With interest rates at all time lows these past several years, many young adults have decided to take the next step to adulthood by purchasing a home, condo, or townhouse over renting an apartment. These young adults are in their mid-twenties, beginning the search for their future investment. When you speak with these first time home buyers, the understanding they have about throwing their money into rent being a waste and not getting any tax write offs will surprise many parents and long term homeowners.
The concept of understanding mortgages and what owning a home can do for them in the future will amaze many. With all the positive information they receive and learn about buying a home, it seems many first time home buyers are not informed about the bidding process and getting a prequalification for a mortgage.
The first step a first time home buyer needs is to obtain a prequalification letter for two reasons. One, by having this letter in hand, it shows the realtor or home seller you are serious about making a bid and second, it shows the amount of a mortgage you qualify for before beginning your search. For example, if the first time home buyer is searching properties priced between $400,000 and $500,000 without a prequalification letter and finds a property they want to make a bid on; then gets their prequal letter to find they are only approved for a $350,000 mortgage, it becomes a rude awakening for them. Unless the first time home buyer has the difference of money saved, $50,000 – $150,000, and in the prequalification letter these terms are written in that the home buyer will be using their own money as a down payment, then the $350,000 mortgage would work toward making a bid since it would cover the difference.
When bidding on a property, remember once a bid is made, it usually can only be raised, not lowered. Let’s say John has been searching properties for four months and he is not particular on living in a single family home, condo, or townhouse. He just wants to find a nice place to live, in a safe area, where he can take public transportation to get to his job in the city. John is losing his patience with the home search and finds a property that he can see himself living in, which has all the factors he desires, and is at the top of his price range. Due to his exhaustion of searching, John sees the price, knows he is qualified for this amount of mortgage, and makes his bid for the seller’s asking price without even thinking.
The realtor did suggest to him to take a look at the other properties in the area before making his bid but John didn’t want to waste anymore time; he wanted to make a decision and knew this was the property for him. Later on that day, after the bid was placed, John began looking at the other properties in the area and found the average price was 45% less than what he bid. John’s heart began pumping very fast and called the realtor to find out if he could lower his bid. According to the realtor once John made the official bid, there was no changing it unless he was raising it.
There is never a rush to bid on a property without researching the history of the areas home prices. Many realtors will print up all the homes sold in the area within the past six months to help the first time home buyer make an educational and informed decision. There is nothing wrong with beginning a bid low since a bid can be raised. Set a limit for yourself for each property that is bid on and once you reach that limit; if another bid comes in higher, and then the first time home buyer must decide is the property worth pushing their limit. In many real estate markets all around the US, home sales have grown close to 80% and many feel rushing to buy is the only answer. This is not true, especially for a first time home buyer.
Until a young adult is involved in purchasing their first home, it is very hard for them to understand the process of bidding and mortgages. Many realtors or home sellers will hold a $1000 check with the bid proposal as a good faith deposit. This can be confusing since most realtors explain this as, “This check will go toward the purchasing of your new home.” The FTHB freaks out because they do not understand that the check will not be cashed unless their bid is accepted and they choose to move forward on the property; otherwise the check just sits in your file, in the realtor’s office, with all your paperwork till you are ready to buy.
Before wasting time searching around for properties, apply for a prequalification letter. This can be done over the phone, on the internet, or at a bank in a matter of minutes. By doing this, it will allow the realtor and first time home buyer to focus and zero in on the properties that fit into this price range. Seeking out more expensive properties when your financials show it is unaffordable is a waste of time. Obtain the prequal letter before searching, before making a bid review the price of properties sold in the area within the past six months, and set limits on your bidding. Remember, there are always properties around to buy and when the right one comes along, the first time home buyer will have no doubts.