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First Time Home Buyer Tips
Dated: June 12 2019
Buying a home can be an overwhelming process for even the most experienced shoppers. For a new home buyer shopping for the very first time, the process can be paralyzing at times. Afterall, it is the BIGGEST purchase most people ever make! Rest assured, GroupWatson has several Buyer Specialists, Realtors that focus only on representing clients that are purchasing homes, here to help every step of the way! For those who’ve never purchased a home, or those needing a refresher, below our best tips to help eliminate some of the mystery and ensure that each decision is made with confidence.
The very first step when considering a home purchase is to know your financial status. Go through your budget and determine what you’re comfortable spending each month for housing, including utilities, insurance, and maintenance. Review your savings as well, because you will need funds for a down payment, inspections, appraisal, closing costs, and then you should keep some in savings for deductibles, maintenance, and repairs. Water utility rates can often be found online or by calling the city utility department in the area you’re looking at. Online calculators are available to estimate energy cost expenses or talk to our office utility concierge. Once you begin looking at homes, average utility costs can be requested from most sellers. Internet, phone, and television provider costs will vary by area and plan as well. As a rule of thumb, many financial experts recommend spending under 40% of your total income on housing costs, including the mortgage payment, utilities, and maintenance.
Once you’ve done some legwork on your budget, contact a mortgage loan officer to begin the preapproval process (your preferred Realtor can recommend some trustworthy loan officers). Pre-approval ensures that you are eligible to buy a home, confirms the price you can realistically afford, and proves to sellers that you’re a serious buyer when you’re ready to make an offer. Most homeowners will not consider an offer made without a preapproval letter. For this, your loan officer will do a credit check, verify your income & assets, and recommend the best loan type for your needs. They will also give you an estimated monthly mortgage payment for the qualified loan amount and a break-down of the fees you can expect to pay at closing. These fees will include loan origination charges, property taxes, closing and title company fees, etc. You can plan on roughly 3% of the purchase price for closing costs. Don’t have a lot saved? There are some down payment assistance programs available to qualifying first time home buyers and those who haven’t owned a home in several years.
When shopping for mortgages, multiple credit checks for home loans within a 45-day period are counted as just 1 inquiry, so you may shop around for the best rate without penalty. If the monthly payment for the amount you qualify to spend is higher than you’re comfortable paying, that’s ok. Let your lender know what your comfort level is, and they will recommend a purchase price to meet that goal. If by chance you’re not able to qualify yet, loan officers can advise you on the best steps to take to improve your credit scores. Sometimes a couple of months of strategic payments are all that’s needed!
Set aside funds for your up-front purchase expenses. When you’re ready to purchase, be prepared to pay about 1% of the price of the home as an Earnest Money deposit, anywhere from $100-$250 on average, for the Option Money Fee, $350 to $800 for inspections, and about $400 to $600 for an appraisal. The Earnest Money is will be held by the title company until closing as collateral, but is then credited back at closing toward your closing costs. You only risk losing this deposit if you default on the contract terms, or back out after allowable deadlines have passed. Option Money is paid directly to the seller, for the option period, a time used for inspections and further investigation. In Texas, the buyer has the right or “option” to terminate the contract for any reason, or no reason at all, and receive their earnest money deposit back. If the option period is used, you’ll forfeit the option fee to the seller, to compensate them for the inconvenience of taking the home off of the market. If it is not used and the contract proceeds to closing, the option fee can be credited toward closing costs as well, depending on what is marked in the contract.
Research the areas you’re considering. (You can do this in conjunction with steps 1 and 2 but avoid touring homes until you’re pre-approved so that you don’t fall in love with something before you’re ready.) Test commute times and traffic around your work hours. Drive through different neighborhoods during the day and night to see how much activity there is. Read up on school districts (even if you don’t have children, school ratings can have a strong impact on resale values), decide whether you want a single detached house, condo, townhome, etc. Determine how much space you’ll need. If you’ve never owned a home before, it may be hard to gauge how many square feet you will need, so start with the basics- minimum number of bedrooms, bathrooms, and garage spaces. Casually browse online listings for different areas to get a feel for styles and prices in different neighborhoods. Generally, the larger the home, the higher the price. Same with well kept homes and those with the latest upgrades. They’ll usually sell for a higher price than homes needing updates or repairs.
Next, consult with your trusted Realtor. In Texas, buyer’s agents are typically paid a split of the listing fee as a “finder’s fee” when a home is sold. Therefore, their services to you are available at no cost to you as a buyer, in most cases. Sit down and discuss the locations you like along with your needs, wants, and plans for your new home. This consultation should also go over the basic steps in the process, offer strategies based on current market conditions, and communication preferences. Discuss long term plans- like do you plan to live in this home for 5 years and then upgrade, or will this be a long-term home? How much time and money do you intend to devote to maintenance? Are you willing to do some updating, or do you prefer something “turn-key ready?” All of this information will help your agent set up a search and start looking for homes that may be a good fit. It’s not uncommon for a first-time home buyer to need to see several homes to get a true feel for what you’d like to live in. Don’t feel like you’re inconveniencing your agent, either. A good Realtor will show you as many homes as you need to see in order to find the right fit.
Let the home tours begin! This can be equally exciting and daunting as you begin to realize that popular TV shows simplify a more in-depth process. The search your agent set up will be the most up-to-date source for listings. Third-party sites get most of their listings from an MLS auto-feed, but may show a few additional options listed by the owners themselves. Keep in mind that some consumer websites may continue to display listings that are under contract or sold. Unfortunately sites that allow owner-added listings can sometimes fall victim to scam listings- homes that seem like a deal, entered by dishonest users as an attempt to collect personal data or money. These scams are most common with rental listings, but all sites that allow “for sale by owner” listings from the general public are all vulnerable to them. Tell your agent about any homes that appear on these sites but not on your MLS search that you’re interested so that they can look them up and verify the accuracy. To protect yourself, never fill out a loan application, rental application, or send money to a stranger.
Keep an open line of communication- you and your agent are working as a team toward the same goal. If you’re wanting to attend an open house or builder model, no need to hide that information from your agent. You’re not bothering your agent by asking to see something, either. Their job is to help you find the home that best suits your needs. If they’ve got appointments lined up already, your agent can always advise you on what to say and what to keep to yourself so that you don’t play all of your cards before any negotiations!
Keep an open mind and be realistic. As a first-time home buyer, it’s likely that your budget will limit your choices. Few homes will be “perfect” the way they are, but many will have the potential to be a great home. You may have to sacrifice some of your wants to ensure that your needs are met. If a house is in the right location and has the layout you need, don’t cross it off your list because of ugly paint or carpet. Cosmetic changes cost very little when compared to the overall price of a house and can be done over time to make the home suit your style. Doing so adds value to your property, without increasing your loan payment, too. You may even find that home improvement is your new favorite hobby!
Offer up! Once you’ve found a home that’s a good fit- the right location, good layout, and a reasonable price, it’s time to make an offer. Your agent will work with you to prepare the offer contract including the price you’re willing to pay for the home, a closing date, and other terms of the sale. They’ll discuss your obligations and rights under the contract and help structure your offer to be both competitive and fair. The offer documents will be submitted along with your lender’s pre-approval letter. Your agent will send the offer to the seller’s agent, and the seller’s agent will then review it with the owner or owners of the home.
Be patient! It can take a day or 2 to receive a response, depending on their situation. Even in today’s technology-driven world, not everyone is able to respond to a phone call or email right away. Keep in mind that some homeowners may live outside of the area, work odd hours (like a nurse or pilot), etc., or if it is an estate situation- there may be several people involved in making a decision. The owner has a few options when responding to offers- accept the offer as it’s written, reject the offer, make a counter offer with a price & terms more favorable to their needs, and finally, the option to not respond at all. This is rare, and quite rude, but be aware that it is a seller’s right. Counter offers are most common, and it is not unusual for buyers and sellers to counter back and forth a few times before coming to a complete agreement. In a more competitive market, a seller might have multiple offers to review and choose from.
Acceptance and execution. Once an offer is accepted by the seller(s) and everyone has signed the final version of the contract, the contract will be “executed.” This means that the deadlines in the contract will begin. Time is of the essence, so you and your agent will need to begin your due diligence on inspections.
The earnest money and option money (referenced above) must be delivered within the first 3 days of the contract period, so your agent will need to collect this upon execution of the contract. Your agent will deliver the contract and earnest money to the title company, who will begin their portion of the work and hold the earnest money in an escrow account. The title company will introduce themselves to you and ask for information to facilitate the transfer. For the most part, the work they do will be behind the scenes- researching county records, communicating with agents and the bank, and preparing documents.
Once in contract, you may choose any inspector you wish. Each will set their own rates, and you’ll pay them directly on the day the inspection is performed. Be sure to check reviews and ask for recommendations. Thorough inspectors are worth the price! Plan to spend $400 to $500 for a typical house, and additional fees if the house is larger than 3,000-4,000 square feet. There will be further costs to inspect a pool, septic system, or any other add-ons. Add about $100 for termite inspections, which are required for certain loan types and strongly recommended for all others. The inspector’s job isn’t to “pass” or “fail” the house, but rather to test each system and report on the condition so that you are well informed.
Inspectors are licensed by the state, just like real estate agents, and will test each major system inside and outside of the home. Their report will note any signs of potential condition issues or repairs so that you know exactly what you’re getting. A house cannot “pass” or “fail” a home inspection, and the inspector is not allowed to tell you whether or not they think the house is worth what you are paying for it. They simply report on the condition and help you determine when further investigation is needed. If problems are found with a major system, like electrical, plumbing, or HVAC for example, you may want to call in a licensed specialist or repairman for estimates. Once you know what needs work, you and your agent can prepare a repair request or ask for a credit, or a combination of both. The seller can respond by accepting, rejecting, or countering, just like with an offer, and negotiations may go back and forth quite a bit. Knowing the condition of the home, the cost of repairs, and how much the seller is willing to do will help you make a well-informed decision. Never skip an inspection, even on a brand-new house! Home builders can and do make mistakes, so it’s important to verify that everything is working as it should before closing.
After inspections and repair negotiations, the loan officer will order the appraisal on your behalf. An appraisal is performed by a third-party appraiser, licensed with the state. Fees for a typical house are $400 to $600, but may be more for homes on acreage or that are significantly larger than a typical home in the area. The appraisal fee may be paid to your lender’s bank, an Appraisal Management Company (often referred to as an AMC), or may be postponed until closing, depending on the bank. During their appointment, the appraiser will measure the rooms in the home to verify the square footage, take photos of the home’s features, document the condition of the home, and then compile a report comparing the home with other similar homes that have recently sold in the area to come up with the appraiser’s professional opinion of value.
Depending on the loan type, the appraiser may also note repairs required to ensure that the home is in “livable” condition. This report is returned to the loan officer and reviewed by the loan underwriter to confirm that the value meets their requirements for the financing. Some loans will require that the home’s value be equal to or greater than the purchase price, others may require it to equal or exceed a percentage of the loan amount. Your loan officer will contact you and your agent with the report, once it has been through their quality control process. If there are concerns, the price and/or repairs may need to be renegotiated.
Once the appraisal report is in and approved, the entire loan package will be submitted to the underwriting department at the bank. Be sure to submit any final documents requested by your loan officer as soon as possible to prevent any delays in this process. Underwriters will review the contract, loan application and supporting documents, and the appraisal report to ensure that it meets their final approval criteria. Sometimes this process can feel a little invasive, as they may request explanation letters or further documentation of income, employment, or any minor credit blemishes. Rest assured that this is a normal part of the process, and banks do this to reduce their risk level. After all, loaning out hundreds of thousands of dollars is a pretty big risk so they’ll want to make sure that you’re able to repay the loan!
Your agent will help you determine when to transfer utilities, but the accounts should ideally be set up at least 3 business days before closing. Our office has a utility concierge that can help you compare rates and schedule connections for free. Note that some utility providers will require proof of ownership, so you will need to bring in the requested documents after closing, and others may require an occupancy inspection by the city prior to beginning services. Your agent will communicate with the seller’s agent in this instance to help the transfer go smoothly and avoid interruption of service, whenever possible.
You’ll also need to shop for and select a homeowner’s insurance policy to cover the home and your belongings in the event of a disaster. Your agent can recommend some great insurance providers, but you may use any insurer that you’d like. Often if you have your home and auto policies with the same provider, you can receive a multi-policy discount so you might consider requesting quotes for both the house and your vehicles. Proof of homeowner's insurance will be required by your bank prior to closing, so be sure to send a copy to your loan officer, or have your insurance agent reach out to assist in providing the necessary documentation.
Once all loan and title documents are approved, the underwriters will deem the loan “Clear to close.” These three words are quite celebrated in the real estate & mortgage world! This means that everything is completely approved and you’re ready to go. At this point, the lender will send you a financial disclosure of all purchase costs to sign, which will show the total amount you’ll need to bring to closing to the penny. Current laws require that closing takes place no sooner than 3 days after you sign this final disclosure, allowing time to thoroughly review all numbers. After the 3-day period, and when all documents are ready, you’ll deliver your closing costs and down payment funds (either via wire transfer or cashier’s check) and then you’ll sign a stack of documents either at the title company office or with a travelling notary. It is important to remember that wire fraud is unfortunately a thing, so be sure to independently verify any wiring instructions you receive before sending anything. In the past, scammers have hacked into the email accounts of agents or title companies and sent fraudulent account information. It is important to know that in Texas, a real estate agent will never ask you to wire money anywhere, only the title company will.
Depending upon what’s in your contract, you’ll either take possession after closing, or at the end of a temporary lease. If possession was agreed upon at “closing and funding,” you will receive keys after everyone has signed their documents and the title company has received the loan money from the bank. This usually happens a couple of hours after everyone has signed (all sellers and buyers), sometimes even the next business day. This is because after everyone has signed, the documents are scanned or faxed to the lender for final review and approval. As long as everything is properly signed and notarized, the bank will then send the funds. If either party signs late in the business day, the banks may close before the file can be reviewed or funds can be wired. For planning purposes, don’t schedule your move or cable installation immediately after your closing appointment. If you have a temporary lease, your contract will determine when you will receive the house, unless the sellers move out early. Your agent will stay in touch with the owner’s agent to co-ordinate the transfer of keys either way.
Remember to re-key your new home once you take possession, for your safety and privacy. The sellers were likely great people, but you never know who they’ve given a key to or if they’ve ever lost one!
Enjoy your home and stay in touch! After moving in and getting settled, your agent can still help you out! By this time, you’ve spent a great deal of time together and may have even become friends. Your agent will check in on you from time to time and would love to see what you’ve done with the home as far as decorating and furnishing.
GroupWatson Realtors love to stay in touch with our clients. We are here to help with advice on home improvement projects, adding value, tax exemption applications, and county tax appraisal protests. And of course, if you have friends or family looking for a home, we are happy to help them as well. Referring others is the best compliment a happy home buyer can give an agent. It shows that we have earned your trust and demonstrated our expertise well.
We hope these tips help you to better understand the process and see that there’s nothing to fear. We are here to help, so let’s get started!
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With a background in marketing and journalism, Lisa Ellard is well-equipped to offer each of her clients savvy business advice, while always keeping their lifestyle needs a priority. She is a detail-....