Despite the threat of a potential ‘double dip’ in the economy and housing market, within the last few months I have strongly encouraged my youngest son to consider becoming a homeowner.   While unemployment rates remain high and there is no shortage of uncertainty regarding the strength of the current ‘recovery’ (consumer confidence shrinking, businesses holding capital, lending remaining difficult), there are a number of factors that I think favor the first time homebuyer.   Namely, mortgage interest rates are at record lows, there is an influx of inventory in the housing market, and there continues to be a significant number of motivated sellers eager to downsize, get out of an upside-down mortgage, and/or avoid foreclosure.  

This set of circumstances offers an attractive opportunity to the prospective first time homebuyer.  During multiple conversations with my son, I found that many of our talks revolved around a few overarching topics; these are the topics I chose to emphasize in this post.  And while I realize that my son’s situation might be very different from yours and that each one of these suggestions could be expanded into its own post and discussed in significantly more detail, my intention (as it was with my son) is to provide a broad overview of topics that I think it is easy for first time homebuyers to overlook.  

Current Mortgage Rates 

With 30 year fixed mortgage rates hovering around 4.6%, first time home buyers with their financial houses in order (ie, low consumer debt, credit scores above 700, and a 3.5-5% down payment saved up) are in a position to take advantage of historically low mortgage rates.   To put this in perspective lets take a look at 30 year fixed rates over the last few decades:

To further outline the advantage of these record low rates on a 30 year fixed lets look at a $200,000 mortgage and the monthly payment (principal + interest) at a few different points since 1983.  

Monthly Payments

1984 @ 14% – $2370 

1997 @ 8% – $1467 

2010 @ 4.6% – $1025 

What I’ve said to my son is this – “Right now you are betting on the fact that over the next thirty years you are not going to see rates lower than 4.6%.”  And despite all of the economic uncertainty, I feel much more comfortable in suggesting that in thirty years, when we look back at 2010 interest rates on a 30 year fixed mortgage, they will be among the lowest available over that thirty year time frame.   

The Drivers Seat

In the current housing market, a pre-approved first time homebuyer has a tremendous amount of leverage available when purchasing a home.  While two of the biggest factors currently providing this position of leverage to the new home buyer are the tremendous amount of unsold inventory on the market and a large pool of motivated sellers, both of these factors are made even stronger by the fact that the potential first time home buyer does NOT have to worry about selling an existing home.  Whether purchasing from a motivated seller, a bank REO (Real Estate Owned), or a short sale, the fact that a first time homebuyer does not have to make his/her offer contingent on the sale of another home is a HUGE advantage.  This fact, combined with a bank pre-approval on a historically low 30-year fixed mortgage, puts the first time home buyer in the driver’s seat when it comes to locating and negotiating a potentially great deal on a home.  Sellers (whether individuals or banks) prefer as few contingencies as possible and typically the two biggest road blocks to successfully completing a potential home purchase are financing challenges and coordinating the sale of two homes (the buyer and the seller).  

But all of these potential positive purchasing conditions are for naught if the first time homebuyer doesn’t follow these rules:

1)      Don’t spend more than you can afford!  A good rule of thumb is 2.5-3 times your annual household salary.  If you and your wife currently make a combined income of $60,000 then the search for your first home should not include properties that exceed $180,000.  How much house can you afford? Check out my “Financial Calculators” page to find out.

2)      Get pre-approved.  Getting pre-approval from a lender does not require you to work with that specific lender should you get an accepted offer on your first home.  But it does strengthen the position of your offer and signal to potential sellers that financing will NOT be an issue.  

3)      Establish a specific set of priorities for your potential new home (number of bedrooms, location, yard size, maintenance, taxes, etc) considering both your short term and long term needs.  If you are a newly married couple, that 2 bedroom home in the perfect location might look great now but will likely be the cause of headaches if you plan to have ‘additions’ to your family in the next few years. 

4)      Find a capable real estate agent.  An experienced and competent real estate agent can make a tremendous difference in your house hunting search and purchasing process – so put some time and thought into who you work with!  I am consistently surprised by homebuyers who haphazardly select a real estate agent based on whoever happens to answer the phone or respond to an online home listing.  Instead, ask friends and family members for recommendations and do not be afraid to ‘interview’ your potential agent.  For most, this is the biggest financial investment in their lives and that said, I think it’s fair to ask the person who is helping you navigate this process questions like, “How long have you been a real estate agent?”,  “Are you able to accommodate my schedule?”,  “Do you have any experience with short sales, foreclosures and REO’s?”,  “Can you provide me with any references of clients you have worked with recently?”, or any other question that you think is important and would help you feel comfortable with that person.  Again, a home is a huge investment and it is important that you take a proactive approach in finding a competent real estate agent.  

5)      Look at a number of houses.  Again, there is a tremendous amount of inventory currently on the market and it is to your advantage to look at as many homes as fit your criteria.  Doing so provides you with the opportunity to see what different types of options your money gets you and allows you to more accurately compare different homes.  Perhaps the home downtown is in the perfect location but at the high end of your budget, while the home just outside the city is almost double the square footage and priced $20,000 lower. 

6)      Submit an aggressive offer.   What is an aggressive offer?  Let me make this suggestion – if you are not at least a little embarrassed by the offer you submit on a home, than that offer is too high.  Remember, purchasing your first home is not about making friends or being fearful of ‘insulting’ someone, it is about you making a sound financial decision and investment in your future.  Again, in this market you are in the driver’s seat: you are pre-approved by a lender, you do not have an existing home to sell, and there are more homes for sale than there are buyers.  Your aggressive offer reminds potential sellers of all three of these truths; a reminder that rings especially true to a seller whose home has been on the market for months.  And one last note about your offer – make sure it is ALWAYS contingent upon passing a home inspection.  ALWAYS. 

7)      Explore multiple lending options.  This means that you call at least three different lenders (your local credit union, the bank your parents have banked at for 20 years, the biggest/shiniest bank in your town, etc) and specify you’re you have an accepted offer and are only interest in 30-year fixed rate options.  Request GFE’s (good faith estimates) from each of the lenders and compare closing costs.  Again, it is important that lenders compete for your business and closing costs are an area that provides you with an opportunity to negotiate.  Closing cost fees that you can typically negotiation include: appraisal fee, lawyer fee, title insurance, loan origination fee, and loan discount.   The idea here is to have multiple lenders competing for your business and ultimately, to save yourself money on the purchase of your new home. 

Any recent first time homebuyers out there?  What was your experience?  Any suggestions, additions, subtractions to this list that you would like to share?

One Response to “First Time Homebuyer Checklist”

  1. Lee says:

    I just purchased a home as a single person this year.
    Interest rates were hovering around 4.25 and 4.375 and I found
    a good home in a good neighborhood.

    Two things: If you are doing a short sale or foreclosure if you offering anything more than 80-83% of the value you are over paying. You should also have an aggressive home inspector who does not get recommended by the realtor. Use the inspection to get repairs done (I gained a 7,000 dollar credit).

    Get 3 GFE’s (verbal quotes mean nothing!) 3 bids on any contractor work you want done, and make sure to look at houses for at least a month, realtors and lenders do this professionally and make money off .25% here and $1,000 there on every deal. You need to get a feel for the market and take your time, they want to rush you.

    Also they ALWAYS say there is another bid on the table just to pressure you. Don’t buy that junk and don’t change your price or plans as a result of these tactics.

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