You’re sick of seeing your rent money go toward someone else’s mortgage. You’ve watched friends take the plunge into home ownership. And you’ve watched so many hours of House Hunters you have a PhD in HGTV.
But you’re still not sure where to start and much money you’ll need.
Chillax, I’m here to help.
What follows is a timeline and guide for first-time homebuyers. The advice below is focused on the Austin market, but buyers in other cities should still learn a thing or two about home-buying.
A YEAR OR MORE OUT
Save. Save. And save some more.
Most buyers are surprised at how much money they will need for the down payment, as well as closing costs.
In Austin, it’s safe to assume you will need, AT A MINIMUM, 5 percent of a home’s value, and ideally more. And that money needs to be in your bank account before you even start looking at homes. That means if you’re getting help from family, ask for it well before you start your house search.
There are some exceptions to the 5-percent rule, of course. Sometimes you can get the home seller to pay for closing costs. There are loan programs for first-time homebuyers that pay closing costs. And some buyers, such as military veterans, teachers and doctors, can qualify for special loans that don’t require a down payment. There are even some start-ups that offer innovative ways for buyers to come up with a down payment.
The safest thing, though, is to save as much as possible.
Talk to a mortgage lender.
I know what you’re thinking. Isn’t it too early to do this? Nope. To determine if you can afford a $200,000 house versus a $400,000 house it’s ideal to talk to a mortgage lender.
Yes, mortgage payment calculators online can be useful but a lender is best positioned to help you because they can also run a quick check on your credit score and give you a rough idea of home much home you can afford and what that equals in terms of monthly mortgage payments.
A real estate agent can help connect you with a mortgage lender, or ask friends for recommendations.
Check your credit score.
A mortgage lender can help pull your credit score. You can order a free credit report once a year from www.annualcreditreport.com. They will give you a free report that shows your credit history and delinquencies. But to get your actual credit score, a small fee is required. (There are other sites that will provide a credit score as well.)
To qualify for a loan to purchase a home, buyers typically need a credit score of at least 580, and preferably over 700. The higher the credit score, the less costly the loan. Beware of sites like Credit Karma because they use a different system for determining your credit score than a mortgage lender does.
Don’t have much credit under your belt just yet? Well, now’s the perfect time to open a small line of credit. Look for places like furniture or electronics stores that allow you to purchase something on credit for zero interest as long as you pay them back within a fixed time.
SIX MONTHS OUT
Window shop online.
This is the fun part. Now’s a good time to start “window-shopping” online. There are tech tools that allow you to do this. Some have more accurate information than others.
The most up-to-date is the Austin Board of Realtors and its consumer version of the Multiple Listing Service called www.AustinHomeSearch.com, which also has an app. I also like Coldwell Banker’s website, which is synced to the Austin MLS. Though I find sites like Realtor.com and Zillow.com very user-friendly, just keep in mind they aren’t as accurate in terms of showing what’s still available and what isn’t.
Shopping online gives you a general idea of the type of home you could buy within your budget, and helps you understand home prices in various parts of Austin. These apps/websites have location-based searching so you can see what’s for sale nearby while driving around. You can also set these apps to only show homes within a certain budget.
Develop a list of preferences.
When looking at homes, pay attention to what you like.
Do you want a home that is “turnkey” and new and requires very little work, or are you open to the idea of an older home that is a fixer-upper? How much of a yard do you want? Are there architectural styles that you prefer? One-story versus two-story? Do you want a pool or access to one in your neighborhood? Is an open floor plan important?
Even more important is to know what kind of neighborhood/part of the city you want to be in. It’s more essential, at this juncture, than the exact kind of house you like.
The easiest place to start is commute preferences. Where you work often dictates where you live, unless you work from home. Some people are comfortable with long commutes for the right house while others want to be 15 minutes away.
If you are new to town or don’t have a good sense of commute times, contact a real estate agent (like me!) and ask them for advice on which neighborhoods are within the desired commute time and in your budget. We have access to some pretty cool tools that allow us to see which neighborhoods are within a certain commute time from a specific address.
Then spend some time on the weekends driving around and looking at these neighborhoods to get a feel for them. Here are some other things to consider when “shopping” for neighborhoods:
- School zones and school district preferences, particularly if you have or are planning to have children. Independence Title has great resources for school information.
- Proximity to amenities. How far are you from the grocery store? Restaurants? Clothing stores? Is that even important to you?
- The age/style of the homes. Do the homes in this neighborhood fit your wish list in terms of architectural style and age?
- If you’re looking at suburban communities like Buda, Cedar Park or Dripping Springs, get an understanding of what the tax rates are like there and how that might impact your budget. (A Realtor can help you.)
THREE MONTHS OUT
Now it’s time to get serious.
Find a real estate agent.
If you haven’t already, now is the time to find a trusted real estate agent to help guide you through the home-buying process. Ask friends and family for recommendations, or think about whether there were any Realtors you got along with at any open houses you attended.
It’s perfectly fine to also interview multiple Realtors before settling on one — just tell them up front that is what you are doing. It’s a big purchase and you should feel really comfortable that the person you’ve hired is competent, ethical and knowledgeable about the market.
Also, it’s normal and actually the legally responsible thing to do for a real estate agent to request that you sign what’s known as a “buyer representation agreement” that spells out that you have hired an agent to represent you.
Get a pre-approval letter.
If you haven’t previously talked to a mortgage lender or lenders, now is a good time to do so. You will want to obtain a pre-approval letter from them which states how much money a financial services company is willing to lend you in order to purchase a home based on your income, debts and assets.
A pre-approval is very different from being pre-qualified. Getting pre-qualified is easy, it just means a lender has eyeballed your finances and said “Yeah, you probably qualify for a mortgage at X amount.” Versus a pre-approval, which is a much more in-depth process that involves filling out a loan application, studying your credit history, and verifying your income and assets.
A lender will also tell you what interest rates are available, and go over the different types of loans that might make sense for your situation.
It’s perfectly fine, and in fact appropriate, to talk with several mortgage lenders in order to get several interest rate quotes. Ultimately, what you want from a mortgage lender is to obtain a letter of pre-approval. It is at this point that you should have nearly all of your down payment + closing costs money in hand; and if not, you should start efforts to collect it.
TWO MONTHS OUT
Start looking at houses.
This is when your real estate agent should begin taking you around to look at houses. I like to set my clients up with an MLS search based off an initial in-person discussion about what they are looking for. I prefer to do this in person because there’s a LOT to discuss! It’s not something that really should be done by e-mail or text.
It’s fairly typical for your agent to set a daily limit on how many houses to look at in one day, usually five or six. (Out-of-town clients can see more in one day.) This is because if you look at too many homes in one day, they start to run together. I encourage my clients to take notes to remember each home.
When looking at homes, keep in mind the Big Picture. Pay attention more to the neighborhood, the layout, and whether it fits with your Wish List. Do not waste a ton of time inspecting the HVAC, water heater or trying to crawl into the attic. That’s what an inspection is for.
Submit an offer.
Anywhere from 60 to 30 days before your ideal move-in date is a good time to submit offers on a home. At this time you should have a pre-approval letter in hand from your mortgage lender.
Because it’s a seller’s market in Austin, it’s pretty much mandatory when submitting an offer to also submit your pre-qualification letter to prove you actually have the blessing of a lender and can close the deal.
One point: your real estate agent needs to know as much about your financial situation as the lender does. That’s because when an agent writes a contract, they have to include an addendum that explains how much money you’re putting down and what type of loan you’re taking on to pay for the house.
A MONTH OUT
Stay in contact with your agent. At this point, your real estate agent will closely manage the details and help keep the deal on track.
Assuming your purchase offer is accepted, the first major decision point will involve a home inspection. In Texas, buyers typically use what’s known as an “option period” during which an inspection is conducted. Option periods are typically between 5 to 10 days and it is a time in which the buyer determines if the home is really worth the price they’re willing to pay. In other words, they’re conducting their due diligence on the property.
The nice thing about an option period is it allows buyers to back out of a deal FOR ANY REASON — a change of heart or, perhaps, they didn’t like the results of an inspection. If a buyers decide to back out of the deal during the option period, the buyer loses an “option fee,” which can be anywhere from typically $100 to $500 or more, depending on the terms you and the seller agreed to.
Your real estate agent will provide recommendations for inspectors, but you can also ask for suggestions from friends or family. Technically, you can buy a house without an inspection but it’s not a good idea. The buyer pays for the inspection at the time of the inspection and it typically costs $350 to $500, but could be more, depending on the size of the home.
Keep in mind that every good inspector usually finds something wrong with the house. And if it’s a serious issue, the buyer and seller can negotiate what the seller will fix or what they will credit the buyer in the ultimate home sell.
The next potential deal-killer is the appraisal. Lenders require an appraisal to make sure a buyer isn’t over-paying for the house. Again, the buyer typically pays the appraisal fee up front and not at closing. It can cost as much as an inspection, even more. When it’s final, you will get a report detailing the appraiser’s work and what other homes they reviewed to arrive at their conclusion.
Once you’re past the appraisal hurdle, assuming there are no issues with financing, you’re almost to the finish line.
But there are a few more things…
Watch your spending closely.
Since you’re trying to get the blessing of a bank to take on a major loan, don’t do anything that would jeopardize your credit. Usually, that means not buying appliances or furniture until AFTER closing.
Don’t forget to enjoy closing day.
You officially “close” on your new home on a pre-arranged day that’s identified in the contract. Closing day involves going into a title company and signing a bunch of papers before you get your new house key.
I love closing day. It’s because I see the excitement in my clients’ faces when they get their keys, and I get the pleasure of giving them a closing gift.
GO OUT TO EAT AND CELEBRATE! This is a big deal — you’re a homeowner!
Lilly Rockwell is a real estate agent and former journalist based in Austin, TX.