First Time Home Buyer Steps
Purchasing a new home is an important decision, especially so for a first time home buyer who doesn’t have the knowledge and experience in buying real estate. My goal is to provide the first time home buyer with the tools and information so that they can determine if home ownership is right for them. Buying a home is a process and essentially involves six steps.
Many first time home buyers get caught in the trap of being unprepared and uninformed which can lead to much confusion and frustration. Educate yourself, organize your paperwork, and utilize the resources available and the home buying experience can be less stressful and more enjoyable.
Step 1: Decide to Buy
So you want to be a first time home buyer? Ask yourself these questions:
- What are your personal reasons?
Are you getting married or expecting a child and need more space or do you want to move closer to work? Sit down and make a wants versus needs wish list and think it through.
- How long do you plan to own home?
You may be better off renting if you expect to move or get transferred within 2 years. Contact your loan consultant to figure out how long it would take to break-even on your expected home purchase. Calculate if you should rent or buy. Currently, it takes about 1.5-2 years to break even on a typical home purchase.
- Do you have enough cash for a down payment and closing costs?
Today, lenders are offering great zero down home first time home buyer programs and the seller can pay most or all of the closing costs. You go to the closing table with no check!
- Can you afford to carry a monthly mortgage and still pay your bills and go out to dinner or movie more than once a month with friends?
A mortgage should take no more than 1/3rd of your gross income but this amount will also depend on how much net disposable income you have after paying your mortgage payment.
- Do you need a tax break?
In most cases, renters do not receive a tax break, homeowners do! You are able to deduct the interest and mortgage insurance on your mortgage loan and property taxes. Consult your tax accountant to discuss how purchasing a home will benefit you.
Whatever you decide, keep yourself informed and ask a lot of questions. Also, pay attention to your feelings and trust your instincts. If area real estate is moving fast and you feel pressured to buy, you may want to wait. If you find a neighborhood you like but aren’t ready to commit, consider renting for six months-1 year to learn more about the area.
Step 2: Get Organized
Start a Home-Buying file
If you keep your records in one place, you can get organized in a few hours.
Here is a list of loan documents a first time home buyer will need to process the loan:
- Copy of purchase contract if you have found a property.
- Last 3 pay stubs
- W2 forms and tax returns for last 2 years
- Most recent (2) months asset statements including bank, money market, 401k, etc. (All Pages).
- Loan/debt payment information for credit cards and auto, student, and personal loans.
- Name and phone numbers for landlords, attorneys, and realtors.
- If condo purchase you will need to get declarations and by-laws with budget and name and phone number of association or management company.
Real Estate Listings
Collect the listing sheets on the homes you may want to buy and make notes about properties.
If you are buying a condo you may choose not to have property inspected but I feel that you should always use an inspector on a single family or multi-unit building. The property may look great but there may be some hidden defects such as foundation or structural problems which may cost thousands of dollars!
Choose your insurance agent wisely and cut your insurance cost. Remember, a condo does not require exterior homeowner insurance because protection is provided by blanket insurance policy with the association. You should check into insurance to cover personal belongings and interior structure (studs-in) since these items are not covered by blanket policy. Also, if you live in area where hurricanes, tornadoes, earthquakes, and other unwelcomed acts of mother nature may occur then you will need to get hazard insurance to cover these events. Finally, if you intend to purchase a home in a flood zone then you will need to obtain flood insurance.
Currently, the real estate market is competitive and sellers are looking for buyers who are pre-approved not pre-qualified. A pre-qualification is simply a letter stating that you are pre-qualified to purchase a property based on information given to a loan officer. A pre-approval involves submitting a loan file to underwriting, accompanied by actual documentation, for approval and receiving a Pre-Approval letter. This letter gives a first time home buyer negotiation leverage when submitting an offer to purchase a property.
Step 3: Shop for a Home
“Expect less, Be prepared for anything,” is what a Samurai Warrior might say about buying a home. A home or condo does not always live up to their advertisements, but you may find a real charmer without many listed features.
- Decide whether or not to work with a real estate agent.
If you work with a realtor, make sure they know your priorities, such as price, location, size, number of bedrooms, etc… Make a checklist of what you want, prioritize them, and give them to your agent. Make sure to interview and choose a Realtor who best suits your personality and needs and makes you feel comfortable.
- When you find a home that interests you, research the neighborhood.
Talk to the neighbors and find out what it’s like to live there. You may want to park on street and just observe activity and listen. If everything checks out you are ready to make an offer.
- Special notes about Condos.
Decide if you want to live in a low-rise or hi-rise building and you should be aware that assessments are higher for a hi-rise due mainly to maintenance and security costs. Also, you need to know if any special assessments are in the works because it can hit your pocketbook hard. Finally, call the management company or association and find out if the owner occupancy ratio is below 50% because it may affect your ability to qualify for specific loan programs.
Step 4: Prepare an Offer
Step back from your emotions. You’re making a contract to purchase a home, which will legally bind you if the seller accepts. You also will submit an earnest money deposit with your offer, which is only refundable under certain conditions.
Do your Research
Find out about:
- Current market conditions.
The higher the demand, the more you can expect to pay.
- Price of comparable homes sold in the area recently.
Check home values or rely on your realtor or loan officer to help you.
- The seller’s motivation.
In cases, such as divorce or job relocation, the seller may settle for a lower price in exchange for a quicker sale.
Prepare your Offer
- Always make an offer within your ability to pay.
- To strengthen the offer, include your Pre-Approval letter.
- Attach conditions to your offer.
- You usually will have to include a deposit with your offer, to apply as a good faith down payment if the deal does through.
The seller may accept, reject, or counter your offer. If the seller accepts, it is a done deal. If seller rejects, don’t take it personally, look elsewhere, and you will find the perfect home. If the seller counters, you can accept or counter the counter offer.
Step 5: Secure a Mortgage
The first step in the loan process is to get pre-approved and I believe this should be done before taking any of the other steps. Once you are pre-approved with a lender or broker you can work with them or choose another lender.
- Choose a lender or mortgage broker.
A lender actually makes the loan. A broker acts as a go-between for a buyer and a lender. A direct lender has the ability to originate, underwrite, and close loans in their name which saves you time and money.
- Submit your documentation.
If you have a pre-approval with a lender, your documents are good for at least 90-120 days with that lender. Otherwise, you will need to submit pay stub, bank statements, etc.
- Check interest rates.
Interest rates tend to fluctuate daily. If interest rates are low, you may ask your lender to lock in a rate. Otherwise, you can choose to float but you may end up with a lot higher rate than expected. Are you a gambler?
- Choose a loan.
You may think you want a fixed loan but the most important factor in determining which program to choose is the length of time you will be in home. For example, If you know that you will be selling your home in 3-4 years then an adjustable mortgage may be your best bet. Consult your loan officer about designing a loan program which will best fit your financial needs.
Step 6: Close the Deal!
On closing day, the seller officially signs over the house to you. It can take anywhere between 15 to 90 days to close on a typical real estate transaction.
To avoid last minute surprises:
- Set a closing date that works for you. If you are renting, set a closing date near the end of your lease to avoid paying unnecessary rent. Be sure to schedule enough time to move in and get 3 moving company quotes. The best bet is to close on the sale a few days before you move in to avoid being overwhelmed.
- Estimate your final closing figures.
Two days prior to closing a statement is made available for you and your attorney’s review. Most importantly, the lender is required to give you a good faith estimate of closing costs. Go over the costs with your loan officer and make you sure you understand each one.
- Schedule a final walk-through.
Make certain the seller has completed any repairs specified in the contract and satisfied any other conditions spelled out in the contract involving the home’s condition.
- Sign the Papers, get the keys, and hang your hat on home sweet home.