Six Tips For First Time Home Buyers
Many of our clients are first time home buyers who need some guidance with where to start and what to expect with the process of searching for a home. Predictably, the process involves much more than simply picking a home and paying for it, but it can be simple even for prepared first time home buyers. Following these six tips for first time home buyers will not only reduce the stress involved in purchasing a home, but will also maximize the chance of securing a desired property.
Tip #1 – Know What You Can Afford: Get Pre-Approved
Going to open houses can be fun, but before you get your hopes up by venturing into Bel Aire and looking at multi-million dollar mansions, first time home buyers should have an idea of (a) how much of loan they can obtain and (b) what kind of monthly payment they are comfortable with.
In order to get pre-approved, get in touch with a loan officer or broker and make sure to ask for a pre-approval rather than a pre-qualification. The difference is explained in detail here. The short version is that a pre-qualification is generally based on a quick phone call or filling out an internet form, while a pre-approval involves an in-depth analysis of your income and credit rating. Obtaining a pre-approval will require providing a variety of information, including bank statements, W-2s, tax returns, pay stubs, and any other information supporting your income stream.
A buyer’s ability to obtain a loan, as well as the loan’s interest rate and whether private mortgage insurance (PMI) is required, will depend in-part on the amount of the downpayment. Typically, lenders prefer a 20% downpayment, which will minimize the interest rate and eliminate the need to pay for PMI. However, lenders have recently loosened their requirements, and it’s not impossible to get a loan at less than 20% down, but the days of 0% downpayments are long gone.
Lastly, based on the loan, first time home buyers should determine the monthly payment they are comfortable with. Again, a loan officer or broker should be able to assist with this step, or buyers can simply find an online monthly payment calculator, like the one here. Keep in mind that in addition to the loan expense, there are other monthly and annual expenses associated with purchasing a home, such as insurance, property tax, HOA fees, utilities, and miscellaneous maintenance costs.
Equipped with this information, first time home buyers can set a cap on their purchase price. Getting your finances in order will help significantly in creating a targeted search and minimizing the time you spend looking at properties that you cannot afford.
Tip #2 – Identify Your Needs And Wants
The next step that is often overlooked by first time home buyers is identifying “needs”, as opposed to “wants”. The following list of property characteristics is a good place to start:
- What type of property are you looking for (e.g. condo, townhome, single family residence, etc.)?
- What is the minimum number of bedrooms and/or bathrooms that you are willing to consider?
- What is the minimum square footage that you will consider?
- Are there any other property characteristics that are must-haves (e.g. pool, yard, good school district)?
Keep in mind that your “needs” list should be separate from your “wants” list. By identifying “needs”, you will be able to create a search that will completely eliminate properties that you are unwilling to consider, thereby reducing the time you spend looking at irrelevant listings.
Tip #3 – Choose Your Area(s)
Los Angeles County is enormous and has a wide variety of cities and areas, and even areas within areas. First time home buyers who have accomplished items 1 and 2 above should be able to narrow their search to identify which areas have properties that match their criteria. This is where a good real estate agent can help. Esquire Real Estate Brokerage, Inc. is happy to assist you with identifying the areas and specific properties that fit within your parameters, as well as helping with our other six tips for first time home buyers.
Tip #4 – Be Prepared To Make An Offer
Going to open houses and searching for a home is one thing – making an offer on a property is another. Making a “clean” offer that maximizes the chance of acceptance takes more than simply signing documents.
First, be mentally and emotionally prepared for the idea that you are likely making a long-term commitment, and will be investing a significant portion of your savings in the form of your downpayment. This may seem like a trivial and obvious step, but facing this significant commitment is often a barrier to “buyers” who are comfortable with the concept of purchasing a home, but not the reality.
Second, after locating a desired property, decide on an offer price. In order to assist you with this step, your real estate professional should prepare an analysis of recent comparable sales to give you an idea of the current market conditions and what is a “fair” price for the home. Given this information, you will be able to commit to a price that you are willing to pay, which will assist with avoiding an emotional bidding war with competing purchasers who may be willing to overpay for the property. Keep in mind that not all listing agents will list a property at above-market, so don’t always expect to get a “deal” by offering less than the list price.
Third and finally, be prepared for the logistics. Your offer paperwork will most likely be documented using the California Association of Realtor’s form entitled “California Residential Purchase Agreement and Joint Escrow Instructions.” Familiarize yourself with this document in advance. In addition to filling out the necessary paperwork, in order to make a “clean” offer that communicates to the seller an ability to close the deal, submit a pre-approval letter from your lender and bank statements showing you have sufficient funds to cover the downpayment. You may want to also submit a personalized letter summarizing who you are and what you like about the property to add an emotional aspect to your offer.
In today’s market, offers are often accepted very shortly after an open house or showing. Being prepared in advance to make an offer enables buyers to make quick offers, thereby minimizing the risk of missing out on properties due to failure to submit a timely bid.
Tip #5 – Have A Plan Going Into Escrow
As soon as an offer is accepted, the seller will open an “escrow” account with an escrow company that will guide the parties through the closing process and prepare all the paperwork necessary to document the deal. Being prepared for the escrow process is extremely important, especially for first time home buyers. Three of the most important tasks you will need to accomplish as the purchaser are (1) the initial deposit, (2) physical inspections, and (3) your loan application. Hence, tip #5 of our six tips for first time home buyers.
A buyer’s first task after escrow is opened is making the “initial deposit” of funds into escrow. This amount is typically 3% of the purchase price, and must be deposited within 3 business days after the escrow account is opened. However, the CAR offer form protects this 3% deposit by building “contingencies” into the deal that must be released before the seller can claim a right to the 3% deposit due to a failure to consummate the deal.
The next important task for a buyer, which should also be accomplished quickly after opening escrow, is scheduling physical inspections of the property. One of the “contingencies” of the sale is the buyer’s approval of the physical condition of the property. To that end, buyers have the right to have any and all physical aspects of the property inspected. Know what specific aspects of the property you would like to have inspected (e.g. roof, chimney, foundation, sewer line, plumbing, electrical, etc.). Also make sure to schedule a general inspection with a licensed contractor. The general inspection will involve a cursory review of almost all of the physical aspects of the property, and will likely reveal other specific, in-depth inspections that are necessary.
Last, but not least, is the loan application. This task is easiest for first time home buyers who have been pre-approved, because a lender has already been selected and the loan officer or broker already has much of the necessary information. Find out from your loan officer or broker whether they need any additional or updated information in order to complete the loan application and obtain loan approval. The loan officer or broker should also immediately schedule an appraisal of the property, which will also affect whether the loan will be approved for the amount requested.
There are several other items buyers will also need to accomplish (e.g. reviewing the seller’s disclosures, obtaining homeowners’ insurance, reviewing title and natural hazard reports, etc.), but the above items require the most immediate attention, and will simplify the process if they are accomplished shortly after opening escrow.
Tip #6 – Don’t Lose Sight Of the Goal
Perhaps the most important of our six tips for first time home buyers, remember that you are likely searching for a place that you will call home for many years to come. Too often, first time home buyers get caught up in buying a property because they feel like they are getting a “deal”, and end up sacrificing comfort or “needs”. It’s true that purchasing a home can be an investment, but it’s not like purchasing a stock that you simply wait to cash-out on after some amount of appreciation – it is a place where you will be living. While real estate agents and loan officers/brokers can greatly assist with the process of purchasing a home, ultimately it is up to you to decide whether a specific property is right or wrong for you.
With some advanced planning, buying a home can (and should) be fun, even for first time home buyers. Following these six tips for first time home buyers will help make it fun. If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at email@example.com.