The Ultimate Guide For First Time Home Buyers
First-time home buyers make up roughly 30% to 40% of the real estate market at any give time.
Buying your first home is an exciting time. Finally, you can find a place that gives your children and your family a better living. Your kids could have a better education. A home provides you with more space to pursue extra hobbies, add more children, or even some more dogs.
Buying your first home is an exciting time and there are often a lot of emotions floating around. You get to have a place that you can call your own. A place you can raise a family like mom and dad did. You can give your child the same exciting childhood that you had.
Plus, owning a home gives you the right to decorate, modify, and renovate just the way you want. I’m thinking built-in bookcases, a jacuzzi tub, and maybe a spa room. Oh, and purple walls. I just have to get Alex onboard.
A home is more than just a place to live. It’s a place to build and grow a family. But buying a home can be a confusing and stressful process.
From my time working in the real estate, I’ve learned that the home buying process isn’t complicated. The problem is that many first-time home buyers try to do it on their own or they find low quality agents who leave them in the dark.
Since most agents won’t let you in on the home buying process, we wanted to create this guide for you. We hope to share with you the entire home buying process from start to finish.
Then, we’ll take a look at some common questions we get from buyers like you and some of the problems we see first-time home buyers make.
The Home Buying Process
The entire home buying process can be broken into four different stages:
- Pre-approval and Evaluating Your Wants
- Searching and Touring Homes
- Making an Offer and Negotiating
- Close On Your Home
That’s it. It’s pretty simple. And if you want you can do it all on your own.
As I walk you through the homebuying process, I’m going to assume that you’ve pretty much opted for doing it on your own, so I won’t talk too much about finding a real estate agent. On to the first step.
Get Pre-approved and Create Your Wants
The first thing you want to do — although it isn’t necessary — is get pre-approved for a loan. This means, a lender will take a look at your credit score and verify your documents to approve a specific loan amount. This way you know how much house you can afford.
This shouldn’t be confused with prequalification. If you apply for prequalification, a lender will only give you an amount that you can expect to be approved for, but isn’t guaranteed. The process for becoming prequalified is simple. It’s typically done over the phone or the internet.
If you decide not to take the time to get pre-approved, that’s okay. But understand that prequalifying only gives you a rough idea of the house that you might be able to afford. A pre-approval will give you a specific amount you will be able to take out.
I recommend you do this so that you don’t waste time looking at any houses that are out of your budget. To get pre-approved, visit your bank and talk to a lender. Or you can use some of these online services:
Once you have an idea of the house you can afford, it’s time to look at what you want in a house. Personally, I like houses with more than three bedrooms so we can fit more kids into our house. You might want a smaller house. A house in a bustling metropolitan area.
Whatever it is, write it down. Then looking at your budget, you may have to cut or make tradeoffs. So, determine which items are priorities and which items are just nice-to-haves. For example, it’s a priority for me to have four or more bedrooms. It would be nice if it was sitting on 10 acres.
Next comes the fun part.
Searching and Touring Homes
This is my favorite part. Since over 90% of home buyers search online during the home buying process, I’m going to start there. The three most popular sites for finding a home is:
These sites have all of the homes that are listed in the MLS database — the same information all real estate agents have access to.
These sites are great, as long as the home gets listed. This might be one of the reasons you want to hire a real estate agent. I’ll be quick.
If you find a good real estate agent, you might find out about homes that are for sale that aren’t even listed. For example, in some communities around the Lansing, we have a buyer’s waiting list. In popular neighborhoods, homes will sell in a few days without ever being listed. Which means, you might miss out on some quality homes.
Anyways, you found a few homes you like. Now, you just have to go visit the homes. If you’re not being represented by a buyer’s agent, you will want to call the listing agent and set up a time to tour the house.
While you’re touring the house, look for things you like, things you don’t like, any potential projects, and any potential damage. All of this will help you construct your deal and offer later down the road. Keep in mind that any houses that require work have to be accounted for in your budget.
Expect to spend around 30-minutes looking at each home. You’ll probably look through eight homes before you find a home that you want to put an offer on. Once you found that home, it’s time to move into the offer and negotiation phase.
Making an Offer and Negotiating
Okay, this is where the process becomes a bit more complicated. It’s not difficult to get pre-approved, list what you want in a home, and find the home you want to raise a family in.
But structuring the offer can be difficult, so expect to spend considerable amount of time learning this process if you aren’t going to use a real estate agent. Structuring an offer the right way will protect you from any risk in buying a home.
Evaluate what the asking price is by comparing other homes in the market — sold and those listed — to get a better idea of fair market value. You’ll have to ignore state and even city statistics about what a home is worth because it’s all about what a home is worth in a neighborhood.
Next, decide what the home is worth to you. If you think the home is unique and a must-have, then there is likely nothing wrong with offering full price. Offering full price is typically enough to get your offer accepted right away.
If the house isn’t too important than consider offering a lower price. The only thing is that you don’t know who else is making an offer on the house. So sometimes you may enter a bidding war. That’s why it’s important to determine the maximum amount you will pay for the home.
From our experience, the typical home seller is willing to lower the price by about 1% of the list price.
If you’ve determined the price, stack on some perks. For example, it’s not uncommon for first-time home buyers to ask a seller to sell the appliances with the home. Or pitch in on closing costs. What you’re able to get will depend on the market and other offers.
Probably the most important part of the offer, which will protect you from a lot of risks, is to create contingency clauses. These are just statements that allow you to walk out of a deal without any financial or legal penalties in certain situations.
For example, home buyers will include inspection contingencies, which mean if after an inspection, substantial problems are revealed, then the buyer can walk away.
So, to sum it up. Your offer should include:
- The prices you’re going to pay
- Perks, add-ons, or demands
- Contingency clauses
Once you send the offer, you have to wait. Be prepared to negotiate since most offers aren’t accepted the first time. Counteroffer with different terms, price, or both. Play hardball, but don’t go too hard or sellers will think you’re trying to take advantage of them.
After you and the seller come into agreement about the terms, a purchasing agreement is signed, the house moves into escrow and the closing process begins.
The Closing Process
You can expect to pay anywhere from 2% to 5% on the closing costs. So, if you buy a home for $200,000, then you can expect to pay $4,000 to $10,000. The closing process is broken into two different phases:
- The Escrow Process
- Reviewing and Signing Loan Documents
The Escrow Process
The escrow process is meant to protect both you and the seller. After your offer has been accepted, you’ll typically have to put some money into an escrow account as good faith so a seller knows you’re serious about buying the house.
While you’re in the escrow process there is a lot of documentation and papers that need to be completed before you can get the keys to your new place.
The exact process may vary by escrow company, but most companies go through the same stages.
First, you will need to get the home appraised. This will likely cost you around $400. The appraisal protects the lender from loaning you more money than the house is worth. This can be a problem during the closing process, which we’ll talk about below. The benefit of an appraisal also ensures that you’re not paying too much for a house.
However, if the appraised value is below the selling price, you will have to cover the difference or the seller will have to lower the price. If the seller isn’t willing to go lower and you can’t cover the difference, then the deal will fall through.
After, you will want to consider a home inspection and a pest inspection. Based on your state, the laws may vary. In most of Michigan, pest and home inspections are not required before closing on a house. But I highly recommend them.
Inspectors will notice things your untrained first-time home buyer eyes won’t notice. For example, do you know how to spot if a roof will leak soon? What about that all walls have to have follow certain fire codes?
A home inspection can save you from nasty repairs later down the road. If you have a contingency clause in your offer agreement, then you can back out of the house if anything is wrong with it.
Next, you will want to review the seller’s disclosure. This is basically a document of known problems with the house. Unfortunately, Michigan has some of the least laws concerning a seller’s obligation to disclose information about the house.
The seller should include a list of the condition of appliances, systems such as plumbing, structural components, and existence of any flood, environment, or encroachment issues.
An important point to note, sellers only have to disclose problem they know about. They are not expected to be expert architects or contracts. This is why it’s important to hire a house inspector yourself. Also, Michigan sellers don’t have to disclose if a property has been stigmatized by death, murder, or infectious disease.
The last part of the escrow process is to check the title and make sure no other parties own the house. Then, walk through the house to make sure no damage was done to the house while in the escrow process.
Reviewing and Signing Documents
Yay, almost there! Lastly, you will have to review and sign all documents. You will have to review the HUD-1 form, which is just a form that states all of the fees that you will be responsible for during closing. Typical fees include origination fees, title fees, insurance costs, appraisal certification, and more.
Review the document and make sure there are no outrageous lending fees. If all is good, you can move into signing the loan documents. This is typically a 100-page documents. You will want to take your time reading the document to make sure you agree with all of the terms.
If everything is good, you can sign and a home is yours. Congrats! You’re a new home buyer.
Typically the process isn’t as smooth as I laid out and there are often hiccups along the way. We’re going to cover a few of those now.
Common Problems First-Time Home Buyers Experience
Almost all problems occur in the offer and negotiation process or during the closing process.
Problem #1: Not Structuring the Deal Properly
A lot of first-time home buyers get fixed on the cost. Since they haven’t bought or sold a home before they aren’t aware of all of the additional aspects that go into an offer.
First-time buyers need to consider the price, but more importantly look at contingency clauses to protect themselves and added perks. For example, it’s possible to agree to a certain price, but require the seller redoes the roof before you purchase.
Be sure to look at the house long enough to determine what it’s really worth. Find out how much maintenance or repairs might be involved and see if you can get the seller to complete them or drop the price.
Problem #2: Relying too Much on Zillow for Home Evaluation
I love Zillow. It’s a great place to search for homes, but their home evaluation tool isn’t always accurate. Zillow collects a lot of data, but there is certain types of information that just can’t be captured.
Pricing a home is a local thing, but it’s also heavily a neighborhood thing. Zillow can’t capture the quality of the neighbors.
A house might seem to be priced right, until you find yourself living next to neighbors who never cut their lawn or play loud music at 2am in the morning.
Problem #3: Loan Amount is Less Than Asking Price
Sometimes, buyers find themselves in a situation where they agreed to a higher sale price than the home is actually worth. There could be several reasons for this like a bidding war. Unfortunately, a lender won’t give you more than the home is worth. So you have to either cover the difference or talk the seller down in prices.
I’ve seen plenty of deals fall through because of a situation like this. Either make sure you have extra cash to cover the difference or find a way to talk the seller down in price. It might involve taking out certain contingencies or perks.
Problem #4: Taking Too Long to Close
Okay, this is a bit tricky. When you created your offer, you should have included a closing date in the document. If a house doesn’t close on the date you agreed, you may be responsible for delayed closing fees.
So, you have to find a balance between closing quickly to avoid fees and taking your time to make sure that all documents are signed correctly and the terms are fair. If closing is delayed, depending on whose fault it is, you might not be responsible.
You can always ask the seller to extend the closing date so that you don’t have to pay any fees. In some cases, sellers will back out if you don’t close on the house before the date. This is rare, but I’ve seen it happen.
Problem #5: They Decide Not to Hire a Home Inspector
I know as a first-time home buyer money is often tight, but don’t skip on getting your home inspected. Without an inspection, you could find yourself living in a money eating home that needs major repair after major repair.
Hire a home inspector from the beginning and save yourself any future troubles. If it turns out there is nothing wrong with the home, then you can sleep at night knowing you live in a nice house.
Problem #6: Not Working With a Realtor
I know. A lot of people don’t want to work with a real estate agent. I get it. But a real estate agent can make sure that you don’t get into any problems with structuring an offer. They can help move the closing process along or at least explain how the whole process works.
The internet has given consumers a lot of knowledge. You can certainly find the home you want and buy it yourself. But agents are really useful when it comes time to make an offer.
Also, good agents have “pocket listing”, or listings that aren’t public. Without an agent, you might miss out on your dream home because it never became available to the public.
Common Questions From First-Time Buyers
Should I Rent or Buy?
Ahh, the good ol’ rent vs. buy question. It’s tough to say which one you should do. I certainly don’t think you’re throwing money away by renting. In fact, in a lot of cities it’s actually far cheaper to rent than it is to buy. In a place like Michigan, it’s usually cheaper to buy.
However, there are a lot of things that aren’t taken into account when it comes to renting or buying. For example, a home often offers more space and privacy. It’s often larger and a better place to raise a family. However, a home comes with maintenance expenses such as lawn mowing or snow removal.
It’s hard to say, which is best for you. But you can get a better idea by using this Rent Vs. Buy calculator to get a better idea.
Should I Get Pre-approved?
I recommend that all first-time home buyers get pre-approved. The process to get pre-approved can be a bit of a pain, but it will give a specific number for how much of a house you can purchase.
While getting prequalified can give you a good idea. I recommend getting pre-approved before you start seeing houses. No point in spending a lot of time visiting a house if you can’t get approved for it.
Are There Any Tax Credits or Programs for First-time Buyers?
You bet. First-time home buyers can withdraw money from their IRAs without penalty if they want to put it towards a down payment. There is also a first-time home buyer tax credit that has been extended until 2017. The credit gives first-time buyers a 10% credit up to $8,000 on their taxes. There are also programs that the State of Michigan has.
Should I use a real estate agent? Where do I find one?
A lot of people opt-out of using a real estate agent. That’s okay. It can often save you money in terms of the the house price. However, there are some benefits to hiring a real estate agent to represent you:
Good agents will have pocket listings available. So you can learn about houses that never even make it to public listings. Don’t miss out on your dream home.
Good agents can save you money and time by structuring and negotiating a good deal. Don’t overpay or take on too much risk because contingency clauses weren’t structured right.
A buyer’s agent will have your best interest in mind. A seller’s agent does not.
I recommend finding a good real estate agent. If you’re in the Lansing, Michigan area then you’re in luck because finding a real estate agent is going to be very easy for you.
Want the best team of agents? Just give me a call.
I remember when I was looking for a place to live. I spent hours looking for a place that was in the perfect neighborhood for my children. I wanted it to be safe. I wanted it to be like the neighborhood I grew up in, where mom said, “Just be home before the street lights come on”.
It seems like those types of neighborhoods are getting harder and harder to find. I wanted to find a neighborhood that was in a good school district that gave my kids opportunities. I also wanted a place that had an open layout so that I could keep my eyes on the kids while I cooked.
It was a tall order to find that type of home. The home that every family wants. Well, I’ve devoted my career to helping families and first-time home buyers find the home they’re looking for. I understand that a home isn’t just a home. It’s a place to raise a family.
If you’re ready to start your home buying journey, then give me a call at:517-706-8851. Working with me, you’ll get:
- Inside information about available homes that most buyers — heck, even agents — don’t know about. Without this information, you may miss out on your dream home.
- Keep the headache pills in the cabinet because I’ll make the home buying process as simple as possible for you.
- Specialized and unique knowledge about neighborhoods, school districts, and family events. Everything you need to know to find the perfect place for raising a family.
If you’re ready to get started, call me at: 517-706-8851