On this episode of Making it Count, hosts Cristina and Will learn what it takes to become a homeowner from two local real estate experts: Eric Mieles from H6 Homes and Kathy Michaels from Addition Financial. Listen or read along to get the inside scoop on the entire home buying process – from finding your dream home to closing your first mortgage!
Cristina asks Question 1: “I want to start with something that’s a big concern for first-time homebuyers. What can people do to improve their credit scores before they start the process of looking for a home?”
Kathy responds: “What we always advise when it comes to credit is know what is being reported by the credit bureaus. If you haven’t had your credit pulled recently, obtain one of the free credit reports from one of the bureaus. It doesn’t matter which credit bureau you pull it from, they are typically pretty similar. Review the report and make sure everything is correct – no errors or fraud.”
“What’s going to determine your score are the various score cards that the bureaus use. The biggest impact on your credit score is your payment history. Paying your bills on time is the best thing you can do to keep your score high or improve it. The length of time that you’ve had your accounts open also helps. So if you’ve had cards for a while, even if you don’t use them and especially if they don’t cost you anything, don’t close them.”
“Maintaining lower balances on your credit cards will also help improve your score. So if you have a credit card with a $1,000 limit, try to keep your balance under $300. We know things come up and sometimes you have to charge more on your card than you’d like, but make sure you pay it off as quickly as you can to minimize the impact on your score. But those are the things that are going to contribute to a good credit score.”
Will asks Question 2: “If your credit score is in good shape, is it a good idea to start the homebuying process by getting pre-approved for a mortgage?”
Kathy responds: “Absolutely. To get pre-approved, a loan officer will look at your credit, income, and assets. Some things that are considered in the assets category are your savings, gift funds from family members, and even 401k loans. Sometimes lenders will allow you to borrow against your 401k for the home purchase. And there are other forms of assistance out there to help you pay for the down payment, like grants and second mortgages.”
“Also when a prospective buyer comes in looking to get pre-approved, I like to ask them what a comfortable monthly mortgage payment is for them. They might be paying $1,400 per month on their rent currently and that’s where they are comfortable staying around. So we use that number to work backwards and determine a home loan amount and potential purchase price to fit their budget.”
“As a loan officer, I’m not going to ask you how much your social expenses are or how much you spend on gas or tolls or childcare, but those are real life expenses that you have to take into account when determining a comfortable mortgage payment. So we encourage prospective buyers to come in with their budget already created so we can get them pre-approved for an appropriate amount.”
Eric also responds: “We always recommend that buyers be buttoned up financially with a pre-approval letter in hand before the shopping phase. There are two reasons for this: One, the market is moving at a very fast pace. I've seen buyers go out to get a feel for the market and find a home that they love. But, by the time they get their finances together, the home has had multiple offers and is now off the market. So by skipping that financial step at the beginning and going straight to shopping, you might see a house that you can't even take action on."
"Two, and this one hurts the most, is falling in love with a certain set of houses without knowing what you can actually afford. When you finally do get that pre-approval, you realize you have to look for homes in a lower price range, which can be really disappointing."
Cristina asks Question 3: “What about a down payment? I’ve seen a lot of conflicting information about how much people need to save for a down payment.”
Kathy responds: "Instead of giving a vague percentage of the purchase price to determine the down payment amount, we will provide a quote. So if someone is just starting to entertain the thought of buying a home and they have no idea how much they are going to need saved up, we will use this quote to give them an idea. We determine a purchase price and ask for lump sum of how much they think they'll be able to save up and have available during closing. We use current interest rates to run the numbers and this gives them a better idea of what to expect."
"If they are financially prepared and it all sounds good to them, that is when we do a pre-approval letter and actually run their credit, evaluate their debt-to-income ratio, and determine if they have any other obligations we should know about. It really is giving them the confidence to go out and find their dream home without making the house poor or incurring any surprise costs during closing."
Will asks Question 4: “How can people figure out which homes are in their reach? It’s not necessarily about the listed price, right?”
Eric responds: "First, how we set a baseline of what we can afford is based on the conversation they had with the loan officer previously and that pre-approval that was generated. Some people qualify for, for example, $400,000. That doesn't mean they have to buy a home for $400,000. So really we look at the pre-approval to figure out which homes are within the buyer's reach."
"Second, a listed price is what the seller placed that home on the market for. That doesn't mean it's actually worth that amount – it could be worth less, it could be worth more. The real estate agent will do due diligence to determine if the listed price is fair market value by looking at similar homes in the area and checking what those are selling for. It shows us trends and establishes a baseline of values for that particular community."
"We also have to look at each home on a case-by-case basis. For example, say we found a home that has been sitting on the more for 73 days with no offers on the table. We would have a bit of leeway in negotiating and opening up a dialogue with the sellers. On the other hand, say we found a house that was put on the market on a Friday, had 23 showings, and seven offers by Saturday. We would have a hard time getting $10,000 to $20,000 off the listed price because the seller already has multiple offers in front of them after only two days. There has been no pain associated with marketing the home yet."
"My point is that we need to look at each house in a case-by-case scenario. Every time we find a home that we really, truly love, there's work that goes into figuring out the value, comparables, trends, etc. This allows us to develop a strategy for making an offer."
Cristina asks Question 5: “A lot of first-time buyers focus on the down payment as their only up-front cost, but that’s not accurate. What other costs should buyers expect?”
Kathy responds: "There are quite a few and they can add up to several thousand dollars. Just like with the down payment, some lenders like to give a percentage of the purchase price as an example of those costs. But that really isn't accurate a lot of the time. There are certain fees that, whether you're buying a home for $100,000 or a home for $400,000, are set fees – not based on the purchase price dollar amount."
"Other factors that affect the amount of closings costs are the lender that is chosen, the buyer's credit score, and the mortgage product itself (are you applying for a 30-year fixed rate or a 15-year adjustable rate mortgage?). We've seen sellers motivated enough to help contribute to the closing costs and there are of course programs out there that also put money toward those costs."
"Some of the fees that make up the closing costs include title costs which go to the title company that handles the recording of the mortgage and deed at the county level. There is also the appraiser fees and homeowner's insurance that protect the property and your possessions against possible hazards. Property taxes also vary depending on the home's value and location."
"So as you can see, there are many different fees. Which is why we suggest getting that quote I mentioned before from your lender so you know what to expect. A good quote will itemize those costs and sometimes they do add up to $6,000 or $7,000 on top of the down payment."
Will asks Question 6: “You mentioned the home inspection fees. Let’s talk about why a home inspection is necessary. What should first-time buyers know?”
Eric responds: "It's a vital step in the home buying process. First and foremost, it is not required, but it is highly recommended. And it's an important step because buyers really do need a professional set of eyes to spend two to four hours in the prospective home researching, looking, and testing whatever they can to make sure that, before you proceed and buy your home and invest all those dollars you've been saving for years, you're making a sound decision moving forward."
"So we recommend hiring a licensed inspector who will go top to bottom on the house and do a full blown general inspection and create a report detailing every nook and cranny of the house as best as possible. Based on that report we can make an intelligent decision on whether we a) stay in the transaction and proceed with the purchase, or b) pause the transaction and reconsider because too many red flags came up that we couldn't see during the initial walkthroughs."
Cristina asks a follow-up question: "Could the buyer use what the home inspector's findings as a bargaining chip during negotiations?"
Eric responds: "The answer is yes, but there is an 'as-is' contract that a lot of deals are written on. This states that the seller makes no guarantees, warranties, or claims that they will repair anything or pay to have anything repaired. However, that does not negate our ability as buyers to ask for something if we find it. And we should always do so, no matter if it's on an 'as-is' contract or not. Because if we rightfully find something wrong with the house, we want to open up dialogue and have a discussion. Asking, can it be fixed by the seller? Can we get credits from the seller to do it ourselves after we close? Or can we do a combination of credits, repairs, and price reduction? All of that will happen once we open up dialogue after the inspection is completed."
Kathy also responds: "Two other parts of the home inspection that I'd like to mention are specifically looking for wood destroying organisms (WDOs) and septic issues. I worked on a home purchase when I first moved to Florida where the buyer did a home inspection and everything went great. Two months after closing, he found out that his septic drain field had to be replaced. These types of repairs are very costly, but could have been found out if the buyer did a specific septic inspection before closing."
Eric follows up: "It is an additional expense to get a septic inspection, so we need to prepare buyers for those expenses that come up before closing."
Cristina asks another follow-up question: "So you've both used these two terms and I want to clarify – what's the difference between an appraisal and an inspection?"
Eric responds: "Those are two totally different items and professionals. An appraisal is done by a state certified appraiser who is tasked with unbiasedly going to the property and forming an opinion of value that the lending institution will use. When you are using financing to purchase the home, it is required."
"An inspection done by a professional licensed inspector who is tasked with determining the home's condition, not market value."
Cristina asks another follow-up question: "Kathy, do we hire the appraiser through our financial institution or do we find that professional through our real estate agent?"
Kathy responds: "The lender that the buyer chooses for the mortgage is going to order the appraisal. To keep the process as unbiased and fair as possible, we go through an appraisal management company that then assigns a field appraiser in that home's area to the case. Neither the lender, the seller, nor the buyer has input into which appraiser is chosen to keep it objective."
Will asks Question 7: “In the opening, we mentioned that interest rates are low right now. What should first-time buyers know about shopping for rates?”
Kathy responds: "Interest rates are very low right now and I have seen a lot of different mortgage promotions out there teasing people with even lower rates. Most first-time homebuyers are looking at a 30-year fixed-rate mortgage product, either conventional, FHA, or VA. But when these buyers are comparing products, we need to make sure they aren't just comparing interest rates, but also the APR. For example, one lender may be offering an interest rate of 3.5%, but the APR is 3.997%. Another lender will have the same interest rate of 3.5%, but a lower APR of 3.775%. This is a reflection of their lower overall costs and should be taken into consideration when shopping.”
Cristina asks Question 8: “What are mortgage points and are they worth buying?”
Kathy responds: "With the rates being as low as they are and for a first-time homebuyer, typically mortgage points are not worth buying. A mortgage point is 1% of the amount you are borrowing. For example, if you are borrowing $200,000 with a 3.5% interest rate, one mortgage point would be worth $2,000. If you buy one mortgage point, you are spending $2,000 to reduce your interest rate to 2.5%. Some lenders allow half points or even quarter points, but 1% is the typical percentage.”
"How much a point buys down the interest rate sometimes is not worth the cost. Statistically, homeowners move, or end up refinance their mortgage, around every 5-7 years. So if you're paying $2,000 to reduce your interest rate by 1%, you might be saving say $20 per month. That will take 100 months to recoup your costs, which is 8 years. Sometimes you're better off using that $2,000 for additional down payment – simply financing less."
"On the other hand, if you're lucky enough to buy a home from a seller that is willing to pay some of your costs, you could direct that money to buy down the rate. Mortgage points are not a bad thing, but we don't see them used that often. Most people tend to use any extra money or seller credits to either reduce the amount they finance or reduce their total out of pocket costs during closing.”
Will asks Question 9: “What are some things that first-time buyers should research before deciding where to buy a home?”
Eric responds: "Putting together that wishlist is the most fun part of the process, right? There are things that you as a buyer need to sit down and distinguish what's important for you. Not just blindly follow wherever you think would be a good place to buy."
- Radius to Work – What commute do you want?
- Schools – Both parents and couples that want to be parents while living in this home need to consider the school zone of each house.
- Style of Home – For example, do you want a production build, mid-2000s style or a 1980s/90s semi-custom style with larger lot lines?
- Health Concerns – Do you have allergies to carpets and we need to consider other flooring products?
- Condition – Do you want a turn-key home or do we want to add value to a fixer-upper?"
"All of these are questions buyers should go through during the wishlist phase."
Making it Count Essentials
Will asks Quick Question 1: “When do buyers need to purchase mortgage insurance?”
Kathy responds: "First off, with FHA loans it's called mortgage insurance and with conventional loans it's called private mortgage insurance or PMI. Lenders will add mortgage insurance or PMI if the buyer is putting less than 20% of the purchase price down. In other words, they are financing more than 80% of the home's value."
"There is a misconception that first-time homebuyers have to get an FHA loan. This is not true. It's a great product that typically requires 3.5% of the purchase price down, but there are many conventional loan products out there that only require 3% down. Also, conventional loans don't require buyers to pay the PMI during the entire life of the loan like the FHA loan does. Always ask your lender about the differences and you might find the conventional mortgage is better for you."
Cristina asks Quick Question 2: “Are real estate agent fees negotiable?”
Eric responds: "The short and quick answer is – it depends! All real estate professionals are self-employed, 1099 individuals that run their own businesses with guidance from their broker. So it can vary from professional to professional. But something to note here, buyers do not incur commission costs – sellers do. So it's the sellers who are paying their agents and those agents are paying the buyer's realtor."
Kathy also responds: "Who else can you hire to do a job for you as important as finding a home and not have to pay them a penny?"
Will asks Quick Question 3: “Is a 30-year mortgage the best option?”
Kathy responds: "For most first-time homebuyers, with rates being as low as they are, it is what is typically chosen. However, if you're not a first-time homebuyer, you came into some inheritance money, you have a bigger down payment, or your income level supports a higher monthly payment, a shorter term mortgage might be a better fit. Choosing a 15- or 20-year term will save you so much money in interest over the life of the loan."
"We just really don't want to see buyers stressed trying to make that larger payment on a shorter term loan. Sometimes you can't predict what will happen in life and what new expenses you will incur that could put you in a tough position if you're committed to paying a higher monthly payment."
Cristina asks Quick Question 4: “Do people need to hire a real estate agent?”
Eric responds: "I know it's a biased answer coming from a real estate professional, but I think you should. Technically you do not have to hire an agent; you can buy a home without one. But in my professional opinion, you should take advantage of hiring a real estate agent. There are so many things involved in the homebuying process. Why would you not want a qualified professional that you build a relationship with and trust? Someone that will assist you through the homebuying process and always be thinking three steps ahead?"
The Sum Up
Will asks: "Today’s news is about interest rates, which hit a historically low point – falling from 3.38% to 3.30% according to CNBC. What should first-time buyers know?"
Kathy responds: "Interest rates are certainly important – they are going to keep your monthly payments lower than maybe they would have been a year ago. So now is a great time to start seriously thinking about buying a home. It really just speaks for itself. Also, you might be able to purchase a more expensive house than you could have when the rates were higher."
Eric also responds: "For me, I like to think of the lower interest rates as purchasing power for the buyers."
Cristina asks: "What can first-time buyers do to be prepared for the process and make it go smoothly?"
Kathy responds: "Be responsive to your loan officer and your agent and be ready to submit documents when they are needed. The whole process typically takes 30 days from finding your dream home and applying for financing to closing, sometimes longer depending on what your agreement is with the seller."
Cristina asks a follow-up question: "What should a buyer do to be prepared for the home shopping experience?"
Eric responds: "We created a seven step process for buying a home and it starts with education – listening to shows like this and getting familiar with the process. The next step is buttoning up your finances with a lender. Then we get to the shopping step. Because the buyer is educated on the process and has all their finances in order, it allows them to shop with confidence. They can make offers, start the transaction, close, and be happy with their new set of keys. We want everyone to have a great experience and not regret or think they didn't do the right thing."
How to Make it Count
Cristina: "At the end of every episode, we like to leave our listeners with some practical resources related to the episode’s topic. Today, I’m really excited because we have three resources and they’re all great."
Will: "We have a First-Time Homebuyer’s Guide to Mortgages, which includes everything first-time homebuyers need to know about applying for a mortgage. Basically, it’s a soup-to-nuts guide provided by Addition Financial and it’s completely free."
Cristina: "It’s really helpful! And then, we have two additional resources. The first is a quiz to help you decide if you’re ready to buy your first home, and the second is a monthly expense worksheet for new homeowners."
Will: "Figuring out a budget when you buy a new home is so important and I can’t wait to take the homebuying readiness quiz with my husband."
Posted on Jul 3, 2020