Home Buyer’s Guide

Before you run out and start walking through open houses, before setting up automated internet searches, before you start scouring through the MLS and before you drag your real estate agent out to show you properties, let’s talk about the best way to go about buying your first home and the order in which the steps should be done to give you the best chance to accomplish your goals, save you money and avoid tremendous frustration.

Step 1: Get Your House in Order

Your financial house that is. If you haven’t already, get your financial house in order first… before you do anything else.
Assuming you are not a trust fund baby and don’t have the ability to pay all-cash for a new home, you’re going to need a loan. You’ll need three things (the Thee C’s) to be able to qualify for your first home loan…

1. Cash (for your down payment)
2. Cash Flow (usually in the form of income from your job)
3. Credit (we all know how important good credit is)

Let’s talk about each of these in detail.

Cash / Down Payment
Lots of people think you must save up 20% of the purchase price to buy a home. A 20% down will usually get you the best rate and terms but it’s just not attainable for some and not always the case that you’ll need 20%, especially if you are a first-time buyer. Although some are not well known, there are lots of programs out there that are designed to assist first time buyers in their first purchase (Note: A first time buyer in the lending world is usually defined as someone who has not owned a home in the last three years). Low down payment loans, DPAs (Down Payment Assistance program), private and government sponsored grants, equity investors… there are lots of ways to satisfy the down payment requirements for a variety of loan types. Your lender and/or Realtor should be able to guide you through your options but here are a few resources if you want to read up and educate yourself in the meantime;

Grant Program: http://www.gsfahome.org/programs/platinum/overview.shtml

Features at a Glance:

• Up to 5% of loan amount
• DPA in the form of a Second Loan, with no interest and forgiven after 3 years;
• No first-time homebuyer requirement;
• Minimum FICO 640 / Maximum DTI 50% (keep reading for DTI definition)
• Generous Income Limits / higher than you might expect;
• FHA, VA, USDA and Conventional Mortgage Loans available; and
• Purchase and refinances of primary residences are eligible
• Must be primary residence of borrower.

Equity Investor Program: https://www.unison.com

Features at a Glance:

• Investor will contribute up to half of your down payment.
• In return, investor shares in appreciation / depreciation of home at time of sale
• This is NOT a loan. No interest in charged.
• NO monthly payments
• Reduces the size of your loan
• Helps to avoid Mortgage Insurance (PMI)
• Can buy out investor after 3 years
• Must be primary residence of borrower.

Cash Flow / Income
It may sound obvious but keeping your expenses low and your income high will be the biggest factor in determining your mortgage eligibility. The bank will be calculating your Debt-to-Income Ratio (DTI) as part of their underwriting process.

You should also be prepared to have your employment and your income verified. It is something that pretty much every lender will require these days. So, make sure you can prove up the numbers give you lender and put on your loan application.

Note: That said, there are loan programs available these days called, “Stated Income Loans”. And just like it sounds, they do not verify your income during the underwriting process. You will most likely have to have very good credit and possibly a larger down payment to mitigate the perceived risk the lender is taking in this scenario, however.

Credit
Don’t go buy anything big right now! Don’t finance anything right now! And of course, don’t miss any payments to anyone whom you owe money and don’t be late in making those payments.

Good credit is your friend. When you are trying to qualify for a new home loan, good credit really becomes an important factor. The better your credit, the better your rate usually. The better your rate, the lower your payments. And the lower your payments, the greater your buying power.

That’s not to say those that have less than stellar credit can’t still qualify for a loan though. Lower credit scores equal higher risk to a lender. Higher risk is offset by the lender charging you more money in form of fees or a higher rate.

Figuring out the best balance between income, down payment and credit is what a good lender will do for you. But it’s in your best interest to prepare all three to your advantage as best you can.

Step 2: Get Pre-Qualified

Once you feel like your financial house is in order, you’re going to want to talk to a lender. A 20-minute phone call with a good mortgage broker will be very enlightening, is totally free and does not obligate you to anything. Be prepared to answer lots of personal financial questions though as it is the lender’s job to calculate your Debt-to-Income ratios (DTI) which is how the banks determine your ability to pay your mortgage and your other outstanding debt. (DTI Calculator)

Once he has all the financial information he needs, the lender will be able to provide you with a pre-qualification letter. This is a crucial step. If you don’t have a Pre-Qual Letter before you begin the home search, your offer may very likely be the last one considered in a competitive market.

Understand that being “pre-qualified” is not a commitment from the bank to make a real estate loan to you. Getting “pre-approved” however is just that. (Learn the difference between “pre-qualification” and “pre-approval” here).

Step 3: Set Goals

Not until after you are prequalified will you be able to set realistic goals. You need that information to be able complete this step. When searching for the right home, everyone has their criteria. Think of that criteria in three categories.

1. Must have
2. Preferred
3. Icing on the cake

In the early stages of your search, it is most beneficial to focus primarily on the “must haves”. Sure, make your wish-list but don’t worry about the other two categories initially. Some of those “must haves” include things like.

• Location
  • Narrow this down as much as you can tolerate without abandoning your ultimate goal. Think about location within the state, within the county, within city, within the neighborhood.
• Purchase Price (a “not to exceed” number)
  • This is why you got pre-qualified. It doesn’t do you any good to be searching for a $1M home if your maximum purchase price has been determined to be $750k. Know your not-to-exceed number.
• Bedroom / Bathroom Count
  • And even this can sometimes fall in to the “preferred” category depending upon your particular circumstances.
  • Some really good realtors will have construction knowledge and/or experience as well and be able to tell you if adding an additional bedroom or bathroom is feasible.
• Other (views, school districts, interior laundry, 3-car garage for your Ferrari collection, etc.)
  • You decide what other “must haves” are on your list and make sure you convey that list to your realtor.

By focusing on the “must haves” you can then save yourself lots of time and frustration by weeding out the properties that do not possess these critical criteria. Remember, it’s a team effort between you and your Realtor. He helps make you aware of your options. And then it’s your job is to say “yes” or “no”. Here’s a Purchase Criteria Checklist to get you started.

Step 4: Find a Realtor

The one caveat to the order of how things should be done is this one. You just might want to find a realtor first. Although it’s always nice for the Realtor to have a new client that has all the above in 100% perfect order, the reality is, a good Realtor can help guide you through all the above steps. To name just a few, he can assist with;

1. Helping you address any derogatory credit issues
2. Discussing down payment assistance programs
3. Discuss creative financing options
4. Talking to you about tax savings/ramifications
5. Help you prepare for loan qualification
6. Refer trusted mortgage brokers
7. Help you sort through your purchase criteria
8. Let you know what to expect during the home-buying process
9. And of course, answer any of the hundreds of questions that you will surely have.

So, if you want to execute Step 4 in front of Step 1, that is a perfectly reasonable and logical thing to do. A good realtor is going to be an invaluable resource for you during this journey.

When making the decision about which Realtor to choose, be careful. The barriers to entry into the real estate industry are, in this author’s opinion, too easy. And as a result, there are lots of licensed real estate agents out there that are not full time Realtors and don’t have much more experience than you. Here are a few things to consider when finding the right one;

• Experience
  • Make sure they are well experienced. This is the most important quality a Realtor can have. There is just no substitute for that experience when it comes to helping you avoid the many pitfalls and negotiate the best terms possible. Studies have shown that It takes as least 10 years to be become an expert in any field.
• Commitment
  • Make sure you choose a professional, dedicated Realtor vs. your buddy’s wife’s sister who happens to have a license. You want to use someone who participates in their industry full time. Only through this dedication to honing their craft will your Realtor be able to guide you through any turbulence that may arise and look out for your best interests. The full time, dedicated Realtor will be up to date on current tax law, legal aspects of real estate, contract negotiations, financing options, vendor referrals, and many aspects of construction. These are all things you will need.
• Ancillary skills
  • The best Realtor have wide real estate related experiences in things related to real estate other than just knowing how to execute a real estate transaction.
    • Having a background in or good working knowledge about appraisal, valuation and economics of real estate is invaluable.
    • Having experience in building, development, and construction will allow him to offer advice on the physical aspects of your new home. It will also allow him to interpret any inspection reports and determine the major issues from the minor issues.
    • Having gone through the permitting and entitlement process with the local municipality will give him the knowledge on how to advise you when you have questions about renovations or additions.
    • Understanding the real estate finance world is crucial in every transaction where a loan is part of the equation.

There aren’t a lot of them but Realtors with these skills do exist. If your Realtor does not have these background qualifications, you might want to keep searching. Having these skills on your side almost always translates in to saving you time, frustration and money.

And the last thing to think about when choosing your Realtor… don’t be afraid to sign a Buyer/Broker Agreement.

1. Lots of protective language exists in this agreement that defines the Realtor’s fiduciary duties and obligations to you.
2. It requires your Realtor by law and by agreement to always act in your best interests.
3. It gives the Realtor confidence in your reciprocal dedication to him which helps ensure you get the best attention you need and deserve. Trying to work with multiple Realtors at once is almost always a recipe for problems.
4. A good Buyer/Broker Agreement may even have some “out” language in it in case you decide you don’t like working with him and want to cancel. A good Realtor is not going to want to lock you in to an agreement that you don’t want to be in.

Step 5: Make an Offer

Or better yet, make several! Yes, really. No kidding. A big mistake that buyers (especially first-time buyers) make is to be apprehensive about making an offer. The only result of apprehension that we have seen in over 20 years is missed opportunity.

Popular thinking (and very incorrect thinking at that) is that if you make an offer you are totally committed and must buy the house if your offer gets accepted. That’s just not true. The days of “caveat emptor” (Latin for “buyer beware”) are long gone in the real estate industry in California. The California Purchase / Sale Agreement is very much drafterd toward the protection of the buyer. There are all sorts of contingencies and times frames that benefit the buyer without having to take any financial risk at all… not one dollar needs to be put at risk!

That said, it is not advisable to throw out offers on properties that you know you don’t want. A good, experienced realtor does not need practice in writing offers and you’ll just be wasting everyone’s time. But if you find a property that has all your “must haves” and you’re on the fence because it may not have all your “preferreds” or your “icing on the cake” features, make the offer. You’ll have time to figure out if you can live with or overcome the other challenges.

Step 6: Acceptance & Execution

Once you get your offer accepted, your Realtor should very thoroughly and effectively guide you through your real estate transaction. A whole book could be written about how to best execute a real estate transaction, but this is one of the areas an experienced, knowledgeable Realtor earns his commission and again saves you time, frustration and especially money!