Tips From a First Time Home Buyer
Posted On April 4, 2024
If you follow the news, you have likely seen that homes are more expensive now than anytime over the past 20+ years. Because there is no quick fix to a supply imbalance, I believe that the housing market will continue to be a “sellers market” in many places for a while. Due to life circumstances (and my belief that the sellers market will continue), my fiancée and I reluctantly entered the home search and buying process for our first home. Below are some of the most important lessons that we learned during this process. I hope they make your life a little less stressful during your home search and buying process.
Funding The Home Purchase*
- If you are a first time home buyer, you have the option to withdrawal up to 10,000 dollars from your traditional/rollover IRA or 401k for the home purchase without being penalized by the early withdrawal penalty. You still need to pay income taxes on the amount.
- The “cash to close” amount and estimated monthly payments are extremely confusing. You will likely receive or calculate many different estimates for these amounts. Once you have a ratified contract, your lender should have the most accurate estimates; however, some of their inputs are estimates (e.g. title insurance). Here is a good website for estimating your monthly payments and seeing the principal/interest breakdown over the duration of the loan.
- If you plan on purchasing a home in <5 years, a large portion (or all) of the money you plan to allocate towards the downpayment and closing costs should be in cash (e.g. treasury bills, high interest savings account). If you have a high interest savings account, you need to confirm that they are paying you the interest that was advertised. Unfortunately, many financial institutions advertise a different interest rate than what you might be earning in that account.
*This is not financial advice. Please confirm this information with a financial advisor.
Information Gathering and Home Search
- Googling is a mess when it comes to researching the home buying process. The best information I received came from interviewing friends and family who have gone through the process previously or who have lived in the areas you are searching. I highly recommend giving them a call before and during your home search/buying process.
- A fantastic book I purchased and read was “100 Questions Every First-Time Home Buyer Should Ask” by Ilyce R. Glink.
- Google Earth is a valuable mobile app for researching homes. In some situations, I was able to find walking/biking paths that are not apparent on Google Maps.
- Talking to neighbors is highly recommended. We did not make an offer on one home that we loved because of the lack of parking for visitors. The neighbor confirmed this concern of ours and noted that it is an issue in their neighborhood.
- Not all public school ratings statistics are equivalent. I’d recommend connecting with someone who works in the local school system for their advice.
- Do not forget to research new schools or redistricting efforts that could change school zoning.
- Zillow and Redfin do not always list the correct schools zoned for a particular address. You need to confirm the zoning directly from the primary source for that jurisdiction.
- Most homes sold in less than a week in the desirable areas and popular price ranges. Many would be listed on a Wednesday/Thursday and accept offers through Sunday/Monday. This does not leave much time to view a property in-person.
Lenders, Loans, and Rates
- Many lenders require competing offers in writing to offer you a lower rate. This is frustrating because you will often get offers verbally. Unfortunately, you need to play the game; otherwise you will get a worse rate.
- In my situation, banks did not offer a good rate. They also tend to have worse hours of operation than mortgage companies if you need to move quickly. Lenders from mortgage companies tend to work outside the 9-5 as necessary.
- If you are interested in obtaining financing from a credit union, I would recommend joining one ASAP. Their registration process can take a few days and their web/mobile applications were not the easiest to interact with in my experience.
- Not all lenders offer the same loan programs; however, many have similar ones. One example was a float-down option program where two lenders had key differences between their programs. For context, a float-down program locks you into a maximum rate that you could pay but has the option to decrease if the market rate drops over the next several weeks after locking in the rate. Mortgage rates fluctuate daily so this could lower your rate. Below are the two different float-down programs I was offered and you can clearly see that Lender #2 offers the superior program.
- Lender #1: The float-down program ran from the date of the rate lock until 10 days before the closing date. The borrower has the option to lock-in a lower rate one time during this period if it decreases below the locked rate. They must respond to an email from the lender to confirm.
- Lender #2: The float-down program ran from the date of the rate lock until closing. The lowest rate during that period will be automatically chosen for the borrower.
- Other loan programs I encountered included offering discounted rates for the first year for the borrower, “all cash equivalent” offers, and “no appraisal needed” options.
- Lenders will mislead you on certain pieces of information. Two examples I encountered:
- I was not told that the “no appraisal needed” program was only an option if the agreed upon sales price is below a specific amount relative to the listing price
- Lenders consistently pushed the narrative that interest rates will drop in the upcoming 6-24 months. In reality, nobody can predict the path of interest rates and rates are highly dependent upon inflation which is also unpredictable.
- There are varying levels of lending preparation prior to having a ratified contract (i.e. contract signed). You can be “pre-qualified”, “pre-qualified with underwriting”, or have some form of a “cash equivalent” offer ready. Cash is king when it comes to preparation and offers.
- The Federal Reserve (FOMC; Jerome Powell) have 4 public appearances each year where they significantly influence the federal funds rate. During these 4 public appearances, mortgage rates can change significantly. For reference, mortgage rates tend to be ~1-2 percent higher than the federal funds rate.
- My credit score got dinged a little since my credit got pulled by multiple lenders during the process.
- The better your credit score, the lower your property mortgage insurance (PMI) will be.
- I opened a new credit card ~4 months before getting approved for financing. This was just enough time for my credit score to recover from the dip it took on opening a new line of credit.
Contingencies and Contract
- Depending on how desirable the property is and the current market, you might have to waive most (or all) contingencies. This includes the appraisal, financing (by offering cash), and any inspections.
- Even if you waive all of your contingencies, you might have an opportunity to back out of the contract and still get your earnest money deposit returned. If there is an HOA, some jurisdictions allow you to back out of the contract within a specific number of days once you receive the HOA documents.
Inspections
- While I had to waive the inspection contingency to win our property, I was able to perform an “unofficial inspection” before the offer was officially made. This is an option I would encourage if you are able to schedule an inspection before offers are due and if the seller is amenable to it.
- One of the homes we made an offer on was near big power lines. We decided to perform an EMF (Electric and Magnetic Field) inspection for that property. The scientific community is not in agreement on how toxic EMF exposure can be. To our surprise, we learned that indoors is often more toxic than outdoors due to the plethora of bluetooth-enabled devices and other smart-devices.
- Ask the home inspector as many questions as possible. Ours was a wealth of knowledge. I’d recommend video taping the inspection or recording good notes.
- One of the most important things I learned from the home inspector was that controlling for water/humidity is THE most important thing for your house.
- In the jurisdiction where we purchased our property, the law requires that the seller perform a radon inspection before selling a home.
Insurance
- Many organizations have partnerships with insurance agencies and offer discounts. Some include AAA, Costco, and various credit unions.
- Not all home insurance policies cover underground piping or sewage problems.
- Flood insurance requires a separate policy and is controlled by FEMA.
- Some insurers wont offer home insurance policies if you leave too much of a gap between the closing date and move-in date.
- Be prepared to bundle as many insurance products as possible when weighing providers. You will receive better deals if you bundle auto, home, and umbrella insurance together.
Making the Offer
- Offers have a variety of formats; including escalation clauses, offers that expire after a limited period of time, and a variety of contingencies to protect the buyer.
- There are a variety of methods to make a stronger offer than the competition; including waiving contingencies, offering cash, shortening the inspection period, putting more money down, and/or offering a larger earnest money deposit.
- Speaking of the earnest money deposit, my financial institution flagged the unusual activity as fraud. Be ready for this situation and contact your financial institution immediately to resolve it.
- In a sellers market, you are extremely unlikely to win a property with a “reasonable offer”. We offered $30k over asking on a somewhat outdated property in a fairly desirable location and lost.
- Sending a wire is one of the scariest things you will do. There is no real-time notification that you sent it to the correct place. You need to call (or email) the recipient and confirm they received it. Also, sending a wire typically comes with a fee.
Appraisals
- While articles or real estate professionals might claim that other factors are relevant, it appears that appraisals are decided mostly on comparable sales over the past year.
- Appraisals are inherently a backward looking process. If prices are rising quickly year over year, they will be lower than expected because home sales take weeks before they close and the sales price is made public. Therefore, comparables data is already lagging by 30+ days.
- Understanding the “appraisal gap” is an incredibly important piece of the real estate transaction. Lenders require additional cash to close if there is a gap between the agreed upon sales price and the appraisal price. Essentially, they are not willing to lend money to someone in the amount above the appraisal price. This amount would be in addition to your downpayment and typical closing costs.
While this list is not inclusive of everything I learned, I tried to focus on lessons you might not find as easily via googling. Searching and buying a home can be a long and stressful process. Hopefully, the supply imbalance gets resolved in a reasonable timeframe to make homes more affordable. Best of luck to the home buyers — you’re going to need it!
~ The Data Generalist
Data Science Career Advisor