Hey everybody, how you doing? Casey Smith here, with Matisse Realty.
I wanted to make a quick video to talk to you a little bit today about: What is the first step in buying a home or when you are considering buying a home?
A lot of times, we often get the idea we want to own a house and we go online and start googling homes for sale in, let’s say, Rancho Cucamonga, for example.
And then we often come across online search sites, the big search sites like Zillow, Trulia, maybe Redfin and we'll start clicking, we'll start looking at homes for sale and we see some really beautiful pictures and some really fancy descriptions about the house and looks really appealing and we start to get kind of drawn in.
And you'll often, you'll take note, you’ll look especially like on websites such as Zillow, you'll look and see estimated monthly payments and you'll see a breakdown of what your payment might look like on a house and then it's estimate of what's the house worth, right?
So, the thing to be careful for when we see these online estimated payments though, is often times they're using some of the lowest interest rates out there on the market and not really reasonable interest rate that you might expect.
So, that monthly payment can actually look a lot lower than it might really be.
The other thing is a lot of these websites like Zillow etc. rely on getting their information from software programs that real estate agents use, especially called MLS.
And a lot of times the agents can decide, if they want to allow the homes for sale to hit those major sites, right?
So, you're not necessarily seeing all of the homes that are currently for sale.
The other issue is with these big sites is they don't necessarily get updated, so when a house goes into escrow it's taken off the market, the Zillow might not get that update, so I get a lot of calls about properties - potential buyer gets really excited - and then they talk to me about the address, I look it up and I have to let them know that unfortunately the house sold several months ago and it's not on the market.
So, that's a thing and you hate letting people down.
So, just something to be aware of.
But really - what is the first step?
So really, what it comes down to is of course you need to understand your needs.
What is your goal with purchasing real estate?
Is it the right time?
It's a major - one of the biggest financial investments you'll ever make in your life - so you'll have to decide: Is it time to buy? Do I know exactly where I want to live? How long do I want to be there? What type of home am I looking for? Is this something I'm going to be in two, three years- potentially later use it as an investment property and rent it out or is it going to be a home I’m going to buy and planning to live for ten plus years or forever.
So, maybe it's something larger.
Do you have a family now or are people going to live with you or is it something that you're looking small, that you'll work into, right?
So, those are all things you have to look at, then of course you need to look at what's your monthly budget?
How much of a payment can you afford just then and - or would you like to spend - and how does that relate to the current pricing of what you’re looking for in real estate and then does that align with your budget?
You have to take into account your annual income, how much you earn every month, every year.
Does it change? Does it go up and down? To seasonal jobs, over-time and then what's your expenses, what's your bills, do you have, you know, we all have credit cards, student loans, parking and things like that.
And so, you know, obviously that sounds kind of intimidating, so how do I know, is it time to buy and what not?
So, only you're going to really know is it the right situation, right time for you?
But there's people and partners like myself, that can definitely - are here to help you - and be a resource for you, to make that decision, if it's the right time to buy and if so, where and what type of home are you going to look at? Is it a house? Is it a condo? Is it a town home? Is it, you know, possibly a manufactured home.
There's all kind of things to take into account, depending on the situation.
So then, we, I work with great lender partners or loan officers, we call them, and that’s going to be the major first step - if I was to tell you what’s the first step in buying a home- it's really going to come down to you meeting with a loan officer and going over a lot of the things, I just described.
What's your employment look like?
How long have you been at your employer?
What's your annual salary or income that your making and do you have different investments and different income things that you have coming in?
And then looking at what kind of debt you have.
What your monthly payments as far as credit cards, loans, car payments and things like that, right?
So, another big thing too is - the loan officer would work with you - is needing to look at your credit and run a credit report.
Similar to buying a car right?
Going to collect a lot of information from you, get permission to run your credit and needs to see what your credit score is and also look at what your obligations are as far as debt goes.
So, then what happens is there's an analysis done, bunch of stuff behind the scenes and come up with your monthly debt to income ratio.
So, how much monthly debt do you have compared to what your income is?
And then there's a formula ratio that's developed and that will determine if you are allowed to be approved or a home loan - if you are going to utilise a loan to purchase a house which most of us do.
Which if you're approved to do so and then secondly how much you're going to be approved for, as far as your purchase price goes.
So, if that ratio is done and comes up with a number and let’s say you’re looking at a house of three hundred and fifty dollars we're going to need to figure out what's that payment going to be, every month on a three hundred fifty dollar home and then based on your debt to income ratio, can you qualify for that amount?
So, there’s a lot more that goes into it but that’s kind of the basic process that will happen and of course, there's certain minimum credit scores that you'll need to have, depending on the type of loan you use.
Certain employment history.
Sometimes you need to be with your employer two years, other times may have been in school and let’s say you went to several years of nursing school for example and graduated, got a really good position now you may qualify based, on your time in school and your current job and income.
So, there's a lot of stuff to be looked at and analyzed, but that's what the loan officers going to work with you, collect all the information, educate you, work with you on a comfortable monthly repayment and budget and then work to see if they can get you qualified.
Now with that, when you are, let's say you are qualified to buy a home - congratulations to you - when we go out and look for a home and find a home, your - depending on the type of loan - often times going need to have a down payment and pay for what's called closing costs.
So, closing costs are fees that are, go towards paying for escrow, different notary, when you go to sign loan paperwork, there's a lot of fees that happen during the real estate process and that's where your closing costs comes from.
Now there's often times we're able to structure programs that we can get your closing costs covered, whether it comes from a credit that the lender gives you, when they're giving you a loan.
Sometimes the Sellers are willing to credit you some of their money from their - from the sale of property - to help you with the closing costs and then other times it could come from money you've saved up and will pay towards your closing costs.
There's also like I mentioned, down payment.
So, let’s say you are doing a FHA loan.
FHA loans require that you put three and a half percent down on a purchase price.
So, let’s say that home price is three hundred fifty dollars, you would do a three hundred fifty thousand, times three point five percent and come up with your down payment amount.
Now, there are types of loans, BA loan for example where you may have to put a little to zero money down.
There's also certain times people, maybe they're selling a house and buying a new house and want to put some more money down, to lower the amount they're going to borrow and they maybe doing what’s called 'conventional loan' of putting about twenty percent down of the purchase price.
So, there's advantages to every type of, you know, type of loan and how much you put down and it's all going to, again, depend on your situation and what kind of payment you're comfortable with and approved for.
So, now, the great thing is, especially for first time buyers, there's a lot of down payment assistance programs out there.
So, we have some different resources that can actually contribute and give you money to help with that down payment, closing cost you're going to need.
Now, you do often times have to come out with a little bit of money from your savings, maybe you have some money put away in a 401K that you can access, there's other times people get gift money, maybe you have a nice grandma or grandpa out there that's willing to give you some funds.
It can't be a loan, but let’s say they're willing to give you, let’s say three thousand dollars to help you go out and buy that brand new house.
You know, you say thank you and do some paperwork and get you covered that way.
So, there’s a lot of different ways and we try and combine these programs to see what’s best for you as the client and the home buyer to see if we can make it work.
Now, let’s say there's things on your credit report - we all have stuff happen - that maybe your scores not where it needs to be to get qualified or maybe you're not approved for the amount of money that your - you wanted to go for.
So, at that point we'll definitely continue to work with you, come up with a plan, maybe you need to increase your credit score a bit - so we'll give you things that you can work on to do that.
Maybe it's just taking some time to save some extra money, pay off a little bit of debt and things like that and we'll get you a plan and maybe we determine - "Do you know what? Now's not the time, but let's try again in a year and maybe you go rent for a little bit" or "Hey, maybe you know what, your approved! Let's get you going now and sometimes maybe your approved for more than you realize" - so, we'll have to consider what's best for you at that time.
So, that sort of sums of the first step, it's meeting with that loan officer and we call it the pre-approval process.
You might hear pre-qualification or pre approval, very similar, and what we want to do is get you ultimately a pre-approval letter, where the loan officers collected information such as your employment history, going to look at your W-2's, Form 1099’s for the last few years, going to look at your last past tax returns for the past few years, going to look at a few months of banks statements, going need to get your social security information, driver’s license, permission from you to run that credit report and some other basic information - but that kind of sums of what's going to be collected - and then that analysis is going to be done to determine, can you get pre-approved?
If so, for how much?
And that ultimately gets you what's called a pre-approval letter saying that your information has been reviewed, based on the current information that the loans officers collected, they feel that you would be later approved for a home loan for this amount.
That letter is critical to us actually going out and once you select a home being prepared to put an offer down on that property.
If we're going to go out and find a home and submit an offer, if we don’t have that pre-approval letter the sellers and the agents reviewing that offer, are not going to take that offer seriously, because they don't want to get, accept your offer, get an escrow and later find you're not qualified to purchase that house.
So, that letter arms you with the ability - "Hey, I'm a willing and able buyer, ready to go."
They're going to know that your situations been reviewed, have that approval and be much more willing to accept your offer to purchase the home.
So, that really sums up the first steps in getting that pre-approval.
If you have any questions for me, whether it’s just starting out buying a home, want to know about the real estate market, where we're at and where it's going.
Questions not related to real estate.
I would love to connect with you, if you would like to start sitting down and discussing a plan, whether it’s a purchase now or later.
Let's say you're ready to start that pre-approval process, like I told you, have some great lender partners that I can get you connected with.
If you need some down payment assistance information we can definitely share that with you as well.
Let's say you are a current home owner, considering moving up to a larger home, maybe your family's growing - congrats if it is - or possibly you'll looking to downsize, maybe you've get kids, relatives that have moved on and the house is too big and you'll looking for a smaller home or maybe you're looking to do an investment property, considering moving to a new home and renting your current house out, or staying in your home, purchasing a second property - whether it’s a vacation home, rental property - I can definitely connect with you there as well.
So, feel free to comment, question, let me know how I can help and stay tuned for future videos about the real estate market and other topics that may come our way.
Thank you so much.
Casey & Sarah