IF YOU’RE THINKING ABOUT BUYING A HOME, HERE’S WHERE TO START
You would think the first step to buying a house would be looking at houses, right? Nope. I will explain step by step how to start the process of buying a home.
This is part 1 of a multipart series that will cover the basics of home buying. Future parts in the series will cover the mechanics of the process further, with topics such as submitting an offer, conducting inspections, and preparing for closing.
These are the main steps to start the home buying process that will be covered in this post:
Connecting with a real estate agent
Choosing a lender
Getting pre-approved
Determining loan options
Points 1 and 2 above can occur at the same or in reserve order. You may be connected with an agent first and ask them for recommendations on lenders. Or, you may have a lender in mind and then find an agent. Either way works.
If you are buying in cash: feel free to only read the first section about choosing an agent. You won’t have to work with a lender or get pre-approved. Your agent may request proof of funds, such as a letter from your bank, so they can provide it with your offer in the future.
CONNECTING WITH A REAL ESTATE AGENT
A lot of times this happens by accident...
You may be scrolling through your favorite real estate site, see a house you like, and use one of the interactive features to request a tour or contact an agent. That site then reaches out to agents who pay big money to advertise on those sites to connect you (a potential lead) with them. It’s unlikely that you’ll be connected with the listing agent of the house. Many people are surprised by this, so here is your heads up.
This is a gamble on if you get matched with an agent you vibe with. I know, because I used to advertise on these sites. That’s where I received some of my first clients and I’ve had really great experiences with most them, but it’s not guaranteed to be a great fit.
Other ways to meet your agent: searching the web or social media for local agents in your area or asking friends, family, and coworkers for a recommendation.
I highly recommend the latter. Being referred to an agent via someone you know means it’s likely they did something right. Either the agent guided them through a home purchase or sale, or the agent did it for someone they know. Ask about their experience and why they are recommending them. It could help inform you if they are a good fit.
Even if you are moving to a different state or region, if you know a local real estate, they may be able to refer to you an agent in the location they are moving to.
How do you know the agent is compatible? Ask yourself these questions:
Do you trust them?
Sometimes this is a gut feeling. It can even be based on details and how they respond during your first interaction.
Are they an expert or have a network of experts in their field?
You don’t need an agent with decades of experience, but you do want someone who is connected in the space.
Do they have positive reviews?
Again, they don’t need to have a ton of reviews, but read through them to find the ones that list why they would recommend this person.
Do they meet your pace?
Whether you are in a hurry to buy or waiting for the perfect house, you don’t want to feel like you’re waiting on your agent or feel like they are pushing you to make decisions more quickly that what you are comfortable with.
CHOOSING A LENDER
Getting pre-approved involves choosing a lender. Unfortunately, you can’t be pre-approved by one lender and then it’s applicable for all lenders. So, how do you choose a mortgage lender if you’ve never a bought a house before or haven’t bought in several years?
Ask your real estate agent, friends, and family to see who they recommend. Your agent is always a good resource for recommendations, since they’ve been through the process many times, likely with different lenders.
I highly recommend going with a company that specializes only in mortgage lending or a credit union.
Mortgage lenders specialize in home loans only. This means they will be the most knowledgeable when it comes to home lending, and they don’t have any other banking or lending activities competing for their attention. Also, many mortgage lenders work nights and weekends, whereas as banks only work banking hours. This can be critical in a fast-paced market when you need answers or your pre-approval letter updated before submitting an offer.
In my experience, mortgage lenders tend to provide better service. They can give you insight into how your financial details impact your pre-approval and inform you of items in your credit history that may be negatively impacting your ability to get pre-approved.
Credit unions also provide more personalized service compared to banks. They may provide better rates and loan options to members. For instance, a credit union we looked into for our new build did not charge PMI on construction loans even if the down payment was below 20%. The down side: one or both of the buyers may need to be a member of the credit union.
GETTING PRE-APPROVED
Once you choose a lender, get pre-approved through that lender. Not pre-qualified or qualified, pre-approved. I know these all sound like the same thing but they are not. Pre-approved means that a lender has pulled your credit score, assessed your debts, assets, and income, and determined the amount they will allow you to borrow.
Notice that I said your lender will determine how much they will allow you borrow… this is intentional. I didn’t say they will tell you how much you can afford because that is a personal decision. There are many factors that go into determining that final pre-approval amount, but these are main items:
The amount of savings you have to go toward the down payment
If you currently own your home or any other real estate
Debts: other mortgages, student loans, vehicle loans, credit card debt, etc.
Credit score and history
Job history
Income
Mortgage interest rates
When the lender runs your credit, most if not all debts will appear. Overdue child support, bankruptcy filings, bills in collections, all of these items will impact your ability to get pre-approved. For job history, they look for 2 years of steady employment. Enrolled in school counts as employment and I’ve seen exceptions made due to COVID.
The best approach is to be as open and honest with your lender upfront. This is also why it’s important to find a lender that you trust and feel comfortable sharing this confidential information with. With this information, your lender will be able to determine a couple things: the maximum mortgage payment they would allow and the total house value that that monthly payment correlates to. Your down payment amount and loan type are very impactful to these numbers.
If you don’t want to necessarily max out the amount you are able to borrow and have an idea of the price range you want to stay within, the pre-approval can also be generated with this in mind. Let’s say your current rent is $1,000/month and you want to stay around that monthly payment for your mortgage. Your lender should be able to calculate the total home value based on the loan type, down payment, estimated taxes and insurance, and estimated interest rate.
You can also start with the total home value you think your preferences will land you in. Let’s say you know you want a 3 bed, 2 bath house with a 2 car attached garage and your agent tells you those sell for around $250 – 300k in your area. Your lender can start with the $250 – 300k purchase price range and all of the other factors mentioned above to estimate your monthly payment, and see if you’re pre-approved for that amount.
Once your lender determines the total home value, they can pre-approve you to purchase. At this point, the lender issues a pre-approval letter. Pre-approvals are lender specific. It is important that your real estate has this letter. They will deliver it with your offer to other listing agents in the future. This letter shows that you are a serious home buyer and have been pre-approved to purchase the home you are offering to purchase.
Your interest rate is usually not locked in until you are fully approved for the loan. That is after you submit an offer to purchase a home, it is accepted, and your lender starts your actual loan application.
Getting pre-approved is usually something people do directly before trying to buy a home, but going through the pre-approval process and learning what financial details impact it can help you prepare to buy in future months or years.
DETERMINING LOAN OPTIONS
Part 2 of the buyer’s series will go into more detail about the different loan types but here is a quick overview. Some of the main loan types:
Government-backed:
Veteran Assistance/Affairs (VA)
U.S. Department of Agriculture (USDA)
Federal Housing Administration (FHA)
Conventional:
Fixed Rate
Adjustable Rate (ARM)
I split the list into two categories, government-backed mortgages and conventional mortgages. The reason being, government backed mortgages will be have pretty standard conditions and terms from lender to lender. Government-backed means the type of mortgage is insured by an agency of the federal government. These are programs where the federal government has set conditions to encourage home buying, especially in certain areas or for people in specific economic/financial situations. They also work to lower the barrier to home buying, with the intention of making it more accessible.
Conventional loans are not insured by the federal government; thus, individual lenders have more freedom to determine the terms of these loans. For example, conventional loans at one lender may require a minimum of 20% down payment where other lenders may offer conventional loans that only require 3% down at closing.
There are other loan options that don’t necessarily fall into either category, such as Jumbo, Land, and New Construction mortgages, but I won’t go into detail about those in this post. These are specialized loans and you’ll find a decent amount of variation in the terms from lender to lender.
That’s another major item of note: loan types, fees, and conditions may differ from lender to lender, making it difficult and confusing for the first-time home buyer to choose what option is best.
Make sure to do your research. Look on the lender’s website for loan options and read the fine print. This is a major commitment, sometimes 30 years. Invest time in the research and ask the lender questions about fees and conditions. Also consult with your lender and trusted financial expert.
WHY IS IT IMPORTANT TO DETERMINE LOAN OPTIONS
It’s important to think about this prior to looking at houses because the loan type you qualify for can impact the homes you are able to purchase. This is critical for your real estate agent to know because some loan types require the house to be in a certain condition or location.
For instance, when using an FHA loan, not all homes will qualify for FHA financing. FHA only requires 3.5% down to close, so the house has to be in good condition or it is too much of a liability for the lender to provide the mortgage. This is the lender’s view: when using an FHA loan, you only have to put 3.5% down on the home, so they likely don’t have the savings or cash flow to turn around after purchase and do major structural, electrical, or plumbing repairs. The home needs to be in good condition in order for it to qualify for FHA financing.
USDA and VA loans are going to have similar restrictions on home condition, plus additional restrictions on home location for USDA, and veteran status for VA. You’ll find that conventional mortgages are less restrictive of the home condition because, in most cases, the down payment is larger and/or the credit requirements are more restrictive.
SUMMARY
Once you’re pre-approved, know what loan type(s) you qualify for, and have the pre-approval letter, you are ready to shop with your agent. Share the pre-approval letter with them and enjoy the experience.
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