309 Horseshoe Ln, Downingtown, Pa 19335Asking Price- $279,0004 beds, 2 baths, 1768 sq ft, .86 acres, 2 car garage.Very rarely does a home come up for sale in this neighborhood under $300,000.
Complete Guide To Buying Your First Home PT 1
Complete Guide To Buying Your First Home
How to Navigate the Complex Process of Finding & Purchasing Your First Home
Shawn Connors, RealtorⓇ
Shawn Sells Greater Philadelphia
The stars have aligned and you have decided to buy your first home. Congrats! Now the big questions are, “what’s next and where do I start?” Buying your first home is a big decision and with this big decision comes a lot of responsibilities. There are also many different moving parts that have to be placed together in order for you to be ready to make your purchase. You have to figure out how much you can afford, what kind of loan should you use, what style home you want, how many beds/baths you need, if you should get a fixer upper or something that is move move in ready, etc. As you can tell, this is no simple task and all of these items and more need to be addressed prior to your search. With all of these important topics to discuss you need to know where to start and what to focus on first. This guide was put together for the intention of giving first time home buyers a resource that can help them through each step of the buying process. Sit back, relax, and get ready to take some notes as you read about purchasing your first home!
I think it is necessary to look at the mindset first before we get into the nitty gritty and step by step processes. Preparing yourself ahead of time and setting your expectations up front will go a long way throughout the journey. There is no way to sugar coat this: buying a home can be one of the most exhilarating yet stressful- moments of your life. Owning a home is a big commitment, it almost never works out exactly as your plan and it is one of the largest financial investments you may ever make. This is why it is important to try to get into the right mindframe before you begin. If you have an honest discussion with yourself and/or your spouse and realistically evaluate your goals and objectives you can certainly save yourself a lot of aggravation down the road. I think a good attitude to have is a positive one. Do your best to remain calm and level headed to ensure you will not lose your mind over every little thing that does not go your way. I cannot stress enough the importance of being mentally prepared because when you think about spending hundreds of thousands of dollars on one item, it can start to get very worrisome. Please don’t take this the wrong way or see it as something that will push you away from owning your first home. This is simply to try and help you get into the right state of mind and make the process easier for you!
Choosing a Real Estate Agent
Now let’s get down to the nitty gritty details. The first - most important - step is to find the right agent that will help you find your dream home. When choosing an agent, find one that is knowledgeable, trustworthy, and most important someone that you like. While you may be able to hire the most experienced agent in the area, if your personalities clash he or she may not be the right fit for you. Keep in mind you will most likely be spending several hours with this person touring homes, discussing personal details of your finances, and you will be trusting them with one of the biggest purchases of your life. Therefore, before signing a contract it is important to sit down and get to know the agent on a professional and personal level. Don’t be afraid to ask a lot of questions. You want to be well equipped with all the necessary information you need in order to make an informed decision. Choosing a competent agent will be one of the best decisions you will make because he or she will guide you every step of the way. As a professional real estate agent, I have seen first hand how beneficial my knowledge, experience and expertise is to someone who is green to the home buying process and does not know where to begin. Interview as many agents as you need to in order to find the right fit, or just call me first!
What Can I Afford?
This is a vital step because it will allow you to see what price range you should be focusing in and what makes the most financial sense for you. Buying a home should not force you to become broke afterwards. All too often you see people purchase a home and then shortly after they cannot afford to do anything else and become “house poor.” Don’t let this be you. Be strategic about saving your money and realistic about what you can afford.
The best advice I can give you here is to live within your means! Just because you have been pre-approved for a $500,000 mortgage doesn’t necessarily mean you should buy a $500,000 home. Look at your pre-approval amount as the ceiling or the max of what you can afford. A higher mortgage amount means a higher monthly payment too. Interest rates are still extremely low and lending institutions these days have a plethora of capital they need to lend. These factors combine to result in higher dollar amounts for mortgage approval. So don’t fall into the trap of buying a home that is out of your living means just because the bank will finance it for you. Living within your means will allow you to set aside some additional money that can go towards the unexpected costs that will undoubtedly arise after you purchase a home.
Start Saving for a Down Payment
Buying a home is no small feat or expense as we have mentioned earlier. For a conventional loan it is common to put down anywhere from 10%-20% of the purchase price. In addition to conventional loans there are FHA loans and first time buyer programs which allow buyers to put down a much smaller down payment, sometimes as little as 3%. Putting down less than 20% typically means you will have to pay for private mortgage insurance which will bring your monthly payments up. In addition to down payments, a general rule of thumb for closing costs is 3-5% of the purchase price. For example, if you purchase a $200,000 home with an FHA loan at a 3.5% down payment, you can expect to spend about $13,000-$17,000 in total costs.
A few good tips to start saving for your next or first home purchase is to set aside any work bonuses or tax returns, open a new bank account that gets a weekly direct deposit of 5%-10% from your current income, stop eating out as much, start cutting back where possible, and create a monthly budget that allows you to track your progress to see where you can improve. Don’t get sucked into the lie that it is “too expensive” to buy a home. Saving money is very psychological. Once you start putting away a little money at a time before you know it, you forget that it was even there to begin with.
Next, you will want to find a great lender that you can work with. The best way to find a great lender is to get a referral from your agent or from someone who has recently purchased a home and has used the lender. Once you have chosen your desired lender you will need to follow the pre-approval process. Now I am not going to take a deep dive into this but I will give you an overview of the 5 items you’ll need for a pre-approval;
Proof of Income- W-2 statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent years of tax returns.
Proof of Assets- You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need a gift letter to prove that this is not a loan.
Good Credit- Most lenders today reserve the lowest interest rates for customers with a credit score of 740 or above. Below that, borrowers may have to pay a little more in interest or pay additional discount points to lower the rate.
Employment Verification- Your lender will not only want to see your pay stubs, but is also likely to call your employer to verify that you are still employed and to check on your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Lenders today want to make sure they are loaning only to borrowers with stable employment. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
Documentation- Your lender will need to copy your driver's license and will need your Social Security number and your signature allowing the lender to pull a credit report.
Getting pre-approved prior to searching for homes can save a lot of heartache later, so completing this step early on is a good idea.
There are several different loan options of out there; FHA, VA, USDA, Adjustable Rate Mortgages, Jumbo Loans, Interest Only Loans, and Conventional Loans. I want to focus on some of these that will be beneficial to first time home buyers.
FHA Loans- Insured by and named after the Federal Housing Administration, FHA Loans offer a low down payment, flexible qualifying requirements and are tailored to fit a variety of needs. FHA loans are perfect for homebuyers with less than stellar credit or with less cash available for an initial down payment than usually required. Another advantage of an FHA loan is if you want to sell your home, the buyer can “assume” the loan you have. This is one of the most common loans used by first time home buyers because you can put as little as a 3.5% down payment.
VA Loans- Veteran Affair or VA loans offer military veterans and active military members 100% financing and have flexible requirements and qualifications. These mortgages do not always require a down payment and are guaranteed by the Department of Veterans Affairs, so they do not require mortgage insurance. There's also no minimum credit score requirement which provides added flexibility to those servicemen and women who qualify.
USDA Loans- Backed by the United States Department of Agriculture (USDA), USDA Loans offer 100% financing, minimal down payment, competitively low rates and flexible income requirements for mortgages located in rural areas. There are several types of USDA loans that help low or moderate income borrowers buy, repair or renovate a home in a rural area.
Conventional Conforming Loans- Loans that are generally approved for a term of 15 or 30 years. A 15-year loan provides savings by shaving off the length of time you pay interest on the loan. A 30-year mortgage offers more time to repay the loan and generally provides the homeowner with a lower monthly payment amount. Fixed Rate Mortgage Loans are desirable because the interest rate and payment amount will not increase over the life of the loan. With these loans, generally borrowers will put down anywhere from 10%-20% and now for some conventional loans you can put down as little ast 3%.
Talking with your lender and discussing what your best option is will be vital to your home search.
The Home Search
Now that you have a grasp on the early stages of the home buying process let’s dive in to find your perfect home!
Choosing The Right Home
I think going into the home search you already have a good idea of what kind of home you are looking for. Some of the main factors you should look at are:
Style of home- Ranch, Colonial, Cape, Split Level, Bungalow, Farmhouse, Victorian, etc.
How many beds?
How many baths?
How much square feet?
How big of a lot?
Fixer-upper or move-in ready?
Basement- finished or not?
Make a checklist of your must-haves, nice-to-haves, and other essentials. Then print copies of this checklist. Every time you visit a home, take the checklist along with you; take photographs so you can cross each item off your list. If you fall in love with the house and your checklist shows that the house has none of your must-haves, it will at least make you pause and think twice about what you truly need. Having this general idea of what you are looking for and having a written checklist will make your home search much more efficient. You have to be able to compromise as well. If you are searching with your partner it is almost certain that you will have differing desires than they will. Also, you may not find a home that meets every single checklist item that you have but it meets most and you can add the rest later if you wish. Being flexible and not overly picky will help you to find the best home for you and your family. If you are buying a new construction home then you have the ability to be more picky and get exactly what you want!
Become a Neighborhood Scout
An important part of buying a home is scouting the neighborhood beforehand. Sometimes buyers get so excited about moving into a certain house that they forget to do their due diligence on the actual neighborhood. If you find a home you like, it would be wise to go walk the streets at a few different times during the day, maybe around midday, dinnertime, and then evening to see if you feel comfortable being there. What if you view a home at 10am, walk around the area, fall in love and purchase the home only to discover traffic backs up down your street everyday at school drop off and pick up time? This may seem like a minor issue, but for people with busy schedules the added daily hassle could be a nightmare. Bottom line is this - do ALL of your homework, not just on the house but on the neighborhood as well. And while you’re at it, it might be worthwhile to scout your neighbors.
Buy a Home For Tomorrow
It is easy to look at properties that meet your current needs. But if you plan to start or expand your family, it may be preferable to buy a larger home you can grow into. Consider your future needs and wants and whether this home will suit them. You can also consider looking for a home that you could always add on to later. If you are buying a 3 bedroom home and you think you’ll someday need a 4th bedroom, either for a child or an in-law, look at homes that have a basement that can be finished or an attic that can be converted into another bedroom. A benefit of creating more usable space such as another bedroom is that it will in turn add value to your property, which means more equity for you!
Be Mindful of All the Expenses
When budgeting for your home purchase, don’t stop with principal, interest, taxes and insurance; add in utilities, cost of commuting, and upgrades. Call the utility companies that service the house you are considering and ask for an estimate of what the cost will be, whether there are any budget plans, etc. Many times you can ask the seller what their bills usually run them a month to get a better idea. Will the gas budget for your car go up if you are moving further away from the places you frequently visit? This is one aspect that most buyers don’t even consider when purchasing a home. Also, don’t forget to put some money aside for future repairs because almost without fail, once you buy a new home, something will go wrong within the first year. Budget all of these expenses and see if you can still afford the house and the neighborhood. This is called smart buying and you will thank yourself later if you take into account all these factors.
Buy With Logic, Don't Buy on Emotion
This may sound a little apathetic, but the reality is you are making one of the biggest financial decisions in your life and if you overpay for a home it may come back to hurt you in the end. Also, I do understand that buying a home is a very emotional process, especially when you consider all the time your family will be spending there for years to come, but it is an even bigger financial commitment.
Consequently, as emotional as it can be you still have to take into consideration that you cannot afford to make a poor financial decision. You may find your dream home that is $100,000 above your budget and you may be able to qualify for it, but that doesn't mean you should buy it. Your mortgage payment, insurance cost, and most importantly your risk will all go up. Just because the market is up right now does not mean it will stay that way forever.
So in short, be smart and logical in your buying decisions. Make sure you are working with a knowledgeable agent and lender who can guide you in the process to help you make an economically smart decision when you purchase your new home.
Writing an Offer
After you have found the home you just can’t live without, the next step is writing the offer.
Be Prepared to Make a Strong Offer!
Especially in this current market, it is important to be ready to quickly make a strong offer when you find a home that you love. Having a solid offer with a sufficient deposit can separate you from the pack and land you the deal in a multiple offer situation. I believe that a strong deposit is roughly 2-3% of the offer price. So if you plan to make a $300,000 offer I would encourage you to give a deposit of $6000-$9000. Strong offers accompanied by a strong deposit speak volumes to agents and to sellers and show that you are a serious buyer who can execute.
Along with your offer you should also include a BFI, or a Buyer’s Financial Information statement. This statement gives a run down of your financial situation and shows the seller that you are well qualified to purchase their home. In a multiple offer situation the seller will sometimes take a lower offer if the buyer submitting that offer has a more appealing deposit, provides a BFI, and can close more quickly. Sellers do not want to risk wasting time by going into escrow with a buyer who ultimately can’t follow through with the purchase. Therefore, presenting yourself as a serious and capable buyer makes you and your offer more appealing to sellers.
Helpful Tips When Making an Offer
The more you ask from a seller, the less likely it is that he or she will accept your offer. Don’t ask for closing assistance or a home warranty if you have any reason to believe you are in a competitive situation.
Add value to your offer in ways that don’t cost you a penny but may save the seller some bucks. For example, can you shorten the closing date to ten days if the seller is in a hurry? Conversely, if the property is owner occupied, a longer escrow whereby you will assume the property three days after the close of escrow may be preferred.
Play the emotions card. Every family that has lived in a home more than a few years develops an attachment to it. In your offer letter, promise to take care of the places that were so special to the seller’s family as well as the property as a whole. Include an invitation to visit. Congratulate them on the wonderful job they have done taking care of the property and promise to do so as well.
More often than not, when a buyer submits an offer they tend to want some sort of seller's assist or money back at closing. This is very typical and it is to be expected by most people who make an offer on a home. Where buyers will make mistakes is asking the seller to repair almost all the items that come up on the inspection report. This is a huge mistake in a seller's market because it is likely that the seller has had a lot of interest and multiple offers but chose to go with yours. If they have this kind of leverage than the last thing you want to do is have them make a bunch of minor repairs and drive them away with your many requests. Stick to only asking for big ticket items to be repaired. If you see in the report that there is a leaky faucet, just know that it is something you will have to fix when you settle on the home. Don't push the sellers away with outrageous requests especially if it is something you can handle by yourself.
Congrats on your accepted offer! Now the fun part begins during the due diligence process. First step is to get a home inspection done.
What is a Home Inspection?
A home inspection is an all-encompassing examination of the condition of a home. A certified home inspector is a professional who will conduct an inspection of the general condition of the home. A good home inspection will assist a buyer in understanding exactly what they are about to acquire. A home may look move in ready, but an inspector will cover features of the house such as electrical wiring, plumbing, roofing, insulation, as well as structural features of the home and may unveil issues that are not noticeable to the buyer’s eye. As a buyer, you are making a vast investment, and it is important to understand exactly what you are purchasing. Having a certified home inspector conduct a thorough inspection of the prospective property, could be compared to taking out an insurance policy against all potential operating costs.
What Type of Inspections Are There? Take a look at the following contract items in regards to inspections to learn more:
General Inspection- There are many different types of home inspection processes that you may want to conduct before the purchase of a home. First and most importantly, you will need a general or residential inspection performed on the home. The certified home inspector will inspect the structure, exterior, roof, electrical, plumbing, HVAC, interior, insulation and ventilation.
Termite or WDI (Wood Destroying Insects)- A certified inspector will check for signs of structural damage caused by wood boring insects. These insects may cause problems down the road. A general home inspector may perform this inspection for an additional cost, or recommend a WDI inspector to the buyer.
Radon Test- Radon is a radioactive gaseous element formed by breakdown of radium, that occurs naturally, especially in areas over granite, and is considered hazardous to health. Radon gas from natural sources can accumulate in homes, especially in confined areas such as attics and basements. Radon levels fluctuate naturally, therefore testing for high levels is important. A radon test consists of using a radon kit that is be hung or placed in the lowest habitable floor of the house for two to seven days. After the kit sits for the required amount of time, the inspector then sends the kit to a lab for analysis. If a radon test comes back high, some ways to alleviate the radon include sealing concrete slab floors, basement foundations, and water drainage systems. These fixes can be costly, suggesting the importance of radon inspections.
Deeds, Restrictions and Zoning- Buyers may investigate easements, deed and use restrictions (including any historic preservation restrictions or ordinances) that apply to the property and review local zoning ordinances. Buyers may verify that the present use of the property (such as in-law quarters, apartments, home office, day care, commercial or recreational vehicle parking) is permitted and may elect to make the agreement contingent upon an anticipated use.
Water Service- Buyers may obtain an inspection of the quality and quantity of the water system from a properly licensed or otherwise qualified water/well testing company. If and as required by the inspection company, Seller, at Seller’s expense, will locate and provide access to the on-site (or individual) water system. Seller will restore the Property to its previous condition, at Seller’s expense, prior to settlement.
On-lot Sewage (If Applicable)- Buyer may obtain an Inspection of the individual on-lot sewage disposal system from a qualified, professional inspector. If and as required by the inspection company, Seller, at Seller’s expense, will locate, provide access to, and empty the individual on-lot sewage disposal system. Seller will restore the Property to its previous condition, at Seller’s expense, prior to settlement.
Property and Flood Insurance- Buyer may determine the insurability of the Property by making application for property and casualty insurance for the Property to a responsible insurer. Broker for Buyer, if any, otherwise Broker for Seller,may communicate with the insurer to assist in the insurance process. If the Property is located in a specially-designated flood zone, Buyer may be required to carry flood insurance at Buyer’s expense, which may need to be ordered 14 days or more prior to Settlement Date. Revised flood maps and changes to Federal law may substantially increase future flood insurance premiums or require insurance for formerly exempt properties. Buyer should consult with one or more flood insur-ance agents regarding the need for flood insurance and possible premium increases.
Property Boundaries- Buyer may engage the services of a surveyor, title abstractor, or other qualified professional to assess the legal description, certainty and location of boundaries and/or quantum of land. Most sellers have not had the Property surveyed as it is not a requirement of property transfer in Pennsylvania. Any fences, hedges, walls and other natural or constructed barriers may or may not represent the true boundary lines of the Property. Any numerical representations of size of property are approximations only and may be inaccurate.
Lead-Based Paint Hazards (For Properties built prior to 1978 only)- Before Buyer is obligated to purchase a residential dwelling built prior to 1978, Buyer has the option to conduct a risk assessment and/or inspection of the Property for the presence of lead-based paint and/or lead-based paint hazards. Regardless of whether this inspection is elected or waived, the Residential Lead-Based Paint Hazard Reduction Act requires a seller of property built prior to 1978 to provide the Buyer with an EPA-approved lead hazards information pamphlet titled "Protect Your Family from Lead in Your Home," along with a separate form, attached to this Agreement, disclosing Seller's knowledge of lead-based paint hazards and any lead-based paint records regarding the Property.
Leverage Your Home Inspection
After your inspection you have a period where you will submit your Reply to Inspections in order to have certain items fixed or ask the seller for a financial incentive instead of doing the work themselves. Again, this is not the time to ask for EVERYTHING to be done on the list. Nothing is more unappealing to a seller than having a picky buyer want every little thing fixed. Unless the home you are buying is a new construction or fully renovated home, there will be issues. You should focus on the most important items that are either a safety concern or a big ticket fix in the
Shawn Connors is a licensed real estate professional that services the Philadelphia & Greater Philadelphia region. Shawn was born and raised in Philadelphia but has taken up new roots in Chester Coun....