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Posted: Rebecca Graham|December 7th, 2018

Home Loans

10 Things First-Time Homebuyers Won’t Learn from HGTV

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Written by Rebecca Graham
Rebecca Graham is a Content Management Specialist for Best Company. She enjoys bluegrass music, hiking with her husband, and reading with her two kids.

There’s no shortage of entertaining home buying, home improvement, and property investment series on TV. If you imagine your typical show, it may follow a familiar format: 

The would-be homebuyers are chauffeured around by a realtor, visiting various listings, walking inside, arguing, and visualizing the ideal scenario. In some cases, the home in question would make a great fixer-upper, flip project, or income property. The buyers discuss nuts-and-bolts costs, estimated renovation project time frame, and sometimes negotiate with the seller. The realtor spends about 15 seconds saying something like, "Let's just double-check with the bank," and then, an hour and some time-lapsed renovations later, the happy couple has a home! 

Easy peasy, right? 

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Expectations vs. Reality

Anyone who's actually traversed the complex and often lengthy home-buying process understands that these shows tend to oversimplify just how much goes into buying a home. To be fair, HGTV's priority is not to highlight the boring loan approval and offer acceptance waiting games that accompany the home-buying process (nobody wants to watch that!). Nevertheless, this and other aspects are vitally important to be aware of.

House flipping and other home renovations — as popularly portrayed in Fixer Upper and Good Bones — are common considerations among first-time homebuyers and veteran homeowners alike. According to a Houzz survey of over 130,000 homeowners, over 50 percent of them had completed renovations or planned to in both 2017 and 2018. 

In an Open Listings survey, over 500 homeowners were asked what they would most likely do if they had $10,000 to allocate towards housing. 73 percent said they would use it toward current home renovations while only 27 percent said they would put it towards a down payment on their next home. 

Whether you’re looking for a move-in ready home, a place requiring some renovations, or a true fixer-upper, here are 10 important details about home buying that TV doesn’t always show. 

1. Buying a home (usually) takes time 

Lots of us are suckers for before and after pictures without regard to the time it took in between, whether it’s a dramatic fitness transformation or a home makeover that’s turned grungy into gorgeous. 

On average, the home buying process takes about four and a half months from shopping to closing but can range anywhere from 30 days to the greater part of a year. Debra Carpenter of Sandpoint, Idaho’s Nathan Oulman Realty has noticed that many first-time buyers are unaware of the time it can take to make offers and finalize an accepted offer. 

“Reality shows don’t portray how long it takes to close on a house once you’ve made the decision to buy,” Carpenter explains, but she admits that while the process definitely takes longer than it appears on TV, “the feeling of being in your new home is completely worth it.” 

When faced with TV-inspired unrealistic expectations from clients, top agent Lisa Larson of Warburg Realty in Manhattan wisely poses the question, “Would you take relationship advice from The Bachelor?” 

Chew on that food for thought!

Larson continues, “If you watch reality shows, be aware that they are scripted and edited versions of reality. The irony, of course, is that the popular and entertaining shows on HGTV set up unrealistic expectations when it comes to renovation, its expense budgets, time constraints, and obstacles — as well as real estate in general.”  

Quickly flipping a home and expecting a huge return profit is not feasible in every market, especially for the inexperienced. Larson cautions agents against promising multiple offers over the asking price of a home and finding a deal good enough to flip soon after. This process requires patience — sometimes years of searching for an opportunity where all stars align. 

2. Your credit score is a crucial factor 

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Two words never really mentioned on House Hunters are "credit" and "score." Your credit score is among the most influential determinants in the home-buying process, especially if you need to take out a home loan (and most first-time buyers do). 

Your credit score is measured by a number of factors, including your credit history, the number of lines of credit under your name, and how prompt you are in making your monthly payments. Banks and other lenders pay close attention to your credit score to help them quantify your trustworthiness in paying back a home loan on time. 

Generally, if your credit score is above 700, you are considered a low-risk borrower, and lenders have confidence they will get their money back. If your credit score is too low (below 600), you will be considered high-risk and likely won't even qualify for a home loan. Most lenders won't even make you an offer if your credit score is below 620.

Even if your credit score is good enough to place you in the market as a buyer, the lower your credit score, the higher your mortgage interest rates and monthly payments are likely to be. Sometimes a greater down payment is also required. And, of course, higher rates and payments can in turn affect how much home you can afford. 

Take a look at these data projections (courtesy of myFICO.com) to see how your FICO score can influence your annual percentage rate (APR), monthly payment amount, and total interest paid — assuming you live in Colorado and are requesting a principal amount of $100,000:

FICO Score APR Monthly Payment Total Interest Paid
 760-850 4.469 % $505 $81,744
 700-759 4.691 % $518 $86,515
 680-699 4.867 % $529 $90,340
 660-679 5.081 % $542 $95,042
 640-659 5.51 % $568 $104,630
 620-639 6.055 % $603 $117,113

As you can see, a bad credit score will not only lock you into a higher rate but also force you to pay more each month, resulting in an additional $35,369 in total interest paid!

3. Luxe features require a larger budget

In the Open Listings survey mentioned previously, respondents were asked which amenity or feature they didn’t have in their current home that was a “must” in their next (or, presumably, a renovation requirement). Top responses included hardwood floors (18 percent) and quartz or granite countertops (15 percent). 

Additionally, Doug Smith, president of Miller & Smith, a Washington D.C.-based home builder and real estate developer, has seen "a seismic shift in buyer expectations” over the last few years. 

“Today’s consumers bypass anything mass produced in exchange for ‘artisan’ products, fixtures, and features,” Smith says. “Thanks to the HGTV phenomenon and saturation of home improvement shows, many buyers expect luxe features, such as hardwoods on every floor and granite or quartz countertops, to come standard at all price levels.” 

Of course, that’s simply not the case. The price tag of such specialized features is above standard levels, and the customization homeowners crave may not always be feasible for the average budget. 

That doesn’t mean homebuyers, flippers, and builders need to be millionaires to make their homes into something that suits some of their preferences. But be prepared to pay more for luxe renovations or to buy a move-in ready home with them. Smith explains that his company finds the balance in offering customization and providing simplified options through a selection process where homebuyers can capitalize on what is most important to them. 

4. Your debt-to-income ratio matters

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What you might not realize while you're binge-watching Property Brothers is that homebuyers almost always go into debt when financing a home. However, if lenders predict that you're about to take on more debt than you can handle, they will not make you a loan offer. Right behind your credit score in order of importance is something called your "debt-to-income" ratio, or DTI. 

Simply put, your DTI measures your housing, monthly, and other debt expenses against how much you earn. This number shows creditors how well you can manage your debt payments and, unlike your credit score, you want to keep this number as low as possible. Usually, lenders won't even give you the time of day if your DTI is above 43 percent, meaning 43 percent of your income goes directly to managing your debt. The ideal DTI ratio is at or below 36 percent.

Lenders pay particularly close attention to two types of DTI ratios:

  • Front-End DTI: Also known as the housing ratio, the front-end DTI shows the percentage of your income that goes exclusively to housing expenses, such as mortgage payments, mortgage insurance, etc. Usually, your front-end DTI needs to be around 28 percent or lower in order to qualify for a mortgage. The higher your front-end DTI, the more likely you are to default on your mortgage.
  • Back-End DTI: The back-end DTI measures what percentage of your income goes to paying off other debts, like credit card payments or car payments.

In simple terms, you can only improve your DTI ratio in two ways: either increase your income or decrease your debt. Unfortunately, these methods tend to be easier said than done. While there's no magic bullet answer for increasing your income, some smart strategies can help you cut down debts and improve your personal finance management. 

5. Managing renovations can get messy

In Fixer Upper, Chip and Joanna Gaines never shy away from the physically messy aspects of flipping a home, whether it’s removing an abandoned refrigerator with rotting food or discovering a termite infestation in a crawl space. But if you’re not a contractor yourself, you need to be on top of your game managing the various parties renovating your home. 

John Bodrozic, co-founder of HomeZada, says that home improvement shows completely underestimate how you, the homeowner, need to manage your contractor on the remodel projects. HomeZada helps customers negotiate pricing, build budgets for projects, and track documents and photos to manage your contractor.  

Bodrozic explains, “You need to review a contractor’s quotes, make sure they are licensed and insured, check their references, and agree to a contract with payment terms that protect you.” Otherwise, you can end up paying more than you bargained for with unsatisfactory results at best — and damaged property at worst.  

Bodrozic also advises homeowners to take pictures during the remodel to document in case things go wrong “so you can hold your contractor accountable to finish the project to your satisfaction.” 

Keep in mind that before renovations or even a purchase, a proper inspection that goes more than skin deep is key to determining if a house is worthy of an offer. And, like hiring a contractor, that depends on someone else (in this case, the home inspector) doing a job right. 

Ben Mizes, founder and CEO of St. Louis-based Clever Real Estate explains that “the walkthrough process isn’t like as seen on TV. There’s much more meticulous inspection of the core systems of the property and looking for major red flags than it is talking about dream floor plans and designs.” A good home inspector won’t let emotions interfere with what should be a thorough and unbiased inventory of the condition of the home.

6. Mortgage rates change every day 

Occasionally, while you're watching your favorite home-buying program, you might wonder why either the homebuyers or the realtor is particularly anxious to close the deal on a certain day or at a certain time. While this urgency can be attributed to excitement at starting a new life (the homebuyers) or getting paid (the agent), it might also be due to the fact that they've happened upon a particularly good mortgage rate and want to strike a deal before that rate goes up. 

The fact of the matter is that mortgage rates operate very similar to stock prices: they fluctuate frequently, even several times a day. This is why it can be almost impossible to get a stable rate quote ahead of time. Take a look at this chart (courtesy of Zillow.com) to see just how much a mortgage rate can dip and spike in just one day:

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Mortgage rates change so often for a variety of reasons, many of which revolve around the current state of the economy and economic forecasts. Thankfully, mortgage rate aggregators like Zillow can clue you into the best mortgage rates at any given time, and many top mortgage companies will update their mortgage rate estimators according to market conditions.

7. Soft costs are involved 

Jonathan Faccone, managing member and founder of New Jersey-based Halo Homebuyers, says that whether it’s from the house-flipping show phenomenon or the first-time home buyer shows, everyone thinks they know what it entails to purchase and renovate the perfect home. However, a key element missing from the media portrayal is cost. 

Faccone explains that “the flipping shows never show you what the ‘soft costs’ are when purchasing a fixer-upper.” These soft costs include all the costs other than the actual construction-related expenses that will be incurred and include, but are not limited to, the following: 

  • Title insurance
  • Attorney fees (in certain states)
  • Home inspection
  • Home insurance (impacted by vacancy and need for a builder’s risk policy) 
  • Closing costs
  • Carrying costs

When planning your home purchase with renovations in mind, plan for the expected soft costs as well as for the inevitable unexpected. Faccone suggests that the amount of money a typical buyer thinks a home needs for a renovation budget should be doubled. “I am always going over budget in my own projects because of the unknown fixes that I didn’t expect lurking behind the walls.” 

Alberto Marinas, CEO and co-founder of PadBlock, reminds buyers about the impact of the appraisal on the home sale. The price, the value of upgrades, and the reliability of current appliances may not be appraised to the agreed purchase price. 

“This can derail even the most cooperative seller,” he explains. “Unless the buyer has additional cash to cover the difference, the asking price will have to drop to the appraisal price. More often than not, in today’s market, the buyer has just enough cash for downpayment and closing fees — and not a penny more.”  

Finally, adequate insurance for a house requiring major renovations can be steep. Scott Johnson, founder of Marindependent Insurance Services in the Bay Area, California, explains that “consumers often fail to disclose to the agent their intentions [to flip] and often go mis-insured.” He describes two issues regarding property insurance during a house flip: 

  1. If you are not planning on living in your new purchase in the first 30 or 60 days, then the home will be considered vacant and you are not eligible for typical home insurance.
  2. If your home undergoes significant construction, you should secure a builder’s risk policy protecting contractors and workers on your property. 

So how much does proper coverage cost under such circumstances? Johnson says it’s impossible to say without knowing all of the details of a situation, but a builder’s risk policy can easily cost $3,000 per year, while a regular home insurance policy might only cost $900. 

8. There are different types of mortgages

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Wait, what? 

Whenever agents on TV tell clients something like, "Alright, now we just have to fill out some paperwork," they are most likely referring to the loan application. And somewhere on that application, the future homeowners will have to indicate which type of mortgage loan they are shopping for. 

The sheer number of mortgage loans is the many-headed monster of the home-buying process and includes FHA loans, VA loans, Jumbo loans, USDA loans, Conventional loans, and ARMs. Each type of loan has unique eligibility requirements, advantages, and disadvantages, but for the purposes of this article we’ll touch on two types: 

Fixed-Rate Mortgages: The main benefit of choosing a conventional or fixed-rate mortgage is you know exactly how much you'll be paying each month for the term of the loan. The one main drawback, however, is that fixed-rate mortgages tend to initially sport higher rates than do adjustable-rate mortgages. The most popular term lengths of fixed-rate mortgages are the 30-year and the 15-year. Each term length has strengths of its own. 

Mortgage Type Advantages Disadvantages
30-Year Fixed-Rate Monthly payments tend to be lower You will end up paying more interest over time, and at a higher interest rate
15-Year Fixed-Rate/strong> You pay less total interest over time, and at a lower interest rate Your monthly payments will be much higher

Buyers who want lower monthly payments will often go with the 30-year fixed-rate mortgage, but a 15-year mortgage gets you on track to pay off your home loan in half the time, avoiding a bulk of the interest payment. 

Adjustable-Rate Mortgages (ARMs): Adjustable-rate mortgages are just as they sound: over the course of your loan, the rates and monthly amount you pay are subject to change. This can either be a good or a bad thing depending on your future plans (e.g., how long you plan on staying in the home, how comfortable you are with changing your rates, etc.). Just remember, while you might initially pay a lower interest rate than you would with a fixed-rate mortgage, that can easily change in as little as a year. Below is a list of some of the most common ARMs available:

Mortgage Type Description Advantages Disadvantages
1-Year ARM Interest Rate Changes year-to-year Qualifies for a higher loan amount; good for flipping Considered risky, as payment can change significantly each year
10/1 ARM Rates fixed for first 10 years; fluctuates for next 20 Lower rates than 30-year fixed rate (at least for first 10 years) Bad for those wanting to stay in the same house for more than 10 years
2-Step Rates are fixed for first part of mortgage, and adjustable for the second Borrowers can choose when to pay fixed vs. adjustable Rates could adjust upward following fixed period
5/5 and 5/1 ARM Rates are stable for 5 years, then adjust every year or five years until loan is paid off Good for borrowers who can accept periodic changes Bad for short-term homeowners
5/25 ARM Rates stable for 5 years, then adjusted at year 6. Rate only changes once in 30 years Rate could adjust upward for a 25-year period
3/3 and 3/1 ARM Rates are stable for 3 years, adjust every year or three years until loan is paid off Good for borrowers wanting a new rate after 3 years Bad for long-term borrowers

Keep in mind that if you’re considering buying a fixer-upper, ideally you should be ready with a cash offer with minimal contingencies so that you can land a great deal. “The better deal you can get,” explains Jonathan Faccone of Halo Homebuyers, “the more margin you can build in for unexpected costs, along with being able to put in your desired finishes and renovation requirements.” 

Faccone says the problem is that most home buyers don’t have enough cash to fund both the purchase and renovation. In that case, there are conventional and FHA 203(k) rehabilitation loans that can cover the difference, “but the amount of paperwork that you have to do and the red-tape of the process can put a damper on your first flip experience.” It’s clear that funding a flip is not for the faint of heart! 

9. Knowledge and grit don't guarantee success

Successfully renovating a home or even purchasing the perfect move-in ready home can’t be guaranteed on a certain timeline or with certain financial limits, even for the most persistent buyers. Grit, talent, or strong emotions alone won’t carry a sale or renovation to fruition. An evolving market and other factors outside your control are at play. 

John Bodrozic, co-Founder of HomeZada, laments that real estate TV shows “tend to focus on the lifestyle and emotional aspects of buying a home and fixing it up while glossing over financial details” such as negotiating strategies on how much to offer based on list price and other market comparisons. 

In addition to knowing how much of a down payment you can make and the loan amount you qualify for, “it is wise to get a comparative marketing analysis (CMA) to help you determine your approach” when it’s time to make an offer and negotiate. Remodeling costs, too, can vary dramatically based on your product and brand selections and the market conditions with local contractors.

In regards to a complete remodel, even the most experienced flippers find that things unexpectedly go wrong throughout the process. Many of the experts we consulted for this piece shared their own not-made-for-TV stories. 

Ben Mizes, founder and CEO of Clever Real Estate, says, “I wish these shows would share that investing and flipping isn’t as glamorous as it sounds. When I first started investing in real estate, I did all my own work, and there was a lot more of hauling old cabinets and 2:00AM sewer clogs than there were brand new houses and excited buyers.” 

10. A good lender is crucial 

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Brad Pauly, owner of Pauly Presley Realty based in Austin, Texas, thinks HGTV makes buying real estate look easy. And, surprisingly, he says it can be — “as long as you have the right people working for you!”  An agent with years of experience is important because “the seasoned agent has already experienced all the potential pitfalls of the home purchase.” 

Pauly explains that a good lender is crucial because once a buyer puts a property under contract, the lender is responsible for getting the buyer’s loan approved — and on time.

So how do you choose a good mortgage lender? Obviously, some mortgage lenders are going to be better than others. The home loans industry can seem difficult to navigate, especially if you're a first-time homebuyer. So here are some guiding questions to keep in mind before you sign any paperwork:

  • What do mortgage reviews say? Read real, verified customer reviews to determine if a lending company provides good customer service and follows contractual agreements. 
  • How transparent is the lender? One of the most important qualities of a trustworthy mortgage lender is how honest the company is about what you, as the borrower can expect throughout the process and what the company generally charges for lender fees. 
  • Which loan type are you seeking? The type of loan you seek for your purchase and/or remodel is important because not all lenders offer every loan product available. Is a fixed-rate or adjustable-rate mortgage best for your long-term plan? For a remodel, will you purchase with a 203(k) renovation loan, or finance with a conventional loan, then fund your renovation with a personal loan, credit card, or another method? 
  • Who can give you the lowest rate according to your credit score? As we discussed, interest rates vary, but get an interest rate estimate from multiple lenders to see how each lender’s rates compare to the national daily average.  

If you’re disappointed we've ruined the picture-perfect world of your HGTV binge-a-thon, take heart in knowing you can still embrace the entertainment value of these shows while also being armed with the knowledge of important details often left out of these portrayals. 

And when the time comes for you to play the lead in your own, real-life house-hunting drama, you’ll have realistic expectations to guide you and keep you grounded through the excitement! 

 

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