Friday, February 16, 2018
By Kevin Deselms
My top tips for first-time homebuyers

It's a challenging time to be a buyer, with supply at historic lows and demand continuing to rise...even more challenging for first-time homebuyers, who can be overwhelmed by the sheer amount of preparation and research that's required, before they can even write an offer! This is one of the biggest and most significant purchases of a new homeowner's life, but it's a process that can seem a little daunting.

Before I even get into my tips for first-timers, I'm going to give you the most important tip I can offer: 

Buyers typically don't pay a real estate agent anything, to represent them!

Realtors who are representing buyers get paid a percentage of the transaction as a co-op fee from the seller and their agent. When you realize that your agent is there strictly to help you navigate the process, and will do so without costing you a dime, it doesn't make any sense not to have someone representing your interests and making sure the transaction goes as smoothly as possible for you!

Tip #1: Get your finances in order!

This is the biggie, and the one most first time buyers struggle with the most. Paying down your existing debt will boost your credit score and improve your odds of being approved for a mortgage loan with the best interest rate possible. The most common misconception among buyers is that they'll be required to put 20% down, in order to buy a house. The truth is, today's lenders have an abundance of programs to help first time homebuyers and will require a much smaller down payment, as low as 3% in many cases. This will incur PMI (Private Mortgage Insurance) but many lenders also have programs to mitigate that cost, as well. Talking to a lender and/or a financial planner early in the preparation stages of buying a home is a recipe for success. Also, check your credit scores and dispute any incorrect/outdated information. A score in the high 600s or low 700s will set you up for the best interest rate possible. Need to boost your credit score? I have some great tips for doing just that, here!

Tip #2: Figure out how much you can afford.

It will be extremely important to know what your budget is, before you ever start looking at homes! Realtor.com has a simple calculator that will help you get an estimate of how much house you can comfortably afford, given your income. When the time comes to get serious about making a purchase, a good lender will be able to pre-qualify you for a loan that will tell you exactly what your price ceiling is. I work with several lenders that know every potential avenue that can be explored by a first-time buyer and I'm happy to refer my buyer clients to them, when needed.

Remember, too, that the costs associated with buying a house don't end with the accepted offer. Buyers also have to shoulder a portion of the closing costs, including things like loan origination fees, homeowner's insurance, inspections and title searches, which typically run between 2% and 5% of the loan amount.

Tip #3: No new lines of credit, and stop using existing credit.

This one can be tough, but it's very important - especially after you've been pre-qualified for a loan. The worst experience for a new home buyer is to be pre-qualified, make an offer on a house, and then discover that they can no longer get the loan amount or interest rate they initially planned on, because of substantial changes to their credit rating. So once you've got the ball rolling on your house hunt, don't take out any new lines of credit or make any large purchases that would impact your creditworthiness or your budget.

Tip #4: Find all available sources of cash, other than the down payment savings.

The majority of sellers will require what is known as an "earnest money" deposit, when you're making an offer on their home. It's typically a small percentage of the asking price and is used as security for the seller, who is accepting your offer with the expectation that you'll hold up your end of the agreement to buy. If, as the buyer, you act in bad faith and don't follow through with the purchase, the earnest money will go to the seller and the seller's agent, to compensate them for the time and money they've lost in accepting an offer from a buyer that didn't hold up their end. If you follow through and reach the closing table (hooray!), the earnest money is credited toward your purchase of the home.

Having cash available is also becoming more important in the midst of a heavy seller's market, because many homes are selling for over the asking price. Because most Realtors are pretty good at pricing homes correctly, the chances are good that when an appraiser offers an opinion on what the home's value actually is, that number will be lower than the final offer. Since a lender will only make a new mortgage loan covering the appraised value, the "gap" - or the difference between the asking price and the higher accepted offer - will be the buyer's responsibility, at the closing table.

Tip #5: Know what you're looking for!

It seems like a no-brainer, but many new home buyers go out into a competitive marketplace with no idea what they should be looking for. Consider first the lifestyle that you are hoping to attain, living in your new house. Are you planning on adding children in the near future? Do you want to do a lot of entertaining with friends? Are you working from home and need a good home office? Do you have family that visits frequently and needs a place to stay? Spend some time thinking about what you want your life to look like, in your new house. Knowing that is going to help you figure out what your needs are, so that when you go out and start looking for a new home, it'll be much easier to identify a great fit, when you see it. Bear in mind, almost no home will be "perfect" for your needs, particularly in a market with low supply. Know where you're willing to compromise, and what are your deal-breakers. The communicate all of this to your Realtor, so that they can set you up with showings of new homes that are close to what you're looking for.

Tip #6: Research your mortgage options.

Every lender has different products for different types of clients...30 year fixed, 15 year fixed, jumbo, FHA, VA, CHFA, it can be enough to make your head spin! A good lender is going to be able to walk you through everything and explain what it all means, so that you're not as intimidated by the loan process. In general, a shorter term will require a much higher monthly payment, but you'll ultimately pay less additional money toward interest, over the long term. Don't be afraid to shop around for a better rate, and see what different lenders have to offer. This is a huge expense, you want to make sure that you're not getting into a loan that you'll regret having chosen, in five years. If you have questions about mortgages, I have answers!

Tip #7: Decide if paying points makes sense.

Many lenders offer borrowers the option of buying what's known as "discount points," which is essentially pre-paying a portion of your loan's interest, to get a lower overall interest rate. There is even sometimes the option of negative points, where the lender pays a portion of your closing costs (or PMI) in exchange for a slight increase in your interest rate. How long you plan to live in your new home is one of the main factors in determining whether you should pay points.

Tip #8: Hire the right Realtor to help you!

This is the person that is going to usher you through the entire process, prepare all of your documents, and hand you the keys to your new home at the closing table. You want someone that knows the area you're looking for very well, is easy to get along with, available to answer your questions in a timely fashion, is able to listen to your needs and then translate them into showings of homes that truly match up with your desires. Don't be afraid to sign an employment agreement (we call it the "exclusive right to buy" contract) with a good Realtor that you know will help you through the process. I've said it before but it bears repeating...you won't be responsible for paying them! The seller and their agent agree to share the commission with a buyer's agent, the contract you enter into with your buyer's agent just ensures that they're entitled to be paid by the seller.

As it happens, I know a good Realtor you should call...

Tip #9: Carefully consider the neighborhood.

It's not just about the house, after all...a major consideration is the quality of the neighborhood you're going to be living in. If you have kids, or are planning to raise a family in this house, the quality of the assigned schools for your neighborhood is going to be a major factor...and it also affects the value of the home. What about the proximity to conveniences that are important to you? Nearby parks, stores, restaurants, and activities are all important things to consider, when selecting a place to call home. Drive through the neighborhoods you're researching on different days and at different times, to see if you would feel comfortable living there.

Tip #10: Think forward.

You may be spending many years, or perhaps even the majority of your life, in this new home...so you're not just buying a home for today, but for 5-10 years from now. If you're a young couple just getting started, without kids, your lifestyle will look very different today than it will in ten years, when you have school-age kids co-habitating with you! While a home may suit your lifestyle as a young, active couple...it might not work as well down the road. Do your best to future-proof your purchase by considering what your plans for the future are, and whether it will meet those needs, as well.

Tip #11: Know when to make compromises.

I touched on this earlier, but it's important to realize that no home is going to be perfect. Know where you're willing to make compromises, and which are the things you absolutely must have. You may find a home that is just the right size, has the right number of rooms and a great backyard, with a great community around it...but the kitchen and bathrooms need updates. This could be an opportunity to personalize the home to your own tastes, and probably shouldn't be considered a deal-breaker. Conversely, if you come upon a house that is perfect in every way, but exists in an area that has a reputation for higher crime or bad schools, those may be deal-breakers.

Tip #12: Make your best offer, but avoid bidding wars.

It's important to come in with a strong offer, in a competitive seller's market. When the supply is at historic lows, as it is in Denver right now (and likely will be, for the next decade-plus), the days of offering below asking price are long gone. The average home purchased in the Denver metro area in 2017 sold for more than the asking price. If you like the home, chances are good that a lot of other people have, too...and you'll be competing with multiple offers. Your agent can help you make your offer as attractive as possible to sellers, but ultimately the decision of which one to accept will fall to the seller, and whatever criteria they feel is most important.

This is why it's crucial to work with a Realtor that knows the areas you're looking to buy in, and is constantly checking the market for new listings that will work for you. The faster you can jump on a new listing and make an offer, the better your odds are at getting that home under contract!

Tip #13: Be patient, and have fun!

This can be a stressful and time-consuming process...but try to have fun! When you go out to look at some new properties, enjoy seeing what is out there and imagine what your future looks like, in your new home. Those goals and dreams are what will help you push through what can sometimes be a stressful and challenging process. You've come to the right site, and the right Realtor, to help you with your research! If you are ready to start the process, or you've already been taking a peek at what's out there, get in touch with me and let's start talking about what your goals and aspirations are, for a new home. I'm looking forward to helping you achieve the lifestyle you're after, here on Colorado's front range!

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Kevin DeselmsKevin Deselms
Front range lifestyle ambassador and your new favorite Realtor!