The following is an excerpt from the new edition of the firsttuesday Career Manual, a best practices guide to help new real estate licensees establish their personal brands and boost income. In this excerpt, we discuss considerations for agents when dealing with first-time homebuyers.

First-time buyers – critical to your success

One-in-three buyer clients are first-time homebuyers. Also, their access to the home sales market is primarily through agents such as you – the entryway gatekeeper. Thus, your training and familiarity with the unique needs of this group of homebuyers is a vital step in bolstering your real estate resume. Ultimately, it is about completing more transactions.

Your review of this material will arm you with tips and strategies on:

  • how representing first-time homebuyers is a different approach from assisting repeat buyers and sellers;
  • advising first-time homebuyers on the merits of different locations, proximity to services, and a home with suitable amenities.
  • informing first-time homebuyers about the practical aspects of real estate transactions and the costs of buying and owning a home;
  • helping first-time homebuyers qualify for a mortgage; and
  • how to market yourself and locate first-time homebuyers.

Approaching the first-time homebuyer

First-time homebuyers have different needs than buyers who have previously owned a home. First-timers are more likely to:

  • be less knowledgeable, or worse, ill-informed about acquiring real estate;
  • qualify to buy in a low-tier home price point;
  • hold unrealistic expectations about ownership and property operations and costs;
  • have less personal impetus to enter into property ownership; and
  • require more of your time than other buyers as their agent.

So, you approach first-time homebuyers with this in mind: it will take more of your time, talent, and energy to close a transaction involving a first-time homebuyer.

Once you mentally accept this challenge, you will begin to form a strategy for completing transactions (and earning fees). You will learn to turn an uncertain homebuyer into a satisfied homeowner. In turn, they become a source of referrals among their peers in the first-time homebuyer tier. Your name is embedded in their mind for years to come. Eventually, they will need your services to sell the home you found for them and relocate to another.

When they do not (yet) qualify

First-time homebuyers typically are unsure about the mortgage application and pre-approval process. However, until they are pre-approved for the maximum mortgage amount they can borrow, you do not know the price point range they are able to pay.

Always have your buyers apply for pre-approval with at least three mortgage lenders including your preferred lender. Shopping mortgage companies keeps them honest. Without a comparison of commitments from different lenders, your buyers simply cannot locate the most competitive or alternative terms available. Remember: where they bank will not likely be the best terms available due to customer bonding – of course.

Walk them through the pre-approval process before you expose them to properties for sale, and never wait until you start preparing purchase offers.

Inform them what personal documentation they need to make available to the lender. When the time comes to submit a mortgage application following acceptance of your buyer’s offer, remind the buyer to stay on top of the loan process (with your help, of course).

Even after they have been pre-approved for the most advantageous mortgage available, you move the application process along by keeping in contact with both your buyers and their chosen lender.

What happens when a potential client wants to buy, but is unable to qualify for the mortgage amount they need to close their purchase?

First, inform them about special mortgage programs designed for first-time homebuyers. Some of these programs allow more leeway in qualifying.

The important thing is not to give up on this client. Most often, they will be able to obtain a mortgage approval after taking a few steps to pare down debt as advised by the lender or on the buyer’s review of their credit report.

But don’t just assume they will do so — without being pushy, continue to check in with them every week to see what they have done and are doing to get themselves qualified. They may be embarrassed or astonished about being denied a mortgage, but it’s your job to keep them motivated — and on the path to homeownership.

The number one reason a lender will not approve a mortgage application is a debt-to-income (DTI) ratio that is too high. A homebuyer measures their DTI 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 cannot exceed 43% of their combined monthly income (before withholdings). Debt includes the entire payment to the mortgage lender of principal, interest, private mortgage insurance (PMI), property taxes and homeowner’s insurance.

One common obstacle to an acceptable DTI is the high amount of student debt today’s generation of first-time homebuyers too often carry. Some renters assume they can’t qualify to buy a home until they pay off their student debt — a process which typically takes ten years or frequently more. However, you need to make these clients aware of their options when tackling student debt.

Student debt options include enrolling in a repayment program that caps the student loan borrower’s monthly payment to a fixed percentage of their income. For example, the Pay As You Earn (PAYE) program puts a ceiling on the student’s payments at 10% of their income, part of the homebuyer’s total debt for setting the DTI ratio.

Things first-time homebuyers don’t know — but need to

Encourage your first-time homebuyer clients to ask questions. Highlight your ability to answer them or quickly find the answer. End your conversations with “and what other questions do you have for me?” to engage your first-time buyers and make it clear you are here to help.

While first-time homebuyers will ask you plenty of general questions, they have no clue about specific questions they need to ask concerning things in the home buying process they have not heard about. That’s where you voluntarily step in and initiate their enlightenment.

Your client likely knows about how much cash they need available for a down payment. However, additional costs exist that you need to prepare first-time homebuyers for, including:

  • mortgage insurance — when your homebuyer has a down payment less than 20% of the home’s purchase price, they need to account for payment of a mortgage insurance premium. When they are close to having a 20% down payment, they may want to wait until they build up savings or find a donor to acquire the full down payment. The goal is to avoid the premium, so they qualify for a larger mortgage amount and a home with more amenities and a preferred location;
  • closing costs — your buyer needs to know up-front that they are to set aside thousands of dollars to cover buyer closing and moving costs when sellers will not agree to pay them or the lender will not add them to the loan amount, a sum which impacts their saving and buying timeline;
  • the supplemental property tax bill the buyer will receive shortly after closing and must pay themselves, separate from the annual property tax billing;
  • initial costs needed to make the home livable — appliances, furnishings, interior decorations, etc.; and
  • the ongoing ownership costs of maintenance and upkeep — help your first-time homebuyer understand how much of their income to budget for property maintenance and utilities by requesting the seller to fill out a property operating expense disclosure 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 it typically takes around 45 days or more after their offer is accepted for the lender to fund and escrow to close;
  • the home inspection — the buyer needs to authorize you to order out a home inspection report, unless the seller prudently provides one when they enter into a purchase agreement – through this report they confirm the improvements are in the condition “as disclosed” by the seller and the seller’s agent before contracting to sell. [See RPI Form 130];
  • choosing homeowners’ insurance required by the lender — the homebuyer needs to know they have options when choosing a homeowners’ insurance provider, and that premiums vary based on coverage, claims history of the property and the insurer selected; and
  • the tax reductions available to homeowners, by deducting mortgage interest, the mortgage origination fee, mortgage insurance premiums (MIPs), interest on bonded assessments and property taxes.

How to find first-time homebuyers

Your first stop to find potential first-time homebuyers is in areas 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 may 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.

And remember to always ask clients, past and present, for referrals. Whenever you help a client close, send them a card or an email asking for the information about any potential buyers or sellers who they think will benefit from your assistance. Specifically mention first-time homebuyers.

Don’t forget to reward loyalty. When you make contact with their referral, thank them. Send the person who made the referral a small gift, like a gift card to a local establishment — it shows your appreciation and continuing support of your relationship.

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 and on social media. They all work to create your brand.