should you expect? Once you select a Realtor you will want to establish a business relationship. You may know that some realtors represent sellers while others represent buyers.  As a buyer, it is important that you have your own representation and Realtor that represents your interests first.  If you were to work with an agent representing the seller they have first duty to the seller so you’ll be at a disadvantage when negotiations are taking place.   Once hired for the job, the Realtor will provide you with information detailing current market conditions, lists of properties that will best fit your needs, financing options and negotiating issues that might apply to each situation. Remember: Because market conditions can change and the strategies that apply in one negotiation may be inappropriate in another, this information should not be set in stone. During your time in the market, your Realtor will keep you updated and alert you to each step in the transaction process.

3. GET LOAN PREAPPROVAL

What is it?

“Preapproval” means you have met with a loan originator, your credit, income and assets have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which shows your borrowing power. You can visit as many lenders as you like and get several preapprovals, but keep in mind that each one carries with it a new credit check, which will show up on future credit reports and can hurt your credit scores.  Although not a final loan commitment, the preapproval letter can be shown to listing brokers when making an offer. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.

How do you get preapproval?

Real estate financing is available from numerous sources such as banks, credit unions and mortgage brokers that work with local Realtors and in some cases individual Realtors such as myself, who are licensed to do both.   Licensing of loan originators is now a national requirement so be sure to check that the person you’re working with is licensed to do so in your state.   The loan originator will carefully review your financial situation, including your credit report and other information such as income and assets. They then will then suggest programs which most-closely meet your needs. For instance, a first-time buyer may qualify for a government backed mortgage program with little money down and low interest rates, while a repeat purchaser (someone who has bought a home before) with more equity (money invested in the home) might want to get a 15-year loan and the lower overall interest costs it represents. Typically, first-time buyers opt for the traditional 30-year loan, with a fixed rate of interest over the life of the loan.

I suggest that buyers start the mortgage process well before making an offer on a home. By meeting with mortgage brokers or lenders — either online or face to face — and looking at loan options, you will find which programs best meet your needs, how much you can afford and get pre-approved.  I also recommend preapprovals for another reason: Purchase forms often require buyers to apply for financing within a given time period, in many cases, 5 to 10 days. By meeting with a licensed loan originator in advance and identifying mortgage programs, it won’t be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option. 

Up next in Part 2  of my Buyers Guide – Looking For Homes!

Michael Pollock is an Accredited Buyers Representative, member of the Seattle King County Association of Realtors and Licensed Loan Originator in Washington.  He also works with clients in the Tacoma/Pierce County area – visit us at www.tacomapowersearch.com