Home Buyer Pro Tips
Whether you are a first time buyer or have been through the home buying experience previously, due to new regulations, the lending environment and local market real estate practice, it is best to be well prepared for what you will be facing if you want to have a successful outcome.
Let's start by defining successful outcome.
- Buying a home that you will love living in and that will have
- Minimal issues (or surprises) going forward and
- Appreciate over time and be a great investment.
Let's start by dispelling certain myths.
Myth # 1 You Don't Need an Agent
Sure, all the listings are on Zillow, Trulia and hundreds of other websites (including this one) and you can look at the comps, go to open houses and whatever real estate app you have on your phone notifies you about recent listings etc. Truthfully, in the Beach Cities in 2017 that just isn't going to get it done. And if you want to own in North Redondo Beach which has been the most competitive market the last few years, you will become very frustrated going it on your own.
You really need an agent to represent you. (Full disclosure, I have a dog in this fight because I am an agent.)
What the agents know that no app or website knows is a) what is really available for sale and what's not, b) what is coming on the market and when (top agents network), c) which sellers will take less and which homes will sell for more, d) how the process works, and e) how to get stuff fixed i.e. roofs, plumbing, electrical etc. (no home is perfect). And that's the short version of the list.
Myth # 2 You Don't Need 20% Down
Let me state here that I am not a lender so I am speaking in broad generalities about loan programs. I can put you in touch with some great lenders to address your specific situation.
There are a number of programs that allow for less than 20% down. Depending on the property type, price range, your FICO score, DTI and other factors you may qualify with as little as 3.5% down (FHA) or even less with a VA loan.
The most common scenario I see these days is what we call an 80/10/10. Or at least that's what I call it. Here's how that works.
You have 10% down, your lender based their loan on 80% and then they broker the other 10% to companies that specialize in that loan product. Some lenders also have 15% down no mortgage insurance (MI) products.
I also see many buyers getting "gifts" from their families. Each lender has their own guidelines for gift letters, amounts and the like but a very common scenario today.
Myth # 3 You Should Get a 30 Year Fixed Rate
While the 30 year fixed rate mortgage has been the gold standard, chances are that you will really not be in the home you are buying for that long. In fact, if you stay longer than 10 years you are really bucking the trend.
Adjustable Rate Mortgages (ARMs) have a fixed rate for 5, 7, or 10 years and then adjust once a year after that. The most common ARM that buyers opt for is the 7 year. Many people tell me that even if it adjusts the max year 8 and 9 you are no worse off after 10 years. And you always have the option to refinance out with no pre-payment penalty for a new lower rate at a lower loan balance.
Now let's look at some common mistakes Buyers are making these days.
Mistake # 1 Not Getting a Solid Pre-Approval
In competitive situations often listing agents (and the seller) will select the buyer with the strongest financing all other factors being equal. I have even seen situations where a seller accepts less than the highest offer because the person who offered the highest price has questionable financing.
This means that not only has the lender run your credit score, but also that your assets, income and employment have also been verified and that any potential red flags in your file have been resolved. In an optimal situation an underwriter has looked at your file and all you need is the signed purchase offer, open escrow, appraisal and title prelim and you are good to go.
Mistake # 2 Only Going to Open Houses
Not every property has an Open House. Let me repeat that. Not every listing is available to see on weekends. There are many reasons for this such as day sleepers, pets, valuables, privacy and who knows what else. Please don't constrain your search to only opens.
Mistake # 3 Not Looking at Everything in Your Price Range
I define your "price range" as 5-10% above and below what you would like to spend which may also be lower than your maximum loan approval.
There's a few reasons I recommend this.
Some of the homes priced above your target may very well be reduced and sell for less. Others that are priced lower will get bid up and sell for more. The more properties you view, the better you will understand fair market value when you see it.
Here's some jargon you will hear when you are a Home Buyer. Sometimes these words and phrases have a different meaning when used in Real Estate than in "Real Life".
- Residential Purchase Agreement (RPA) that's how you make an offer. Your Realtor will fill it out for you.
- Earnest Money Deposit also referred to as "EMD".
- Contingencies are the conditions that your offer is based on but your lender will use the term conditions differently.
- A Home Warranty which is often paid for by the Seller is different than your Home Owner's Insurance.
- Unless you are buying a Condo or Townhome in which case there may be a Master Policy on the Building.
- But you may still be required to buy HO6 Insurance.
- Title Insurance insures that after the close of Escrow there will not be any liens on your new home from previous owners.
- Appraisal is the value placed on the property you are buying by an independent 3rd party. The appraisal is different than the General Home Inspection.
- Some Cities have Building Reports stating the size of the property and what Permits have been pulled over the years.
- Retrofits are required in some Cities for low flow toilets and Seismic Shut Off.
- Smoke and CO2 Detectors are required by law as is water heater strapping unless your water heater is tankless.
- You will also receive a package of documents from Escrow containing items such as a Preliminary Title Report, Escrow Instructions and some totally confusing paperwork such as the "PCOR" The Preliminary Change of Ownership Report.