What to Consider When Buying Your First Home

Are you ready to buy your first home? First off — in case no one has told you already — I’m so proud of you! Purchasing a home is a sign that you’ve reached a level of financial stability that some people never do, so give yourself a quick pat on the back. Then sit down and get ready to take some notes, because this is serious business and the more you know…well, you get the idea.

Buyers today have their fair share of struggles — rents are high, but so are home prices. Salaries aren’t growing at the same rate as inflation, interest rates have risen a lot over the past few years, and many are having to wait longer to purchase their first home than their parents did. But if you’re confident that you’ll be living in the same area for the next 2-5 years, owning a home is the most common and effective way to build wealth. I’m not just saying that because it’s my business: the gap in wealth between homeowners and renters has always been significant, but has been growing steadily over the past 30 years.

Step one should always be evaluating your financial position: How is your credit? How much of a mortgage can you qualify for? What kind of monthly payment are you comfortable with? How much money do you have saved for a down payment? What types of loan options are available to you? Do you qualify for any down payment assistance or grants to help with closing costs? A good real estate agent can put you in touch with local lenders who will be happy to discuss all of the options available to you, so you can determine your desired budget and get a better idea of how much money you’ll need to have on hand. They can even help you if you’re not ready: many lenders offer advice on debt reduction and improving your credit score to make sure you’re as qualified as possible when the time comes.

Next up, interview some buyer agents if you don’t already know one that you trust. Have an honest conversation about what to expect in the current market in terms of competition, pricing, and seller concessions. Find out if they only work in specific areas or price ranges, if they have scheduling conflicts that will make it difficult to meet up for showings, and if they understand your needs and wants. How much do they expect you to pay in commission, and will they negotiate to have that and/or other costs paid by the seller? Are they knowledgable enough to help identify red flags during showings, and make sure you don’t overpay?

Finally, decide whether you’re going to have anyone else help you in this process, such as an attorney, an aunt who’s a broker in another state, your bestie who bought a home last year, or your parents who have offered to gift you money to move out of their basement (or just because they love you). Whose advice do you value? Let your agent know that they’ll be helping you make smart decisions and they should be welcomed with open arms; after all, we like meeting new people! Getting opinions from someone who’s not making money from your purchase isn’t a bad idea, and it should give your agent more peace of mind that you’re going to be happy about your decision for years to come.

Everything You Need to Know About Appraisals

Despite real estate appraisal being part of nearly every real estate transaction, I’ve noticed that many clients (and even some agents) have a lot of questions about the process and purpose of property valuation. Below, you’ll find some of the most common questions with answers that will hopefully clear up any misunderstandings!

• Is the appraisal the same as a home inspection? No. The buyer hires their own inspector(s) to do a thorough investigation of the property’s condition and ensure that it meets their expectations. An appraiser is usually hired by the mortgage lender, paid for by the buyer, to ensure that the property value is worth at least what the buyer has agreed to pay. If a lender has agreed to provide a mortgage equal to 90% of the property value, they have to verify that the value is actually there in case someone defaults on the mortgage and they have to sell the property.

  • Some types of loans (e.g. FHA, VA, USDA) require appraisers to visually inspect the attic and verify that the utilities are functioning. Assume that you should have all utilities active unless your purchase contract specifies otherwise.

• My lender told me I don’t need an appraisal. Why not, and should I get one anyway? Many lenders have automated valuation software that can provide a general idea of a property’s value; if you are making a substantial down payment or purchasing a property below market value, your lender may decide to waive the appraisal. It saves the buyer money and saves the lender time. If you’re worried about the value, don’t be — there’s hardly any chance that a traditional lender today would assume a property’s value without plenty of evidence. If they’re agreeing to lend you the money you need to buy it, just roll with it.

• I just had my home appraised a few months ago for a refinance. Can’t we just use that report instead? Nope. Because property values can change over time, each appraisal is technically only valid for the date the property was evaluated. Also, appraisers must take the purpose of the appraisal into account when preparing the report, so it is not uncommon to see different values for refinances, purchases, divorces, etc. That might seem strange, but if you consider the lower risk of refinancing an existing mortgage for a homeowner who has already been making regular payments, it does actually make sense.

• I want to make sure the appraiser gets the “right” value — what information can I give them? This depends on who you are, but first, please remember: it takes a shocking amount of time and work to become an appraiser, so they might not look kindly upon someone else telling them how to do their job. Also, there are very strict appraisal guidelines that detail exactly what information can and can’t be considered.

  • The lender is not allowed to instruct the appraiser and will usually avoid personal contact with them; this is to avoid the appearance of undue influence (which was definitely something that used to happen a lot before the mortgage crisis and subsequent new laws).

  • I encourage sellers to provide a list of any substantial improvements made during their ownership, especially during the previous 5 years. Knowing the age of the roof, doors, windows, siding, etc. is always helpful. Any additions or major remodeling would also affect value. If you want to share the cost of those improvements, feel free…but it doesn’t matter. What you paid doesn’t impact the value from an appraisal perspective.

  • Agents, please know that the appraiser has access to the same data you do in the MLS and public records! So while it may be tempting to leave comparable sale information for every appraiser, please don’t waste your time or theirs unless the property is especially unique or you’re aware of a reasonably similar home that might be missed during a standard comp search. One exception that might be made during very competitive markets is providing information on the number of offers that were received and the relevant details of those offers (all over list price, etc.). This might help justify, for example, a picture-perfect mid-century modern home selling for $100k over list price and at least $125k more than any other nearby home with the same number bedrooms and bathrooms.

• Who can be present during the appraisal? The seller is always allowed to be present at their property, and the seller may require their agent (or the buyer’s agent) to be on the premises when any 3rd party is at the home. However, if you are present during the appraisal, let the appraiser do their thing — be available to answer any questions, but don’t follow them around. Pretend it’s a buyer tour and turn on all the lights, make sure doors are unlocked, and make it easy to access the major mechanics and the attic if necessary.

• Can I get a copy of the appraisal? If you’re the buyer who paid for the report, absolutely. If you’re the seller, no. When the lender has approved the appraisal report, you’ll be notified whether it is “good” or not (in other words, did it meet the value in the purchase contract?) and whether there are any conditions — these are repairs that could be required by an appraiser to ensure the property meets the minimum standard for that type of loan.

• The appraisal says the value is good, but subject to some repairs. Does the seller have to make the repairs or can they refuse? If they want to sell the property to this buyer, they need to make the repairs — and if they are unclear about any part of the conditions, definitely get clarification from the appraiser as soon as possible. However, a seller might decide that it’s too much work or expense. The buyer is usually prohibited from making any repairs to a property they are purchasing (unless they are already a tenant of the property, which is a fair exclusion in my opinion), but there’s technically nothing to prevent an agent helping out.

• Can I appeal the appraisal if I don’t like the value? While there is a process to appeal an appraisal, there are many factors involved and the success rate varies greatly (based on a quick Facebook survey of Cincinnati-area agents I did last night). Some agents recommend changing lenders instead, which would usually prompt a new appraisal. Others have had luck by using the right language: “please help me understand” rather than “what on earth are you looking at”. From my experience, it’s always worth a try, but don’t get your hopes up — discuss backup plans to be sure you know what your best options are.

Home Equity Saves the Day

NAR recently reported that the Baby Boomer generation has overtaken Millenials as the largest homebuyer segment in the USA, despite being a smaller percentage of the overall population and having lower income on average than Gen Xers. How are they doing it? By leveraging their home equity. As it happens, almost half of the over-60 crowd have been in their homes for 20 years or more, so not only have they been paying down their mortgages but their home values have increased dramatically. In the past 5 years, in fact, home prices have increased over 40% (on average) nationwide!

Homeowners have been using their home equity in a variety of ways, especially since interest rates started to rise to more stable levels after the pandemic. The most common use has been to roll the proceeds from the sale of one home into the purchase of their next home: in most cases, homeowners have enough equity to end up with a similar or lower monthly payment even if they are purchasing a more expensive property. More equity = larger down payment, or money to pay down other debts in order to increase your credit score and qualify for better loan terms. Another smart use for extra funds during this process is to buy down your interest rate — also known as paying points. This upfront fee buys you a lower interest rate for the length of your mortgage, enabling you to pay down the principal and gain equity more quickly.

Paying down debt or consolidating it is another popular use for home equity, especially with interest rates rising, high inflation, and relatively stagnant wages. Let’s say you have $20,000 in credit card debt spread over three credit cards, and your average interest rate on those is now 20%. If you took out a home equity loan or line of credit (HELOC) instead, your interest rate would be closer to 8%! If you were struggling to make those payments before and making little to no progress on paying down your debt, this lower interest rate should make a huge difference in your ability to pay the balance more quickly while also decreasing the amount of interest you are charged over time. The amount of equity you can use depends on the value of your home and your current mortgage balance, but if you’ve owned your home for 5 years or more, chances are very good that you’ll have enough equity to substantially improve mounting credit card debt.

But what if you love your home and don’t need to move? You can still use that home equity to make improvements to your home: think kitchen or bathroom renovations, new flooring, finishing a basement, adding an in-law suite, replacing your windows, or exterior hardscapes like a paver patio! If you’re not sure which improvements to make first, ask your favorite real estate agent — they’ll have the most up to date information on what buyers are willing to pay a premium for in your neighborhood. But in general, I’d recommend you prioritize like this:

1. If it’s broken or at the end of its life, fix it! Roofing older than 20 years, furnaces older than 15 years, windows and doors that don’t operate quite right, broken garage door springs, faulty electrical wiring…it could be anything, but waiting too long to do maintenance on some of these things can cause major problems.

2. Keep the water & critters outside, and the heating/cooling inside. This would include sealing any small holes or gaps in siding and soffits, adding weather stripping or insulation, regrading your yard to direct water away from the foundation, adding a french drain or basement waterproofing system (don’t forget a battery backup for that sump pump…you can thank me later), recaulking around plumbing fixtures, replacing hose bibs with anti-frost spigots, and more. Replacing single paned windows with insulated double-paned windows, or replacing a basic wood door with an insulated fiberglass door, can make a big impact on your home’s comfort and appearance, as well as on your utility bills.

3. Cosmetic updates, specifically those that positively impact your home value: over time there remain some upgrades that buyers are always looking for, some that are taste- or lifestyle-specific, and others that are appealing to only a small segment of buyers (or only to you!) or only certain areas/climates. Freshly remodeled kitchens, upgraded bathrooms, and finished basements have always been popular selling points; having suffered through some of these remodels myself, I can understand the appeal of finding a home that won’t need that kind of work anytime soon! Keep in mind that the finishes you’re choosing for these remodels need to appeal to a wide segment of people (your agent will be a great resource for this) or your improvements might not result in enthusiastic buyers when it’s time to sell. And if you’re thinking about adding a big ticket item like a swimming pool, pickleball court, pole barn, or elevator, make sure that buyers in your area share your desire for these amenities! Minnesota is not Tennessee, and California is not New York: real estate is local, so it’s important to understand what your local market wants.

Anyhow, that’s an overview of how your home equity can work for you — hope you found it helpful! Remember, even if you’re not ready to move, your favorite real estate agent will be happy to talk to you about your current home value, estimate your equity position, and advise you on the best bang for your buck when improving your home. They can also connect you with a skilled finance professional so you can determine whether using your equity to pay down debt is the best option right now.

Crash Course in Closing Costs

Chances are you have heard the term “closing costs” even if you’ve never purchased a home before, but if you have paid them in the past, did you really understand what they are and how to know if you’re getting a good deal? Thanks to laws passed over the last decade or so, mortgage lenders are required to provide you with a Good Faith Estimate (GFE) detailing all of the potential costs of a mortgage, so it’s easier than ever to compare estimates from multiple lenders. But let’s start with understanding what they are in the first place: closing costs are everything you need to pay, above and beyond your down payment, in order to purchase a home.

• Loan Charges: Lenders charge certain fees to process your loan. These services often include pulling your credit report, getting a flood certification for the property, processing your application, underwriting the loan, paying the appraiser (sometimes you pay for the appraisal when it’s ordered rather than at closing), and recording the mortgage. Other loan charges that are more common now are “points,” essentially pre-paid interest to lower the interest rate for the overall term of the mortgage.

• Impounds: These costs are directly related to setting up your escrow account — that’s the portion of your mortgage payment that goes toward taxes and insurance. I usually see my clients pay at closing three months of their annual homeowner’s insurance, one to six months of property taxes depending on the time of year the closing takes place, and about three months of mortgage insurance if applicable. These amounts may be adjusted if the total impound amount is above the lender’s threshold, noted as an “aggregate adjustment” on the GFE, closing disclosure (CD) and/or settlement statement.

• Title & Settlement Charges: In Ohio and Kentucky, most real estate closings are handled via third party companies called title agencies. They charge fees to both buyers and sellers for guaranteeing the property is transferred with a clean title and that the monies are disbursed appropriately. Buyers usually pay for a portion of the settlement fee, closing protection coverage for the lender, a lender’s policy of title insurance or a title commitment, sometimes an attorney fee, certain endorsements that your lender requests, and an owner’s policy of title insurance if you choose to purchase one. Also, if you can’t be present for the closing, the title company may send you a mobile notary and there will usually be a fee for that service.

• Commission: Depending on your buyer agency agreement and the terms of your purchase contract, you might pay commission to the broker who represented you. Some brokers also charge administration fees that are separate from commission, and if you purchase homes from certain corporate sellers you might have to pay a “buyer premium” or “technology fee”. You should always verify that the amount of commission paid, whether by you or by the seller, matches the buyer agency agreement you have signed: if it’s higher, that is prohibited by law, and if it’s lower, you might be responsible for paying the balance outside of closing.

• Government Recording and Transfer Charges: In Ohio and Kentucky, the buyer is traditionally responsible for the cost of recording the mortgage and the new deed with the county in which the property is located. This fee varies by county but is usually dependent on the number of pages recorded. Some lenders have a standard mortgage on file in some counties to minimize the number of pages that need to be recorded for individual transactions.

• Homeowner’s Insurance Premium: If you didn’t already pay your first year of homeowner’s insurance when you ordered the policy, this will be included in your closing costs.

Depending on the lender, local and state regulations and customs, and your specific situation, your closing costs can vary quite a bit which is why it’s so important to ask about them when you are evaluating which lender to use. You can offset these costs in a few ways: gift funds from a family member or friend, local grants, or contributions from the seller. Knowing your financial needs and limitations up front will help you and your real estate agent negotiate the best terms possible, and help you avoid an unpleasant surprise when it comes time to close the deal.