Must Watch Video before you Buy your First Home
Are you thinking about buying your first home? Whether you’re gonna buy in 90 days, in a year or two years. Congratulations! So I’m going to talk about the five common mistakes that first time buyers make when they are thinking of buying a house. So let’s get right into it.
1.) I’ve noticed a lot of times one of the most common mistakes that the first time buyers make is that they either don’t get preapproved or they get preapproved too late to buying a house. My recommendation is get preapproved 90 days,six months, even a year ahead so you know several things. And what are those several things? Well, the one thing you will find out getting preapproved is how much of a monthly payment can you afford every month. So when you talk to a lender or a bank, they’re going to ask you how much money do you make, how much payments do you have? Do you have a sibling or a wife or a brother or sister signing with you? They will talk to them.
So based on your combined expenses and your combined debts, like car payments, credit card payments, medical payments, he or she, the lender will let you know based on your income and expenses, this is how much the mortgage payments you are going to need. So now you are prepared to make that payment. In addition, what you will find out by talking to the lender is based on your mortgage payment that you can afford, how much down payment are you going to need if you can afford a $500,000 house? Actually, if you can afford a $500,000 payment ona mortgage and let’s say it’s $2,500 a month. So for you to buy a house for $500,000, there may not be something for $500,000 that you like.You may find something that’s worth $600,000, but you are approved for a $500,000 loan. But the difference is $100,000. So the question now is can you come up with that $100,000 down payment? So this is why you need to find out with a lender or a banker what your preapproval is.
The other reason you want to find your preapproval way before you start buying or when you are ready to buy is let’s say you decided to buy in 90 days because you have a job transfer. And when you talk to the lender, you find out, oh my gosh, you had a past bill, medical bill, or you have bad credit score and you don’t have the great credit score and great debt ratios. So you’re going to end up paying a higher interest rates because you have some dings on your portfolio. But if you were going to buy a house a year later from now and you find out that you forgot to pay a bill and that’s affected your credit, or you have some liens on your child support or whatever, you can take care of all of that. So when you’re ready to buy, you will get a clean lender’s bill of approval, and you will get better rates in terms so very important that you talk to a lender way ahead. That’s the number one mistake. The other mistakes won’t be this long, but they are very important.
2.) The mistake number two is making an emotional decision when buying a house. Let’s say you find a house and you had certain restrictions on the house. You were supposed to buy a house no more than $600,000. You want to buy like 2 miles from the hospital or 3 miles from the work or 5 miles from your mom or somebody who’s going to help you. But you are looking at open house. You come to an open house or your agent shows you a house, and it’s the perfect dream home that you want. And this is just an example. It’s listed for $630,000. It has a view, it has a pool, and it’s 10 miles away from your work and school and mom and everybody else. But you fall in love with this house and you tell your agent, I really want to buy the house. And I’ve seen that many times. I remember back in the early 2000, I sold the house to my friend, and his budget was at that time, $600,000. And I showed him a house with a pool. I didn’t know there was a pool in the house because it was not on the Multiple Listing service. And my friend goes, “I want to buy this house.” And it was $60,000 more than his budget. And I had to convince him not to buy it, not me, but the lender had to convince him not to buy it because he was buying it on emotional value, which is okay as long as it’s in your budget, as long as it’s not too far from your work or your kids school or somebody’s hospital.
So all those things come into factor. So when you do find a house and you really fall in love, but it’s out of your range, out of your budget, out of your area, it’s not the location you want, or it has a fabulous view and a pool, but it does not have a bedroom downstairs. And you needed a bedroom downstairs for your parents. And you let go of the room for the view and the pool. So those are the emotional decisions that you want to avoid. And by working with an agent who knows what you’re looking for because he or she is going to ask you for the criteria, they will help you. So not making emotional decision is very critical in buying a house.
3.) Common mistake number three that first time buyers may make, and they do make is that they remove their contingencies too soon or don’t have contingencies whenever you buy a house. So let’s say you are approved and now you bought a house and you are now in escrow, you have 30 days to close your sale and the seller’s agent is asking you or pressuring you to remove contingencies. Don’t do inspections, don’t do termite, or they will not pay for any repairs. They don’t want you to look at too many disclosures.They want you to make a decision fast, and they force you to have a five day contingency removal of your inspections and everything. Don’t fall in that trap because the sellers want to sell it right away, because they have four or five offers. But you as a buyer, this is one of your biggest purchases of your house. You’re going to get tied up with a 30 year mortgage payment. You’re going to dish out $200,000 of your down payment, some of which may be borrowed from your friends and family, some of it from your hardwork that you work all these years. So very critical that you go very carefully of not removing your contingency and not doing some of those things.
The two things that you have to do is make sure you do the home inspection. Never, never buy a house, even if it’s a brand new house, to do an inspection. Even if you’re a nice handyman or you have contractor experience. We as buyers don’t know if there’s mold in the house, or if there’s a foundation issues, or how good the air conditioning is running, or the heater is running, if the appliances are working, if all the electrical plugs are working. There’s so many things in the house. So you want to make sure that you do those inspections. And in California, typically in a normal market, you have about 17 days to do those inspections. But in a hot market that we just went through and still somewhat are in a good market, the seller’s agent will push you to remove it very fast or not even have them do it.
The other contingency that you don’t want to remove is don’t remove your loan contingencies unless you have a full approval. Like I mentioned earlier, you have about 17 days to remove the contingencies, including the loan. So at 17 days, they’re going to send you a cr, which is a contingency removal, remove the home inspection, remove the loan contingencies, remove the termite, whatever contingencies you have. But if your loan is not approved, if your lender has not given you a green light, don’t remove the contingency, fearing that you’re going to lose the house. And some of the buyers have done it and they get into trouble.
So let’s say you remove the contingencies and you did not get a loan from your banker A or your lender A. So you go to a banker B or a lender B to get a second loan. But because you did not get the loan the first time you had some issues with it, you’re going to get a B class loan. So you may have to pay higher mortgage or higher fees. So be careful until you have your loan fully approved, don’t remove it. I’d rather you lose that house and find another house, then get a middle class or B class loan with a higher mortgage payments and higher interest rates. So that’s very critical. Hope that helps. And that’s one of the things also very important about buying a house as a first time home buyer.
So let’s continue, let me go back to the contingency point again. I just thought of a really important point that I wanted to share with you a lot of times and I’ve done that myself way back. I had a condo and I wanted to buy a house. And I’ve seen that with other buyers.They have a town house or they have a small house and they want to buy a bigger house or they have a bigger house and they want to buy a smaller house. So one of the contingencies, if you have to sell the house to buy the house, I had to do that when I bought my house, I had to sell the house. So when I sell the house, I get the money from it and put it into my bigger house, which went through. So my contingency to buy was I have to sell my townhouse to buy this house. And a lot of the agents will not let you do that. So don’t ever sell your house without buying another house if you need the money from it.
And sometimes you are able to buy it because the lenders will push and shove and make you buy the house or approve to buy the house that you want without selling the other house because you can rent that other house and show the rental income and take some dings on your interest rate and closing costs and be able to buy the other house. But what happens if it takes two or three or four months after you buy a new house and it takes you that long to sell your other house? Then you have two payments which is not good, or you may have a renter in there for two or three months that you rented it out and now he doesn’t want to move out.
So if you have to sell a house to buy another house, make sure you absolutely do that and do not make a mistake of buying the house first and then selling another one. You figure that this does not happen, but it happens all the time. It’s very common. And one of the reasons these things do happen is because they find a house and they get emotionally attached to the house, going back to the emotional decision and they say, no, I really have to have this house. It’s my dream home, it’s my wife’s dream home. Next thing you know, you’re on a rollercoaster ride that’s going to be tough on you. So that’s another point that I wanted to mention. When it comes to contingencies, it’s a common contingency and a lot of times it gets you into trouble.
4.) Common mistake to buy your first home, number four. And that is that you don’t use your Realtor as your buyer’s agent.
A lot of the buyers that work sometimes they don’t have a Realtor or they don’t have a real estate agent. I highly recommend that you work with an agent, somebody who’s local in your area, somebody who’s an expert, somebody who’s a top producer, knows the market, knows the trends, knows the local schools, the restaurants,the shopping, and they will help you.
Often times we see that for example, I’m an agent and let’s say I have a buyer and I’ve been working with these buyers for a while. I found them from the Internet or my YouTube channel or I was referred to them many times. That buyer may say, “You know what, let me go to an open house.” And they don’t tell us, “Hey agent, I’m going to an open house.” And they go to an open house and they fall in love with the house. Again, going back to that emotional decision and they tell the seller’s agent who is holding the open house, “Hey, I love this house.” And they sense that you are very motivated to buy this house. So they may say, “Hey, let me help you buy the house, I’ll give you a cut of my commission.” Or “I’m the seller’s agent, I can do this and that” don’t fall into the trap because here’s the question.
If I’m your Realtor and one day you go to an open house and I’ve shown you a lot of homes, I know exactly what you want, I know your capabilities, I know your down payment, I know what your maximum payments are. And then one day you go to the open house and the seller’s agent says, let me help you. The question that you have to ask is if he or she helps you on the buyer side. And let’s say you do go into escrow and you do the inspection and there’s a lot of work to be done. There are termite issues, there’s mold issues, there’s repair issues. And you tell your agent, which is not me anymore now, sorry, it’s the open house agent. When you give the open house agent, which was truly the seller’s agent, say, hey, I have these fixings to be done. Whose side is he or she going to push to negotiate the repairs? Is he going to push the seller’s side and say no, don’t fix anything or is he going to push your side and ask the seller?
So there’s a lot of issues there and the number one reason you have to use your agent is because they know what you’re looking for, they’re going to be loyal to you. You don’t have to pay them anything because the seller’s side pays the buyer side. So always work with an agent that you trust, who is able, who’s knowledgeable and who knows how to negotiate for you. So that’s very important. So hook up with an agent, you’ll be glad you did.
5.) Fifth common mistake that first time buyers make and that is factoring in what your total costs are when you close escrow. So what are other factors in the closing cost?
Well for one, in my initial example, let’s say you are going to put $100,000 down because your loan amount was $500,000 and you had $100,000. So you bought a $600,000 house. And of course your lender or your agent must have told you there’s escrow fees and closing costs and lender fees. But did you know that when you close escrow there are additional fees that a lot of the first time buyers may not know. So what are those additional fees and cost?
Well, for one these days because the lenders are very strict, the lenders and banks have become very strict in the last one or two years. Not only do they charge you the fees and the appraisal fees and the underwriting fees and of course you have the title fees and the escrow fees and the recording fees. Those are standard. But in addition you have to pay, at least in California, up to six months of property taxes. So if you have a million dollar house you may have to pay $70,000 additional property tax upfront, which is a lot of money.
Going back to the lenders, a lot of the lenders, depending on your qualification and your terms and conditions, the loan you’re getting and the type of loan you are getting and the debt ratio that you have, a lot of the lenders asked you to put six months reserve or twelve months reserve or what are reserved.
I’ll give you an example. I just sold a house in Anaheim Hills for $1.2 million. He was putting 25% down at the end of the loan. When we were two or three days before close of escrow, the lender came back and said you have to put one year reserve. Of course this gentleman, I know him very well, he’s a business person. There’s a lot of businesses, a lot of K-1s and taxes and a lot of depreciation going on. He had cosigned for his daughter’s house and for his son’s car. So a lot of things were happening on his tax returns. So the lender got a little bit nervous about it. So they wanted a one year reserve. That means they wanted to make sure that if his payment was about $6,000 a month, they wanted to make sure that they had about $72,000, which is twelve months of payments in reserve in his account. That’s what a reserve is.
They may require six months or one year, depending on the lender. So all these the closing costs, property taxes, escrow fees, title fees, reserves, by the way, you also have moving costs. And because you may have to hire a, uhaul, you’re buying a house and you’re moving from a two bedroom to a four bedroom, you may have to buy extra furniture, you may have to come and repair some things. So in addition to the $100,000 plus another $10,000 closing costs, you can add property tax, reservoir repairs, it could easily go to $130,000.
So before you buy the house, before you open escrow, talk to your lender in detail, talk to your agent in detail. Find out all the costs that you’re going to need to buy the house because they add up pretty fast. It’s one of your biggest investment. You want to do the right investment and you want to have the money to close escrow. Good luck to you!