Your First Home
The homebuying process doesn’t slow down to accommodate the learning curve of first-time buyers. The competitive Texas market pits newbies against veteran buyers, who have more leverage and experience. But with a reliable mortgage lender and seasoned agent, plus your own arsenal of knowledge gleaned from our 10 tips, first-timers are equipped for the journey ahead.
Here are 10 tips for first-time buyers:
It would be a detriment to the entire process to start looking for a property before getting your financing in place. Compare mortgage rates from at least three lenders.
There are numerous advantages to working with a local lender as opposed to a national bank. In the heavy buying season, April to August, national banks are often bombarded with loan requests. You could have a loan officer in Fort Worth, processing in Michigan, underwriting in Fort Lauderdale — essentially, a conveyor belt where any snag leads to delay. With a local, independent mortgage banker, communication is streamlined, thanks to a small staff in the same office.
Do your due diligence
Among other things, your credit will affect your interest rate and possibly your loan terms. Check your credit score and dispute anything that could be weighing it down. Pay down debt to boost your score, if possible.
Don’t underestimate the amount of paperwork required to get a mortgage loan. It’s not as simple as filling out a loan application and closing. Lender have to document everything as the guidelines require: several months of bank statements, possibly tax returns, W2s, explanations of large deposits into your bank statements that can’t easily be tied to anything. A lot of times, you’re required to have reserves — extra funds after closing — to show you have future house-paying ability in the event you lose your job.
Know your buying power
Ninety percent of the time, you can qualify for more than you want and probably more than you need — known as "reverse-engineering the approval.”
An approval limit is essentially a “debt ratio.” How much monthly debt can you afford? Add up your monthly housing payment, plus everything on your credit report: auto loans, student loans, minimums on credit cards, etc. Take taxes, insurance, and mortgage insurance, if applicable, into account. That number needs to be 45 percent of your gross monthly income. Once you have that, you can back into a price range that fits your monthly payment goals and how much money you have to close.
Go with a seasoned agent
This is probably the biggest financial decision of your life up to this point. Don’t take it lightly; shop full-time agents. Look at the agent's production, particularly within your preferred neighborhoods — you want a specialist.
A good agent will walk you through the homebuying process linearly, before taking you to visit houses. They’ll help you understand what you can afford in what neighborhoods. Otherwise, if you’re just throwing a dart on a map and saying, "That neighborhood looks good, and that house looks good," the process is going to take you months.
Raise your expectations
You also want someone who's in-the-know about off-market properties going for sale soon. If they’re simply sending you listings that you can readily find on Redfin, Trulia, or Zillow, search for someone else.
Think outside the (downtown) box
Buyers usually budge on one of three hinge points during the house hunting process: price, condition of the home, or location. If you can afford $250,000 and you want to live in the center of town, you’re looking at a two-bedroom, one-bathroom house that needs some work. But further out, you can get a four-bedroom new house for that price.
Right now it's a seller’s market, so once you place a bid on a house, you need loan approval within 30 days. Any longer and you'll likely lose out on that house.
When you go under contract, make haste
Notify your lender immediately when you place a bid. There’s significant financial risk for a buyer if their lender encounters a surprise issue while trying to close. If you don’t meet the financing deadline or close on time, there’s the possibility that the seller could take a backup offer and keep your earnest money, which runs about 1 percent of the sales price.
The closing documents need to be delivered to the buyer three business days before closing — Saturdays included. Proceed from day one as if this closing is going to happen to stay on track and make sure everything goes smoothly.
Pay attention to inspection
Once you’re under contract, you go under the option period, called the inspection period outside of Texas. It generally lasts anywhere from five to 10 days. A general inspector should give you a good snapshot of what everything looks like as far as the foundation, electrical, plumbing, even down to whether or not your dishwasher or oven works. Afterward, analyze everything with your agent because before you go out of your option period, your earnest money is on the line and you need to know fully what you’re getting into.
If incidental payments are of concern, it's perfectly fine to ask the seller for their bills during high months, like August and December.
Seal the deal
You’ve compared and contrasted homes; now the seller is likely comparing and contrasting you. While you can always increase your asking price to stay competitive, there are other ways to win over the seller. Consider increasing your earnest money, or letting the seller stay longer after closing for free. There are different incentives for the seller that sometimes speak louder than just cash.