Purchasing real estate is the biggest and most costly financial investment most of us will ever make. Doing this for the first time can be intimidating and very stressful. I have had very few first-time homebuyers that weren’t, at some point, overcome by frustration and angst as they try to obtain that elusive, first property. After all, it’s part of the American Dream, right? Isn’t it what we’re all supposed to strive to do? 

When I first got into real estate I would have agreed with those notions. Now, I’m not so sure. It depends on where you live, where you want to live, where you work, and what your life goals are. Purchasing real estate—especially when you’re buying a home in the Bay Area—is no small undertaking and I have, on several occasions, advised clients to wait until they knew more about their situation before taking this step. Everyone’s situation is different and should be considered as such. However, there are a few things that first time homebuyers need to know before and during the process. Let’s dive in!

8 Things You Should Consider Before Looking at Homes for Sale in San Francisco

1. Your Realtor

After deciding to venture down the path of homeownership, who you choose as your realtor may be the most important decision you make as a first-time homebuyer. They can be the key to how everything else plays out for you in the process. You want to choose someone who has experience with first-time homebuyers, has patience, and has time to walk you through every single step in the process. The best thing about them: They’re free! 

A realtor on the side of the buyer gets paid by the listing agent (the agent that has listed a property to be sold). So, utilize your realtor as an advocate. They should make sure all of your questions are answered and that no one takes advantage of your lack of knowledge in any way. They are your protector and the gatekeeper to your financial prowess during the transaction.

They should also be able to connect you with a reputable lender and title company that will work together to make sure your transaction goes smoothly. Lean on your realtor during every twist and turn of the transaction—that’s what they’re there for.

Once you’ve found your perfect realtor, here are some of the things to consider prior to making an offer to purchase a home. Your preparation and understanding of these items will help you and your realtor focus the search so that less time is wasted in the pursuit of your dream home.

2. The Banks

I recommend working with a mortgage originator or mortgage broker. They have access to multiple bank programs and will shop for a suitable loan with the information you provide them.

2. Your Down Payment

3.5-percent of the purchase price is typically the minimum downpayment required to buy a home. Most reputable banks and brokers can provide information about FHA programs for first-time homebuyers. The higher the down payment, the better the loan terms and the easier it will be to qualify.

4. Things to Avoid

1. Prepayment penalties

The lender will penalize you for refinancing or getting out of the loan before a pre-set time.

2. Private Mortgage Insurance (PMI)

This is the insurance that you pay to insure the bank's risk for lending to you. This cost can range from as low as $50 per month to several hundred.

While you may have heard otherwise, you do not have to put 20-percent down to avoid paying for PMI. There are lenders that have loan products that will allow you to put less than 20-percent down without PMI.

5. Your Credit

First-time homebuyers need to know their credit scores before going out to find the homes for sale in their area. Most lenders have credit score requirements for the three bureaus (Equifax, Experian, and TransUnion). Generally, if you have a score of 640-plus, you will be able to find a lender that will lend to you. The higher the score the better. 

Your credit score is established by a process called a tri-merge. This is when a lender pulls your credit score from all three bureaus and chooses the middle score. If you are financing with a partner or spouse, the lender will take the middle score of the person with the lowest average score.

6. The Taxes

Understanding your local and federal property tax laws can be crucial. Know the tax rate in the area you are looking to purchase in and what’s included. Also, know whether or not there’s a Mello Roos (a special tax assessment) for the particular area. The preliminary title report will have this information, so you will have all the information you need before escrow closes. 

7. The Location

The old adage that location is everything rings true when it comes to real estate. The closer you are to a good school district, shopping, downtown areas, and other local attractions will determine the value of a property. Seclusion can also be highly desirable, especially if there are views from the property. 

8. The Contract

There are so many factors to consider when putting in an offer beyond just the price. Your realtor should guide you through this process step by step. Be prepared to provide a deposit (an amount of money held by escrow until you close the deal). The deposit can range from zero to three-percent of the purchase price. 

Buyers often worry that they will lose this deposit, but there are many ways to ensure this doesn’t happen. However, understanding how to keep your deposit safe will revolve around your understanding of contingencies. Think of a contingency as a way to get out of the deal—an “out” if you will—to get out of the contract without losing your deposit. The fewer the number of contingencies there are in the contract, the happier a seller will be with your offer. 

There are three main contingencies to consider:

1. Inspection Contingency 

Your way out of the deal if you don’t like something about the property—seriously, anything about the property!

2. Appraisal Contingency 

The bank orders an appraisal to see what the value of the home is compared to the purchase price. If the appraisal comes back lower than the purchase price and you don’t have this contingency, you could be on the hook to cover the difference.

3. Loan Contingency

If for whatever reason you are not approved for the loan you’re seeking, this is another way to walk away from the deal.

You may enter into a deal non-contingent—in other words, without contingencies—but you run the risk of losing your deposit if things go awry. This is something to discuss with your realtor at length so that you have a full understanding of what’s required to obtain your desired home.

Your first property probably won’t be perfect, but hopefully you now have some insight into your own situation and have the answers to some of your questions about buying your first home. When you’re ready to start the process of buying a home in the  Bay Area—or anywhere else in California—call a REALTOR® you trust and turn your dreams into reality.