YFP 282: The Top 10 Mistakes First-Time Homebuyers Make

Nate Hedrick, The Real Estate RPh and co-host of the YFP Real Estate Investing Podcast discusses the top ten mistakes first time homebuyers make.

Episode Summary

On this episode of the Your Financial Pharmacist podcast, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, welcomes Nate Hedrick, The Real Estate RPh, back to the show to discuss the top 10 mistakes that first-time home buyers commonly make and how you can avoid them. In their discussion, Nate shares a brief market update since his last appearance and details how market changes have impacted him as a real estate investor looking for new opportunities in the current environment. Next, Tim and Nate go through the top 10 mistakes first-time home buyers make in a rapid-fire style, elaborating on each of the common themes plus some insight on how to avoid them when shopping for your first home. 

The Top 10 Mistakes include:

1. Letting the Bank Set the Budget
2. Rushing In
3. Comparing Your Rent Payment to Your Mortgage Payment
4. Assuming You Need 20% Down
5. Skipping the Pre-approval
6. Waiving a Home Inspection
7. Overlooking the Big-ticket Items
8. Making a Large Purchase Before Closing
9. Forgetting to Lock in Your Interest Rate
10. Skipping Out on the Proper Team

Listeners will learn how best to position themselves for their first home purchase and the critical role a real estate agent plays in the process. 

Links Mentioned in Today’s Episode

• Real Estate RPh
• YFP Real Estate Investing Podcast
• YFP Real Estate Concierge Service
• Book Your Jump Start Planning Meeting
• Find an Investor-Friendly Agent
• YFP 268: Buying a Home with Spiking Interest Rates, Inflation, and Market Insanity
• New York Times: Rent vs. Buy Calculator
• Three Strategies for Buying a House with Student Loans
• YFP Planning: Financial Planning for Pharmacists
• YFP 160: Navigating the Home Buying Process Through the YFP Concierge Service
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRO]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. 

This week, I had the chance to welcome back a friend of the show, Nate Hedrick, the Real Estate RPH, and cohost of the YFP Real Estate Investing Podcast. On today’s episode, we talk about top 10 mistakes that first-time homebuyers make.

Now, we know that buying a home or investment property is certainly an exciting experience, but also can feel overwhelming at times. Between finding an agent, securing your financing, and actually searching for a property, it’s hard to know where to get started. That’s why we’ve teamed up with my guest today, Nate Hedrick, the Real Estate RPH, to provide a simple solution to jumpstart your home buying process. Through this concierge service, Nate will help you craft a plan, connect with a local agent you trust, and stay by your side throughout the process to lend an ear or helping hand. 

You can learn more about the free concierge service with Nate and book a call by visiting yourfinancialpharmacist.com. Click on home buying at the top and then find an agent. Again, yourfinancialpharmacist.com. Click on home buying and then find an agent. Okay, let’s jump on an interview with Nate Hedrick, the Real Estate RPH. 

[INTERVIEW]

[00:01:15] TU: Nate, welcome back to the show. 

[00:01:16] NH: Hey, Tim. Always great to be here.

[00:01:18] TU: Glad to have you back. It’s been a while. Episode 268, we had you on the show. At the time, we talked about how interest rates, inflation, and market insanity are impacting homebuyers. Here we are, just a couple weeks later. Interest rates have gone up even more since that point, and I want to get a pulse from you on what you’re seeing out there in the market, before we talk about some of the common mistakes that we see with our first-time homebuyers.

[00:01:43] NH: Yeah. Obviously, the interest rate increases have been significant since we last talked, and it’s affecting the market in different ways. Again, I’m only one piece of the broader country that is the market because it’s different everywhere. But in my neck of the woods, in both my personal investing and with my clients that are buying homes or investing in homes, is that the interest rates are hurting, right? It’s really raising that monthly payment. So it’s affecting people’s budget. It’s affecting their ability to purchase, in some cases. 

I’ve had investors completely back out of deals because a couple months down the road now, it’s – Nothing makes sense any longer in terms of the buying price. So it’s making some waves there. On the flip side, though, demand is still high because there aren’t a lot of sellers that are ready to release their properties. Just like we talked about previously, if you’re locked in right now at three or three and a half percent, what’s the use in selling, just to go grab seven percent somewhere else if you don’t have to? Absolutely. So it’s an interesting time right now. It’s still getting – It’s still crazy, and I don’t think it’s going away anytime soon.

[00:02:43] TU: I keep coming back to that, as we talked about in a previous episode. But it’s such a good point. If somebody’s locked in high twos, low threes, when we saw the rates really dip, unless there’s a real urgency to move, new job, whatever might be the situation, like who wants to trade a three percent rate for a high six in the time right now? Yeah. 

It’s crazy. When you just look at monthly payment, which, of course, many folks are thinking about their monthly budget and how the home purchase fits into the rest of their expenses. But, man, what you can get today from a monthly payment versus what you could get 12 months ago is wild. I mean, just wild to see the differences. So I’d be curious to see what happens with rates longer term. 

I’m curious, from your perspective as an investor, considering you’re the cohost of the YFP Real Estate Investing Podcast, like how has the market, environment conditions, interest rates, how has that changed your perspective and outlook as an investor looking for opportunities?

[00:03:43] NH: Yeah. It hasn’t changed the fact that I’m looking, right? I’m always looking to purchase. It’s just changing how we’re running the deal analysis, right? I just had a property come out. I kind of have to relearn the market. We just had one come up this week that kind of hit those numbers, right? Where we know the markets that we look in so well, that when a property pops up and it’s in a certain price range, like I immediately would know, “Oh, this is a deal. We need to go look at it,” right? 

Well, this one that just popped up hit those warning bells. But then when we actually did the deal analysis, it’s no longer a deal. So I have to really reset my numbers, which is tricky, just because the interest rate is hurting cash flow so much. So if we are making those purchases, they have to be a really, really good deal for it to work.

[00:04:24] TU: Yeah. I think you know better than I. You’re much more active in the space than I am. But it feels like a time period like this, where you start to really whittle down maybe the investor pool that’s out there actively looking. It really feels like it incentivizes those investors that have a sound system and process in place and have been doing this for a while. Not only on a deal analysis, but also how can you efficiently manage a group of properties and how can you optimize the portfolio that you have. 

I think for those like you and David that have done the hard work over several years to develop those systems, not to say deals are readily available, but that I think it incentivizes those that have a good foundation and a good system in place.

[00:05:04] NH: Yeah. They’re still out there. It just takes, like you said, some creativity, some diligence, and making sure you adjust.

[00:05:11] TU: I love that, though. I’m always looking, right? I’m always looking. 

[00:05:14] NH: Absolutely. 

[00:05:15] TU: All right. So this week’s episode, we’re going to cover the top 10 mistakes that we see first-time homebuyers making. Nate, to be clear, there is no judgment here, as you and I, I think, have probably made all of these mistakes maybe between the two of us. So we’re hopeful through our experiences. Being both first-time and second-time homebuyers, we’re hopeful that we can share some of this information, what we’ve seen also with other pharmacists, to help prevent others from maybe making some of these same mistakes. We’re going to run through these in somewhat of a rapid fire format. I’m going to present the mistakes 1 through 10, and then we’ll talk about each one in more detail. 

Nate, number one is something we’ve talked about often when it comes to first-time homebuyers, and that is the number one mistake is letting the bank set the budget. Tell us more about what you mean here.

[00:06:02] NH: Yeah. I think what we see from first-time homebuyers, especially, is the thought that, “Well, I’m going to go to the bank. I’m going to get pre-approved. I’m going to ask them what I can afford.” The bank looks at your finances and says, “You can afford up to a $500,000 house. This is your budget,” when in reality, the way we should be approaching it is to determine our budget way in advance, separately together, whatever that looks like, without the bank even involved. Then you can go to that lender and say, “I’m looking to purchase up to $350,000 home. Help me get financing for that,” and really trying to approach it from that budget first perspective, rather than letting the bank determine it for you. 

[00:06:39] TU: Yeah. We’ve talked about this before, home buying, important piece of the financial plan. It’s one part of the financial plan, right? There’s a lot of competing priorities for your monthly budget. I think that you and I have been talking about this now for years, but this is maybe even more true than it has been in years gone by. When we consider the impact of inflation on the monthly budget, the average student loan debt continues to creep up in a direction where a greater percentage of one’s monthly income might be accounted for when it comes to student loans or other debt. 

Oh, and by the way, like pharmacists’ income, even if we see some growth there, like they’re not accounting for what we’re seeing the rise when it comes to not only inflation, but also the rise in the housing market, as we were just talking a few moments ago. So all the more reason that we really need to be setting the budget when it comes to purchasing the home before the bank sets that budget for us to make sure that it fits in with other priorities, and that we’re able to accelerate those other goals in the financial plan, and that we don’t find ourselves locked into a 30-year timeline of something that we look up and say, “Hey, wait a minute. We don’t have a whole lot of cash flow to do other things.” 

Number one mistake, letting the bank set the budget. Number two is rushing into the purchase, right? Easier said than done. Nate, tell us more. 

[00:07:54] NH: Yeah. What I’m seeing right now, especially in the last six months or so, is individuals who have this this FOMO, the fear of missing out. The interest rates are rising. The market is crazy. I have to bid fast. But take a step back. Take some perspective. Realize that, again, if we look at the huge timescale that is mortgage interest rates over time and the market in general, we’re still not at a point where the interest rate is exorbitantly high compared to history. We’re still not at a point where there aren’t going to be homes on the market soon. 

They’re not going away, right? So don’t rush into this decision. It’s a huge purchase. So you want to make sure you’re doing your work upfront. You’re setting that budget, like we just talked about. You’re choosing a location that you actually want to be in, right? You don’t want to make that decision and then want to change it later. You’re looking at what’s important to you. Again, what I’m seeing and what I’m hearing from others in the marketplace is they’re making decisions. Then six months later, they’re regretting it because it’s not exactly what they wanted. They just felt like they had to buy now. So don’t rush in.

[00:08:52] TU: Yeah. I think there’s always a feeling of pressure around that home purchase, right? You and I felt that even in the market. That is not the market that we’re seeing today, right? I just remember that feeling of like, “Okay, I graduated. I did residency. I got married. We’re thinking about starting a family.” It just feels like that box. Like you got to go check it off and buy a home. As we’ll talk about here in a moment, like, “Hey, I don’t really want to pay rent anymore.” 

I think that pressure is always there for first-time homebuyers. But in this current environment, it’s on fire even more. I think there’s this feeling of like, “Oh, man. The Fed’s going to raise the rates like even more. It’s going to go up. Everyone else is kind of rushing into this period of competition. I better jump on this.” Certainly, if the deal, location, and everything lines up, there’s a case, obviously, to move forward. But there’s very few things that we’re locking ourselves into for 30 years, and we want to be careful to make sure that, again, fits in the budget. We talked about that in point number one, but also that it fits in with our plans, and that we’re not 6, 12 months in and saying, “Man, maybe I should have waited a little bit longer,” or, “I regret this purchase at the time.” 

Number three is comparing your rent payment to your mortgage payment. Guilty as charged. I remember when we bought our first home, Nate, back in 2000 – I think it’s been 2009. We were paying $1,100 a month for rent, and it’s even hard to say that out loud in 2022, three-bedroom condo. I think it was like 1,500 or 1,800 square feet. I remember looking at a mortgage payment, our first home we purchased for $176,000. Again, hard to believe in 2022, and I remember seeing, “Wait a minute, $1,100 rent. Principal and interest is going to be about $1,100. Why would I not purchase a home?” 

So talk to us about why comparing rent payment and mortgage payment can potentially be a mistake and not considering all the costs involved?

[00:10:45] NH: Yeah. I think this is something I, again, totally agree. I did the exact same thing when we bought our first home, right? You’re looking at that price, and you’re saying, “Well, it’s a monthly payment that makes me live here, versus a monthly payment makes me live here. I got to compare those.” But with buying a home, there are these other costs, right? You’ve got property taxes, which is huge. You’ve got insurance, which you might not have any insurance, or you might just have renter’s insurance on your current rented property. 

It’s not just that upfront balance. There are a lot of these hidden costs that go into purchasing a home, even something as simple as maintenance and repairs, right? Today, you probably have a landlord or a management company that you call if something breaks. But when you buy that house, you’re in charge, right? You’re calling a plumber. You’re calling an electrician. You’re calling a HVAC specialist. So you have to expect those costs and be ready for them.

[00:11:31] TU: Yeah. Depending on the area that you live in, property taxes, it feels like there’s, obviously, a significant creep that can happen in there. But that can be a big part, the monthly payments. I think about our property taxes here in Columbus. We’re looking at about $500 per month, which I know in some parts of the country might be higher. Some might be a little bit lower. But when you look at that as a percentage, compared to your mortgage payment, like for us, it’s a pretty big chunk that’s going to our property taxes. Then you add on top of that insurance. You mentioned potentially HOA fees, depending on the area that you live in, maintenance and upkeep. 

Especially for first-time homebuyers, like you don’t have a garage full of lawn equipment and other things. You might want to do landscaping. You might want to do some remodeling, furniture you’re going to need for the home. So making sure that we’re factoring all these things in. I’ll link too in the show notes that the New York Times has a really cool calculator that looks at the rent versus buy, and it really tries to put it as apples to apples as you possibly can. So factor in a lot of the costs that Nate’s talking about here and making sure that we’re looking at the big picture, as we look at what the impact of that will be on the monthly budget. That’s number three, potentially making the mistake of comparing your rent payment, your mortgage payment. 

Number four, Nate, is assuming you have to have 20% down. So this really gets into the types of loan options that are out there and how we need to be thinking about saving for that down payment. Tell us more.

[00:12:59] NH: Yeah. I often see this when somebody talks to somebody who bought a house somewhere else, right? Or 10 years ago. I talked to my folks, and they said, “This is how I bought a house,” and they get this advice that, well, you got to have 20% down, and then you can move forward. Some people can feel really stuck with that, especially in these higher cost of living areas, where 20% down could be $200,000, right? So what we’re advocating for is not – Don’t skip 20% down. That’s not a bad place to be but evaluate it. Look to see what your other options are. 

We’ve got pharmacist home loan options that are three and a half percent down. We’ve got FHA lending. That’s the same rate. There’s a lot of different options out there that aren’t just 20%, and there are advantages and disadvantages to each of those. So weigh those options, look at them, talk with somebody who knows what they’re talking about, a mortgage lender, preferably, and figure out what the best option is going to be for you.

[00:13:48] TU: Yeah. Nate, I’m curious. Is your opinion on this changing at all, as interest rates creep, right? So when you and I talked about this a year, a year and a half ago, if we’re just thinking about from an opportunity cost standpoint, obviously, there’s a risk in if we have nothing down or too little down, market changes. You would potentially be upside down on the mortgage. We need to be considering that, our comfort with risk. How else that fits into the rest of the plan. 

But purely from an opportunity cost standpoint, when you’re talking about a loan at 3% or 2.8, 2.9%, you could make a reasonable argument that like, “Hey, if I can put as little down as possible and finance that out over 30 years, I could potentially use those dollars elsewhere in the financial plan in a more strategic way.” As we look at high sixes, is your opinion on that changing at all?

[00:14:38] NH: It’s always been that you want to create a safety net, right? Like David and I talk about on the podcast all the time, we are safety-oriented, boring pharmacists, and that’s not a bad place to be, right? Where you want to go into this with the idea that if the market does correct and I have to sell because that’s when it’s a problem, when you have to sell. Or am I going to be okay? So if you’ve got 10 percent down in a property and there’s an 8% correction, you’re in a good space. 

But if you’re talking about maybe a bigger correction or a lower percentage down, it can be a little more risky, right? There’s no way to know exactly what the future holds, so just it can be beneficial to at least consider that 20% down, just because of the safety net that it provides. 

[00:15:20] TU: Yeah, yeah. Good point about the future, right? We might find ourselves with a huge refinance market in a year or two if rates were to come back down, so good thing to be thinking about. Can’t bank on it but certainly might be an option in the future. The other thing I think of here, Nate, with a 20% down, you’ve talked before on the podcast, you also wrote a blog post about this, we’ll link to it in the show notes, is that student loans is often a common barrier to being able to save up 20% down, right? 

You think about even here in pretty affordable Ohio, if you’re looking at buying a three to four-bedroom home, 2,000, 2,500 square feet, depending where you’re living, probably pushing now 400,000 to 500,000 dollars on that home. So traditional 20% down, we need 80,000 to 100,000 dollars. Trying to accrue that as a first-time homebuyer, while making student loan payments, which we haven’t been doing now for over two years, but those are going to start back up, that can be very overwhelming. So I think that consideration of how do I balance a student loan repayment with the home buying, and that’s an opportunity where maybe you don’t need 20% down. Maybe you decide to do 20% because you feel comfortable with that. But we’ll link to that article in the show notes, as I think that’s probably a topic of interest among many listeners. So that’s number four, assuming you have to 20% down. 

Number five mistake is skipping the pre-approval. Tell us more here.

[00:16:40] NH: Yeah. One of the things that I’ve seen other buyers and I always advise my clients is to get that pre-approval process done early. That’s going to the lender and making sure that you are going to be able to get a loan from them. What you really want to check with them is, one, are there things that I was not aware of, right? Maybe the budget that I said is not realistic, and the bank is going to tell me otherwise or perhaps that the rates are higher than I was expecting, and my calculations are off. That data check is really important from a perspective of which houses can I look at. 

But then more importantly is once you do find the house that you like, everybody’s requiring you to have that pre-approval letter with your offer. So if you find a place, and let’s say there’s competing offers, or you need to move quickly on it, and it’s a Friday afternoon, you don’t have that pre-approval letter in place, you might not be able to purchase that home, just because your offer is no longer a competitive one. Doing that upfront, doing that early is never going to hurt you. You can always renew those pre-approval letters 90 days later or 180 days later. Do it upfront. Make sure that you’ve got that pre-approval letter in place. It’ll just protect you when you’re going to look at those homes.

[00:17:45] TU: Yeah. I think that’s really good advice, Nate, because it’s one of those things I remember when we were looking for homes. My thought was like I’m just casually looking exactly on realtor.com or Redfin or Zillow or whatever. That often quickly turns into like, “I’m seeing a property, and I want to make an offer.” So I think we got to be realistic about where are we at in the process of readiness to buy home. Then as you mentioned, you can renew those, but having that ready if there’s a potential that we’re going to be moving forward with an offer. 

All right, number six is waiving a home inspection. Nate, that gives me anxiety, even hearing that. So tell me more about what you’re seeing here.

[00:18:22] NH: Yeah. So especially the last year or so and even going back a little further, we saw a lot of the craziness in the market leading to people saying, “Well, how else can I be competitive, right? What else can I do? I can’t offer more money. So maybe I’ll waive the inspections, and I’ll just get the house and kind of roll the dice that way.” so I’m always an advocate that you need to have that expert in there to take a look at home, especially if you’re a first-time homebuyer, right? You don’t know what you’re looking for. Your agent can be helpful in this, but they are not an expert in home maintenance. They’re just not. 

We’re experts in the process. We’re experts in the communication. We’re experts in the forms that you need to fill out and how to navigate the actual buying process. But we are not contractors, right? I don’t know how to look at a roof and say, “Oh, yeah. That’s a 15-year roof or a 30-year roof,” right? We just – That’s not part of our process. So making sure that you’ve got an expert on your team that specializes in that area is absolutely essential, and that last line of defense is that home inspection. So make sure you’ve got one in place.

[00:19:20] TU: Yeah. Not all inspectors are created equal, right? Just like not all agents or financial planners or accountants are created equal. So we’ll talk in a little bit about having a team, but this is why I think it’s so important that you’ve talked about this before. If you start with a really good reputable real estate agent, they often are going to be able to point you to a reputable inspector, right? You want to make sure if you’re spending whatever, 400, 500, 600 dollars on an inspection that you’re going to feel good about the quality of that inspection. 

I’ve been through the process of because of the results of an inspection pulling out of a purchase of a property, and like it’s significant. If it’s something that maybe comes up that’s going to cost you 500 bucks, 1,000, 2,000 bucks, like you can roll with that. But it’s the big structural foundational types of things that, man, you just don’t want to be surprised. I think we got to know our role as pharmacists, right? I can’t walk into a home. Maybe you’re [inaudible 00:20:12], but I can’t walk into a home and be like, “Oh, yeah. This is really going to be a problem,” or, “This is not.” 

I’m more enamored in the moment about like what does this look like for our family living in this home, right? I think that tends to even gloss over sometimes what can be some of the bigger pieces that come up. 

[00:20:29] NH: Even with my experience and David’s experience, I mean, when I’m working with a client as their agent, I still don’t want to be the only expert they’re getting advice from, right? I can look at something and say, “Yeah, that’s probably going to be a problem.” But the extent of that problem, I don’t want to be the one to speak to that. You need an expert, right? So it’s super important to clarify that and just make sure that even if you’ve got a really, really good agent on your team, that inspection is still a super important piece.

[00:20:54] TU: So that’s number six, waving a home inspection. Number seven is related but different, and that’s overlooking the big ticket items. Again, I think often when we’re looking at a home, we get excited about maybe some of the fixtures, the furnishings, the remodeled kitchen, those types of things. But are we thinking about the major expenses that might be coming in the future, even if it’s not something in the moment that they’re going to be coming down the road? Are we ready for it from saving standpoint as well? So tell us more here what you’re thinking about.

[00:21:23] NH: Yeah. Just I wanted to put this in people’s heads because it’s something that I often have to coach my buyers through of, hey, the inspection report says this is perfect, and it’s working today. But take a look at the fact that it’s deteriorating, and that it’s going to be replaced in five years, right? Your furnace is working, and everything looks great, and the house is warm. But it’s 22 years old, and we’re about to be done with it, right? So those are things that even with an inspection you might not necessarily catch. 

The other one I saw just recently was a house that was – It was painted wood siding, and it looked flawless. It looked great. It was probably done in the last two years, and just, again, look fantastic. But that’s something that’s going to have to be maintained, right? You have to paint that every five, six, seven years. So a buyer might go into that and think, “This is great. It’s painted siding. I’m done.” But that’s a huge expense that’s going to be coming down the road. So what I advise buyers to do is to look at some of those big ticket items, even if they’re not problems today, and sort of budget for them for the future because they can become problems quite quickly.

[00:22:22] TU: Yeah. Some of them you don’t necessarily think about, even on the second or third home purchase. So I think for first-time homebuyers it makes sense. But things like the roof maybe are some common ones. But driveway, so like we have asphalt driveways. It’s getting beat up right now, and we got a quote for what would that take to eventually repair, put in a cement driveway. Holy cow, right? That’s really expensive. Or what’s the potential lifespan of your AC unit, your hot water tanks? How new or not are those? Other types of upkeep, you gave the example of kind of painting the wood. So there’s a lot of things that could come up.

Just to nerd out here for a moment from the financial plan perspective, this is where having a bucket of funds that you’re planning each month for these expenses that we know are going to come up, we want to be planning for it, right? So we talk a lot with the planning team about creating buckets of savings. If I need a roof, and it’s expected to kind of be at the point of replacement in five years, that’s not an emergency when it gets to that point, right? So what can we be doing to both plan and project those, and then create the buckets of savings, so we can accrue those funds over time and to be ready to pay for those when they come to be?

I think those are great examples, Nate, of things that we’re often overlooking when we do like the rent versus buy comparison. 

[00:23:41] NH: 100%. Yeah. 

[00:23:42] TU: Those big – Especially if you convert them into like a monthly payment of what it would take to save those and then tack that on to what we may be paying in terms of rent. 

[00:23:50] NH: Something that people often rely on here is a home warranty, which is not a bad idea, right? You can use a home warranty at purchase to help combat some of those high cost items, maybe fixing a furnace that breaks down or repairing an AC unit, whatever. But don’t rely on that only, right? A lot of those home warranties – I’ll give you another example from recent past, home warranty for a roof. Great. It seems like, okay, if the roof is going to break, when it does, I’ve got this home warranty in place. 

Well, what happens a lot of times is that home warranty company looks at when you purchase that warranty. Let’s say you purchase it at year 15 on a 20-year roof. We’re only going to cover that quarter of that roof that you’ve actually kind of paid for at the time that you bought it. So keep in mind, home warranty can be helpful in terms of defraying some of those costs, but it is not a solve all the problems kind of a thing.

[00:24:39] TU: Yep. Great point. So that’s number seven, overlooking the big ticket items. Number eight common mistake among first-time homebuyers is making a large purchase before closing. So I assume we’re referencing some impacts here on credit and lending. Tell us more.

[00:24:54] NH: Yeah. When you were going through the pre-approval process, the bank is looking at all of your debt and all of your income and all of your assets. If you are adding things to the debt side of that equation before closing, when they go to recheck things, you can actually price yourself out of things. You could mess up your interest rate. You could mess up actually getting the property. I’ve seen people where they go and they buy furniture before closing. This has never happened to me but to others I’ve heard about, where they go to those great 36 months, same as cash. I’m going to buy all the new furniture I need for this new house before closing. 

When you buy something like that on credit at a furniture store, for example, it’s looked at like a maxed out debt. So if I buy $5,000 of the furniture, 36 months, same as cash, they are taking out a $5,000 line of credit, and I have maxed out that line of credit. 

[00:25:40] TU: Oh, utilization of it. Yeah. 

[00:25:42] NH: Exactly. So when the bank goes to rerun your report on this great home that you’re about to purchase, they all of a sudden see that, whoa, you got this credit hit. Now, your credit score has dropped. Your new interest rate is now a point higher because you’ve messed this up. So don’t make any major purchases. Don’t take out credit cards. All that stuff should be just put on hold until after closing.

[00:26:02] TU: Yeah. A point higher over 30 years is going to be a lot more than $5,000. That’s a really good one. So really making sure that as you get to that point of closing, as you’re working through the process with the bank, making sure any purchases, any opening up credit card you need to put on hold or making sure you got some space in separation in that as well.

[00:26:25] NH: Or at the very least, talk to your lender first. Hey, lender, I know we’re going through this, but I’m thinking about doing this. Is that going to be okay? Is that a bad idea? Ask them. Keep them engaged. Do not surprise your lender. That’s the worst thing you can do.

[00:26:38] TU: Okay, number nine is forgetting to lock in your interest rate. I know another common question that comes up here is when people are comparing rates, especially if they’re searching these on a website, is the option of purchasing points as well. So tell us about rate locks and then how one should be thinking about the purchasing of points and what that means.

[00:26:59] NH: Yeah. So the rate lock point was actually something that I just added kind of for this time, right? Because previously, locking your interest rate wasn’t nearly as important. Interest rates weren’t going anywhere. So if it was 3.5 this week or 3.3 next week, I mean, whatever, right? It’s not that big of a deal. Locking it was great, but it was not as important. 

Now, with the way that rates have been increasing recently, what we’re seeing a lot of lenders offer is a locked rate, where you can lock it for 45 days or even sometimes longer with a float down option so that if the rate does drop, you’re allowed to drop along with it. But if you don’t lock in that rate, your rate can increase with the market. 

So I actually saw – I had a buyer recently that closed on a property, and we almost missed the date for his rate lock. Luckily, the lender was able to extend it and make sure that we met with closing. But if you don’t lock that rate at the right time or don’t close on time, you can miss that window and easily see half a point or a point increase as that month and a half goes by that it takes to close on a property. So it can be a big deal.

[00:28:01] TU: Tell us about the option of purchasing points. I know this comes up a lot, where kind of the window rate that someone will get may include or be assuming that you’re going to be buying points, essentially buying down that interest rate. So what are you seeing out there right now in terms of the viability of that and how people can think about the breakeven point where that makes sense?

[00:28:23] NH: Yeah. Another question that’s changed dramatically in the last two years since I last talked. But the idea with a point is that you can essentially pay money up front to have a lower interest rate over time, right? You can decrease your interest rate by paying for it in the form of what’s called points. You can even, in some cases, have the seller pay the points at closing. That’s pretty uncommon still in this market, but it’s out there. 

Typically, again, in the past, I was not recommending buying down points because the rates were already so low that why spend cash up front, just to get from 3 to 2.9, right? Who cares. But now, if you can get significant movement on that interest rate and you’re looking at a very, very large loan, it might be worthwhile to consider, especially if you’ve got a little extra capital upfront today and want to lock in that lower interest rate over a longer period of time. 

It’s something to consider. It’s always worth looking at. The best way to do it and compare things apples to apples is to ask every lender that you’re shopping with for a rate that is without points. Give me the flat rate without points. Let me see that first, and then let’s talk about adding points onto it. Because that’s the only way you’re going to be able to compare it apples to apples.

[00:29:26] TU: Yeah. That might not even be so obvious when you’re initially shopping. I was talking with a pharmacist recently that was talking about a rate they had received from a lender, and they didn’t realize that there was built into that an assumption they were going to pay X dollars to buy down the rate. But they were comparing that to another rate that didn’t have points involved. So to your point, we really need to compare those as equal as possible to be able to make a decision on where to go forward. That’s great.

Number 10, Nate, is skipping out on the proper team. I talked about this a little bit with making sure you’ve got a good agent that can be a connection and referral to other parts on the team. But there are a ton of folks involved in this process, right? When you think about the agent, you think about the lender, you think about the title company, the lawyers that are working as a part of the title process. Tell us a little bit about what is the proper team and some strategies folks can employ to make sure they’ve got the right team in place. 

[00:30:16] NH: Yeah. This part can feel overwhelming. Whenever somebody started talking about team, I started to feel like, “Oh, I don’t know how to make a team. I’m a first-time homebuyer. I don’t know what I’m talking about. I don’t know who to call. That’s too overwhelming. I’m not going to deal with it,” right? But I encourage you to look at that and not think of it as something scary, but it’s something that’s there to help you, right? Just like we have a team in the hospital or a team in the pharmacy, we’re not expected to know and do everything exactly, right? It’s a team effort. 

Starting with someone like a real estate agent can be a great place to go. You can find one expert. Then from that expert, they can refer you to others that are in that space, so your accountant, your insurance agent, your lawyer, your home inspector, your contractors. All those can stem from that real estate agent if you’d like. But you want to make sure those experts are in place because, again, relying on you to do all the background research and googling things ahead of time and YouTube videos online, right? Like you want to make sure that you’ve got experts in place that can help you with those difficult things so that you’re not trying to manage all of it, while also having a career and a family and everything else that’s going on.

[00:31:18] TU: I really like how you’ve simplified this because the concept of all those individual members is overwhelming. But if I can feel good about finding a good agent who is qualified, reputable, I feel good about the working relationship with that individual, good communication skills. From there, I can really rely on them and trust them to help me with those other connections and other parts of the team. 

Just like we talk about with financial planning, the bar of entry into financial planning is fairly low in terms of someone being able to call themselves a financial advisor. Therefore, there’s a huge span that’s out there in terms of experience, credential, certifications, individuals that they’ve worked with and areas of expertise. I would argue there’s a lot of similarities in terms of real estate agent, in terms of how many deals they’ve done, experience they have in working with pharmacists or working with certain lending options and their awareness of lending options that are out there. So I think really doing due diligence and homework to make sure you have that good agent is really important. 

That’s one of the main reasons, Nate, that we’ve now collaborated probably going on, what, three-plus years working with you to develop the home buying concierge service, which is really intended to help individuals in the YFP community, looking to purchase a home, whether it’s their first home or a second home, whether it’s a real estate investment property to make sure they find an agent that they are comfortable with, that’s a good fit, but also that has you there as a resource along the way. So tell us a little bit more about that home buying concierge service, and then we’ll make sure to point folks in the right direction to learn more information.

[00:32:53] NH: Yeah. What we wanted to develop was a way to take the guesswork out of that first step. Like I said, when I was buying my home, first-time home purchase, I was overwhelmed by this idea of the team and like where do I start. I think I just like asked a couple of friends for a real estate agent. That can work, right? It’s good to get a referral from someone personal. But what we’re finding is that a lot of times, people are moving somewhere, or they’re in an area where maybe they don’t know a good agent, or maybe that friend didn’t have the best experience. 

So if you’re looking to take that guesswork out of the process, what we’ve developed is a really simple phone call. You can connect with me 20 or 30 minutes on the phone. We’ll get an idea of your budget, where you’re looking to buy, what your must haves are, what type of agent we think you’d work best with. We have some really cool targeted questions about what that process looks like and what’s important to you when picking an agent. Then we help you get connected with them, all for free. So we’ll actually interview agents in your local area, if we don’t have anybody already in our Rolodex of people, and we’ll get you connected with them so that you can get off and running on the right foot. Like we said, If you don’t know anything else about the area or any other people to work with, start with that agent, and everything can kind of grow from there. 

The last piece that I think is important is that once we make that connection to the agent, we don’t go away like, “I don’t drop off the team. I’m still part of that process.” So if you need a second opinion on something, if you want to bounce ideas off of somebody who’s both a pharmacist and an agent, come right back. I’m still part of the team that can help you guys out. So it’s been a fun service because I get to see pharmacists buy places all over the country and see them grow. It’s a great way for us to kind of give back and help out with a pretty stressful process and making it less stressful.

[00:34:30] TU: Yeah. Again, whether you’re a first-time homebuyer or you’re moving or you’re looking for an investment property, all of those involve finding a good agent, and that service that Nate just described is intended to do exactly that, regardless of if it’s a primary home or an investment property. We’ve had some really cool success stories through this program, and I would point folks to episode 160 as an example of that, where you talked with Shelby Bennett and Bryce Platt about their experiences, working with you through that concierge service and what that is experience was like and why it was valuable. We’ll link to that in the show notes. 

For folks to get connected with you, very easy, you can go to yourfinancialpharmacist.com. At the top, you can click on home buying and then find an agent. From there, you’ll find an option to reach out and connect with Nate. Then you’ll be off and running with finding a good agent that’s local to your area. 

Nate, as always, thanks so much. It’s been an awesome 2022 and looking forward to having you on throughout 2023 to provide our community with ongoing updates and information related to home buying.

[00:35:29] NH: Thanks, Tim. I really appreciate it.

[END OF INTERVIEW]

[00:35:30] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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