Buying for Beginners
Buying your first home is an exciting and anxiety-inducing step in the quest for financial stability. I just did it myself this past year and I’ll discuss how to get pre-approved, meet your agent, shop for a house, and put in an offer.
In January of 2019, I felt stuck. Stuck in a city I didn’t like that much, stuck in a job that exhausted me, and stuck feeling like I had been floating around after moving three times in six years. I decided I wanted to buy a house, as it was a better reason than most to uproot my life (again) and move somewhere new. I had spent a lot of time in Portland while I was in graduate school and had many friends here. It felt like a logical next step. I had thought about moving and buying a house for a while, but the thing that really kicked off my ability to start seriously looking is step #1: speak to a lender.
Speak to a Lender
I had been thinking about buying for a little while, but the first (and arguably worst) step was speaking to a lender. Once you gather all the relevant documents, it’s actually pretty straightforward (I start to sweat when I have to open my file folder where my tax returns are, so it probably will be less stressful for you). The lender will help you gather all the important financial documents and will assess your credit-worthiness. They will tell you how much you qualify for now and your potential monthly payments, so you know what price range of homes you can shop in. They can also give you some advice about how to increase your credit score and give you an actionable plan if you’re not happy with current options. That might mean saving more money for a down payment, or paying off high-balance credit cards, or staying at your job for another year.
If your lender approves you for a mortgage and you are happy with the pre-approval amount, interest rate, and potential monthly payment, then you get what’s called a pre-approval letter. Consider this your golden ticket to getting into homes and writing offers. With this, you are given a thumbs top from the loan company to write offers up to a certain amount that you qualify for. Once you get the pre-approval letter, you can start looking at houses immediately. We suggest getting this letter before actively searching for houses online, because there is a lot of potential for heartbreak if you fall in love with a house beyond the amount you’re approved for. Even if you’re not actively looking, speaking to a few lenders and getting a rough sense of how much you can afford will provide you with a plan for the future without letting you search beyond your means.
We recommend calling a few lenders and shopping around. All lenders are in competition for your business, so you can speak to a few lenders and compare perks. We prefer local lenders because they likely will keep your loan in house and won’t sell it to a bigger company later; additionally, you can go into the bank and talk to a real human being if there’s a problem. But no matter which bank you choose, make sure their rates are competitive, closing costs are low, and the broker you speak to is available after hours and on weekends to help with any offers you might want to write. Here is our resource list that has lenders we’ve worked well with in the past and we know to be communicative and effectual.
Chat with us!
Steps one and two are often flipped and it is totally OK to chat with a real estate agent before you are pre-approved. I talked to Chandra about buying a house for nearly a year before I ended up getting pre-approved. We provide a lot of information about the current market, the entire home buying process, and generally get to know you and your goals. Developing a good working relationship with your agent is important because we are going to be spending a LOT of time together. But, as much as we love our clients, we are limited in our ability to help our clients find homes until we have the pre-approval letter. We can still sign you up for listing alerts in the areas you’re interested in, or give you more information about the whole process. But once you have a pre-approval letter, we can start showing you houses immediately in the price range you’re approved for.
Look at Houses
This should be the fun part! Once you’re pre-approved, we will compile a list of 7-10 houses in your price range currently on the market at that time. We will look at all these houses together and you get to see what you like or don't like. As we see houses, we will point out any red flags we see. Don’t be discouraged by our feedback, even if it’s pointing out negative parts about a house you love. Our job is to prepare you for the inspection process so there hopefully won’t be any surprises and you can make an informed decision.Even if you don’t want to put an offer in on any of these houses, this step is crucial for deciding what’s important to you and seeing what is currently on the market in your price range.
After we show you those houses that first day, usually we will go out to view new houses as they go on the market, depending on how fast houses are going pending. We can show you any house that is currently on the MLS, so don’t be shy about reaching out to go look at a house that caught your eye. The Portland housing market has historically been a very “hot” market, and houses priced well usually go pending in a few weeks (even within a few days), so it is important to be really on top of seeing houses you are interested in. We recommend being well-rested and fully caffeinated for showings, as well as wearing slip off shoes.
When I was shopping, I flew in for showings and crammed 10-12 houses a day for three days. I found my house on day two! Sometimes it takes a while to find a house you love, potentially months. And that’s ok! Typically, we’re looking for a feeling of excitement when you walk in the door and imagining your stuff—and your life—in that house. That’s when you know the house is a good one, besides checking most (if not all) of your boxes and being within your budget. Once you get that feeling, we know it’s time to put in an offer.
Putting in an Offer
Putting in an offer on a house is a big deal. You’ll be signing a contract that, once accepted, is legally binding. However, you should feel comfortable and prepared for it by this point. We will give you feedback about the house you want to write on, comps (comparable sales) in the area, and insight into what the sellers are looking for to make a competitive offer.
The offer itself has several negotiable terms. Most important is offer price. The strategy for offer price depends on the market and the property itself. Comps will give you a rough guideline of what the house is worth based on similar homes that have sold in the area. In a seller’s market, where inventory is low and demand is high, comps can often be outdated and offers go over asking and above what comps indicate. Time on market is a good indicator of what offer price should be: houses that are getting multiple offers in the first few days will likely go over asking, while if the house has been sitting on the market for a few weeks, we can offer list price or even below. In a hot market, we will often recommend shopping 10-15% below your max budget so you have room to make a competitive over ask offer if need be.
Some other parts of competitive offers includes earnest money, inspection period, and waiving contingencies. Your earnest money is 1-3% of the offer price of the home that is deposited to escrow (neutral third party) once the contract is accepted. Your earnest money is an up front part of your down payment that takes the house off the market and makes the contract “official.” If you break the contract at the wrong time, the sellers get to keep your earnest money. Thus, your agents job becomes to protect this money for you and if you want to back out, telling you when to do it. Generally, earnest money is around 5k. You can write in your offer for more, like 10k, which shows the seller you’re serious.
The inspection period is negotiable as well. Typically, you have 10-15 days to complete professional inspections and if you want to back out for any reason during this period, you can get your earnest money back. You can shorten this window to 6-8 days for a more competitive offer. You can even waive inspection, but we don’t recommend it. Some problems are hidden and expensive, and usually no house is worth the risk. Instead of waiving inspection, we can write in your offer you will take the house “as-is”, meaning you keep the ability to do inspections and back out if you want, but generally you’re prepared to take the house as you have seen it, barring the discovery of big issues.
Other contingencies can be waived as well. The appraisal contingency allows the buyer to back out of the contract if the appraisal comes in below what the offer price is. Typically, the price will either need to be lowered or the buyer pays for the difference in price if the seller is unwilling. Additionally, if you don’t want to pay to cover the gap, you can use the appraisal contingency to back out of the contract and get your earnest money back. If you have extra funds to cover a gap if it happens, waiving the contingency can be a very competitive advantage. Instead of waiving it altogether, you can also write in your offer a predetermined gap waiver, such as an additional 10k to cover any gap. Most of the time, appraisals come in right at offer price, but accounting for this creates a very competitive offer.
In a buyer’s market, or if you find a house that has been sitting on the market for a while, buyers have more power in their offer. You can offer list price or below, retain all of your contingencies, and even ask for credits or concessions from the seller. For example, in a seller’s market, typically buyers have to pay for their own closing costs. If the situation is right, you can ask for the seller to give you a credit so they will be paid for by the seller through the transaction. This happened to me—in a hot market, I found a house that had been sitting on the market 60+ days. We offered and negotiated a below asking price offer with closing costs and repairs included.
Sometimes it will take several offers before one is accepted. Don’t be discouraged! Even though we look for our clients to have a good emotional connection to any house you want to put an offer in on, it shouldn’t be the only thing guiding one of the biggest financial decisions of your life. Make an informed decision, put in an offer, cross your fingers. The right house will come along.
The information provided is for informational purposes only. Author is licensed broker in the state of Oregon.