Buying a house, it’s a rite of passage and a HUGE deal for any first time home buyer. In fact knowing how to buy your first home is probably one of the bigger more elaborate things you can ask, and we are going to break it down for you step by step so you know exactly what to do.
Before we begin, we want to remind you that this guide builds on our first book which focuses on how to save up for a down payment.
More importantly our first book demonstrates you how much of a home you can safely afford. With all the information out there we want to make sure you’re looking for a home that you cannot only afford, but also be comfortable with for years to come.
Our first book covers this in great detail so if you haven’t gone through it yet, it’s best to start there.
Once you know how much of a home you can afford safely, the process of buying your first home is so much more fun!
How This Guide Is Divided Up
This guide is broken up into 5 main parts:
Part 1: is all about building your team. We give you questions to ask, email templates to send, and questions to have answered by potential realtors, mortgage brokers and lawyers, before you sign with any of them.
Part 2: is all about getting your mortgage ready. In this section of the book, you will get learn how to become pre-approved so you know what you qualify for. This will also allow you to know what you can safely afford.
Part 3: focuses on finding the right home. We give you worksheets to evaluate a home when you do a walk-through, as well as, a comparison worksheet so you can compare prospective homes. The more you do this, the better you will get at evaluating your options and getting closer to the right home for you.
Part 4: is about understanding the costs involved in owning a home. A house isn’t just a mortgage, there are many other costs that come up and we want to make sure you understand them and are prepared for them, before you put in an offer.
Part 5: covers what you need to know after you have found a home and are putting in an offer. You may go through this phase a few times when buying your first house.
Here’s to your housing success!
Part 1: How To Assemble Your Home Buying Team
How To Use This Section
Whether you’re selecting a realtor, a mortgage broker, or a lawyer, the steps are all the same:
- Step 1: Start screening realtors/mortgage brokers/lawyers using the “How to pick” section.
- Step 2: Come up with a short list of potential realtors/mortgage brokers/lawyers.
- Step 3: Email your potential candidates – using our template.
- Step 4: Interview them on the phone with our questions.
- Step 5: Select the best one for your needs.
*Use the individual sections in this part, so you know what you need, what to ask, and what answers to look for, every step of the way.
How to Find A Real Estate Agent
Finding a realtor is your first step towards buying your very first dream home. Often, first time home buyers ask: “Do I need a realtor?”
In short: Yes.
Hiring a realtor ensures you have a professional in your corner guiding you through the maze of first time home buying. You can attempt to do it on your own, but that often opens you up to many potential pitfalls that a realtor can help you avoid.
Here are some easy ways to find realtors for your real estate team.
Bus benches in your sought after area:
This one might sound like a cliché, but normally realtors put bus benches in the areas they want to work in, not the areas they dislike. Take down some names while you check out the neighborhood(s) and visit their websites to see if it feels like a fit and what kinds of listings they have up.
Yup, good ol’Google. The quickest way to find a realtor is to do a search on Google and see who comes up.
Ask friends, co-workers and others in your network:
This is usually the best reference for a realtor. Use the experience of someone you know to find a reputable realtor in the area you’re after.
Go to open houses in the neighborhood(s) where you’re searching:
The best way to meet, and screen a realtor, is by visiting an open house they’re hosting. This way, you can see how they interact with you and the other potential buyers. It’s an easy and quick way to determine if this is the right person for your short list.
The bonus here, is that you can maintain a low profile, as they will likely assume you’re just there to look at the house and not scoping out a realtor.
Call the real estate body in your area:
Many cities have real estate bodies you can call to ask for advice finding a realtor. Some states have legislation in place and others are self-regulated. It’s a good idea to contact them to see if there are any realtors they recommend.
Since we are talking about Google…
While we’re on the topic of Google – do some research on the realtor you plan to use. Search for things like: realtors’ name + complaints or realtors’ name + issues. Never accept a person onto your team without doing some background research. A site to check out is http://www.rate-my-agent.com/ using a couple of realtors who work in the area, I could see which ones had complaints and which ones didn’t.
Come up with a list:
Once you have a shortlist of realtors you may want to work with, send the potential one’s the email in the next section.
Questions to ask Your Real Estate Agent
Questions to ask Your Realtor:
These are the questions you will ask them in person (or on the phone) after you’ve sent the email pre-qualifying them as your realtor.
Which area(s) of the city are you most familiar with?
You want to make sure your realtor has experience in the neighborhood(s) where you want to buy a house. If they don’t work in the neighborhood(s) you’re looking in, you can ask them to refer you to a realtor who specializes in those areas. Many realtors will want to take you on as a new client, so make sure to screen them accordingly.
If they work in the area, ask them to provide some addresses you can drive by. This allows you to determine what kind of homes the realtor typically lists.
Do you often work with first time home buyers?
Not every realtor wants to work with first time home buyers. There is a certain stigma with first time home buyers and many feel there is a lot more hand holding. This is because it’s a new experience and it’s often filled with a fair amount of indecision and second guessing.
This is perfectly normal when purchasing your first home, but not every realtor wants to work with first time home buyers. It’s best to know up front what type of clients the realtor is used to working with.
Can you set up a search function that will automatically let me know when new properties come up that match my criteria?
This should be an easy thing for your realtor to do. It should be free of charge, however the realtor may want to have you under contract before performing this service.
Do you have a lawyer that you can recommend?
Working with a lawyer that was recommended by your realtor can often make the process smoother because the two have a working relationship. They will need to be in communication once a deal is reached (provided you feel comfortable with the recommendations offered).
You are of course, not obligated to use the lawyer that your realtor recommends, but it’s a nice place to start your search.
Do you have a mortgage broker you can recommend?
Like the lawyer recommendation, working with a mortgage broker that has been endorsed by your realtor can save you the headache of searching for one yourself. But the due diligence is still on you to make sure that it’s the right mortgage broker for you. Visit our section on hiring a mortgage broker for more on this.
Do you have any first time home buyer references?
Again, you want to emphasize that you’re a first time home buyer. Going through the process with someone who’s already bought and sold multiple houses is much easier for a realtor because the client already understands the process and knows more about what they want.
As a new home buyer your needs are different and you don’t want to pick a realtor who is impatient when showing you multiple houses and pressuring you to buy something you don’t want.
Are you a buying or a selling realtor?
Some realtors specialize in finding homes for others (buying realtor) and others can specialize in selling homes (selling realtor). There are also a good majority that do both. It’s good to know if you find your realtor is a ‘selling home realtor,’ as they may not be the best fit when looking to purchase your first home.
Do you have any open houses coming up that I can visit?
As we discussed above, stopping by an open house that a realtor is hosting can provide you with a feel for how the realtor interacts with people and what kind of sales personality they have.
It’s also a good idea to stop by some other open houses in the area to meet some additional realtors. Again, this will provide an opportunity for a first impression, without them knowing you’re vetting them. (Fun Fact: this is how I met my realtor).
Do your clients sign a contract? And for how long?
This is fairly common, but you want to make sure you know what you’re getting into. If your realtor has you sign a 90 day contract and you find a house on your own, depending on your contract, you might still owe them a commission.
Ask them about the terms of the contract and what happens if you chose to terminate it.
Tip: We’ve heard horror stories of people signing contracts with realtors, resulting in the realtor doing nothing for them during the term of the contract. This can force people to go out looking on their own and when they find a place, the realtor still gets their commission because they’re under contract.
While these cases are generally a minority situation, we think its best that you know it does happen, so you’re aware and prepared, should this ever come up.
How much do you charge?
Since you’re buying a home, you shouldn’t be charged anything. Your realtor will get paid once you purchase a home and the amount they are paid will be deducted from the seller’s commission.
How do you get paid?
Realtors should only get paid once you purchase a house. Some realtors may want to charge you upfront for their services. If that’s the case, we recommend looking elsewhere for a new realtor.
Email Template to Send to Your Potential Realtor
My name is _________ and I’m searching for a home in the following neighborhood(s):
I’m a first time home buyer and looking for at least a (1-4)___ bedroom and (1-3)___ bathroom house. My maximum price is $__________.
I am looking for homes built from _______ onwards.
A few other features that are on my wish list are:
• Finished basement
• Attached (or detached) ___ car garage
• Schools in the area
I’m wondering if you have experience in these neighborhoods and working with first time home buyers?
If you do and are looking to take on new client’s, please let me know – it would be great to speak with you and continue conversations.
Questions to Ask Your Realtor – Worksheet
If you find this resource valuable you can purchase the worksheets that accompany this book here.
This worksheet is a place where you can keep a list of names of people that you are considering for your team. Simply enter in your notes any information about them and note down anything you will need for later.
How to find a Lawyer
Tips For Finding a Lawyer
There’s something intimidating about finding a lawyer. I don’t know why. They put their pants on the same way as the rest of us do – one leg at a time… (though to be fair, I’ve never seen a lawyer get dressed).
The truth is, a home purchase is a pretty straight forward transaction for a lawyer to work through, but it can still feel challenging and complex.
That’s because it’s new to us.
For most first time home buyers this might also be one of your first dealings with a lawyer. Given that this is likely one of the largest purchases you will make, you want to make sure you’re represented properly. We’ve outlined a few helpful suggestions below that we hope will help guide you through the process.
Yup, good ol’ Google, another quick and easy way to find a lawyer.
While we are on the topic of Google, we suggest always doing some research on the lawyer you plan to use. Search for things like: Lawyer’s name + complaints or lawyer’s name + issues.
Never accept someone onto your team without doing some background research to ensure it’s a good fit and you’re comfortable with your decision.
Ask family, friends, co-workers and others in your network:
This is probably the best way to find a lawyer. Chances are you know someone who recently bought a house and used a lawyer. If your place of employment has a legal department, it might be a good idea to ask if they can recommend someone. Maybe they even know someone from their graduating class who went into legal real estate.
Reaching out to your network is often one of the best (and easiest!) ways to find a lawyer, especially one that comes recommended.
Ask your realtor:
Chances are your realtor knows a few lawyers they can recommend. Working with a lawyer that is part of your realtor’s team can speed up the process. Even if your realtor makes a suggestion, always make sure to do a bit of your own research, rather than going into it blindly and simply accepting their suggestion.
Generate your shortlist
Once you have a shortlist of lawyers you’re considering working with, send the potential members the email in the next section.
Questions To Ask A Lawyer
Is real estate one of your areas of practice?
You don’t want to hire a lawyer that doesn’t have any experience in real estate. This is a qualifying question. If they don’t answer yes, it’s time to move on to the next lawyer on your list.
Do you have a set fee schedule for home purchases?
Any lawyer should be able to give you a detailed, or at the very least, ballpark figure of what it will cost to work with them.
Can you give me the complete list of costs involved in the closing of this sale? Can you email me a list of the costs involved for my budget?
This question focuses on moving yourself down the line of knowing what costs to expect and what you will need to plan for, as you get closer to the final purchase.
For example, a lawyer can list their fee as $1,000 for all things related to buying a home, but you may get there and realize they forgot to include their other fees like photocopying, delivery, taxes, and other day-to-day business costs.
For this reason, you want to ask for a breakdown of the costs. If you don’t understand one of the costs, ask for an explanation. You’re paying for the service and you have the right to know what you’re paying for in full.
Tip: Many lawyers have a bunch of extra fees tacked onto their bill. If you are up for it, ask if it’s possible for them to waive any of the fees to save you some money.
Do you have any paperwork that outlines my responsibilities in this transaction?
The process of buying a home is pretty straight forward, but it’s a good idea to ask what your responsibilities are (if any) when you’re about to enter into one of the biggest purchases of your life.
What other costs might come up in this transaction that aren’t included in the above price? If there are additional costs, will someone notify me before hand to seek my approval before moving forward?
We want to make sure you’ve covered all the bases here. Most importantly you don’t want to show up at your closing appointment to find “surprise” amounts on your bill.
Ask up front, it will show that you’re on top of your finances, you have some familiarity with the process and you will demonstrate that you’re paying attention.
What amount will I need to bring when we have our in-person meeting? How can I pay that amount?
This may just be their bill, but if you need a larger down payment, extra funds for variances, or other unforeseen items, it’s a good question to ask.
Don’t leave these amounts to chance – you should know how much money you need to have with you when you go to see your lawyer.
You may be able to pay your lawyer’s fees with debit, cash or credit, but your down payment and other amounts may need to be certified.
Email to send to your potential lawyer:
My name is _________ and I’m looking for a lawyer that specializes in home purchases, specifically residential real estate. I am currently looking to purchase my first home and am seeking a lawyer to represent me.
While I plan on purchasing a home in the near future, I do not yet have one selected.
If you do have expertise in this area and are looking to take on new clients, please let me know, as it would be great to speak further.
INSERT YOUR NAME
Questions to Ask Your Lawyer Worksheet:
If you would like to get the worksheets for buying your first home, you can buy the workbook here.
Should I Use My Bank Or A Mortgage Broker?
For some reason, many people have a sense of security from dealing with a bank that makes them question using a mortgage broker. Many people tell me they want to use the bank they’ve been using since they were a kid, the bank that their parents have been using for 30 years.
Somehow people believe that being a long-time customer is going to get them a better rate, or better terms. I hate to be the bearer of bad news, but it’s not likely.
I have nothing against banks, but I believe, at the end of the day, or end of the term in this case, you come out ahead using a broker, and here’s why:
Their service is free!
Well it’s free to you anyway. Mortgage brokers are paid by whatever lending institution or bank they end up getting you a mortgage with. The mortgage broker acts as a salesperson for dozens of different lenders and they get a commission from those lenders when they sell one of their products.
The big banks and lenders can afford to do this, because by working with mortgage brokers, they need to hire fewer staff who work directly for them selling mortgages. As a bonus, they only have to pay the mortgage brokers when someone signs a mortgage.
Another bonus for the banks and lenders, is that they can have mortgage brokers as partners nationwide, giving them much more reach without having to build additional brick and mortar banks and offices.
You get the best rates
Like I said before, mortgage brokers have access to dozens of lenders, allowing them to make sure you’re getting the most competitive rate available.
They know that getting a good rate is at the top of everyone’s list, and they know that even someone with little knowledge of mortgages is going to have a good idea of where the current bank rates are sitting.
This forces them to stay on their game and make sure their customers are getting the best rates possible.
Remember, the business of selling mortgages is a competitive game, where referrals go a long way. It’s in their best interest to ensure you get the best service and the best rate.
While you’re at work or busy managing your hectic life, they’re staying up to date on all of the latest products available
Mortgage brokers are always shopping for the best deals, and because they live and breathe this every single day, they always have the latest on what’s available. They also know, that the rate isn’t the only important thing when it comes to mortgages – different mortgages suit different people, and a broker can help you find the best one for you.
Mortgages for first time buyers can be different, in comparison to remortgaging or buying a 3rd home. A broker has access to the different lenders and can find out which one offers the best incentives for first time buyers. They’re not restricted the same way a bank is, with only whatever products are offered at that specific bank.
Mortgage brokers only get paid if you sign a mortgage
I know in today’s society, we’re taught to hate commission sales people, but, in this case, I love it. I like knowing that this person needs to do their job and find a mortgage that makes me happy if they want to get paid.
I think it helps to know, that at any point, I can walk away and go to a different broker or bank to get my mortgage, which is likely a very motivating driver to succeed.
They’re basically like a small business person who relies on sales and referrals to succeed, and I like that. This usually increases the level of customer service you’ll receive and makes for a much more enjoyable experience overall.
Mortgage brokers are less strict than banks
When you sit down to apply for a mortgage with a bank, they plug all your numbers into a computer and see what comes out. A mortgage broker deals with so many different lenders who all do their own calculations, that each differs slightly from one another. This usually results in many more options and ones that aren’t so black and white.Here’s my experience with getting my first mortgage.
When I applied for my first mortgage (Glen here), I was young with a short credit history, and when I sat down with the bank, they proceeded to tell me that I had poor credit and I could only qualify to borrow $50,000.
Feeling frustrated, I went to visit my real estate agent to deliver the bad news. “Don’t sweat it,” he said and then proceeded to pick up the phone and call a mortgage broker that he dealt with all the time. He made an appointment for me half an hour later.
I walked into the meeting feeling nervous and like I was about to be disappointed again, but then the broker told me I had great credit for someone my age, and that it would be no problem to find a mortgage for up to $150,000.
That was triple what the bank said!
How was that even possible I wondered? I realize that today, $150,000 wouldn’t get you very far, but at the time I was buying it gave me plenty of options.
Needless to say, I left her office on cloud nine and eventually signed a mortgage with that broker and recommended her to everyone I knew.
It wasn’t just the fact that she was able to get me a mortgage when the bank all but said no, it was also how kind and understanding she was of my situation and how at ease I felt about the whole thing after I left her office.
You can’t replace the feeling of confidence (and human connection) in these types of situations.
So, now that you’ve got my opinion on mortgage brokers, go check it out for yourself! Don’t simply take my word for it. Go talk to a broker and see what they have to say.
It’s nice to build these relationships before you have a pending home offer on the line. Buying a home takes a team of people, and even if you’re not ready to buy today, you can still start building your dream team.
Questions to Ask Your Mortgage Broker or Banker
How do you get paid?
You want to ask this question to find out how your broker makes their money. It’s best to get it out in the open right away. Normally, they will be paid by the lending agency with a referral fee, so it doesn’t cost you anything out of pocket.
What are the current rates for a fixed rate mortgage?
A good broker should know these rates or have access to them in a few seconds. This is a good question to ask to see how they respond. *Tip: write down what they tell you, so you can reference this quote later, if need be.
What are the current rates for a variable rate mortgage?
Again, see how they answer and make a note of the rates.
How much of a down payment will I need?
Depending on your situation, it will be a range starting at 5% and go up from there. We dive into this topic as part of our first book.
Are there any programs available for first time homebuyers to help with the down payment?
Depending on where you are in the country, there are various incentives and rebates for new and first time home buyers. A good mortgage broker will know what is available to you and be able to tell you about your options.
Can I put extra money down on my mortgage directly onto the principle? Will this incur extra charges if I do?
It’s always good to know what kind of pre-payment and extra payment options you have available to you and what it will cost. You will likely be making more and more money as time goes on, so it’s a good idea to know your options.
What lengths of terms are available for fixed and variable rate mortgages?
These will vary. Make a note of what is available to you.
If I go with a variable mortgage, can I lock it in at any time?
Although you may not be interested in this right now, it’s a good thing to know.
What are the consequences if I pay off my mortgage before the term is up?
Each mortgage will have different terms and clauses. By asking what clauses exist for different types of mortgages, it will help you understand more about what you’re getting into.
Do you work with any realtors you can recommend?
It’s always good to see who they recommend, you can also ask if there is anyone who you should avoid.
Do you have any lawyers you can recommend?
Recommendations between professionals hold a lot of value for me. Generally speaking, professionals want to recommend other great professionals. It looks good on them and makes everyone’s life easier.
What documents will you need to process my pre-approval?
This will be a big part of the process. You will need to get pre-approved for your mortgage before you get serious about looking. You can always apply with an online mortgage broker to get started, but you need to make sure you have the relevant documents when it comes time to apply.
Can you please complete a pre-approval, so I have a budget for my home?
You will want to do this to make sure you know what budget you’re working with. While we cover this in more detail in our other ebook, remember that they will approve you for the amount they are authorized to lend you, not the right amount to suit your budget.
There is a world of difference in these two numbers (which is why we did a separate book on it), so make sure you have completed your budget and are an expert in your own finances.
It’s not the mortgage broker or banks job to make the financial decisions for you and more importantly, to advise what you should be spending and can afford.
Their job is to tell you what the maximum amount is that they can lend and it’s your job to make sure it all lines up with you finances. Sometimes the number they provide is much higher than what you should be spending.
Questions to Ask Your Mortgage Broker or Banker – Worksheet
Just a reminder to do your own calculation to figure out what you should be spending on your mortgage.
We have done a whole book on this because it’s SO IMPORTANT.
It’s not the mortgage broker or banks job to make the financial decisions for you and what you should be spending. Their job is to tell you what the maximum amount is that they can lend and it’s your job to make sure it all lines up with you finances.
Sometimes the number they provide you might be much higher than what you should be spending.
Part 2: Mortgages for the First Time Home Buyer
Getting Your Mortgage Ready
There are several options for the first time buyer when it comes to mortgages. There isn’t necessarily one that is better than the other, perhaps one that might be a better fit for you.
Conventional (conforming) Mortgages
Conventional, or otherwise known as conforming, mortgages are loans that conform to the guidelines established by the Federal National Mortgage Association/Federal Home Loan Mortgage Corporation (Fanny Mae and Freddie Mac).
Guidelines will include the size of the mortgage, loan to value ratio and minimum credit score. Usually a conventional mortgage will get .25 or .5 of a percent better interest rate because of the stricter guidelines.
Requirements for a conventional mortgage:
1. Must have a credit score of 740 or higher
2. Loan amount of $424,000 for a single family home
3. Down payment of 5-20 percent. The higher the downpayment, the better your rate will be
Federal Housing Administration (FHA) Mortgages
FHA loans are a government backed loan insured by the Federal Housing Administration. FHA loans are more flexible on lending requirements than conventional mortgages. They don’t require such a high credit score and can have a downpayment as low as 3.5 percent.
As a result of the more flexible lending requirements, and the smaller down payment, the rate will be slightly higher than a conventional mortgage. With this type of loan, it may also be required for the buyer to pay mortgage insurance premiums along with the monthly mortgage payments. Again, this is a result of the more flexible lending requirements, which in actuality, create a higher risk for the lender.
Even though nobody wants to have a higher cost of borrowing, most first time buyers will end up with a FHA loan. Simply for the fact that most first time buyers are relatively young and have not had time to build up a high credit score or a large down payment.
Veteran Affairs (VA) Loans
VA mortgages are mortgages backed by the department of veteran affairs. These loans allow eligible military service members to buy a home with little to no downpayment. The approval process for these loans has been simplified for service members, veterans and their families, and because they are backed by VA, mortgage insurance isn’t required, which is a significant savings.
Who qualifies for a VA loan?
1) Active or retired duty members of the armed forces with at least:
– 90 days of consecutive service during wartime
– 181 days of service during peacetime
– 6 years of service in the national guard or reserves
2) Spouses of service members who died in the line of duty or as a result of a service related injury.
Fixed vs. Adjustable Rate Mortgages
Any of the above mortgages can be a fixed rate or adjustable rate mortgage. One is not necessarily better than the other, but one is probably better suited for you. It’s important to consider your circumstances and future plans when deciding on which type of mortgage to choose.
Fixed Rate Mortgages
A fixed rate mortgage is when the interest rate stays the same for the life of the loan. Fixed rate loans are ideal for people wanting to stay in their homes for longer periods of time. Terms for a fixed rate mortgage usually range from 10-30 years (1-10 years in Canada).
The advantage of a fixed rate mortgage is that you always know what your payments will be and it’s hard to put a price on that. Paying a slightly higher interest rate so that you can sleep soundly, knowing that if interest rates rise, your payment will stay the same and your financial situation will be unaffected.
The disadvantage of a fixed rate mortgage is that there may be some substantial penalties if you ever want to sell or move before your term is up.
Be sure to ask what the penalties are for breaking the term of your fixed rate mortgage before you sign. We all know how life has a way of changing even the best laid plans.
Adjustable Rate Mortgages (ARM)
Adjustable rate mortgages are generally 30-year mortgages where the first portion of the mortgage has a fixed rate and then the rate is adjusted periodically after that. These mortgages are usually described by their name.
For example: a 5/1 ARM would mean that the first 5 years of the mortgage is fixed and then the rate is adjusted once per year after that. Generally the fixed portion of these mortgages ranges from 3-10 years.
These are great mortgages for first time buyers. Often we don’t stay in our first home longer than 10 years, so we can benefit from the advantage of the fixed rate at the beginning, while not being locked in for the entire term of the loan, and therefore aren’t forced to pay penalties if we move or sell. The rates will also be lower on this type of mortgage, so it allows you build more equity in your home.
Loan discount points are prepaid interest. One point is equal to one percent of the loan. By paying points up front, it will decrease the interest rate on your loan. Different lenders will have different options for what they offer in the way of discount points.
Whether it’s worth it for you or not depends on how long you’re planning to stay in a home. It takes time to make the money back that you spend on points, and it may not be worth it depending on how long you stay in the house.
For most first time buyers, there is usually not a lot of extra money kicking around when you close on a home, so buying extra points is not often even an option.
APR? What Does That Even Mean?
APR stands for Annual Percentage Rate and provides a more complete analysis of the cost of borrowing. APR takes into account things like lender fees and mortgage points, as well as the interest rate to provide you with a more complete idea of the cost of borrowing.
The APR will be a higher percentage than the interest rate, because it includes more things. It will give you a fairer assessment between lenders, as one lender might have a lower interest rate with higher fees, and another might have a higher rate with lower fees. In both cases the APR might be exactly the same.
Knowing Your Down Payment Options
Everyone knows you can simply save up the money you need for the down payment, but that can be easier said than done and many people don’t realize there are other options.
For example, borrowing from a retirement savings account can be a good way to get part of your down payment. But be advised, this option is only if you’re unable to save enough money in a reasonable amount of time to make buying a home possible.
In a perfect world, you would leave your retirement savings where it is and save for the down payment in another account. However, sometimes circumstances don’t allow for this. In some areas people are fighting fast rising markets and are trying to buy a home before they become unaffordable.
In some cases, buying a home might actually decrease your monthly payments (maybe you’re planning to have a renter) allowing you to save money faster in the long term, so mathematically you come out ahead.
Either way, if you want to borrow from your retirement account for your down payment, you should definitely talk to your accountant to confirm the tax implications in your area and for the type of retirement account you have.
In the meantime, here are the basics of what you need to know :
Using Money From Your Roth IRA
Roth IRA is probably your best bet as far as taking money out of a retirement account goes. All the contributions to a Roth IRA have already been taxed, so you can withdraw them at any time, without paying a tax penalty.
However, there is a 10% early withdrawal fee for taking out the money before the age of 59 (this is known as a hardship withdrawal).
The good news is, there’s an exemption for first time home buyers that allows you to withdraw up to $10,000 as a lifetime limit to apply toward the down payment or closing costs of your new home, as long as the account has been open for five years.
Using Money From Your Traditional IRA
Using traditional IRA money also has the same first time homebuyer exemption on the 10% hardship withdrawal fee up to $10,000. The main difference here, you need to pay state and federal tax on the money you withdraw from a traditional IRA. You’ll need to take this calculation into account when deciding if this option is worth it or not.
Important Things to Note (about withdrawing money from any IRA for first time homebuyers):
1. The definition of a first time home buyer, is anyone who hasn’t invested interest in a property for at least 2 years. So, if you owned a home more than 2 years ago, you still qualify!
2. The exemption can be used for you AND your spouse if you both qualify, bumping your limit to $20,000 withdrawal without paying the 10% penalty
3. You have 120 days from the time of withdrawal to the time you use the money for qualifying home buying expenses (down payment and closing costs). For this reason, make sure you don’t withdraw the money until the last possible minute. If for some reason the closing on your home falls through, you could be stuck with the 10% hardship withdrawal fee because you took longer than 120 days to apply the funds to a qualified purchase.
Borrowing From a 401k
You can borrow up to $50,000 or half of the value fund, whichever is less, for the purchase of your home. There is no penalty or tax implications here because it’s a loan, not a withdrawal. You will however be required to pay interest on the loan (which you are actually paying to yourself), usually about two points above prime. There are some important things to note about borrowing from a 401k:
1. Every employer is different and has different rules. Talk to your HR department to learn about the rules for your 401k
2. Usually, you have five years to pay back the loan with interest
3. If you lose your job or quit your job, you will generally have 60-90 days to pay back the loan in full. And if you fail to do so, you’ll be forced to pay taxes on the money as well as a hardship withdrawal fee
One of the most important things to do before withdrawing money from any retirement account is to get advice from your accountant and financial advisor!
Everyone’s situation is different and tax laws can change. The information above has been reduced down to the simplest form to provide you with an easy understanding of the basics of getting money from retirement accounts for the purpose of buying a home.
It’s important to sit down with the professionals for a complete understanding of what this might mean for you in the short and long term and of course, the bigger picture of it all.
Remember, getting into a home sooner isn’t more valuable than retiring sooner, so make a long-term game plan and get all the information before making any decisions on dipping into your retirement accounts.
Mortgage Pre-qualification vs. Pre-approval for You: What Does It Mean?
First of all, what’s the difference? Let’s start by looking at pre-qualification. This is the first step in finding out what the bank is willing to lend you for a mortgage. Once you’ve made a choice on what mortgage broker or bank you will use, the next step is to get prequalified. So what does this mean?
• Evaluates assets, debt, and income to give you a number that the bank is willing to lend you
• There is no credit check involved at this stage
• There are no requirements for proof of income, debts or assets
• There is no evaluation on what you have saved for a down payment
• This process is basically entirely based on info you provide the bank, without verification on the above mentioned info
So, what this actually means is: in order for you to be pre-qualified, you provide your bank with the info they need to decide how much mortgage they’re willing to give you, without them actually verifying any of information.
If you’re being honest in what you’re telling the bank, this number should reflect your pre-approval number fairly accurately, assuming you have an appropriate down payment and decent credit.
At face value though, getting pre-qualified isn’t a whole lot different than punching your info into a mortgage calculator, you’re just getting the results from a real person which can definitely add some additional confidence.
A pre-approval on the other hand is a more in depth process. It’s also what we recommend doing before going house shopping. The two big advantages of having a pre-approval over being prequalified are:
1. You’ll have much more confidence in the price range you’re looking in, knowing that you should have no problem getting a mortgage for that amount
2. You actually have more buying power. If you do make an offer on a home (especially in a tough market where there could be multiple buyers), the seller will give your offer more weight because they know that your financing won’t fall through
So, what are the main differences with getting pre-approved?
• You need to fill out a mortgage application which usually carries a small fee
• You must provide proof of assets, liabilities, income and debt
• There will be a credit check on your credit rating and your credit history
• You will find out what the interest rate is and usually be able to lock in that interest rate for a period of 30-120 days
• You will also receive a letter of approval (stating what you’ve been approved for as well as the rate and how long that rate is good for)
What you’ll need to provide for your pre-approval:
• Record of employment
• Proof of income
• Account locations and numbers of all of your bank accounts and investments
• Proof of assets: vehicle, boat, ATV, retirement savings account, real estate investments etc.
• Proof of liabilities: credit card statements, line of credit, car loan, student loan, child support etc.
Once you’ve been pre-approved, unfortunately, this still doesn’t guarantee you a loan. The reason for this is that pre-approval doesn’t take into account the physical property.
You could have a home that has a low mortgage value, but is extremely expensive to run. Or, you could have a seller listing a home for more than it was appraised for and the banks don’t like to lend more than appraised value.
All that being said, in my experience it’s been rare that someone gets pre-approved and then turned down at the time of purchase.
And, given that most people’s price range that they’re comfortable with is lower than what the bank is willing to lend, this puts buyers in a position where they have some wiggle room anyway and won’t be over mortgaged.
Part 3: How To Find The Right House
What To Include On Your Realtor’s Initial Home Search
The following are the items you should be considering when giving your realtor a search criteria. They will use this to create a custom search for you and you will be notified when new houses come up for sale.
1) Square Footage
This doesn’t need to be an exact number, but you should have a range of where you’d like to be.
A few things to consider with square footage:
• Basement square footage may not be included in the total
• Outside storage like sheds and garages does not count in the total
• Consider the timeline for your first house – is it a 5-year house or a 30-year house? Depending on your timeline you may be able to do with less house.
2) Number of Bedrooms
Consider not simply what you need now, but any future plans for children. Are you thinking of renting out a room or taking on roommates to help pay the bills?
Like square footage, if you’re buying your house for the long-term, you may want to think about how many rooms you will need.
As mentioned above, consider if you need an office in your home, one of the bedrooms might end up being used for that.
One last note, for a basement bedroom to be considered a “true bedroom,” the windows must pass egress. This means, that there could be useable rooms that aren’t considered actual bedrooms in the house listing.
3) Number of Washrooms
Make note of the type of plumbing fixtures in each washroom. A home could have 4 washrooms with only 1 shower and no bath tubs.
4) Age of Home
This is a decision that should be made based on the number and extent of the upgrades and repairs you intend to do. There’s nothing wrong with older homes, as long as you know that the upgrading costs will be more than with a newer home. However, this should be reflected in the price.
Take the following into account
- Crime rate
*Bonus points: When you’re picking an area, it’s a really good idea to spend some time in the neighborhood. Visit it at different times of the day on different days. This will give you a better idea of the people and amenities that are available to you.
6) Price Range
At this point you will have been pre-approved for a mortgage and should know what the bank will afford you. Remember that this is not what you should necessarily spend, but what the bank is willing to lend you.
Make sure to maintain some wiggle room here. Many people set up a search right up to their maximum budget, and are forced to pass on houses that they fall in love with because there’s an extra few thousand dollars of extras needed once the house is purchased and there is no room left in their budget.
7) Does the House Have a Garage or Not?
If you want your new home to have a garage, it’s best to know what type you want. Some features to consider include:
- Number of cars
8) Finished Basement
This is usually a bonus. A finished basement can mean more space, while an unfinished basement can mean developing exactly what you want at a later time.
9) Would Be Nice Items
These are the items that would be great if you got them, but they aren’t on the “must have” list. Things you may want to include are items like:
• Hardwood floors
• Newer appliances
• Deck or patio
Things to Look for When Viewing a Home for the First Time
When it comes to looking at a home for the first time there are a lot of things to consider. Sometimes we need to think about what is missing as much as what is there. Here are the things to look for when viewing a home:
1) Room Shape and Size
This is something that may be labeled on the listing, but it’s important for you to check the dimensions and think about how certain furniture might fit or be laid out in a room. Having a tape measure with you would certainly be helpful. If you already have furniture it’s a good idea to have the dimensions of your main pieces with you so you know if your furniture will be a good fit.
Laundry is a commonly overlooked aspect of a home. With all the other important things to look at, don’t forget to check if there’s a laundry hookup in the home and where its located.
If there is a washer and dryer in the home, you might want to consider trying to have them included in your offer if you don’t have your own. If you do plan on including them in your offer, do a quick inspection when you view the house.
This is another item that may or my not be on your initial search criteria. Even if it is, it’s a good idea to confirm. Two car parking can be open to interpretation and very dependant on the size of cars. Just like the rooms where you’re looking to fit your furniture, make sure your cars will be able to fit in the parking area.
Keep an eye out for this one. Pay attention to what time of day you’re viewing a home. Sometimes we view a home midday in the sunlight and don’t realize that certain rooms may have little to no light fixtures!
It wasn’t uncommon 30 years ago for homes to be built without a light fixture in the center and only plugs for lamps. Sometimes the plugs would be connected to a switch on the wall so you could turn the lamps on and off when you enter or leave a room.
5) Watch Out for Staging Tricks
Now, I’m not going to bash staging, in fact, I think its great and everyone selling a house should definitely do it, but I do want to highlight some of the potential considerations.
(When I sold my first home, the company I hired to stage it did such a fantastic job that I almost had second thoughts about selling.)
Things like changing out furniture to make rooms look bigger, not having a TV in the living room, so that furniture doesn’t have to be centered around it, and generally taking out many of the things you might have in a house, are just a few of the tricks.
Our house was missing so many things when it was staged, it was barely livable. The kitchen table they put in barely fit 2 people. Which made our small kitchen look big. Smaller beds made the rooms look more spacious. Remember, it’s pretty common to remove the bulk of the furniture, so the home looks it’s biggest and best.
The key thing to remember, is to look at each room and think about the things that YOU would likely have in them and make sure it will suit your needs.
Ask yourself in each room, “Ok where would my TV/Sofa/Bed/Table go?” Go through the motions of what your day would look like, when you take a shower is there a place close by to grab towel? When you get up is the sun hitting your face because they have removed all the curtains?
There are a million little tricks that can be used to make the house more appealing. Take your time going through each room and make sure that you get a good idea of what it would be like to live in it.
6) Make a List of Anything That May Need Upgrading in the Next 5 Years
This list is meant to be used on the initial viewing of a home and may weed out some properties before putting in an offer and getting a home inspection. Often, people only look at what needs to be fixed immediately, instead of looking down the road a bit.
The first couple years in a home are always expensive and money is often tight during this time. It’s important to be aware of any upcoming costs, so you can either prepare for them, or take them into consideration when making your offer.
7) Window Sizes
Most people take notice of the windows when viewing a home. However, depending on what time of day you’re viewing a home you may not be able to tell how much natural light you’re getting (i.e. viewing at night.)
If a home is meeting all your criteria and you’re interested in purchasing it, try to view it once in the later evening and once during the day.
The other thing to pay attention to with windows, is to make sure all the bedrooms have large enough openings to escape in case of fire. This is a requirement of any bedroom by law and most homes are built this way, but sometimes renovations are done to add an extra bedroom in a home and the windows aren’t to code.
8) Check Out the Neighborhood
If you’re already going to view the property in the late evening after dark, take this time to look around the neighborhood. Many places are very different in the daylight, we’ve all seen these neighborhoods. It’s better to find out now if this is somewhere you don’t want to be after the street lights go on.
First Time Homeowner Story
When we bought our first place, we were awoken by a firetruck in the middle of the night. Turns out we were a block away from the firehall. We were also closer to a few schools and had the buzzer bells going off through the day. It wasn’t a big deal for us, but if I worked an evening shift, those sirens would definitely have kept me up.
Even though I had lived in the area my whole life, I had completely overlooked what types of noises, people and places were around our new home.
Eventually, we got used to the sound and slept right through, but the first six months were rough!
What to Look For in Your Home Walkthrough
Viewing a home is both exciting and overwhelming. There’s so much to look at and so much to take in, and it all usually happens in a very short amount of time. Now, if you’re serious about a particular home, you know that you’ll likely get a home inspection, which will evaluate the nuts and bolts of the home, but what they won’t tell you, is if your king size bed will fit in the master bedroom.
When walking through a home, we want to make sure we’re not missing something obvious, or falling for any staging tricks. To help guide you through this process, we’ve broken down a very basic list of a few things to consider in each part of the home.
• Shingles: You can look at the shingles and see if they are in need of a repair, any good realtor will be able to tell you. If not you can ask the seller the last time the roof was re-shingled to get an idea of how much longer the current shingles have.
• Exterior finishes (siding, brick, stucco etc.): we’re not going to go too in depth here, but want to remind you to take a full 360 degree walk around the exterior to make sure there are no glaring problems(large cracks in brick work, siding falling off etc.).
• Concrete driveways and steps: have a quick look to see if there are any major cracks, or if the surface is breaking. For driveways and steps, this is mostly aesthetic, but you’re still the one who has to look at it
• Make sure there is enough room to actually hang multiple coats and put multiple sets of shoes and boots in the closet. You want to make sure this area is functional. When houses are empty, the amount of room can seem satisfactory, when it’s really not. Keep in mind many starter homes are tight on space. I’m not saying this should be a deal breaker for you, but in my first home we had to buy a cabinet for the entryway to help organize clothes and save space. It’s just nice to know ahead of time if you need to spend a few hundred dollars on a space saving solution.
• Look down at your feet. How does the floor look? This is a prime spot for a damaged floor with wet shoes and boots coming in and out year round.
• Lighting: look around the room and see where the lights are, especially if you’re viewing the home in the daylight. Many older homes don’t even have a light in the living room, they often have a plug that is connected to a light switch so that you can plug in a lamp and then turn it off and on with the switch
• Window sizes: natural light is underrated sometimes. Again, this isn’t necessarily a make or break item, just something to be aware of.
• Room size and possible furniture layout: this one’s important. Bring a measuring tape with you to ensure the furniture you have will actually work (and fit) in the space. Take it from someone who staged their first house when selling, things aren’t always as roomy as they seem.
Average Furniture Sizes:
• Couch – 7’x3’
• Love seat – 5’x3’
• Recliner – 3’x3’
- Sink and Fixture: Check to make sure both the hot and cold taps are working (sometimes the hot water may take a minute depending on the distance between the kitchen and the hot water tank)
- Appliances: If the appliances are being sold with the house, make sure to go over the general condition of them and make sure they’re in good working order
- Cabinets: Check the overall condition of the cabinets: make sure the doors and drawers function smoothly and that nothing is falling apart
- Cabinet and kitchen layouts are all different, but there are two things that most people don’t consider when viewing a home:
- Working space: look at the available counter space and try to think about where you will prep your meals
- Pantry space: where are you going to store pantry items when you get back from the grocery store?
- Some kitchens are lacking in these 2 departments, so be aware!
• Whether it’s part of the kitchen or separate, make sure you know where your dining table is going to go and if it will actually fit with chairs around it
• This is a classic staging trick: either put in a dining table that’s made for 2 people to eat at, or take the table out all together so potential buyers are forced to envision where the table would go on their own. Some people don’t even realize it’s missing until they move in, or they end up grossly underestimating how much space it will take up
Dining Table Sizing:
• Standard width is between 36”- 40”
• Standard length is 48” for a 4 person and 60” for a 6 person
• Allow for at least 36” from the edge of the table to any walls or other furniture to allow for chairs to be pulled out or people to walk behind
- Check to make sure both the hot and cold taps are working in the sink and the shower (and that there is enough water flow)(sometimes the hot water may take a minute depending on the distance between the kitchen and the hot water tank)
- Look for signs of mold (especially at the corners of the ceiling directly above the shower)
- Flush the toilet to make sure it works
- Check window size and the dimensions of the opening part of the window. At least one window in every bedroom must meet egress requirements (egress is the regulation that stipulates the minimum size that a bedroom window must open for safe escape in case of a fire):
▪ Minimum unobstructed width: 20 inches
▪ Minimum unobstructed height: 24 inches
▪ Minimum unobstructed opening of 5.7 square feet
▪ The window sill height must be no more than 44 inches off the floor
- Measure the bedroom for potential furniture placement. Take into account the size of your bed and dresser, as well as any other furniture you may want in the room
- Take notice of bedroom locations: where is the master in relation to the other bedrooms? Do you want them close together if you have small children? Is there a bathroom on the same floor as the bedrooms?
▪ Minimum unobstructed opening of 3.8 square feet with no part of the opening (height or width) being less than 15”
- Twin: 39” x 75”
- Full (double): 54”x 75”
- Queen: 60” x 80”
- King: 76” x 80”
- Typical 6 drawer dresser: 60”w x 20”d x 30”h
- Typical armoire: 60”w x 17”d x 60”h
- Typical night stand: 20”w x 20”d
- Observe the amount of space available for storage or vehicles
- Make sure the overhead door works
- Measure the size of the overhead door, then measure the height and width of your vehicle to make sure it’s going to fit. Many of the older garage doors weren’t designed for the size of vehicles we have today
- Measure the length of your vehicle and compare it to the length available to park in the garage
- Look at the overall structural condition of the garage: a number of garages aren’t finished on the inside so you might actually be able to see if the framing or concrete floor is in decent condition
- Check the shingles and exterior just as you did for the house
Home Walkthrough Worksheet
If you would like the worksheets that come along with this you can get them here.
How Involved Should My Parents Be In My First Home Purchase?
This question is such a struggle for so many. Where do you draw the line?
Add in another dimension, if you’re buying with a significant other, and there is the potential for two sets of parents to be involved in the process. This means, you’ve gone from having two people that need to agree (which can be hard enough) to six people giving their two cents.
Is there a ‘right’ way to navigate this? Some parents may be offended if you don’t involve them, and others have a way of involving themselves whether you want them to be or not. The tough part is having them involved when you want them to be, and having them give you some space when you don’t.
First, let’s look at the possible pros and cons of parent involvement:
- They have more experience than you and can often give valuable insight into the buying process
- Parents look at things from a different perspective and may pick up on aspects you might have missed, saving you time, money and frustration
- Generally, parents have their kids best interest at heart and it’s always good to have people like looking out for you
- Most people tend to feel more confident in a purchase like this, if their parents agree that it’s the right move
- Parents can be overbearing and might not realize that you’re the one who’s in charge of this decision, and you’re the one who needs to live with the outcome
- It’s hard enough to find the right home when you only have one or two people that need to agree. Adding more people’s opinions can sometimes lead to more confusion and doubt
- It’s hard to not give significant weight to your parents opinion. That said, their opinion is just that, an opinion and it’s not always the right one
- We have a natural tendency to assume that our parents are always right. If we don’t agree, we assume that we’re wrong and this can lead to a lack of confidence, which is what we’re trying to avoid
- Parents are human, and when they are looking at a house they see it through their own eyes. Which means they might not be considering the stage of life you are at, and evaluate based on their own needs
I know what you’re thinking, everything I’ve told you so far is already stuff you know! So what’s the answer? Should we involve our parents, yes or no?
Here’s what I think:
I think you should seek your parents advice for recommendations on building your team (real estate agents, lawyers etc.), assuming they have a recommendation.
Then, I suggest you go through the ‘shopping’ process on your own (or of course with your partner, if you’re making the purchase together).
It’s my experience, that you need to decide exactly what you’re looking for and visit those homes by yourself (and/or with your significant other), free of other’s judgements and opinions.
Once you’ve found the house that you believe the be the right one, then ask your parents if they’d like to come see it with you.
What’s really important about this process is how you weight your parents concerns. The feedback that you’re after here isn’t their opinion on the colour of the walls.
By this point, you’ve decided that you can afford the house, you like the physical appearance of the house and can see yourself living there, you’ve considered the neighborhood and all the other important elements.
What you’re seeking now, is to have them point out what you might have missed. It’s possible, that due to your excitement, there are a few things you might have overlooked. As such, it could be helpful to have these pointed out before you move ahead with an offer.
Parents are a couple steps further removed from the process, so it’s possible they’re able to pick up on things you might have missed. The key is: don’t get defensive if they have some questions or if their comments feel critical. Evaluate and consider their concerns and then make your own decision.
At the end of the day, YOU need to be happy with this home, not them or anyone else for that matter.
Everyone always has an opinion and it’s your job to take in all of the information and make the best decision for you.
I know this can be hard at times, but you’ve put in a lot of effort into educating yourself on this process and you need to be confident in your decision.
Should I Be Looking At Houses Above My Budget?
Many people struggle with the idea of looking at homes that are priced higher than their budget. On one hand, it feels like a tease seeing all the things you can’t afford, on the other hand, what harm can it do?
Let’s take a look at the pros and cons of viewing homes that are out of your price range.
For the purpose of this list, we’ll assume you’re looking at homes within a 10% margin of your max price.
• You’ll learn what features make the higher priced homes more valuable and possibly be able to recognize those features in a home that is in your price range and make a good buy
• It’s hard to know what a good deal is if you’ve never seen anything better
• There may be higher priced homes that have been on the market for a while, giving you the opportunity to purchase them for under list. This may bring homes that are slightly above your price range into your price range
• After looking at a bunch of homes above your budget, it makes the ones within your budget look less and less attractive
• Many people end up buying above their budget after continuously looking at homes in a higher price bracket
All this being said, what’s the right answer?
The right answer is that it’s probably beneficial ONLY if you’re disciplined. You need to be able to look at the higher priced homes and resist the temptation to buy, unless you can get them below the list price. You need to be very intentional about why you’re including these higher priced homes in your search, and stick to the plan, even when finding the right home gets frustrating.
You make the choice – can you resist the temptation? Or, are you better off not including those homes in your search in the the first place? It’s important to know yourself and your tendencies and stay within them.
House Comparison Worksheet
We go into how much house you can afford in our first book about finding how much house you can safely afford, so if you’re unsure about how much home you can safely afford, please check this book out first.
When you start looking at potential houses to buy you will need this worksheet to evaluate the costs of each house to see if it is a viable house for your budget.
To get this workbook click here.
Red Flags You Need To Know
Not everyone can have the eye of a home builder when it comes to house shopping. Because of this, many people are nervous and think they might miss something important that could cause a lot of problems and cost a lot of money down the road.
Now, obviously I can’t teach, all of what I’ve learned in a lifetime, but I can share with you some of the major red flags to consider when viewing a home.
Should you find any of these in a home that you are seriously looking at buying, this should definitely trigger a home inspection at a bare minimum, and encourage you to have a contractor look at the home as well, to provide you with an estimated cost to fix the issues, before you proceed on the house.
Bowed or curved roof lines
With the exception of a clearly intentional rounded or curved roof, roof lines are supposed to be straight. When you walk back about 50 feet from the house and look at the roof from different angles, how straight does it look? If it’s got any major curves or bows to it, there’s definitely an issue.
I’m not talking about an inch or two, I’m talking like 3-4 inches or more. It’s going to be obvious. The most common place this happens is along the eave (usually bows out), along the ridge or top of the roof (usually bows down), and along the flat sloped part of the roof (usually bows down).
If you see that any of these areas bowed out or have sagged down 3-4 inches or more, there are sure to be issues with the roof structure.
Bowed in foundation walls
Similarly to the roof lines, the outside of the foundation wall should look straight. Often over time, these walls bow in toward the house due to the continuous pressure of the mud against the walls. This usually happens over decades. We call this backfill pressure.
When you step back 20-30 feet from the foundation and look along the wall, you should be able to tell if it looks like is curved in. If you’re unsure about doing this, bring along a string line. String the line out along the edge of the foundation wall, having one person hold each end at the corner of the house. If there is a significant gap between the string and the wall in the middle, you have a problem.
1-2 inches is not the end of the world as many older homes do have this issue to a certain extent, and I wouldn’t be worried about them falling down.
However, if it’s 3” or more, you definitely need a home inspection to confirm what you’re seeing and to determine the significance of the damage. This issue is also going to require you find a contractor to provide you with quote. The fix will almost definitely involve digging up the basement, and it won’t be cheap.
I’m not talking about the difference between 2 flooring surfaces that are different heights and where they butt together. I’m talking about the floor as a whole being uneven. Meaning one side is higher or lower than the other.
In older homes, no floors are perfect, so again here, we’re looking for a major difference. On a floor, 2” would be a lot. More than 2” is a real cause for concern, as this means the foundation is either settling or heaving in certain areas. Either is bad and will eventually need an expensive fix.
This is one of those red flags that is definitely going to require a contractor to look it over and provide a quote before you purchase the home.
So, how do you check for uneven floors? If it’s really bad, you’ll be able to tell just by looking at the floor, even if you don’t have a construction background. To make it easier squat down like a golfer does when they’re looking at a put. The closer you are to the floor, the easier it is to see any slope.
Following along with the golf theme, if you’re unsure, keep a golf ball in your pocket when viewing homes and if you come across a floor that seems to be sloping, put the ball on the floor and see what happens.
On regular floors, the ball might roll around a bit slowly and eventually roll to one side of the room. On really bad floors, the ball will start rolling down hill immediately, picking up speed quickly as it goes.
Water in the basement
I think most people would see this as a red flag, but most wouldn’t know what to do about it. Obviously if there’s water on the basement floor, or signs that there has been, it’s likely that the water is leaking from the outside.
It’s critical that you find an experienced contractor to look into this and give you a price to fix before moving forward. An inspector may or may not be able to tell you what’s causing the issue, but you need to know the cost to fix it before moving ahead any further .
Sometimes, these issues involve digging down around the outside of all the basement walls and doing major foundation work. Sometimes, it’s simply the lack of a sump pump and drain tile. Almost always, a lack of grading on the outside contributes to water issues.
Grading is the slope that the ground is at around the house. Consider this, if all of the rainwater that hit the ground ran away from the house because the mud outside was sloped that way, how would water ever get into the basement?
This is a really good thing to check if there’s water issues. Again, get down low like a golfer and look along the outside of the house. Which way is the ground sloping? Toward the house? Or away from the house? If it’s sloping towards the house, this will help you determine that the issue might be partly because of grading, or is being made worse by it.
We all know that mold is bad, but it’s not something that’s always front of mind when viewing a home. It’s important to know if there’s any mold in the home you’re buying, as it greatly affects the air quality that you and your family are breathing.
Start by checking in areas that are prone to moisture build up (moisture grows mold). Place like the windows, bathrooms, and basements. These are the common spots where we see mold starting to grow. If you do find mold, or an area of the home has that damp, or a place that has musty smell to it, you may want to consider making your offer contingent on an air quality test. This will either immediately point out where any mold issues are or give you the confidence you need to move forward.
There are of course, a number of issues to be aware of, but the above are some of the most common. We hope by understanding each one a little more in depth, you have a little more confidence going into your next viewing!
Part 4: Understanding the Costs of Being a Homeowner
Costs to consider for the first year of home ownership (after you move in)
Your first house will bring new costs into your monthly budget. To make sure you aren’t caught off guard we’ve created a list of things you should make sure you include in your budget.
1. Mortgage payment: this will generally be your largest monthly bill
2. Electricity bill: now I’m not even going to try to give you an idea of what this might cost, as varies greatly from area to area
3. Heating bill: again, I can’t tell you what to budget for this as its different everywhere. In some cases this might already be included in your electricity bill if the home has an electric furnace. Record the current heating and electricity bills of any home that you’re seriously considering
4. Water bill: what? I need to pay for water? Not always. Some properties may use a well to supply the house with water, but more often then not, homes are hooked up to the city water supply (which they don’t give away for free).
Again, here you can ask for a record of previous water bills for any home you’re interested in pursuing. It’s a good idea to know how many people are living in the house when you get the homes’ water bill. For example, two seniors will use a lot less water than a family with four teenagers.
5. Property tax: this will be one of your biggest monthly costs and is definitely something to take into consideration when buying a home. This is one cost that you have no control over, and it will never go down (unless some sort of miracle occurs). You can always buy plumbing fixtures that use less water, appliances that are more energy efficient and LED light bulbs to cut down on utility costs. However, it’s important to remember that property taxes only go up. Make sure you know what this cost is and find out if it’s paid annually, quarterly or monthly.
6. Home insurance: this can also be a high ticket item. But it does vary depending on many factors (such as credit score, house location, housing contents, history of the home etc…) Getting the cost of home insurance that the previous owners were paying will provide you a close estimate. However, when it comes time to purchase the home, do your own research.
7. TV bill (cable and streaming): this budget item often gets missed by people who are moving from their parents home and out on their own for the first time. Check out the websites of some local providers to see what type of rates they offer. Or if you are going to go streaming, it’s good to include your monthly cost of Netflix, Hulu and other streaming services in your budget. Remember if you are streaming you will need internet, so add that in here too!
8. Phone bill: you probably already have a cell phone bill, and while land lines are becoming increasingly obsolete, if you are considering a land line in your new home, check out the local providers to get an idea of cost for your budget (you can sometimes bundle the payments by including your mobile, internet, home phone and cable. This bundling can sometimes be a cost saver, but other times involves you paying for things you don’t need, want or use, and with a larger monthly payment, so always make sure you do your research).
9. Alarm: some homes have alarm systems and some don’t. If the home that you purchase has an alarm, you can get the cost of the monitoring fee from the previous owners. You can then chose to either use it or not. If the home doesn’t have an alarm system, and you want one it can be easily retrofitted into any home with today’s wireless technology. Again, just research some costs on this from local providers
10. Fix ups: list of fix ups or renovations that need to be done in the first year of home ownership.
11. Maintenance tools: under this category I put anything that you’ll need to buy for the upkeep of your home. This list may include:
12. Repair and maintenance budget: this is something most people don’t consider in their monthly budgets, but can creep up as a surprising and costly amount if not taken into account.
Regardless of how thoroughly you complete your DIY home inspection, and even if supplemented by a professional inspection, things can and will go wrong.
Unforeseen things always seem to come along when money is the tightest. Don’t be caught off guard.
Start by creating a monthly budget for everything that will need to be fixed in the first 5 years, and then add a bit extra for the unforeseen.
Think about if your furnace breaks in the middle of winter and you haven’t set aside any emergency fund money to fix it! Cozying up in your wool sweater will only go so far. Don’t forget you can also pay for a long-term insurance plan for your furnace if it’s an older model, but this isn’t necessarily needed for a furnace five years or less. As always, use your discretion and shop around to make sure you’re paying for the insurance you want/need.
Ideally your repair and maintenance budget should be approximately one percent of the cost of your home annually. If the repairs listed for the first five years exceed that budget, you may want to take that into account when making your offer or when deciding how much money to set aside before you move in.
13. Condo Fees: this can be another large cost. It not only varies from state to state, but also varies from building to building, even on the same street. This fee is obviously only applicable to condo living.
14. Homeowners association fees: depending on the community you’re planning on moving into, you may be required to be part of a homeowners association (HOA). There will be a fee associated with this. Ask your realtor about possible HOA fees when viewing the home. See this section in the guide for more information on HOA’s.
15. Painting: once we move into a new home, we usually want to make it our own. Painting is a great way to add your own style to home and is a change that generally won’t break the bank. If painting is something you want to do, don’t forget to plan for it in your budget.
16. Changing the locks: it’s a good idea to have the locks changed or re-keyed once you move into your new home. Realtors often have a local resource that they can recommend, or you can go to Home Depot or Amazon, pick out some locks and change them yourself. Costs on this can vary depending on the number of locks and how fancy you get with the replacements.
17. Extra commuting costs: consider where you work and where most of your weekly activities take place so you know if your commuting costs will increase based on your new location. This is definitely something to consider when setting up your initial realtor search in module 1.
18. Furniture: while furniture is also on the list of costs to consider when purchasing a home, there may be things you can’t live without when you move in and that you may want in you home in the first year.
19. Electronics: again, you may want to have certain electronics right when you move in, while others can be purchased sometime within the first year or later.
20. Curtains or drapes: often overlooked until you’re standing naked in your bedroom looking across the backyard into the neighbors kitchen! Don’t forget about window coverings (they aren’t always included in the deal). That’s not how you want to meet your neighbors. Or maybe it is. I don’t know. Don’t say I didn’t warn you.
21. Stocking your kitchen: this is something that can get out of hand if you let it. Don’t think you need to go out and buy everything you see in your parent’s or a gourmet kitchen – these things have been accumulated over many years.
You will however, if you don’t own them already, probably want to have a basic pots and pans set as well as some cutlery, glasses and some cooking utensils. Again, think about your lifestyle and how you use your kitchen.
What is a Homeowners Association (HOA)?
HOA’s are usually relevant when you live in a condo, townhouse or gated community, but aren’t restricted to only those three. HOA’s purpose is to maintain common areas, whether that be outdoor or indoor, shared costs of building repairs (such as fixing the roof of a condo building) and to maintain neighborhood standards. Before you jump into a neighborhood that has a HOA, there are a few things that you need to know:
Usually HOA fees range from $200-$400 per month depending on the area and what’s included in the fees. There are some questions you should ask, and information you should get regarding the fees when vetting a HOA.
• What do the fees cover? There may be some items on this list that will surprise you, good and bad. Things like garbage pick-up or cable may be covered and you would otherwise have to pay for that.
• Get a record of how often the fees have been increased in the last 10 years, as well as a record of all special assessments for the last 10 years. Special assessments are expenses the HOA must pay when they don’t have enough money in the reserve to cover the cost. This cost is divided between residents and can be thousands of dollars on top of the fees you already pay. By having access to these 2 records, you’ll have a better sense of the HOA’s habits and where they like to spend their money.
• Check the reserve fund. The reserve fund is where all the HOA fees go until they are needed. If this fund is extremely low, special assessments are usually on the horizon.
• The important thing to note here is that HOA’s are often run by volunteers in the community – everyday people that don’t always have a background in finances. It often becomes a bit of a political game. Nobody wants to pay taxes, but everyone wants all the benefits that come from paying taxes. In a HOA, nobody wants a fee increases, but the same people who complain about them will be the ones complaining the loudest when the special assessment comes along. You can’t have it both ways. You’ll want to check that the money appears to be managed properly and not wasted. By assessing the 10 year history, you should be able to get a handle on this
OMG, the rules! Sometimes they’re not bad, but some rules are ridiculous. You definitely want to get a list of them and READ IT. You don’t need to wake up 9 months from now all pissed off because you got a letter in the mail informing you that you planted the wrong type of flower in the front left corner of your house and you need to replant a red one in its place before the next HOA meeting (Ok, that might be a bit extreme, but you get the point). Ignorance is not an excuse, read the rules ahead of time. These rules might include, but are not limited to:
• Landscaping requirements
• Stipulations on what can be done to the exterior of your house (paint color, type of siding or brick etc.)
• Restrictions on pets
• Restrictions on what type of vehicles can be parked in the driveway or on the street. (eg. no RV’s or boat trailers)
• Snow clearing requirements
Once you know the rules, it’s important to make sure the property you’re looking at is in compliance with these rules when you buy. You don’t want to start off with a list of things to fix the second you move in.
3) HOA Management
It’s a good idea to get a copy of the minutes from the most recent HOA meeting or if you have time, sit in on one. It will give you a good idea of how the HOA is managed and the type of “personality” or demeanour of the HOA committee.
Be aware of extremes in either direction. Having a committee of people breathing down your neck every time your grass isn’t perfect can be just as bad as having a neighbor who’s house looks like it’s been abandoned and a committee who doesn’t seem to care.
If possible to get a bit of perspective on dealing with the HOA, it’s nice to be able to talk to someone who’s part of the community but not on the committee.
4) Consider Your Personality
Before moving into a home governed by a HOA, think about the type of person you are. If you’re the type of person who likes everything in the neighborhood to be in order and appreciates the fact that everyone is required to put in the same effort as you, and maintain certain standards, you may love a HOA.
But, if the idea of someone telling you how to maintain your yard makes you want cringe, HOA’s might not be for you
Look into what the HOA’s insurance covers. Things like fire, hail damage, flooding, earthquakes or other natural disasters can be particularly important. Make sure that there are no holes between what your policy covers and what the HOA covers
Millennial Homeowner Story:
“I went into my first place blind. It was a condo in a high rise, and I had several units to choose from. It was in a nice area and I thought I was getting a deal. Two months after I moved in I got a letter from the HOA telling me that they had voted to redo the roof and that there would be a one-time fee of $5,000 from every tenant to help cover the cost. This was followed by another vote to redo the lobby for an extra $3,000 per tenant. Had I known about this I never would have bought [the condo]. [My advice]: do your due diligence first. It takes a little extra time, but the savings can be considerable.” –Paul
Home Insurance for the First Time Home Buyer
House insurance can be confusing when you first look at it. To better prepare you, we’ve put together some tips for purchasing home insurance.
Cheaper isn’t’ always better…
Make sure to look at the details – It’s easy for someone to sell you something at a lower cost because ultimately that’s what you want to hear. Sometimes we can get away with going the cheaper route, but this is one case where we need to be highly skeptical of policies that come with the cheaper version. It’s important to take the time to review your policy carefully to ensure it suits your needs, as everyone and every house is different.
Make sure (at very least) your insurance covers these 3 items:
• Dwelling Protection: this is the coverage on the structure itself including anything attached to the house, such as a garage, screen room or decks
*Quick tip: This amount needs to cover the costs of rebuilding, not re-buying. Just because houses are selling at lowers costs, doesn’t mean you should insure it for that low price. The cost of new construction could be more expensive than simply buying another house. Look into the price of new home in your area to have a rough cost comparison. This way you’ll be confident you have enough coverage.
• Personal Property Protection: this covers your personal belongings inside the home. Be sure that if you have expensive items, such as jewelry, that you confirm those specific items are covered. Sometimes jewelry requires additional coverage depending on the value
• Liability Coverage: this is what covers you if someone were to get injured on your property
Save by bundling:
Many insurance providers will offer savings when you have multiple policies with them (car insurance, for example).
Check with your existing insurance provider to see what can be done if you have all your insurance policies with them.
Keep an eye on your credit report:
Many people don’t know it, but having a better credit score will actually decrease your insurance rates. Take a look at the credit report section of this guide to find out how to check your credit reports.
Get a CLUE:
CLUE (comprehensive loss underwriting exchange) is a claims history data base that provides all the information on any claims you’ve made on a property in the last 7 years. This will help you find any underlying conditions on a home that may not have been disclosed by a seller or that the seller didn’t even know about if they’ve been there for less than 7 years. This will help you further asses the risk factor your insurance company will use when deciding your premiums.
CLUE is a resource that insurance companies use to make sure the details of a property aren’t hidden by a seller. Your insurance company will probably be checking this database, just like you will. Take note that not EVERY insurance company reports to this database, so not EVERY claim will be reported here. However, most do, so there’s a high probability that any claims that have been made involving a home you’re interested in, will likely be listed.
Understanding Your Credit Report
What is a Credit Report?
A credit report is a detailed list of your credit history, as reported by lenders (credit card companies, car loan companies, banks or any other lending institutions). It will detail how much debt you have, the debt that is available to you, as well as payment history: bad debts, late payments etc.
There are three main credit reporting agencies in the United States: Equifax, Trans Union, and Experian.
When lenders request these reports from the credit bureaus, they’re checking how much risk is involved to lend to you. It’s a good idea to get a copy of these reports before going to see a lender. It will prevent any surprises when you’re trying to apply for a loan.
A credit score is a number given to evaluate your credit, either on the high end (good) or low end (bad).This number is provided by the same agencies listed above that also run credit reports. The number goes from 300-900, with 700 or higher being ideal or at least where you should be aiming.
The higher the number, the better your credit. It’s a mix of this score and the credit reports that lenders use to qualify you for a loan. Credit scores increase with good credit history (paying bills regularly and on time). However, first time buyers don’t often have high credit scores, as it takes time to build up a good credit history. Therefore, lenders also look at the credit history a buyer does have to help evaluate the risk of lending.
For example, if someone has only had a credit card for a couple of years and only one vehicle loan that started six months ago, there’s not a long enough history available to have a high credit score. However, the history inside that 2 years could be great with all payments being made on time, every time. Lenders will take that into account.
Hard Inquiries vs. Soft Inquiries
Many of you have heard that every time your credit gets checked, it drops your score. This isn’t totally untrue, but it actually depends how your credit was checked. There’s such thing as a soft inquiry and a hard inquiry.
A hard inquiry is when a lender is checking your score and history when you’re applying for a loan of some kind. This could be for a car, a home, a credit card, etc.
A soft inquiry is when your credit history and score is being pulled, but not for the purpose of lending money to you at that time. Examples of a soft inquiry would be: background check for an employer, pre-approval for a loan, and checking your own credit score. With a soft inquiry, your credit score will not be affected.
Either way, checking your own credit won’t negatively affect your credit when it comes to getting a mortgage. However, when a hard inquiry is made, your credit score does drop a few points. Now this will rebound in a short amount of time if you seldom have a hard inquiry. Hard inquiries stay on your credit history for 2-3 years.
*Important Note: if you have a number of hard inquiries on your credit reports, it will impact your score. Lenders will be concerned with this, as it looks like you’re desperate for cash, indicating that perhaps you’re not great with money. Generally, people who are constantly trying to secure additional loans, are the same people who struggle with their finances.
Obtaining Your Credit Score and Credit Reports
So far, the best place I’ve found to obtain your credit reports and scores are:
It’s important to compare the credit reports from the different agencies to make sure they all match and no mistakes have been made. By checking this ahead of time, you have a chance to address any mistakes before you have a house on the line waiting for a mortgage approval.
When it comes to credit scores, ideally, you would have a score of 700 or higher (this should also be your target when building your credit). Keep in mind your credit score will likely be different depending on the agency. The reason for this, is that each agency has its own proprietary model for calculating the score.
In fact, they have multiple models to calculate scores depending on who’s asking. Meaning, if a car company asks them for your credit score for a vehicle loan, the number they give them may be different from the one they provide to the mortgage broker.
Long story short, if the score numbers are slightly different between the agencies, don’t sweat it. Unlike the credit reports, these don’t have to match perfectly (and they likely won’t).
What Does All This Mean to Me?
Now the point of telling you all this isn’t to confuse or worry you, rather it’s to provide you with a basic understanding of how it all works. If your credit is good, the numbers and reports will come back in your favor and you have nothing to worry about. Even if your credit history is relatively short, if you’ve always been responsible with your credit, and paid your bills on time, you’ll be fine.
However, if you know your credit isn’t great, or your credit reports have come back with less than favorable numbers, it’s time to make a change. Having good credit will not only allow you to get a loan, but it will also reduce your interest rate and insurance costs.
Good credit will help you for the rest of your life, and it’s never too late to start practicing good credit boosting habits.
The bottom line, pay your monthly bills on time every time, pay the minimum balance on your credit card on time, every time, pay your rent on time, every time. This is 90 percent of the battle and you will be well on your way to a good credit score. If you’re looking to buy a house in the next few years, it’s the perfect time to start working towards great credit.
What If My Credit Isn’t Very Good?
We’ve all been there. Student loans, credit card debt, car loans, sometimes all it takes is one bad month to wreck your credit. The good news is, that you know about it now and not when you go to apply for a mortgage.
The bright side of all of this, is, if you’re in the early stages of your homeownership journey, you will likely a few years to save up for a downpayment and doing that will give you time to repair you credit. Start by making your monthly payments on all your debt, and focus on paying one off (either the smallest debt, so you get a quick win) or the one with the largest interest rate (so that you aren’t paying a lot in interest).
This is why we check our credit now and not when we’re looking for a house. It makes a world of difference to know it now and you can start working right away to improving it.
Should I Pay Off All My Debts First?
It will help you in the long run to not have any debt before buying a house, but if you don’t, you won’t be the first one to buy a home with extra debts (we had a car loan when we purchase our first home). So, as long as you’re budgeting for the payments, you’re on the right track.
Module 5: Making an Offer
Making An Offer and Closing on a House
So, you’ve found the right house and now it’s time to put in your offer (how exciting!). This is where things get real for a lot of people.
Up to this point it’s been lots of looking and researching, but no commitment, which can make this part particularly stressful. In an effort to help you navigate some of the stress, we’ve outlined a few important considerations below.
First Things First. How Much Should You Offer?
There are several factors to take into account when deciding how much to offer:
1. What’s your budget? Many people think that the only thing that matters here is that the offer isn’t higher than the number that the lender pre-approved. Make sure you consider all the variables – what if they counter offer? Are there any improvements to be done? Are there any other costs or expenses that you want your mortgage to cover? Make sure you leave room for these line items in your budget. Some of these details can be outlined before you set your price range, while others will be specific to the property.
2. Items that need immediate remediation. I’m not necessarily talking about renovations here, but items you feel should have already been dealt with for this home to be on the market at the price it’s listed. For example, if you check the faucets and one is leaking, or the drain is slow, these are regular maintenance items that you shouldn’t have to pay to fix. You should have a basic list of this from your walk through inspection. You can subtract the cost of these fix-ups from your offer, if the price of the home does not already reflect this.
3. What’s market value? It’s really important to have your realtor check out comparable houses in the area to make sure you’re not paying above market value. If anything happened after purchased the home and you needed to sell, you’d hate to have to sell at a loss. Ideally, you would buy below market value to try and build equity, although I realize that’s easier said than done.
4. How much do you love the home? While being mathematical to a certain extent is definitely important when coming up with an offer amount, we do need to put some weight on how you feel about the home in general. Are you absolutely in love with it, or does it just fit your needs? I suggest you not give too much weight to this, as it usually ends up with over paying for something, but it’s still important to consider. Generally speaking, the less emotional you are about a purchase, the better deal you’ll get.
5. Is there potential to easily increase value on the property? Give some consideration to how value could be added to the property and how easily it could be done. You may pick up on something that others have missed. Sometimes with a little foresight and thinking outside the box, a mediocre deal can turn into a great one. Keep in mind, most people don’t stay in the same home forever and the easiest way to upgrade to a bigger or nicer home in the future, is to build equity in the home you have.
When you put in your offer, you will be required to give an earnest money deposit. The amount of this deposit will eventually be subtracted from your down payment and is usually1-2 percent of the total property value (although some markets can be up to 5 percent).
If your offer is accepted, the deposit will be held in an escrow account until closing (see the section “What the Heck is Escrow” in this module). Never give the deposit directly to the seller. If the deal doesn’t go through for whatever reason, you could have a hard time getting the deposit back.
Sometimes by putting down a larger deposit, it shows the seller that you’re more committed to making the deal go through and satisfying your conditions of the contract. Therefore increasing the likelihood of your offer being accepted.
What Should Your Offer Be Subject To (conditions, contingencies)?
Conditions or contingencies are responsibilities that need to be met by the buyer, seller or both. The sale of the home will not close until all conditions have been satisfied.
1. Financing. Even if you’re pre-approved for a mortgage, your offer should always be subject to financing. And just because you’ve been pre-approved, it isn’t a guarantee. Pre-approvals are done based on information you’ve provided to the lender, and the lender will not necessarily do the background check to confirm the information is correct until you have a real deal pending. The lender will also want an appraisal done to verify the value of the home. If the appraisal comes in low, the lender will not approve the financing.
2. Appraisal. Even though the lender will not over lend on the property, it’s still important to have an appraisal as a condition on the property to avoid any grey area.
3. Home Inspection. We strongly recommend a proper home inspection is completed by a professional. This inspection will confirm that the property is in good condition, or will point out any repairs needed that were not disclosed by the seller.
Even though you have also already made an offer for a certain price, the results of the inspection can still be used as a bargaining tool to either get the seller to fix the issues or drop the price so you can fix them. Either way, the seller is responsible to deal with any undisclosed issues found in the inspection, whether that be by directly fixing the issues, or decreasing the price to compensate.
4. Sale of an existing home. If you have an existing home that you’re trying to sell, it has become popular in some markets to put the sale of the home you’re buying as contingent on the sale of the home you’re selling. This only works in slow markets however. In a seller’s market, this condition would never be accepted.
5. Third party inspection or approval. This is basically an out for the buyer. If something changes in the mind of the buyer after the offer is accepted, they have an out in the way that this third party could be a friend or relative who could come in and say they don’t approve of the property for whatever reason. Again, in a seller’s market, this condition will rarely be accepted.
6. One last thing: it’s a good idea to include, as part of the contract, some sort of agreed upon access to the home while waiting for the actual possession date. This will allow you to take measurements for furniture, drapes etc. and also give you the chance to bring in any trades people if you’re planning on having any work done when you get possession. By planning for this ahead of time and allowing them to see the property, it will ensure they’re prepared, most likely resulting in an expediting process after possession. They will be able to order any materials needed ahead of time instead of waiting for some product on back order while you’re waiting to move into your new home.
Millennial Homeowner Story
When I sold my first house the women who bought it was a single mom with a special needs child. She needed a fence built in the back yard to keep her son safe, as he liked to take off on her. She decreased her offer by $2,500 dollars to have money left in her budget for the fence.
The offer was still in the range that I was willing to accept, and I was appreciative of her being honest with regards to her explanation of why she was offering what she was, so we made the deal.
In hindsight the reason for a buyer offering what they offer should be irrelevant to the seller, but somehow it made me feel better than someone just “lowballing” me.
Don’t forget about the human element here. An explanation of why your offer is what it is can sometimes make a difference.
When to Make an Aggressive Offer
It’s often a struggle to decide how much to offer on a home – realtors guide buyers to offer list or higher (from their perspective, they’d like to see the deal get done), but there are certainly a few considerations to take into account with this type of guideline.
It’s important to remember that success for a realtor is defined by you purchasing a house. Success from Millennial Homeowner’s perspective, is you buying the right house, for the right price and having total confidence throughout the process. Part of this, is making sure you get the best deal possible and keep as much of your hard earned money in your pocket as you can.
Now, I’ll be the first to say, going around throwing out lowball offers at every house you see just pisses everyone off and you probably don’t want to be that person.
However, I do want you to be able to distinguish when to actually make an aggressive offer and have the confidence to do so.
Let’s take a look at the key factors that might contribute to your decision to get aggressive with your offer.
The home has been on the market for over 30 days:
this is usually the point when people start to stress about the fact that their house hasn’t sold yet (especially in hot markets). As much as you think it’s stressful to buy a home, it’s equally stressful to sell.
It’s nerve racking having people come through the house week after week and not seeing any offers. When someone finally does make an offer, it comes as a welcome sight, even if it is a bit low.
There have been multiple price drops:
regardless of how long a home has been on the market, multiple price drops indicate one of two things; (a) either the seller is very motivated or (b) they were possibly talked into listing their home at a higher price than they should have.
Realtors that work for sellers are always trying to get the most for their clients (as they should), but sometimes they can get a bit too optimistic on what a home could sell for. It’s equally possible that someone believes their home is worth more than it actually is and won’t budge, meaning it’s listed for a higher price than was recommended by the realtor.
Either way, this leads to a home sitting on the market for over 30 days and the seller starting to feel anxious.
Pay close attention to the wording used in the listing:
words or phrases like: “immediate possession,” “motivated seller,” “divorce,” or anything referencing a situation where someone is forced to sell and usually quickly. This could suggest someone settling an estate after a death, or someone moving to a new city.
I know what you’re thinking, “I can’t help but feel like I’m taking advantage of people when I’m making an offer below listing when they’re already in a tough situation.”
And you’re not wrong, but here are a few things that I want you to think about when you’re feeling guilty:
• No one is ever forced to accept your offer. A simple ‘no’ will leave them in the exact same position they were before you made an offer
• They can always counter offer if they feel like your offer is close to what they want, but not quite there
• They might be absolutely thrilled with your offer! Consider this: if they accept your offer, that means that no one else has offered them as much as you did! Don’t assume that you know what other people are thinking, the thing that you’re scared to do, may be the exact thing the seller is hoping for
• You didn’t put anyone in the position that they’re in. You can only make the best decisions for you and hope that it helps someone else out in the process
So, how can you be confident that submitting a below list price offer is the right thing to do?
But who cares?! Like I said before, the worst thing that can happen is they decline your offer.
So what? No one is going to take away your birthday for that.
What you CAN be confident in, is recognizing the situation where it makes sense to try an aggressive offer… That’s s what we’re really after here.
Think of the benefits. Even if you save $5,000, all you had to do is make an offer that’ll take the same amount of time to write if you weren’t aggressive, and maybe read a counter offer, or write a second counter offer. What does all this take? 2 hours? That works out to $2,500 per hour. After you pay the interest on that for 25 years it’ll likely be double that amount.
Future you can either thank you for the extra money, or kick you in the butt for not taking the 2 extra hours out of your day to make that money. You choose.
After Your Offer Has Been Accepted
Now that your offer has been accepted (YAY!), it’s time to satisfy your end of the conditions.
1. Book the inspection.
By now you should already have this contact in your phone. When the inspector shows up, walk through the home in person so they have the opportunity to point things out and explain them. It’s much easier this way, rather than reading a report later that might not make much sense. Don’t be afraid to ask question, this can be a great learning experience for you and it’s your home, you want to know all about it. You may even be able to add some extra notes on to your DIY inspection guide as you go. Nothing beats hands on learning from a professional.
2. Get your financing approved.
Go visit your lender and do the final approval for financing, then provide the information to your realtor and lawyer.
Once the offer has been accepted, the lender should also arrange for the appraisal of the property. The appraiser will do their inspection and report back the value. If the value comes in lower than the offer price, use this as a way to drop the offer to the appraised value. If the appraisal came in low, then the contingency of appraisal will not be able to be met, essentially nullifying the contract unless you decide to waive the contingency (which, based on our experience, you shouldn’t).
Many people get totally stressed when an appraisal comes back low, but it can in fact work out to your benefit as you may get the property far cheaper than you thought. If the seller however, isn’t willing to drop the price to the lower appraised value, you’ll have two choices – (a) either come up with the difference out of pocket (the lender won’t give you any more than the appraised value), (b) or walk away from the deal
4. Contact your lawyer.
Call up your lawyer and provide them with the property details, so they can start putting together their end of the paperwork to complete the deal
5. Insurance. Contact your insurance company and provide them with the property details. They can then put together a policy for you which you’ll provide to the lender and your lawyer
Things To Do Before Possession
After the conditions of the contract are satisfied and everyone has filed their paperwork, there will likely be some down time while waiting for the actual possession date to come (the day you get the keys), another exciting moment in the process. There are a few things you should get done in this “down time.”
1. Book the mover.
Whether this means sending your friends a save the date or booking an actual moving company, book it!
2. Order any furniture and appliances needed.
Some of these things can have a 6 week lead time, so consider this when you’re planning. You already included in your contract to have access to the home, so go take measurements and get this stuff ordered. I’ll say again GO TAKE MEASUREMENTS. All appliances are NOT the same size. There are some common sizes, but you need to check before you order
3. Arrange any services that need to be transferred and book the appropriate people.
These might include: hydro, alarm, tv, internet, phone, satellite etc.
4. Book any trades people for work you’d like done right after possession.
This should include someone to change or re-key the locks when you move in, if you’re not doing it yourself
Finding a Home Inspector
I imagine, most of you would likely agree with me when I say that having a home inspection is a fairly important part of buying your first home.
Buying a home is a huge purchase and spending a relatively small amount of money on a home inspection (to help ensure there aren’t any unwanted surprises), goes a long way in providing you peace of mind at a time when uncertainty and a lack of confidence are probably two of your most common emotions.
That being said, the last thing we want is a false sense of security given by someone who’s not qualified to be doing home inspections in the first place.
It’s important to note, that home inspection industry regulations vary by region (state, city, county, etc.). Some have extensive requirements to be a licensed home inspector, some have minimal requirements, and some have none at all.
It falls on you, as the home buyer, to properly vet an inspector to ensure that he or she is qualified to do the job we’re asking of them.
So, how do we make sure that happens? Below is a short list of questions to ask a home inspector or home inspection company before you hire them to inspect your potential future home.
You might even be able to answer some of these questions on your own by visiting the company’s website.
Q: Are you a licensed home inspector in this State?
A: Obviously, you want a yes here. However, not all states even have regulations to become a licensed home inspector, so sometimes this question doesn’t hold much weight. If there is qualifications needed though, you definitely want that person to have them.
Q: Are you a part of any home inspector associations?
A: This isn’t necessarily a MUST have, but if they are, you can visit that association’s website and see what the qualifications are to be a member of that association. Often the associations can have stricter rules to be a member than the state has for being a qualified inspector.
Basically it’s just another question to qualify them and make sure they’re legit. I doubt there are too many fly by night inspectors that take the time to be members of home inspection associations.
There are many good associations out there – too many to list – as there are national, international and even different ones that are state specific. Once you know which association, if any, that they’re part of, you can do some research on that particular association.
Q: Are you a full time inspector?
A: It’s not that part time inspectors aren’t going to do a good job, it’s just a little different when someone’s livelihood depends on the future success of their business. Someone who is full time and doing this as a long term career has much more motivation to do a good job and ensure they have word of mouth advertising that goes along with that. Which brings us to the next question…
Q: How long have you been in business?
A: Ideally, as long as possible, but 5-10 years would be a good start. You want the company to be around long enough to have gained some experience and hopefully a solid reputation. If it has a bad reputation, that should be showing through by that 5-10 year mark as well.
Q: Do you have any references?
A: Make sure they have them, and make sure you check them. Ideally you’d get references who have lived in the home that was inspected for a couple years. This would give ample time for issues to show up that the inspector might have missed. Ask for references from 2-3 years ago.
Q: What is included in the inspection?
A: The first part of the answer will likely be all around proper reports and paperwork for the inspection. The report should include what they checked what their findings are and what recommendations they have.
The second part, is a list of every part of the house that is included in the inspection. This should include, but is not limited to: foundation, attic, roof structure, structural components, mold, insulation, plumbing, heating and ventilation system, air conditioning, electrical system, windows and doors, ceilings, floors and walls.
Q: Do you have errors and omissions insurance?
A: If something ever does go wrong, and it’s something that definitely should have been caught by the inspector, you want that person to be insured so you have some recourse. You can successfully sue an inspector for being negligent, but if that person or company doesn’t have the money to pay you, or isn’t insured, you’re still left footing the bill.
Q: Can I join the walk-through with you on the inspection?
A: This is a valuable learning experience that you don’t want to miss out on. Being along on the inspection will give you a chance to ask questions and get to know the nuts and bolts of your potential future home.
Finally, make sure that the home inspector has no affiliation with anyone who has a vested interest in you purchasing the property in question. Of all people, you really need this person to be neutral.
So, at what point should you go find a home inspector? Ideally, you would want to secure an inspector before you start looking at homes. It’s nice to have done all the leg work and research on this person or company before you get too far through the process.
Generally, you wouldn’t book an inspection until you have a conditional accepted offer, so trying to find an inspector on short notice and, when you need them, won’t allow you the time needed to properly vet them.
One last note of importance: Home Inspectors are still human, and don’t have some kind of secret x-ray vision that can see through walls. Neither do they have the ability to predict the future. Keep this in mind throughout the process and remember that a home inspection definitely provides great peace of mind and assurance as you move forward with a possible home purchase, but definitely isn’t a 100% guarantee.
Finding a Home Inspector Worksheet
If you would like to purchase our workbook for buying your first home you can purchase it here.
What the Heck is Escrow?
We all hear this term thrown around when people are talking about buying or selling a house. It’s used as if it’s common knowledge, and if you’re like me, the first few times you heard someone talk about it, it felt like something you should already know and felt silly asking what it meant.
Well now you don’t need to ask!
Escrow is basically a holding when money is in limbo between two parties – an account that money will stay in until both parties fulfill whatever obligations they have that are related to that money.
Once the obligations are met, the money will be released to the appropriate party. I know what you’re thinking, if I wanted an answer like that I could of just checked Wikipedia.
Ok, let’s get in to how it impacts you and your new home (something you might not find on Wikipedia).
There are 2 instances when you’ll deal with escrow when purchasing a home:
1. At the time of the offer:
When you make an offer, and that offer is accepted you will be required to make an Earnest Money Deposit (fancy way to say deposit). This deposit will be held in an escrow account. This deposit will usually be between 1-2 percent of the total sale and will eventually be subtracted off your down payment.
The point of the escrow account in this case, is to make sure you actually have the deposit and can produce it. It’s also to ensure that the seller can’t take the deposit and cash it before the closing date.
You never want to give the deposit directly to the seller, it might be the last time you see it. The seller will not be able to get this money until all of the conditions of the sale are met. This might include conditions such as a home inspection or specific items that the seller is required to fix before closing. The escrow account in this case protects both the buyer and the seller.
2. Escrow account with your lender:
Often you’ll have an escrow account set up with your lender. You will make payments to this account for your mortgage, taxes, and home insurance. Your lender will then transfer money to the appropriate institutions when it’s due.
By having you pre-pay taxes and home insurance on a monthly basis, it protects the lender. If your taxes don’t get paid, the government can put a lien on (a right to keep possession of property belonging to another person until a debt owed by that person is discharged), or repossess the home. When this happens you can guess who gets paid first between the government and the lender.
Similarly, if your insurance doesn’t get paid and the house burns down, who ends up footing the bill? Technically you, but if you don’t have the money to pay, the lender is still the one who ultimately loses.
What I imagine you’re thinking now is, ‘great, this account protects everyone else.’
Technically you’re right, but it can be a great benefit to you too. For large bills such as taxes and home insurance, many people have a tough time being diligent enough to save for them over the course of the year.
It’s easy to tell ourselves “I’ll save for that next month.” But next month never comes, until the end of the year when you get the big bill and you haven’t been saving at all.
By setting up an automatic payment for these two items, you’ll never have to worry about the money being there when it’s needed. And trust me, you’ll have many other payments to worry about, without adding these 2 to the list.
Congratulations! You Bought A HOUSE!!!
You bought your first home! It’s a milestone and a rite of passage. You should be very proud of what you have done.
This brings us to the end of our journey together and the start of a whole new journey.
Well done! We are so happy for you!