For me, houses have always been an obsession. It started around 1999, when my family made our big move from my parents’ “starter home,” to their “forever home.” And from that point on, I was often found feverishly scouring listings in the weekend paper, drawing floor plans in my bedroom late at night (such a rebel), glued to Trading Spaces on television, and tagging along my mother on every home tour in the city.
Fast forward nearly 20 years, and it’s beginning to feel like I’m finally ready to take the plunge into homeownership myself. I’ve gotten just about all I can out of my 1000 sq. ft rental, and really, we all gotta grow up sometime, right? So, Eric and I have been on the hunt. And there’s no one we’d trust more to take us through the process than our good friend, Russell Cavin, Real Estate Broker and Partner at Uptown Realty. Thinking you might be ready, too? Russell joins us today with some priceless info on buying your first home (including those things you’ll wish someone would have told you!)
1. First thing’s first: get prequalified.
Looking for a house is exciting and many people want to dive right in by looking at houses that they think they can afford. However, before we look at properties it’s important to know how you intend to pay for the property and make sure we have a clear understanding of what you can afford. Choosing a mortgage broker or lender who has loan programs that fit your situation is crucial. The lender has the ability to make or break your dreams of home ownership. There are many factors that play into how much house you can afford such as credit score, debt to income ratio, income, and job stability. A good mortgage broker will be able to work with you and suggest ways for you to improve these factors so you can either qualify for a better interest rate or qualify at a higher price point. Additionally, most seller’s will not accept an offer from a buyer that does not have a pre-approval letter.
2. Count your pennies.
“Down payment” refers to how much cash you will be paying upfront at closing towards the property. When most people think of the necessary down payment, they often default to 20%. However, there are many options that require much less cash out of pocket. We don’t see them as often, but there are loan programs that will allow you to put 0% down which can be very appealing to some buyers. A FHA (Federal Housing Administration) loan will allow you to put as little as 3.5% down, but there are limits on the house you can purchase and you will carry what’s called PMI (Private Mortgage Insurance) for the life of the loan. The majority of Conventional Loans will have options for as little as 5% down. The caveat with putting less than 20% down is that you will typically carry PMI until you reach 20% equity in the property, as you’re seen as a higher risk than someone putting a minimum of 20% down. In a multiple offer situation where you may get in a bidding war, a buyer with a higher percentage down will often be seen as a safer bet and has a better chance of being chosen by the seller.
3. Timing is everything.
Every market will have variations in when is the best/worst time to buy. Historically there are a few best practices to follow. Everything boils down to supply and demand. You ideally want to look to buy when the fewest buyers (or competition) are out there. The catch is that during these times, inventory is lower and there are fewer houses to choose from. The spring and summer are typically the busiest times of year, so as a savvy buyer, these should be the times you avoid. Generally, the best time of year to buy is the fall and winter. People with children tend to try and move during the summer as not to disrupt their kids during the school year. In Austin, TX for example The University of Texas also plays into this summer trend as many college graduates stay on the August-to-August lease rotation and tend to look to buy a home during the summer before their lease expires. Some of the best deals I have found for clients occur in September/October, if we’ve managed to find a house that has been on the market since the summer but did not sell for some reason (often overpricing). The seller’s during these cooler months are generally eager to get the property off their hands, so may consider an offer that they wouldn’t have during the summer when demand is higher. There are fewer buyers due to discretionary income needed during the holidays and people’s minds being elsewhere outside of the housing market — another reason this is a great time to buy!
4. Once you’ve found a place, here’s what happens:
- Run a CMA (Comparative Market Analysis): This will help you determine a fair offer price on the property. Every deal is different and depending on the situation this could be an offer at, below, or above asking price.
- Present Offer: The goal with any offer is to elicit some sort of response from the seller. Sometimes low ball offers will not even be enough for the seller to counter back. However, if you feel the lowball offer is fair, don’t be scared to do it. You just have to be prepared to walk away and lose the house.
- Offer Accepted: Congratulations, you have successfully negotiated the terms of the deal and are now under contract! Now you will need to write checks for the Option Fee (if you have one) and Earnest Money. The Option Fee is paid directly to the seller and the Earnest Money is paid to the Title Company. We will go over those below!
- Option Period: Generally, you will have negotiated what is called the “Option Period” into your terms. This is usually 7-10 days (ending at 5PM on the final day) during which you will pay the seller a nominal fee for your unrestricted right to back out for any reason at all. Time is of the essence during this period. You MUST have the option fee money in the seller’s hand within 3 days from the effective date of the contract or you forfeit your right to the option period. This is a crucial time for you to have the property inspected and bring out any specialists as needed to further inspect concerns on the property. During this time you will also negotiate repairs or money off the asking price due to items you uncovered during the inspection. If you back out of the contract during the Option Period, you will receive your Earnest Money back but not the Option Fee.
- Earnest Money: The Earnest Money is similar to a security deposit with a lease. This amount is negotiable but generally equal to 1% of the purchase price. You can be more aggressive with your offer by offering more earnest money. After your Option Period expires, your Earnest Money is now at stake if you back out. There are a few more exceptions for you to back out of the contract and retain your earnest money, for example, if you do not receive specific documents such as the Seller’s Disclosure or HOA documents in the time allotted by the contract. You may also retain the Earnest Money if the house does not appraise or you’re unable to obtain financing within the terms of the Third Party Financing Addendum which was submitted with your original offer. It is possible but somewhat rare for buyer’s to lose their earnest money.
- Appraisal: If you’re taking out a loan on the property, the lender will have a third party appraiser go to the property and give their estimate on its value. The purpose is to insure that the price you are paying is at or below market value for the property, so the bank is able to sell the property if the worst case scenario happens and you default on the loan. If the house appraises UNDER the value you are offering, you have three options:
- Negotiate the price with the seller down to the appraised value.
- Come up with additional cash out of pocket to cover the difference between the sales price and the appraised value.
- Back out of the contract if you have a Third Party Financing Addendum in place that allows you to do so while still retaining your Earnest Money.
- Closing: Congratulations, you’ve made it to the closing table and are about to get keys to your new home! If you are taking out a mortgage, the closing date is typically 30-45 days from the date your offer is accepted. This will all have been negotiated in the initial contract. If you are paying cash, you can close much quicker — the fastest I have seen is 10 days. Make sure to get your hand ready because at closing you will sign what feels like hundreds of papers before keys are handed over to you. You will be working with the Escrow Agent from the title company — they are there to help you with the process, so if you have any questions whatsoever do not hesitate to ask.
5. What no one tells you.
- Just because you’re qualified for a certain amount doesn’t mean you should spend every penny of that. You know and understand your financial situation and lifestyle better than anyone else, so do not get out of your comfort zone when it comes to the mortgage amount. Homeownership comes with much more responsibility and costs than renting does — you no longer have a landlord to call when your refrigerator breaks — so make sure you leave a cushion for yourself! The last thing I want for any of my clients is to be house poor, especially in a great city like Austin where there are so many other amazing things to spend your money on.
- DO NOT take out credit on anything else while you’re going through the home buying process. Wait until you have keys in hand before opening a credit card to buy new shiny appliances or anything else. Opening additional lines of credit will affect your debt-to-income ratio, which can and typically will adversely affect your home loan.
- Don’t be fooled by pretty staging furniture. Often times seller’s will “stage” their home with beautiful furniture that always looks pristine. This is a great thing to do as a seller, but as a buyer you need to pay attention to details of the home, not the distracting decorations. When looking at remodeled homes, the flooring, backsplash, and countertops are all good things, but what about the big ticket items that aren’t so sexy? How old is the roof, HVAC, plumbing, wiring, etc.? These are the items that will cost you big money down the line to replace and should be considered when finding your dream home.
- Don’t rush, but when you find the right one, don’t wait! Buying a home is possibly one of the largest financial decisions you will make in your life, so do not rush into something. Take your time to make sure you know what you are getting yourself into. However, when the right house comes along, depending on your market it may only be there for a day, so be ready to submit offers once you have a clear understanding of your wants and needs.
Russell Cavin has been a Realtor in Austin, TX for over a decade with Uptown Realty. Originally from San Antonio, he began his real estate career during his Sophomore year at the University of Texas and has continued as a Broker and Partner at Uptown. During his time in Austin, Russell has lived in many different areas and has a well rounded understanding of the city and market. His goal is to provide excellent service to his clients while always putting their needs first and treating the deal as if it were his own.