One-in-three buyer clients are first-time homebuyers. Therefore, becoming familiar with the unique needs of this group is an important step in filling out your real estate resume and ultimately completing more transactions.
Read this article for tips and strategies on:
- how representing first-time homebuyers requires a different approach than assisting seasoned buyers and sellers;
- helping first-time homebuyers qualify for a mortgage;
- aspects and costs of real estate transactions agents need to inform first-time homebuyers about; and
- how to locate and market to first-time homebuyers.
After you’re done reading this article and are ready to implement your plan to grow your first-time homebuyer client base, stay tuned for first tuesday’s free downloadable first-time homebuyer kit, coming in 2017. This personalizable kit will contain information for you to share with each of your first-time homebuyer clients to answer their questions, ease their concerns and help keep them on track for a smooth transaction.
The first-time homebuyer approach
First-time homebuyers are different than other clients. They are more likely to:
- be less knowledgeable;
- shop in a low-tier home price point;
- hold unrealistic expectations;
- have less impetus to complete a transaction; and
- require more time and effort on behalf of the agent.
Therefore, agents need to approach a first-time homebuyer client with this in mind: it will take more of your energy to close any transaction involving a first-time homebuyer. Once you accept and prepare for this fact, you can begin to form a strategy to not only complete the transaction (and earn a fee), but to turn an uncertain homebuyer into a satisfied homeowner who will be a source of referrals for years to come.
When they can’t (yet) qualify
The first question to ask a homebuyer client, be they first-timers or current homeowners, is whether they have a mortgage pre-approval letter.
First-time homebuyers may be unsure about the mortgage application and pre-approval process, so have a couple trustworthy lenders you can send them to for pre-approvals. They ought to apply with at least three mortgage lenders so they can choose the best terms.
Editor’s note — Keep in mind that an agent receiving payment for referring a client to a mortgage lender is considered a kickback, which is unlawful under the Real Estate Settlement Procedures Act (RESPA). For more information, see: Brokerage Reminder: Kickbacks — the unlawful referral fee.
Let them know what documents they will need to have available, and remind them to stay on top of the process. Even after they receive approval, there are several “next steps” that need to be taken once their offer is accepted. You can move the process along by keeping in contact with both the client and their chosen lender.
What happens when a potential client wants to buy, but is unable qualify?
First, inform them about special mortgage programs designed for first-time homebuyers. Some of these programs allow more leeway in qualifying.
The most important thing is not to give up on this client. In many cases, they will be able to gain mortgage approval after taking a few steps to pare down debt. But don’t just assume they will do so — without being pushy, continue to check in on them every month or so to see where they are in the process. They may be embarrassed about being denied a mortgage, but it’s your job to keep them motivated and on the path to homeownership.
The number one reason for receiving a mortgage denial is a too-high debt-to-income (DTI) ratio. A homebuyer’s DTI is measured by comparing all of their monthly debt obligations (e.g. auto loan payments, student debt, credit card payments, etc.) with their monthly income. In most cases, a homebuyer’s total debt — including a mortgage payment — cannot exceed 43% of their monthly income.
One common obstacle to an acceptable DTI is the high amount of student debt today’s generation of first-time homebuyers carries. Some young renters assume they can’t qualify to buy a home until after their student debt is paid off — a process which typically takes ten years or longer. While this is true for some, there are options to tackling student debt you can make these clients aware of.
These options include enrolling in a repayment program that caps the student loan borrower’s monthly payment to a certain percentage of their income. The pay as you earn program limits a borrower’s payments to 10% of their income — the income-based repayment plan limits payments to 15% of their income.
Learn the basics of these programs and how to let your buyer clients know about them here.
Also, download and distribute this free FARM letter to first-time homebuyers with student debt here.
Things first-time homebuyers don’t know they need to know
Encourage your first-time homebuyer clients to ask questions. Each time you speak with them, end the conversation with “and do you have any questions for me?” Chances are, they do.
Check out first tuesday’s Client Q&A Flyers, which answer common client questions in a user-friendly format, and are free for you to download and distribute to clients.
While first-time homebuyers will ask you plenty of questions, there are also a few things they have no clue they need to ask. That’s where your initiative comes in.
Your client likely knows about how much cash on hand they need for a down payment. But some additional costs you may need to prepare first-time homebuyers for are:
- mortgage insurance — when your homebuyer has a down payment less than 20% of the home’s purchase price, they need to account for mortgage insurance, and if they are very close to having a 20% down payment they may want to wait until they can save up the full down payment so they can avoid the extra monthly cost,
- closing costs — your client needs to know up-front they will need to set aside thousands of dollars just for closing, an amount which may impact their saving and buying timeline;
- the supplemental tax bill the homeowner will receive shortly after closing — a substantial cost the homebuyer needs to prepare for following closing, which can be calculated here;
- initial repairs needed to make the home livable — when viewing a home that’s missing or needs new appliances, fixtures or major repairs, help the homebuyer estimate how quickly these costs can add up to thousands; and
- the true costs of maintenance and upkeep — help your first-time homebuyers understand how much money they will need to budget for property maintenance and utilities by asking the seller to fill out a property expense form. [See RPI Form 306]
Other aspects of the transaction the first-time homebuyer may be unaware of include:
- the time it takes to close — having never experienced a closing before, they won’t realize that it typically takes 30-45 days from their offer being accepted to closing;
- the home inspection — the buyer needs to make their offer contingent on a satisfactory home inspection, even if the contingency makes their offer less attractive to the seller;
- choosing homeowners’ insurance — required by the lender, the homebuyer needs to know they have options when choosing a homeowners’ insurance provider and that the costs can vary based on coverage and the provider; and
- the tax deductions available to homeowners, including mortgage interest deductions and deductions on property taxes and bonded assessments.
How to find first-time homebuyers
Your first stop to find potential first-time homebuyers is in places where renters live, including apartment complexes and single family residential (SFR) rentals.
Also consider reaching out to non-dwelling places frequented by potential first-time homebuyers. For instance, newlyweds are one source you can mine by making contacts with wedding planners, venues, photographers and other professionals who commonly work with engaged couples. Ask if you can leave some brochures in their office.
Think creatively: where do young adults spend time in your community? Is the local coffee shop or gym teeming with Millennials? Advertise at places like these with a simple flyer promoting your experience with first-time homebuyers.
Ask past clients for referrals. Whenever you help a client close, send them a card or an email asking for the information of any potential buyers or sellers who they think could use your assistance and specifically mention first-time homebuyers. Don’t forget to reward loyalty by thanking them when someone they referred contacts you by sending a small gift, like a gift card to a local establishment.
Finally, don’t forget to take your marketing campaign online. Dedicate a highly visible section of your real estate website to answering first-time homebuyer questions. Also advertise your expertise with first-time homebuyers on sites homebuyers frequent, like Zillow, Trulia, Realtor.com and on social media.
What kind of material is best to reach out to first-time homebuyers? Consider distributing these free FARM Letters to potential clients:
For more how to start a FARMing campaign and build your client base, see: FARMing 101: Keys to success.
Agents and brokers: What other information do you want to see in first tuesday’s forthcoming first-time homebuyer kit? Let us know in the comments below!