How to buy your first home

It is incredibly exciting to purchase your first home but for some it can be a daunting and stressful experience if you don’t approach it properly.  After doing this myself, I want to help others after learning a few things from experience. I will break this down into some large easy to follow steps.

Talk to a lender

Before you can buy any house, you must first determine how much house you need and how much house you can afford. One of the best ways to do this is by talking to a lender first.  There are many costs associated with owning a home including the mortgage principal, interest, taxes, insurance and many more.  A lender will accurately compute your monthly payment, the down payment size, the terms and conditions of your mortgage and much more.  Additionally, they use your income, debt, and overall financial scenario to tell you how much you can afford.  

If this is your first time using a home lender or you haven’t spoken to one in a long time, I recommend having an introductory call with at least 10 lenders. Some lenders specialize in certain types of financing such as residential vs. commercial, investment vs. primary residence, business loans vs. individual etc. This is why you want a lender that is knowledgeable for your strategy.  

Here are some questions you can ask the lender to see if they are competent in assisting you:

1. What are the current first time homebuyer programs available in my state? Can you provide more details and what I need to qualify for them?
2. Do I qualify for a down payment assistance program?
3. What is the interest rate for my loan type?
4. Do you perform a hard credit check?
5. Do you charge for an interest rate lock?

Every lender should be able to answer these questions. After you speak with all of them, see what others had to say in reviews and select the one you feel most comfortable to work with.

Find an agent

I’m assuming you don’t currently hold a real estate license and as a first time home buyer it’s a good idea to have a solid agent on your team.  An excellent agent can mean the difference between getting an offer accepted and having an offer miss the mark.  

Your agent should be doing a few things for you since they are representing you and will get paid through a percentage of the final sale. They should also be readily available and answer the phone when you call and if they are unavailable, they should call you back in under a couple hours.  It is not their full responsibility to find you a property but you should be set up with the tools needed to browse properties that hit the market.

A real estate agent must be a valuable resource when touring properties and offering advice from experience.  Having an agent that can accurately value properties puts you at an advantage when making offers.  Your agent has the responsibility to communicate with the seller’s agent to relay all seller disclosures and additional information to you as the potential buyer.

I recommend doing some research and networking before signing a contract with the first agent you meet.  Networking is a key component to finding a quality agent.  Your reasoning for working with a certain agent should not alone be that your friend or cousin used them.  You should ask some of the following questions when interviewing realtors.  How many buyers have you helped get an offer accepted in the past 6 months?  Are you a full or part time agent? Do you invest in real estate yourself?  Explain why I would want you as a member to my team? 

Looking at houses 

When touring a house I like to do a lot of visual checks and analysis before I compute my offer amount. There are lots of houses out there and they all have pros and cons when compared to the previous one.  I recommend taking the time to check some key items yourself first.  Just like a one-owner car,  a house that has been owned by the same family for many years usually is in better condition than ones that aren’t.  Houses that have been rented out will have more wear and tear and possibly more deferred maintenance than other properties.

Structurally you will want to check the foundation for cracks. It’s also important to check the sills for termites and rot. The age of the roof, HVAC systems, electrical, plumbing and appliances is important to know because repair and replacement of these items can be very costly.  

Personally I like to check the basement to see if there is evidence of water.  Staining, a musty smell, and rotted wood on any permanent shelving or framing are all indicators that water was present at one point.  Fans and sump pumps are almost always found in basements that get wet.  

To check if the floors are straight,  I bring a golf ball with me. I will place the ball on the hardwood floors and tile to see if it rolls in any direction.  You can also place the ball in the showers to see if they drain properly. If all floors roll towards the same direction this could be an indication of an underlying structural issue.

Making Offers

When making offers it’s important to be logical. Just because someone is willing to pay more for a house doesn’t mean that you should too.  After performing analysis on comparable homes, you should arrive at a number that makes sense for your offer. You don’t want to exceed this number if the price no longer makes sense. The seller’s agent’s primary job is to get the most money possible for the seller.  Sometimes the seller’s agent and assistants will say there are multiple offers well over asking etc. These statements should not influence your decision and it is up to you to generate your competitive offer.

For a first-time home buyer, it can be beneficial to include a letter to the seller with your offer. If two offers are exactly the same and you explain why you like the property and how it aligns with your goals, the seller may select your offer. People tend to like doing business with others who they know or feel comfortable with especially if the house has a lot of sentimental value to the seller.  If you can make the seller feel good about their decision it can work out in your favor. 

Another tip is to try and include a closing credit.  Rather than paying the closing costs as the buyer, you can raise your offer and state that the seller pays closing. The seller is still getting the same amount of money for the sale but your closing costs are wrapped into the mortgage rather than paying them in full at closing.

Another buyer’s tip is the possibility of using an escalation clause in your offer.  What this does is increase the chances of getting an offer accepted when there is a lot of competition for a property. The clause can work like this “I am submitting an offer for $350k. If there are any offers above mine, I will increase my offer $3k above the highest to a maximum of $375k.” Remember to talk to your agent to discuss these terms and analyze how this can be done.

Closing and getting the keys

During the time between having an offer accepted and closing on the property, it’s important to not make changes to your debt / savings amounts. Doing so can delay the closing since the bank providing your home loan will no longer be providing the loan on the terms previously accounted for. 

As the buyer you can use this closing time to negotiate additional items with the seller. In my house, I really liked the kitchen chairs that matched the island and asked the seller if she would consider selling them. The woman had no use or space for them where she was going so I ended up receiving them for free along with a few other things such as a wet/dry vacuum, a couple ladders and a BBQ grill. Moving can be a hassle and if you can keep or find a home for some of the seller’s belongings it can be a win-win situation for both parties. 

The final walkthrough occurs with your agent typically a day or two before closing.  During this time, you will essentially walk through the property and make sure that it has not been vandalized, modified, or altered in any way since you’ve seen it at the showing.  This is also a time to make sure you kept or removed all of the items you negotiated with the seller.  

As the official closing day approaches it’s important to make sure you bring the correct amount of cash to close.  This is typically made out as a check and the final amount of cash that includes the downpayment and closing costs in one payment.