This is NOT a sponsored post.
….But given that it is home ownership month, I wanted to get in a real expert (read, real estate agent) to answer your most pressing questions. I called upon former brand partner, Redfin, to field questions from readers.
Over one hundred of you responded (!!!) when I asked for questions, (home ownership is super tricky, I get it) and here are the questions I picked to be answered by Atlanta Redfin Agent, Adrian Smith.
Also- I get that this post is hella long, but it is PACKED (packed, I tell you!) with important information first time buyers need to know. Here are the questions, so feel free to read and skip ahead if you want 🙂
- What is the biggest mistake you see first time buyers making?
- What if my parents are gifting me a downpayment?
- Is it true you get approved for about 3x your salary?
- What should I do to prepare for homeownership if I work for myself?
- What are some things to look for in a home if I am buying for the first time?
- Are there options that will let me put less than 20% down?
- What are some questions I need to ask my agent?
Now onto the first time homebuyer Q&A!
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Q: As an apartment dweller looking to purchase my first home, it is really difficult to save up the money for a down payment. Where can I find assistance with that, or are there options that will let me put down less than 10-20%?
Adrian: Many first-time homebuyers don’t realize that you don’t have to have a 20% down payment to get a loan; there are banks that will offer you a loan with as little as 3.5% down, as long as you have good credit. (You can check yours for free, here.) If your credit is less than stellar, you should look into an FHA loan, which is insured by the Federal Housing Administration and has less stringent credit requirements.
That said, there are a few downsides to getting a loan with less than 20% down. You’ll need to pay private mortgage insurance, which protects the lender if you default on your loan. The insurance usually costs from 0.15% to 2.5% of the loan amount, and will be tacked onto your monthly payments. You’ll also pay a higher interest rate, which can really add up over time.
Q: What if I live in an expensive City?
In addition, if you live in a hot real estate market where there are a lot of people shopping for a home and not that many homes on the market, putting less than 20% down will make your offer less attractive to sellers. If a homeowner receives multiple offers, they most often choose the one with the highest down payment (or all-cash offers, which are even better), because those offers are viewed as having a lower risk of falling through due to financing issues.
There are many cities, states, companies and nonprofits that offer down payment assistance programs, especially if you are a veteran, make under a certain amount of income, or have a disability. You should talk to a local lender to learn more about the options in your area. Click here to get your FREE credit score with Credit Sesame.
Q: Is it true that as a general rule of thumb, you can get pre-approved for ABOUT three times your current yearly salary?
Adrian: Your salary is important, but it isn’t the only thing the bank will look at when you apply for a mortgage. The amount you get pre-approved for largely depends on how much debt you have. Your loan officer will look at your debt-to-income (DTI) ratio, which represents how much of your income you spend every month to cover your debts. There are two types of DTI numbers: a front ratio and a back ratio.
The front ratio represents how much of your income goes toward paying for where you live. If you rent, this is the amount you pay in rent each month divided by your gross monthly income. If you own a home, this is the amount you spend on monthly housing payments — including mortgage, property taxes, insurance premiums, and homeowner association dues, if applicable — divided by your monthly income.
The back ratio represents how much of your income goes toward all of your recurring debt payments. This is the sum of all your monthly debt payments — that is, your housing payments plus any other debts, like credit card payments, car loan payments and student loan payments — divided by your gross monthly income.
To qualify for a conventional mortgage, you typically want your DTI front ratio to be 28% or lower and your back ratio to be 36% or lower.
Before you start shopping for homes, you should talk to a lender and get a pre-approval letter, which will give you an idea of what you can afford and help you make an offer more quickly when you do find a home. I recommend getting recommendations from friends and reading reviews of lenders online to make sure you’re getting someone trustworthy. Here's how to shop mortgage and home loan interest rates with zero hassle or commitment..
Q: What is the biggest mistake you often see a first time homebuyer making?
Adrian: In a lot of cities, bidding wars are taking place and homes are selling very quickly. In that situation, people can end up making decisions in the heat of the moment that they later regret. To avoid buyer’s remorse, you should know what you want and what you can afford, and stick to that.
Before you start looking at homes, put together a list of “must have” vs. “nice to have” features so that when you find a home that meets your needs, you can jump on it and feel good about your decision. This is especially important for couples who are shopping for homes together; you should know what your priorities are and what you’re willing to sacrifice.
You should also determine your price range, and set a maximum amount that is realistic. The Redfin home affordability calculator is a good place to start.
Make sure your agent knows what you’re looking for and what you can afford. A good agent will look out for your best interests and will tell you when to walk away from a deal that you could regret.
Q: What do I do if I my parents want to gift me money for the down payment? I've heard it can be tricky to get pre-approved.
Adrian: Having a down payment demonstrates your ability to save and manage money. For lenders, it suggests that you're less likely to default on a loan, or ultimately go into foreclosure. If you haven’t been able to save any money on your own and are using a gift as a down payment, it can be a red flag for lenders and make it more difficult to get pre-approved.
But don’t be discouraged, it’s still possible to get a loan. You’ll need to document the process very well. Banks will often require the following paperwork to pre-approve you for the loan and process it:
- Gift letter: A standard form that most banks require you to fill out.
- Bank statement: The bank needs proof that your parents have the funds; the statement should show their name, account number, and balance.
- Proof of transfer: A copy of the check or money order they used to give you the money.
- Deposit receipt: Get a receipt for your deposit, and make sure that the account number from which you received the funds matches the bank statement that you submitted.
Keep in mind that you could be taxed on the gift amount, so you should have some money saved to pay taxes the year you buy your home.
Q: What should I do to prepare for the home buying process if I work for myself?
Adrian: If you're self-employed, qualifying for a loan can be more complex, even if you have a down payment saved and good credit. You’ll need to gather a lot of documents to prove that you have enough income to make your loan payments. These documents could include:
- Signed, dated individual tax returns, with all applicable tax schedules for the most recent two years
- For a corporation, “S” corporation, or partnership: signed copies of Federal business income tax returns for the last two years, with all applicable tax schedules
- Business credit report for corporations and “S” corporations
- An audited profit and loss statement or balance sheet
- A copy of your business license
You should do your best to keep personal and business-related financial activities completely separate. Don’t plan to use business assets as part of the down payment, because banks may be concerned about how a large withdrawal will affect the business. You should also pay off business loans using a business-only bank account, not a personal account, so that the business’ debt isn’t factored into your personal debt-to-income ratio.
Banks will want to see that your income has increased over time, so now may not be the best time to take big risks that will affect your monthly income.
You should also talk to an accountant about tax deductions; while deductions may help you pay less taxes, they also reduce your net income, which is what banks look at to determine if you’re eligible for a loan.
Q: What are some things to look for in a first home if you've never purchased before?
Adrian: First of all, you’ll want to make sure that the home will meet your needs for the next five years. In the first few years after getting a mortgage, your monthly payments will be going toward paying down the interest on your loan, not the principal. That means you’re not paying down the debt right away.
After a few years, you’ll start paying down the principal on the loan, and that, along with home price appreciation, is what builds equity in a home.
That means most people will need to stay in their home for at least five to seven years before it makes financial sense to sell. If you want to expand your family in the next five years, you may want to look for homes with more space, and keep school ratings and districts in mind.
In addition, it’s important to stay practical. When you are out touring homes, it’s easy to fall in love with a remodeled kitchen or a pool in the backyard. Try to see past those shiny features and take a close look at the overall condition and age of the home. Will it need a new roof soon? Is water draining properly from the gutters? Are tree roots affecting the foundation or pipes? Will the siding need to be replaced? Your agent has likely seen hundreds of homes and should be able to help you identify potential issues that will cost you down the road. On the flip side, don’t let ugly carpet and bad wallpaper sway you from considering a home that’s in a good location and with “good bones”; those types of homes often make the best investments.
Q: What are some questions I should ask my agent? I want to make sure it’s a good fit.
Adrian: Below is a list of questions I recommend that you ask while you’re shopping around for a real estate agent.
How many sales have you handled in my target areas?
You’ll want to find a real estate agent who knows the market conditions in the areas in which you’re looking, so they can help you come up with the best offer for a home based on how competitive it is in the area and how the home compares to others nearby.
What’s your fee?
The home seller typically pays 6% of the final sale price of the home to the real estate agents involved; 3% goes to the seller’s agent, and 3% goes to the buyer’s agent. However, some agents charge less. At Redfin, we only charge 1.5% to sell your home, and when you work with us to buy a home, we refund a portion of our commission back to you. You’ll want to understand how much your agent will charge and if there are any refunds involved from the beginning.
When am I committed to working with you?
Many homebuyers start touring homes without realizing this can obligate them to work with an agent. Ask when you will be required to sign a buyer’s agency agreement, which is a document you’ll sign once you decide to work with an agent at a particular brokerage. By signing the agreement, you are promising to pay your agent when a sale occurs. The length of the agreement varies, but usually lasts 3 to 12 months.
How quickly can you get me into a home?
In competitive real estate markets, being the first person to tour a home can make the difference between buying your dream home or watching it sell to someone else. You’ll want to make sure your agent or someone on their team can get you into a home on short notice.
What if I'm unhappy with your service?
Most agents get paid when you buy a house, giving them an incentive to close the deal, even if you have doubts. Even if you have complaints after you purchase your home, it may be too late to do anything. Ask your agent if he or she is willing to guarantee your satisfaction, and what recourse you'll have for a bad experience.