First Time Home Buyer Guide Part 2

4. LOOKING AT HOMES

Some 6 million new and existing homes are sold each year. There is no shortage of housing options, but with so many choices the challenge becomes finding the property which best meets your needs. The housing market is complicated because the stock of homes for sale is always in flux. If it were possible to have a complete list of every home for sale at this very moment in a given community, such a list would become obsolete within seconds as new homes become available and properties now for sale are put under contract.

In effect, buyers are looking at a moving target in a marketplace that is never static. Because of this, it is important to know as much as possible about the choices in your preferred markets, and the way to do that is by working closely with a local Realtor who has a good idea of the options available there.   

What are you looking for?

A home is more than just a collection of bedrooms and bathrooms. Several properties — each with four bedrooms, three baths, and the same price — may well represent radically different designs, commuting distances, lot sizes, tax costs, interior dimensions, and exterior finishes. Each of us is different and so it’s important to list the features and benefits you really want or need in a home. Consider such things as pricing, location, size, amenities and design (one floor or two, basement, craftsman, contemporary, Tudor, Cape Cod, etc.).

Next, it’s important to consider your priorities. If you can’t get a home in your price range with all the features you want, then what features are most important or that you must have? For instance, would you trade fewer bedrooms for a larger kitchen? A longer commute for a bigger lot and lower purchase price?

Lastly, consider your needs in several years. If you’ll need a larger home, maybe now is the time to buy a bigger house rather than moving or expanding in the future. If you expect your income to increase, perhaps you should consider a more expensive home financed with a loan program where monthly payments may potentially increase in the future. 

Where should you look?

All neighborhoods and communities have a special nature that gives them identity and value. One community may be well known for historic homes while another offers both suburban living as well as easy access to downtown office areas.  It’s important that you visit the communities you’re considering, drive around them, walk around them or even spend an afternoon visiting the places that you would potentially go there.  It will help to narrow things down and enable you to prioritize the communities that you want to focus on.

How do you find a house?

Some buyers like to search online by looking at listings on the basis of location or price; others prefer to have local their Realtor suggest properties; and many buyers prefer both approaches. Regardless of your choice, it’s important to target your search. By using basic measures such as general location and affordability, you can refine your search and focus on homes that offer the most desirable features.  Once you have an idea of what your needs and goals are I encourage you to share them with your agent.  Agents have access to the MLS in a much more in-depth way than even a robust website such as Tacomapowersearch offers.  We can search for properties based upon a wide range of criteria as in depth as which floor each bedroom is one or whether the yard is flat and fenced.  As you spend more time working with your agent he or she will be able to know your preferences and needs to the extent that she can find properties for you which have the best potential to fit your needs.  That way you can focus your efforts and property viewings on those houses vs. those that may not be as appealing.  As you see houses, you should maintain a file with information on each of the homes you like.  Most agents will provide you with a report or flyer for the homes you are viewing and I always encourage clients to make notes of positive and negative aspects of each home they are interested in.

5. CHOOSE A HOME

Is it THE house?

A house is shelter, but a home is far more. It’s where you live, relax, entertain friends, raise families, and work. A home is where you spend much of your life, and so choosing a house is an enormous decision.  How do you know if a house is THE one? Probably the best approach is to look at as many homes as possible, and do online research at our website Tacomapowersearch.com, where you can quickly and easily view huge numbers of homes, check prices, take virtual tours and view neighborhood information.

Can you really afford it?

Remember Step 2 – the preapproval process? Getting preapproved means you have a very good idea of how much you can borrow, what loan programs will most likely work best in your situation and how much home you can afford.  How reliable is a preapproval? While preapproval is not a loan commitment, it’s still necessary for lenders to check such items as credit reports, income and asset documentation. Despite fluctuating interest rates, preapproval nonetheless provides a reasoned, careful analysis of what you can afford. After all, loan originators are typically paid only when loans are originated. It doesn’t make much sense for loan officers to suggest high loan limits that later can’t be delivered. 

There’s no doubt that choosing a home is a big decision and you want to do it right. As a buyer, here’s what will happen. A home has been placed on the market for which the seller has established an asking price as well as other terms. In effect, this is an offer. At this point, you have three choices: accept the seller’s offer and create a contract; reject it and not make an offer; or suggest different terms and make a counter-offer. If you choose this last option, the seller may accept, reject or make a counter-offer.  This part of the home purchase process is complex, personal and variable with the bargaining going back and forth between buyers and sellers. This is the point where the value of an experienced Realtor is clearly evident because he or she knows the community, has seen numerous homes for sale, knows local values and has spent years negotiating transactions

6. MAKE AN OFFER

Realtor groups, such as the local Northwest MLS, working with legal counsel, have developed forms that are appropriate for real estate transactions in specific communities. Such documents include numerous sale conditions in addenda and their wording should be carefully reviewed to assure that they reflect the terms you want to offer.  Realtors can explain the general contracting process in your community as well as his or her role. While much attention is spent on offering prices, a proposal to buy includes both the price and terms. In some cases, terms can represent thousands of dollars in additional value for buyers — or additional costs. Terms are extremely important and should be carefully reviewed.

How much?

You sometimes hear that the amount of your offer should be x percent below the seller’s asking price or y percent less than you’re really willing to pay. In practice, the offer depends on the basic laws of supply and demand: If many buyers are competing for a home, then sellers will likely get full-price offers and sometimes even more. If demand is weak, then offers below the asking price may be in order.

How do you make an offer?

In a typical situation, you will complete an offer that your agent or the seller’s agent will present to the owner. The owner, in turn, may accept the offer, reject it or make a counter-offer. Because counter-offers are common (any change in an offer can be considered a “counter-offer”), it’s important for buyers to remain in close contact with their agent during the negotiation process so that any proposed changes can be quickly reviewed.

Acceptance

After you and the seller come to agreement on the terms of the transaction and it all signed around by both parties you are considered to be at “mutual acceptance”.  You will likely need to make an “earnest money” deposit with either the company at which the closing will take place or with the real estate office handling your transaction.  Earnest money is a deposit that protects the seller insures that you as the buyer will go through with the transaction and not leave it without cause.  A cause to leave the transaction could be an adverse title report, an appraised value not up to purchase price, failure of financing approval or an inspection which you do not approve of.

How many inspections?

A number of inspections are common in residential realty transactions. They include structural inspections, checks for pests, surveys to determine boundaries, title reviews and appraisals to determine value for lenders.  Structural inspections are particularly important. During these examinations, an inspector comes to the property to determine if there are material physical defects and whether expensive repairs and replacements are likely to be required in the next few years. Such inspections for a single family home often require three to four hours, and buyers should attend. This is an opportunity to examine the property’s mechanics and structure, ask questions and learn far more about the property than is possible with an informal walk-through.

7. GETTING FUNDED

Because financing is so important, buyers should have as much information as possible regarding mortgage options and costs.  Your work in the pre-approval process at the beginning should help to move the funding process forward provided that you continue working with the loan originator your pre-approval came from.  Often the cost of real estate financing is routinely greater than the original purchase price of a home after closing costs and prepaid interest/taxes/insurance.  So it’s important that you are prepared for those costs or you may want to consider asking the seller of the property you are buying to pay for them.

What kind of loan?

There are many different kind of loans available out there from a variety of lenders, but in general, the mortgage you choose will likely be determined by at least several key factors:

· How much down? Loans with 5 percent down or less are still available although the no down payment financing of years past has largely disappeared other than a few limited options. 

· If you are placing less than 20 percent down, lenders will want the mortgage guaranteed by an outside third party such as the Veterans Administration (VA), the Federal Housing Administration (FHA), the USDA (Rural Guaranteed Program) or a private mortgage insurer (PMI).  Private mortgage insurance is required by a lender to protect against mortgage defaults. More than 2.5 million VA, FHA and PMI loans are generated each year.

· How’s your credit? The best rates and terms are only available to those with solid credit. To get the best loan and rates available, make a point of paying credit cards, installment payments, rent and mortgage bills in full and on time.  In order to make sure you have the highest possible scores when your credit report is pulled, you should have your credit card balances as low as possible in relation to your available credit.  You should also review your credit report when it is pulled by the loan originator to make sure that it is accurate and if there are any mistakes they can be corrected.  Some loan originators also offer credit improvement information with their credit reports which can be very helpful if you need to improve your score in order to qualify for the mortgage.

Where do you get a loan?

Mortgage financing can be obtained from mortgage bankers, mortgage brokers, savings and loan associations, mutual savings banks, commercial banks, credit unions, and insurance companies. A growing number of Realtors, such as myself are also licensed to arrange financing for you.

How do you get a loan?

To obtain a loan you must complete a written loan application and provide supporting documentation to the loan originator. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the application process, the loan originator will review your documentation with you to make sure that it can support your application including your monthly income and assets.  One thing that many first time home buyers aren’t aware of is that gross (pre-tax) income is used for income calculations with those people that are salaried W2 employees.  For hourly employees the monthly income is calculated by looking at the Year To Date earnings and dividing by the number of months while also comparing that to your earnings during previous years.  If you are self-employed your income will be calculated from your tax returns using the net income that was reported.  Over the past several years lenders have started reviewing the tax returns of almost all borrowers so no matter your type of employment you should expect that if you have unusual income deductions or information reported that it may affect your loan approval. 

After the application and disclosures are signed and you have provided copies of your documentation to the loan originator your loan then moves to underwriting review.  While almost all loans are initially reviewed by an electronic underwriting system your loan will go in front of a person to review all of the details and aspects of it.  The underwriter will determine what conditions (information, documentation, details) needed in order for the loan to be completed and funded.  It’s highly likely one of those conditions will be an appraisal of the value of the property, which as of government regulations introduced 2009, is now done through the use of an Appraisal Management Company.  Other conditions are likely to include a title report, documentation of property insurance and verification of employment.  After all of the conditions have been completed and signed off by the underwriter the loan moves to closing. 

Up next in Part 3 of my Buyers Guide – Moving Towards Closing & Home Ownership!