Have you heard that 2015 is “The Year of The First-Time Home Buyer”? They’re making a comeback in Virginia Beach, and builders are ramping up production of homes that they think first-time homebuyers and millennials will want.
If that’s true, 2015 will be a great year. But there’s one problem. Buying a home in Hampton Roads is not an easy process. Our first-time homebuyer clients have no idea about what goes into the process from start to finish. They can and do make mistakes. Here are just a few that I’ve identified and some tips on how to help your clients avoid them:
1. Borrowing the maximum amount allowed by the lender and not creating a realistic budget of their expenses
A good amount of research is needed by the buyer to find out what costs come along with owning a home. Some are not prepared for these known or unknown expenses after they sign that contract. Taxes, insurance, association fees, home maintenance, utilities and major/minor repairs are just a few. Knowing what these costs are and budgeting for them ahead of time is important for anyone, but especially the first-time homebuyer. At the first meeting with your clients, include a checklist of these costs in the buyer’s packet, and add some examples of costly surprise home repairs. If they are interested in buying a particular property, ask the seller’s agent to provide the monthly utility costs or call the utility companies for estimates. Some cities even require the utility costs to be included when listing a property.
2. Planning ahead
Resale value is an important factor when buying a home. Most first-time homebuyers aren’t looking into their crystal ball and haven’t thought about their plans and when they eventually plan on selling the home. They’re living in the here and now.
It’s our job as real estate agents to ask the right questions to keep them on track and looking at the big picture. On average, first-time homebuyers only stay in their home for about four years. The other problem when it comes to resale value, is that a lot of buyers tend to rely on the Zillow Zestimates instead of talking to a real estate agent when looking at the resale value of a home that they are buying.
We all know that Zillow Zestimates are notorious for being incorrect and can often be up to 30 percent too high or even too low on a property. So do yourself a favor and have that conversation with your clients ahead of time. You never know. If referrals are a part of your business, you might be selling this house for them in about four years. Don’t you want to know what it might be worth?
3. The dreaded pre-approval
First-time homebuyers, especially millennial buyers, are weary of filling out that pre-approval application for the mortgage lender, and I haven’t quite figured out why they drag their feet on this. The first step is the lender pre-approval before looking at houses.
Most real estate agents that I know require their buyer clients to have that pre-approval letter in-hand before they take them out looking at homes. Why would you want to waste time looking at houses your clients can’t afford?
Doing this pre-approval process ahead of time is vital. If there is something negative on your credit report, it’s best to find it early in the process, so you have time to correct it. Have a list of lenders on hand to give to them. They can choose which one to use.
Ever heard of the saying “Curiosity killed the cat”? Well, here’s another one, “Indecision killed the deal.” Not moving on a house fast enough and taking too much time to make a decision on buying the house is common as well. This indecision gives someone else the opportunity to scoop up that home before your clients have a chance to send in the bid to buy it.
A multiple offer situation is good for the seller, but for a buyer — not so much. In this competitive real estate market with low inventory and high buyer turnout, you need to move quickly in order to get the house that you want. A good real estate agent can try to help their clients through this indecision by asking questions and finding out the reasons behind the hesitation. Some of those reasons might be solvable, but you never know if you don’t ask. Once your client loses a home the first-time because they hesitated on making a bid, I think they probably won’t make that same mistake a second time.
5. Only checking online sources for mortgage rates and available home buyer programs
As much as everyone loves to do everything from their computer or smartphone today, especially the millennials, this is one thing that should be done in person. It is always best practice to call a local mortgage lender and sit down in person with them to talk about the most current rates and programs available to first-time homebuyers.
A good amount of the lenders that you find online are not local and only have teaser rates on their websites. If your client chooses a mortgage lender that doesn’t have a local presence, a lot can change once they get the paperwork in front of them at the closing table. Even the appraisal that is done can be off by thousands of dollars if the in-house appraiser that the lender uses is not familiar with the area in which your clients are buying.
An accurate appraisal is crucial and not using the right comps in the neighborhood can be catastrophic to the buying process. You know that if it doesn’t appraise for the amount of the loan or higher, your buyer will have to come up with the balance of the funds fast to cover the sale or the deal falls apart. As for homebuyer programs, there are many new programs available to buyers, especially first-time buyers. It’s almost impossible to figure all of this out by just looking online. That list of lenders I mentioned in No. 3 above would come in handy for this too.
6. Debt to income ratio (DTI — recurring monthly debt divided by monthly gross income)
Most first-time homebuyers have no idea what this is and in turn don’t know that it affects their buying power when looking for a home. Buying a car or a big ticket item before qualifying for a mortgage is a common mistake made by the first-time buyer. Any extra costs, such as car payments, increase this number. The lower the number, the better. Lenders typically do not want it to be higher than 43 percent. Buyers must be careful, different lenders have different DTI ratios depending on the type of loan. It’s your job to give your clients the facts about the buying process, especially their buying power. And try to make sure they don’t suddenly buy that cute red convertible they’ve always wanted before they have the garage to store it in.