21 Tips for First-Time Homebuyers
Buying your first home is a high-pressure endeavor. The number of homes for sale in America has been steadily declining for years. According to Zillow, inventory has been on a year-over-year downward spiral every single month since February 2015. That means competition for homes is fierce, particularly for starter homes. There's also a great deal to learn as a first-time home buyer, ranging from understanding mortgages to knowing what to look for when touring properties and which markets are the best. Cheapism has asked real estate experts to share their top tips for those making their first foray into the market. Here's what the professionals want all first-time homebuyers to know when they start hunting for their dream home.
There are many ways a real estate agent can make the home-buying process less stressful, says Tracy Ouellette, a regional sales manager with CLV Group, a full-service real estate brokerage. "Quite often first-time buyers try to do it themselves in order to save a bit of money," said Ouellette. "However, there are many of aspects of the home-buying experience that greatly benefit from using a realtor. They know the market and are able to negotiate a fair price, which ends up saving you more money in the end. They also ensure that your contract will protect you and your house, if any issues arise in the future."
Mortgages are complicated financial products, so spend some time educating yourself about them, said David Reiss, a law professor at Brooklyn Law School. "If you understand them, you can choose the right one for your circumstances," said Reiss. "Most people think they should get a 30-year-fixed rate mortgage. But those usually have a higher interest rate than adjustable rate mortgages." For those buying a starter home, an adjustable rate mortgage (ARM) may be worth considering in order to keep the monthly mortgage payment lower initially.
Before you begin your search, one of the most important steps to take is completing the mortgage pre-approval process. This helps define your purchase price-range and prevents heartache. "You need to know what you can afford before you go to open houses and fall in love with a property that's out of your price range," said Lori Kim, a licensed real estate agent with Keller Williams NYC. "Save yourself the time and disappointment."
Future homeowners need to have a firm grasp on how much of a monthly mortgage payment they can truly afford. This can be determined by calculating your debt-to-income ratio (DTI), said Ray Rodriguez, regional mortgage sales manager at TD Bank. This figure is identified by dividing all monthly expenses (mortgage payment, taxes, insurance, credit cards, auto loans, student loans, etc.) by your monthly gross household income. It's a good idea not to let the DTI ratio exceed 43 percent. But some mortgage lenders may have a lower DTI.
To be a successful homeowner, it's a good idea to plan for all of the expenses associated with buying a home. Part of this process should involve finding out what the property tax rates are in the neighborhood you're considering. Also budget for the unknown, said Rodriguez. According to TD's 2016 First-Time Homebuyer Pulse Survey, 17 percent of first-time homebuyers hadn't set aside money for unexpected repairs and costs.
Thoroughly review your credit report before embarking on a home search. Make sure all accounts listed under your name belong to you and that the account balances are accurate or you may run into trouble when attempting to qualify for a loan, said Rodriguez. "It can take several months to have an error removed from your credit report," he explained. "The earlier you look, the more time you give yourself to fix the problem." Additionally, most people should hold off on opening or closing credit cards and making big purchases until after completing a home purchase.
Getting pre-approved for a mortgage may only require a few pieces of income documentation, but final mortgage approval and funding is an extensive, detailed and tedious process that requires volumes of personal financial information. "You're going to be asked for numerous financial documents during the loan underwriting process - some going back two years," said Brooke Palmer, a real estate advisor with Motive Real Estate Group in Texas. "Be prepared to provide information showing where your funds have come from and proving that you have a stable income." This means being able to provide W-2s, pay stubs, employment history, creditor account statements, bank account statements, tax returns, and far, far more.
Take a home-buying course and ask a lot of questions. "Know about the home inspection, appraisal, closing costs, down payment, and when all of these things have to be paid and who is paying them," said Lynnci Barnes, a Realtor with Washington, D.C.-based M Squared Real Estate. Understanding each of these things will help you avoid problems during the closing process.
Create a list of what you want and don't want in a home: the must-haves and the deal-breakers. And then, be prepared to be flexible and compromise, particularly if budget is an issue. It's also important to be open to advice from your realtor. "This is their job. They look at homes and deal with real estate day in and day out," said Barnes.
Rushing through home tours is a big mistake, says Jacqueline Moore of the real estate tech startup Opendoor. Taking just 20 minutes to quickly tour the inside of a home isn't enough time to decide if it's the right home for the next five, 10 or even 20 years of your life. Spend at least 45 to 60 minutes inside a home. "While you're there, open every door, closely examine the status of the current finishes and appliances, blast the heat or AC to test the HVAC, take out a flashlight and look under furniture, flush every toilet and turn on every shower," advised Moore.
Come back at different times of day to see a house in different light and get a well-rounded sense of the neighborhood, said Moore. Does a seemingly quiet street become a loud, crowded thoroughfare during commute times? Does a neighbor have dogs barking from 9 a.m. until 5 p.m.? "Those are only things you'd get a sense of by walking the neighborhood and driving by at various times of the day and days of the week," said Moore.
While you're in the area, chat up the neighbors. "They know the house and the community better than anyone, and it's likely they can give you invaluable intel that your real estate agent may never know," said Moore. After all, you're not just buying a home, you're buying a neighborhood.
Home maintenance is what prevents the property from falling below market value. It includes such things as a well-maintained roof, HVAC, a water heater, and other items that give a home a basic standard of living, said Moore. Upgrades, on the other hand, raise a home above market value and give it an advantage over other local comparable homes. Upgrades include high-end appliances, marble or granite countertops, brand new hardwood floors, or smart-home technology.
Home ownership is very different from renting an apartment because you will eventually run into maintenance that you're financially responsible for. (No more calling the landlord.) So before you buy, find out the age of the roof, the HVAC system, the water heater, every appliance, the pool equipment, and every other system in the home. "If a roof has a lifetime of 20 years and a prospective home has an 18-year-old shingle roof, a first-time buyer needs to consider how the cost of replacing that roof factors into their financial situation and plans in the coming years," said Moore. Knowing what's on the financial horizon can save you as the homebuyer a lot of stress and panic.
If you come across a home that you'd like to put an offer on, always be sure to obtain a home inspection. "This way, you know how much more money you might have to put into the house and you are able to negotiate the price even more," said Ouellette, of CLV Group. "There's nothing worse than spending your life's savings and finding out you need to replace your plumbing after a week in your new home."
In a competitive market such as the current one, asking a seller to fix little things like scratched flooring or paint issues may be a bad move, says Michael Mazek, founder of Mazek Law Group, a real estate law firm that handles residential real estate transactions in Chicago. "In multiple offer situations, these requests serve as encouragement for a seller to take another offer and usually these things are not costly to repair anyway," said Mazek.
When there are multiple offers on a home, it never hurts to write a letter of appreciation to the homeowners, expressing your interest in the home, explaining your personal story, and detailing your admiration for the home and its features, said Ann Marie Comforte, a broker with ERA Central Realty Group in New Jersey. Personalized letters go a long way, helping your offer stand out and giving the homeowners extra reason to choose you.
When you're haggling over the final sale terms of a home, it's important to keep in mind that many expenses are negotiable, said Palmer, of Motive Real Estate Group. "Items such as earnest money, option money, who pays for title insurance, and survey expenses are all negotiable items," Palmer explained. "You should be able to discuss ways to utilize these elements of your contract to help you get the best terms."
Real estate agents are typically very well connected people, said Palmer. In addition to recommending mortgage brokers, title companies, and insurance agents during the purchase process, a real estate agent is usually also a wealth of knowledge when it comes to other providers such as contractors, arborists, landscaping companies, lawn services, and cleaning services.
As a first-time homebuyer, money may be tight when you take possession of the new property. If renovations are on the horizon, remember that certain times of the year are better than others for saving on big purchases. Many stores run sales during holidays like Presidents Day, Memorial Day, July Fourth, and Labor Day, noted Palmer. There are also typically sales on major home appliances during Black Friday.
Finally, one last tip. Before settling on a home, consider whether the property will be one you can grow in as your life evolves. "Many times buyers don't account for life changes," said Abraham Walker, lead agent at Ask A Walker, a real estate agency in Alexandria, Virginia, that is associated with Keller Williams Realty Kingstowne in Alexandria. "A house that might be perfect for you right now, may not work in a few years after a few life changes like getting married or having kids." Buying the wrong house could end up costing you more than renting if you have to sell within a few years.