Buying Your First Home
Updated: Jan 8, 2020
Are you tired of your landlord? Sick of forking over a thousand bucks a month or more in rent?
You should be.
Do you think buying a house is beyond your reach?
Keep reading to find out how you can take that money out of your landlord's pocket and put it back into yours.
"A journey of a thousand miles begins with a single step."
Buying a house is a big deal and there's a lot that goes into it, but if we break the process down into its individual steps it starts to look much easier. Check out the chart below that illustrates the process of becoming a first time homebuyer. Blue text is steps that you will need to take, and the text in black is what your agent will take care of on your behalf. The red arrow running diagonally from bottom left to top right is your timeline, starting months (or years) in advance and culminating at the closing table when you get the keys to your new home.
Don't be intimidated by all of those steps, real estate agents like me exist to help you along the way. The biggest things that you need to worry about is building credit, building income, and saving your down-payment. What does that look like?
Building Credit -- Your credit needs to be at least 580 before a lender will lend to you, and ideally it should be over 620. It's best to get over 740 though, because that's when you can begin to get the best interest rates. I won't get into too much detail on how to improve your score in this post, but please get in touch with me if you have any specific questions!
Building Income -- When a lender evaluates your ability to pay back a mortgage, he or she will look at your debt-to-income ratio. Generally, if your monthly take-home pay is three times greater than your monthly mortgage payment, then you will be able to qualify. There's more to it than that and if you have car payments or other monthly payments your income may need to be higher, but that's a good general rule of thumb.
Saving your Down-Payment -- Most people believe that the down payment needs to be 20% of the purchase price, and that's just not true for a first time buyer. Military veterans can buy a home with 0% down with a VA loan (read more here), and anyone else can buy with 3.5% down with what's known as an FHA loan.
Not sure how to get started with any of that? Call an agent! Any agent worth their salt will talk to any potential buyer, even if that buyer won't be ready to buy for years. We can answer questions and get you in touch with lenders and credit repair specialists who will be able to help you get ready to buy. Once you're ready to buy, your agent will help you get the best deal possible. What does this involve?
Searching for the right home. In the age of Zillow and Truilia, buyers typically come to agents with a list of possible houses in hand. Sometimes we'll find the right house together out of that initial list, but more than half the time we end up working together to refine our screening criteria before we find the right one. I've found "the house" in thirty minutes, and other times it's taken months. There's no right or wrong answer here. An important thing to note is this: your agent should not be trying to sell you on a house. The house should sell itself. When I'm representing a buyer, I like to point out everything wrong with a house for my buyers, because I've found that many times buyers get caught up in the initial euphoria only to sour on the house later in the buying process (or worse, after closing!)
Negotiating. This is your agent's bread and butter. Sometimes there might not be too much room for negotiation, like when a house is newly listed for a competitive price. In that case, you better come in strong. When a house has been on the market for a while, or when it is over-priced, then it pays dividends to have an agent on your team that will fight to get you a good deal.
Earnest Money. Once the deal is agreed upon by you and the seller, you will write a check for what's called earnest money, which is basically a deposit that tells the seller you're committed. This is usually 1% of the purchase price. You can get this money back if you back out of the contract during your due diligence period, but if you back out after then the seller will keep it. Due diligence is usually 10 to 14 days, which is plenty of time to complete your inspections.
Inspections. Once you get a contract on a home, you should hire a home inspector. Your agent should keep a few on speed dial. This generally costs $300 and will generate a 30 to 60 page report detailing everything about the house that the inspector can see without tearing down walls. This leads into the next step.
Negotiating (part two). With your inspection in hand, you might want to negotiate again. Chances are that your inspector found issues with the house that even a savvy agent might have missed. Will you ask for the seller to complete repairs, will you ask for a price reduction, or will you ask for nothing at all? You still hold most of the cards here because you're in your due diligence period, which means you can kill the deal and get your earnest money back. Work with your agent to determine the best course of action.
Paperwork. Your lender will need you to turn in and sign a lot of paperwork. Your agent isn't involved in this process. Do your lender (and yourself) a favor and fill out paperwork as fast as you can. Your lender will also order an appraisal, which will typically cost you between three and five hundred dollars. If the house appraises for the price you agreed to pay, then you're good -- if not, then you will have to work with your agent to determine the best course of action. This usually means getting the seller to agree to a lower price or walking away from the deal.
Closing Costs. I want to include a note about closing costs. As of this writing (Jan. 2, 2020), an FHA or VA buyer can expect to pay about $6500 in closing costs in addition to the inspection and appraisal fees. These are paid at closing and do not include up-front mortgage insurance or VA funding fees. I've seen lenders stick buyers with over $9000 in closing costs -- this should send up red flags. As a buyer, you should talk to a few different lenders and shop around for the best interest rate and closing costs. Closing costs can be paid for by the seller and often a seller will pay at least some portion of those costs.
Final steps. You will select a homeowners insurance policy, do a final walk-through, sign some more paperwork, and get the keys to your new house. Congrats!
After the fact. Now that you're a homeowner, there's no landlord to call when things break. Make sure you have money set aside to deal with these things. If you need a contractor, give your realtor a call -- he or she probably keeps a few on speed dial! Don't forget to file for your homestead exemption -- if you live in Chatham County, GA, check out this blog written by my friend and trusted closing attorney Joel Gerber here. (Note: this was published in January 2019 and might be out of date.)
That's it! When you look at buying a house step-by-step, you'll see that it's a totally manageable process. I believe everyone should strive to own their own home because I believe that home ownership is the best way for average Americans to build wealth. Why?
When you pay a mortgage instead of paying rent, it's really like putting money into a savings account -- a portion of every payment goes toward paying down the balance of your loan.
Compare that to paying rent, where your landlord is using your money to pay of his or her mortgage and pocketing the rest.
Unlike rent, your mortgage payment will never go up if you get a fixed-rate loan.
Once your mortgage is paid off, your housing expenses will only be property taxes, insurance, and maintenance. This will average about $5000/yr for an average starter home in Savannah. Your average rent payments on the same house will be closer to $17,000/yr.
Ready to break up with your landlord? Trophy Point Realty Group serves Savannah, Fort Stewart, Richmond Hill, Pooler, and Hinesville -- we'd love to be your trusted realtors. Call us today!