If you are thinking of making the switch from renter to home owner, undoubtedly you have been considering costs: Can you afford to buy? How much home can you afford? Do you have enough down-payment? What will your monthly payments be? But as a newbie to world of real estate, what other important factors should you be taking into consideration? To find out, we interviewed our broker Elizabeth McDonald of TRG Realty Company and owner of The Rental Girl. As the owner of a leasing agency, Elizabeth works with a lot of 1st time home buyers. Here is our interview:
Q: When a renter approaches you about purchasing their first property, what do you recommend to get them started?
ELIZABETH: My first advice to a renter is to get pre-approved with a lender. The modern day buyer is often very savvy. They’re tech smart and they’re doing research on their own and they’ve come up with an idea on how much of a loan they can get. They are so eager to get started, they want to just jump in and start searching.
My advice is for you to contact and hear what the lender says. The lender will calculate variables like income and debt and see at what amount you can qualify. A lender can see the whole picture and a good lender will know what programs you can qualify for. You may actually qualify for less, or maybe even more than what your preliminary research led you to believe.
If someone is thinking about buying and in the ‘getting prepared’ stage, I recommend they attend one of The Rental Girl’s quarterly Renter to Buyer seminars that we hold with local lender Richard White of Arcstone Financial.
Q: What if the buyer is already pre-approved with a lender, do you still recommend they get approved through your preferred lender?
ELIZABETH: Often when renters approach me to help them find a home, they’ve already talked to their personal banker about being approved. Of course it’s their choice, but I always advise them to get pre-approved with a lender I have worked with in the past. A lender I know and I have confidence in. I work with certain lenders for a reason. They consistently are able to get my clients a lower rate and they consistently close. So many buyers are getting their offers accepted in this market and then they’re having to back out because they’re not able to get a loan. It’s a big problem. Many banks are passing out pre-approval letters like pancakes. And then two to three weeks in to a transaction, telling the buyer “sorry, we can’t get you this loan.” The buyer then has to back out and lose the house. It’s not cool. And it’s easily preventable if the buyer has a back up lender who is ready to go. I feel more comfortable with buyers filling out two applications, “double apping,” getting a second opinion and becoming pre-approved through a lender who can get the job done.
Q: How can buyers qualify a lender? How do you know which one is the best, or which one can get the job done?
ELIZABETH: It’s difficult to know ahead of the process. A lot of times the buyer wants to go with the man or woman they like – someone who gives them a good impression. In my experience, you should go with a lender who can get the job done. And those lenders tend to be very busy. They might be hard to get a hold of and they might need time to get back to you. And because of that they may not give the best impression. They’re busy for a reason and they’re worth the extra wait.
The last thing you want to do is work with a lender who is inexperienced and didn’t know what questions to ask. It’s probably one of the biggest mistakes I see first time home buyers make. They pick the guy they connect with and get along with. I tell my clients to take experience into consideration. I’ll say, “yeah, this one lender may be taking a while to return your phone call… it’s because he’s working on your loan.”
The best way to qualify a lender is to work with a real estate agent who knows what they’re doing. They’ll refer you to the various people who can perform and get the sales process completed.
I see a lot of clients come to me and they’re searching Angie’s List and Yelp for referrals. Ok, that’s a trendy way to do it. You can also talk to friends who have gotten loans recently. But ultimately, your real estate agent does multiple transactions every day and throughout the year. You need to be listening to your agent. I would think twice about going to the Internet and searching for a referral. Find a good, professional real estate agent and you will get good referrals. That’s one of the reasons why you work with a real estate agent.
Q: You mentioned having your clients “double-app” with your preferred lender. Buyers will also find that the listing agent or seller will request the buyer to “double app” with their preferred lender before the offer is accepted. What does it mean to “double app” and what does it entail?
ELIZABETH: What this means is that the borrower is asked to go through the loan application process with a back-up lender. The reason real estate professionals ask buyers to do this is because it gives the real estate agent or seller that much more confidence that the loan is going to go through.
Some buyers don’t want to go through the hassle of going through the loan application process all over again. I like to explain that it’s not going to be a negative hit on your credit and you’ve already got your financial paperwork together from the first approval. It’s a matter of emailing your paperwork over. You can even just ask your original lender to forward the loan package to another lender. This is a common request and they do it all the time, so don’t worry about hurting their feelings.
Other times, buyers feel loyal to their banker or they feel they have to go with the first lender they apply through. However, it’s common to shop around. The lenders that I work with will often tell clients to get a second opinion because that gives the buyer that much more confidence they’re getting the best rate. It’s common and it’s a general practice in this industry. And most importantly, it’s in the buyer’s best interest because a second application serves the buyer if the first lender doesn’t perform. Which unfortunately happens all the time. I can’t tell you how many times buyers have almost lost out on a home because their lender of choice wasn’t able to close. If you lose out you are back to square one. I always recommend my clients double app with my preferred lender. This is advice that any experienced agent will give you.
Q: What if a lender pre-approves a buyer for an amount with a monthly payment higher than he is comfortable with or can actually pay? Does this mean the lender made a mistake?
ELIZABETH: It happens a lot and it means you are a really qualified buyer who has good income and credit! The lender did not make a mistake.
The lender may approve a buyer for 1/3 more than the buyer is comfortable paying. That simply shows the highest level the buyer is qualified for. Generally in this situation, the lender’s going to work with the buyer to see what they’re comfortable with and see the monthly costs, including property taxes and insurance.
I like to discuss all purchasing possibilities with my client. I think there is this notion that we have to own a home. That is a goal we strive for. Becoming a home owner. A buyer may be on a track of purchasing their first home and they’re focused on that. They may not have even considered that there are other options. When a buyer is approved for more than what they expected, I like to bring up the different possibilities that are now available to this buyer – like buying a duplex or a triplex. It’s a great investment opportunity. Yes, maybe they can’t afford that high of a mortgage on their own, but I’ll show them how they’ve got income coming in to help pay the mortgage and expenses. I’ll outline the tax benefits and the higher return on their investment. I help them look creatively at their options and open up the door to possibilities the buyer may not have thought of before. My first purchase was an investment property so I love discussing this possibility.
Buying a multi-unit building is a great opportunity, especially in Los Angeles, and it can be a good way for a buyer to leverage the debt and make a financially sound investment. You can even get a small building with a FHA loan, only 3 ½ percent down. Purchasing an investment property with as little money down as possible can be an excellent way to leverage your money and make it work for you.
Q: Once a buyer’s offer is accepted, when should they expect to deposit their funds? What kind of expenses should a first time home buyer anticipate?
ELIZABETH: The buyer has three days to make the earnest money deposit and that is typically three percent of the purchase price. This deposit can be made by wire transfer or check. That amount will get applied to the down payment and the closing costs when escrow closes. The rest of the down payment has to be deposited before the close of escrow. A first time home buyer should also anticipate closing costs which can average 1.5% of the purchase price. Unanticipated costs at close of escrow can include impound accounts for taxes and insurance, or upfront HOA dues if buying a condo. For an impound account, when the lender pays the property tax and insurance, they will require upfront property tax and insurance payments to build up your reserves. The other costs to anticipate are inspections. You can do one to a countless number of inspections, so the costs will vary. What inspections you perform is specific to your needs and the property you are purchasing.
Q: What other financing or money related advice do you have for renters who are thinking about jumping in to homeownership?
ELIZABETH: If you’re thinking about purchasing your first home, I always encourage renters to believe that it’s a possibility. It’s easy to fall into this trap of “Oh, I can never get there and it will never happen.” But you have to think about it in a positive way. The first step is to think like a homeowner, then talk to a lender and pull your credit. Find out from their perspective what you need to do to get qualified. Do you need to save? Fix your credit? Talk to a financial counselor about saving money.
It will never happen without that first step of deciding, “This is what I want to do.”
Elizabeth McDonald is broker/owner of TRG Realty Company and The Rental Girl, a boutique real estate firm in Los Angeles. If you would like more information about purchasing your first home, contact Elizabeth below:
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