First-time home buyers: Steps to take to purchase your first home

This home on Montero Drive in Sparks recently went under contract for $510,000.

This home on Montero Drive in Sparks recently went under contract for $510,000.

At one point this past March, there were only 170 homes for sale in all of Greater Reno-Sparks.
That dearth of inventory pinches all types of prospective buyers, but more so first-timers hoping to plant their flag in the realm of home ownership.

As prices continue to increase – the median sales price in February was $580,000 in Reno and $510,500 in Sparks – buying a home in the Truckee Meadows has never been more challenging. Sarah Scattini, president of the Reno-Sparks Association of Realtors, told NNBW that homes are going into escrow in as little as five days. Many sellers have an accepted offer in hand – oftentimes for more than their asking price – in under 24 hours.
Here are some steps first-time homebuyers can take to increase their chances of getting their offers accepted in this white-hot market.

Prequalification and pre-approval
Getting prequalified is much different from getting pre-approval from a lender – and the latter can boost your chances of landing your first home.

Prequalification is more or less verbal confirmation with your agent about your income status so you get a rough idea how much home you can afford. It’s an estimate of your borrowing potential. Pre-approval, on the other hand, is a deep dive into your finances with a lender to verify how much house you can truly afford to purchase.

“Being pre-approved is one step further,” Scattini said. “In this hot market, agents want to see that preapproval letter from a lender verifying qualification limits so they know what properties they can set their sights on. That way they know when they put in offers they have a legitimate chance of being accepted.

“First-time buyers definitely want to get the pre-approval process done, because when homes are hitting the market they are on and off very quickly and you want to be ready to go.”

James Anderson, executive vice president of mortgage lending with Greater Nevada Mortgage, agrees that having a pre-approval letter in hand is important in today’s market.

“That’s credit-qualified,” Anderson said. “An underwriter has reviewed your income, assets, debts, debt-to-income ratio and verified what home purchase you qualify for.”

Many lenders use standard underwriting software to determine buyer’s approval limits – and there’s not a lot of wiggle room. Coming in with a large down payment could create some breathing room in the debt-to-income equation,
 however, because it means potentially lower risk for the lender. Generally, though, a buyer’s DTI ratio can’t exceed 43 to 45 percent – and a poor FICO score can lower those limits, Anderson said.

“It is important to see a lender and check out the whole picture before you go shopping,” he said.

Skin in the Game
Saving enough money for a large down payment is crucial. FHA loans rules stipulate homebuyers need just 3.5 percent of the total purchase price. For a $400,000 home, that’s still $14,000 – no small sum.

First-time homebuyers might want to consider putting even more skin in the game, though, Scattini said. The more financial clout you bring with your offer, the better you look against cash buyers and others who have realized significant equity from their current homes and are highly credit-qualified.

“If you are a first-time buyer, having money saved for a down payment and closing costs is beneficial, because anything you are not asking back from the seller is in your favor,” Scattini said. “Whether you are FHA or conventional, if you are not asking for help from the seller or assistance with closing costs, that will put you in a better position.”
Scattini said buyers can expect to add roughly 3 percent on top of their down payment for closing costs – that’s an additional $12,000 on that $400,000 purchase price.

“A cash buyer can go in and not ask for anything and can close very quickly,” Scattini noted. “Being a financed buyer and having your own down payment and closing costs is definitely in your favor.”

Anderson said there are multiple benefits to coming in with a larger down payment. Loan pricing improves because lender risk decreases, and sellers know you have a better chance at closing. And with a minimum of 20 percent down, buyers don’t need to carry mortgage insurance.

Weighing Needs Against Wants
With prices so high, desirability and affordability aren’t likely to sync up. If it’s your first purchase, you may not get everything you want in a home, but if you can attach your name to a mortgage you can get what you need.
Buyers who are unwilling to make concessions based on affordability and availability face a near impossible home buying situation.

“Everyone has to start somewhere,” Scattini said. “Just because it's your first home doesn’t mean it has to be your forever home. In a low-inventory market, you can’t be super picky. If buyers are picky, then maybe this isn’t your market to buy in.”

Being patient also is important, because oftentimes a solid and realistic offer will simply get beat out.

“In a low inventory market it can be very discouraging,” Scattini said. “You are going up against cash buyers and other financed buyers with multiple offers, but with a little patience hopefully you can eventually get there.”

It’s OK to fudge a bit on price, especially if you have a lot of money to put down on the deal, but stretching too far outside of pre-approval limits is likely a waste of time in an ultra-competitive market where homes receive multiple highly qualified offers, Scattini added.

Greater Nevada Mortgage’s Anderson said the housing market will remain very challenging for first-time homebuyers.
“Sellers are looking for cash buyers first, large down payments, and lastly those with down payment assistance or 100 percent financing. Those buyers are higher risk and can’t always close,” he said.

“If you can’t shop in Reno based on what you qualify for, you are looking at Fernley, Fallon and other places that are more affordable. It is so important to get credit-qualified so you absolutely know what you qualify for, and if it’s not what you are looking for you’ll know what you need to do to get there, or you’ll have to look outside the immediate area to find something that works.”


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