When my wife and I purchased our first property, we had no idea what to expect or how to prepare, but we learned a few things while going through the process. Some of the tips listed below will show up in any article you read about the first-time home buying experience and others will not. Nonetheless, these are the things we wish we knew before going down the escrow gauntlet.
If you are serious about buying a place and you want to be taken seriously by the sellers, speak with your primary bank and get pre-approval for the new loan. This letter does not mean you must use your bank for the mortgage, it simply shows the sellers that you are able to afford the place you are looking at, based on the metrics used by the bank.
While searching for our place, we came across multiple listings that would not even show us the property without this letter. Having pre-approval before the house-hunting process starts will ensure you don’t miss out on your dream home because you were unprepared.
Bonus Tip: Develop a friendly relationship with the mortgage broker and obtain new letters periodically with different pre-approval amounts. We had a couple of different letters showing different purchase prices that we would show to sellers depending on the listing we were looking at. In general, try to have a letter with pre-approval for the amount the property is listed for. This will show the seller you can afford their asking price and will bring them to the table for negotiations, without showing how much or how little you can afford to spend.
Banks use specific ratios to determine how much of a property you can afford. The main one being that the total amount you will be spending on housing each month should not exceed 28% of your gross monthly income. This includes principal and interest on the loan, as well as property taxes and homeowner’s insurance. If, after calculating that amount, you are over that 28%, you may need to start looking for a cheaper property (depending on the bank).
If your income is high enough, you may actually run into the opposite issue; mortgage brokers and/or real estate agents telling you to look for a more expensive house to get you closer to that 28% mark. Stay firm on the amount you are willing to pay as to not overextend yourself or go beyond your comfort zone. You are the one who needs to make the payments each month, so make sure the mortgage is an amount you are comfortable spending, even if you can technically afford more.
I recommend obtaining two or three “Good Faith Estimates” (GFE) from possible banks or mortgage brokers to help compare fees and points you will need to pay to close on the loan, as well as to see what rate the banks are able to offer you. A GFE is basically a list of all the costs associated with closing on the loan and is useful in helping you prepare financially for the purchase.
Brokers will provide this information to you for free (without commitment on your part) and it will outline how much you should expect to pay for their services. It will also give you a chance to compare like items (such as lenders fees, points to be paid, or credit check fees) to decide the best bank or broker to proceed with.
Purchasing a home is expensive! There are taxes and fees you have never heard of and charges that come up out of nowhere, not to mention the costs associated with potential renovations, repairs, or new furniture you plan on purchasing. It is essential to have extra cash savings on hand that is NOT earmarked for the down payment. You will need it.
Obtain the previously mentioned “Good Faith Estimate” from your mortgage broker as soon as possible to help give you a better idea of how much additional cash you will need to have on hand in order to pay the escrow company for the lenders fees, any points you may be paying, and any other charges that show up along the way. This will help you budget your additional savings.
You are about to spend the most money you have ever spent in your life to purchase this home. For most people, you will probably also be spending the majority of your life savings up until this point. Before you close the deal, have your real estate agent ask the sellers to pay for a one-year home warranty program to fix any issues that may occur during that first year.
Typical price for a basic home warranty will run $300-$500 and it will give you a little extra peace of mind for the near future. The worst thing that can happen is that the sellers say “No” and the deal proceeds as planned. But more than likely they will be okay with adding that in for you. They do not want to risk losing a potential buyer over a few hundred dollars.
Matt Crisafulli, EA, CFP® is a Partner at ACap Advisors & Accountants, as well as a UCLA Alumnus. He is a Fee-Only CERTIFIED FINANCIAL PLANNER™ practitioner and an Enrolled Agent licensed by the IRS.
ACap Advisors & Accountants is a “Fee-Only” wealth management and full-service accounting firm headquartered in Los Angeles, specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap at info@acapam.com or 818-272-8511.