What Should a First-Time Homebuyer Know?

The housing market is a big landscape of twists and turns. From showings to offers to financing, there will be plenty of decisions to navigate. First-time homebuyers should know that there is plenty of “unknown” going into their first home purchase. That’s why buyers need to hire a Realtor from the start. The purchase or construction of your first home is fun, confusing, stressful and wonderful at the same time. Add the hoopla of financing, negotiation, scheduling, paperwork, inspections, and final approval, and it becomes evident that getting to the closing table requires experience and skill. Having an experienced Realtor on your side will get you there faster. Plus, most agents do not charge a commission to buyers. (It’s the seller that pays a commission on their sale.) This blog will cover some of the bases, but the advice of a live agent is golden in today’s competitive real estate landscape.

Also, know that all Realtors are not equal in their ability to serve the client. Experience matters.

Prices

Prices are trending upward. The Federal Housing Finance Administration (FHFA) increased conforming loan amount limits by 18.05% for 2022. This was in response to a similar increase in home prices. The National Association of Realtors (NAR) applauded this move because it keeps homeownership within reach for more homebuyers. First-time homebuyers need to know that while the increase in loan funds is good, it does signal confidence by the federal government that the inflated prices are here to stay. In other words, “lowball” offers are not likely to get any attention in today’s marketplace. Be prepared to pay fair market value for your first home, which could result in your housing payment representing a substantial portion of your monthly income.

Reserves

Save money in addition to what you plan to use for your down payment. There will be closing costs and an upfront amount that you need to pay into your escrow account. Plus, your new home will require furniture and maybe even some repairs. Reserved money in the bank also helps to get your loan approved, as it indicates financial maturity, a willingness to save, and the ability to weather unexpected costs in the future.

Appraisal

Typically, the buyer pays for the appraisal. Expect to pay approximately $400 for this service. The lender usually orders it as a condition for final approval. The underwriter needs to know whether the collateral (the house) has enough value to secure the loan that the mortgage lender is offering. If the appraisal comes in low, your lender and Realtor can advise on next steps.

Inspections

Prepare to spend a minimum of $500 on inspections. This is separate from the appraisal. Most buyers contract a general home inspector. If you are purchasing a home in a rural area, your lender might condition for a septic inspection, well test, and/or soil test. Some lenders will require a termite or other pest inspection. Of course, you may want to obtain these inspections even if they are not required. Buyers may also need to pay for and furnish proof of upfront for repairs before the transaction can close.

Taxes

Know the annual tax amount on a home before you go see it. (This is one of many areas where Realtors are knowledgeable.) Taxes will affect your payment if you are using an escrow account; therefore, the tax amount will become part of the debt-to-income ratio considered in the underwriter’s decision to offer financing. Consult with your Realtor regarding exemptions and find out whether you will need to file with your county recorder’s office after closing. Some counties have very specific rules on how and when to file your exemptions.

Competition

Today’s real estate market is low on inventory and high on competition. There may be several people interested in the same home at the same time. The good news? Interest rates are still low, making homeownership a possibility for many Americans. However, you might not get the first home you want. It helps to be pre-approved and work with a buyer’s agent. Patience and flexibility regarding location are also helpful in today’s competitive marketplace.

Inflation

As stated above, home prices are up 18% over last year. The U.S. economy’s inflation trend is affecting more than the real estate market, though to a lesser degree. For example, Realtor Magazine reported that paint costs are up 15% and furniture prices have increased 5% since 2019. Homebuyers can expect to pay more for everything and endure longer wait times. This is where reserves come in handy, in addition to patience.

Get Preapproved

Preapproval is essential for borrowers in today’s fast-paced real estate market. It is likely that sellers will receive multiple offers and are therefore they more likely to favor offers with a preapproval letter attached. Documented financing from a lender like Ruoff Mortgage will make your offer more competitive. Some listing agents may even advise their seller not to entertain an offer unless it includes proof of financing. Cash buyers will probably present proof of funds with a purchase offer, and so should mortgage-backed buyers.

How does the preapproval process work? Whether you apply in person or online, your loan application follows the same process. First, there will be many questions. The loan team has to follow a specific set of application guidelines to obtain a preapproval for you. The basic application process involves questions about your current and former housing, employment status, income, assets, and credit history. You may be asked to provide some preliminary documentation. Requirements can vary based on the loan products that fit you best. For example, a conventional loan that adheres to Federal National Mortgage Association (FNMA) standards will have different requirements from an FHA loan guaranteed by the United States Department of Housing and Urban Development (HUD). Once you’re preapproved, your loan officer will issue a preapproval letter. 

For more on the fundamentals of first-time home buying, including a link to get preapproved, visit https://ruoff.com/first-time.