Buying your first home is one of the biggest steps you will ever take in your life — right up there with getting married and starting a family. It likely will be the largest investment you have, at this point in your life, ever made. Intimidating? Of course–one that can evoke sleepless nights! Thrilling? Definitely, because this is not only a huge financial commitment but one in which you will live and love, unlike stocks or bitcoin. But like anything that pushes you out into the deep water of your psyche, it is worth the ecstasy and agony and is best tackled by developing a knowledgeable strategy with a Realtor®. First-time home buyers are my favorite clients because I love to educate. Home buying (whether first or 31st) is a process and once you commit to it you will find the process itself comforting. Here is a simplified step-by-step guide to what happens when you make the BIG DECISION to buy your first home. This is assuming you will need a loan and haven’t saved a boatload of cash! If that is the case, hats off to you and skip numbering two.
1. GET PRE-QUALIFIED OR PRE-APPROVED WITH A LENDER. Now, this is an important step to start with because the lender will tell you the price of the home you CAN buy but the payments may not be what you want to AFFORD! Only about once a year do I have a client who just insists on buying at the top of his or her qualification. I counsel against it. I want you with wiggle room left in your budget to travel, have money for the kids’ braces, and save to buy more real estate in the future because real estate is the best investment there is. The lender should be a person you trust and can communicate well with and one who has a track record of success in closing transactions. Sometimes the best way to find this lender is through a Realtor® who works with these lenders every day and knows of their reputations. Asking family and friends for their referrals is always a good idea as well. The lender can make or break your ability to a home, especially in a competitive market. Often locally based lenders are an excellent choice because they are accessible and often have reputations with the seller and/or listing agent which will give you a leg up over the competition. I will save the rest for a future blog.
2. FIND A REALTOR®/START HOUSE HUNTING. Now that you know what price of the home you qualify to buy, you can start the fun part! House shopping is both exciting and exhausting. It is definitely not like an HGTV show. You will have to see a lot more than 3 houses (usually) to settle on one worth offering. Hire an amazing Realtor® — one whom you trust, one you can communicate freely with, and one who knows the market well. Interview. Ask for references from other clients. Ask how many houses they sold last year and where they sold them. Ask if they will be available if you text them at 9 pm the night before your closing when you are having a nervous breakdown. Your Realtor® works for you –remember that! Open communication is the key to any successful real estate transaction. If you remember that you will find the right Realtor® for you.
3. DECIDE ON A MONTHLY PAYMENT THAT MAKES YOU COMFORTABLE. Here is where this research above pays off. You decide you want to afford $1500 a month and no more. Your lender has qualified you for a certain loan type, says FHA, and (rates are constantly changing) a 4.87 interest rate. Your Realtor® should be able to calculate in each house your down payment amount, what your payment will be with taxes, insurance, and principal, and interest. Here in San Antonio that will have you looking at homes at a price of around $185,000.
4. FIND A HOUSE YOU LOVE-MAKE AN OFFER. Your Realtor® writes a written offer which you sign with terms. These will include who pays some of the closing costs. There are two buckets of money for buyers when it comes to buying a house. One is a down payment and the other is lender closing costs. The down payment (zero for VA and USDA loans) is 3.5% for FHA and 3-5% for conventional loans. This must by law be paid by the buyers or through a gift from a blood relative. The lender closing costs (depending on the cost of the home $4K-$11K generally) can be paid for by the seller if the Realtor® can negotiate it. Closing can take as little as 21 days with some lenders and as many as 45-60 days with others. Your offer is negotiated.
5. OFFER ACCEPTED! NOW WHAT? (This is what happens in Texas; each state has a different procedure) Now the buyer must produce two checks — one to the title company for earnest money which is typically 1% of the sales price. This earnest money will be credited back to the buyer at closing if all else goes well. The second check is for Option Money. This goes to the seller directly as ‘consideration’ for taking the home off the market while the buyer does due diligence. This includes a home inspection with a licensed home inspector which the buyer pays ($250-$800), a wood destroying insect inspection ($80-$125), and any other experts the buyer wants in at that time. The option period ranges from 5 days for competitive homes to 14 days for farm properties that may have more to investigate.
6. ASK FOR REPAIRS AND TREATMENTS. This is a negotiation on the results of the inspections. Your Realtor® will advise you to ask the seller for a list of repairs or a price concession to account for those you must do after you close. If you cannot come to terms you can terminate the contract and receive your earnest money refunded and start over in your home search. However, if you do come to terms…
7. APPRAISAL IS ORDERED. At this time the lender will ask for authorization to order the appraisal. A licensed appraiser will pick up the order and inspect the home. Each loan type requires a different inspection. Ask your Realtor® about the differences in the appraisal inspections. The appraiser is looking for safety issues (FHA and VA) and sales price value (all loan types) — it is said to protect the buyer but it is primarily to protect the lender so that the bank does not loan on property not worth the sales price. If the appraisal comes in below sales price, that can be negotiated or the buyer can leave the transaction (VA/FHA) with getting their earnest money back. Most conventional are not protected in this way.
8. GET THE LENDER ALL DOCUMENTATION. If you are pre-approved, this step will be small. If you only got pre-qualified by the lender this step is huge. The underwriter looking at your file will demand a great deal of paperwork from you to get your loan approved. Expect the underwriter to ask for things last minute as well — this is very common. Often this can be the newest bank statements since you went under contract or letters from family if you are lucky enough to get some gift funds. Sometimes what an underwriter request seems senseless. Don’t argue or try to make logical sense of it, just produce it. Many times the request has to do with government regulations. Enough said.
9. CLEAR TO CLOSE ON YOUR LOAN! Yay. You made it. Now your Realtor® will ask you the time to come to closing and a time to walk through the home once last time before you sign the papers. You are almost there.
10. CLOSING. This takes place at a title company office and will take 30 min-1 hour. You sign a lot of paper, bring your down payment funds and then must wait until all the powers-that-be review it and approve it and “fund” the loan. That is when you get the keys and can start moving in (in Texas, that is. The funding process varies from state to state). Keep in mind that with some efficient lenders this takes place immediately (called table funding) and with some, it can take 3 days! That is why choosing the right lender can matter. If you cannot be at the title company handling the closing because you are out of the city or state, the title company will arrange a mobile notary to meet you to sign. You just bought a home!!!
All along the way, your Realtor® is your guiding force. Choose a good advocate for your first, biggest, best investment in your life!
