The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: cats on April 25, 2015, 02:47:47 PM
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So, we are thinking we *might* be ready to buy a house. Ready in the sense that we have a fairly substantial stash and are getting to the point where rent is quickly approaching "rent" (e.g., mortgage interest, property taxes, estimated maintenance costs) on a home at the lower end of the local real estate spectrum, so it seems to make financial sense to consider becoming property owners. We have a pretty good idea of what our wants/needs are in terms of cost, location, size, overall condition, etc.
However, as neither my partner nor I have actually purchased a house/property before, I feel like we're pretty clueless about where to start or what order to do things in. I hear people toss around words like "pre-approved" or "escrow" and it's a bit of a foreign language. Plus, I have this feeling that house-buying is a process rife with opportunities to be unnecessarily parted from my hard-earned stash.
So, for those of you with some actual experience in the process, where should we start? Go to our credit union and talk about the process for a mortgage? Cash out some stocks to make sure we have a down payment ready and waiting in our checking account? And, what are the things we're likely to hear we "should" spend money (or time) on that we can safely skip? Or, conversely, the optional steps that really ought to be mandatory?
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I am by no means an expert on this topic, but I have been involved in two transactions as a buyer. This is a list of things I feel helped me. Others with more experience will be able to augment my relatively inexperienced view.
First of all, there are a lot of new terms and I remember also feeling overwhelmed.
The first step would be deciding how much you want to spend. This will be a very personal decision, but make sure to take all ownership expenses into consideration. When renting, everything is bundled into your rent payment. These expenses are largely unbundled when you own. Make sure to take not just the mortgage payment into account, but also taxes, insurance, any utilities (water, sewer, garbage) and maintenance, the last of which can vary widely depending on what you purchase.
Once you've decided on what you want to spend, you can work backward to determine your upper price limit.
Next, it is helpful to get prequalified by a lender. You can do this through your credit union and it won't mean that you ultimately need to get a mortgage from them. Prequalification differs from preapproval as there is a level of verification.
Next ask a lender what documentation you should start gathering. It is incredibly helpful to have this ready to go when you are ready to submit for a mortgage. In parallel, you can begin shopping around for a mortgage.
Next, start shopping. Start looking online and after a while, you'll start to understand the market.
It can be helpful to make a list of what you're looking for. This will help you start thinking about must haves vs. nice to haves.
Find a realtor you trust and like because you'll likely be spending a lot of time with them. It may be helpful to interview them a bit before you enter a relationship with them. Understand that once a real estate agent shows you a house, they will consider you their client. Switching realtors after this time can get complicated because the original realtor may ask the next realtor for a share of their commission once a sale is made.
Try to find a realtor that is OK with spending the amount of time necessary to make sure you're comfortable. Ideally this will be someone who doesn't mind showing you houses for months before you make a purchase.
Next, look at as many properties as you possibly can. It can be helpful to look at several in a day. There is simply no substitute for viewing properties in person and imagining yourself in the space. Looking at properties will help you refine your list of desirable property attributes.
When you find a place you like, make an offer. Your realtor can guide you here. Make sure you have someone you trust. Realize that if structured correctly, you'll still have a couple opportunities to back out.
Often times, the realtor will advise putting earnest money down. This is money to show the buyer you intend to purchase the home. Under certain conditions this money is non-refundable if you don't purchase the house.
Once you've put an offer down and the buyer has accepted, then the purchase process begins. It is common to have contingencies in the contract such as subject to inspection and subject to financing. These contingencies mean that if you find something wrong with the house after inspection you can walk away from the deal. Same thing with financing. This is why getting prequalified can be helpful. If the seller knows you've been prequalified, then they'll be less worried about a financing contingency.
Shop around for a mortgage. You can either do this yourself or get the assistance from a mortgage broker. I'm sure there are several on the forums who will be able to weigh in on the best way to get a good mortgage. Keep in mind that it's not just the rate you're interested in. You also want to know that the entity providing the mortgage will be able to close on time.
Inspection: on the two properties I've purchased, I've had inspections on both. Understand that if you're in a hit market, often times people will put in offers with no contingencies, so make sure to ask your realtor about this.
Shop around for insurance. I'm sure there will be several recommendations on the forum for how to do this.
Once your offer is accepted, it's mostly a waiting game until closing if you've done things right. This is one of the reasons you want to have documentation ready to go, because otherwise you'll be scrambling for paperwork, which adds an immense about if stress to an already stressful situation.
At closing, you'll be signing an inordinate amount of documents. Read everything, make sure you understand what you're signing and take your time. It can be helpful to review things ahead of time and ask questions. The escrow agents will not be able to give you advice for the most part.
That's it at a high level. A good realtor can help you through this.
Hope this helps.
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Go to a bookstore or library and check out the guidebooks on home buying. There are lots - look around and see what you like.
For the first house I bought, I went looking at all the new construction model homes in my area, so I could get a feel for what size I wanted (# rooms, square footage etc) and some floor plan ideas for what I liked and what I disliked. I didn't really have any intention of buying any, but I wanted to look and get ideas. Open Houses are also easy ways to do this, but models are easier to locate and view.
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I am going to second knowing what you want and need and having that well thought about by yourself and your partner if you have one is important. With that list in hand you can then gauge your market as well as not be swayed by sales tactics. It also means you are not debating this in front of sales people wants/needs.
In response to "Not telling them your income." I am wondering if that is one of they ways of filtering out the "Tire Kickers?"
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Check out the redfin homebuying guide:
https://www.redfin.com/home-buying-guide/welcome/
I bought with redfin and loved it, but even if you hate them it's still a great overview of every single step of the sometimes confusing process.
Just remember, something _always_ goes wrong at the last moment and it almost always turns out just fine.
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Go back and question your premises after you decide what you want, too. See how much the marginal cost is of each of these preferences (for example, detached house vs. townhome).
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I would recommend getting pre-qualified/pre-approved so you have that ready to go if you find the right house. Now, both times when I have bought houses the mortgage guy told me I was pre-approved up to a certain amount. Just because they tell you that you can spend that much does not mean you should. Since we're all mustachian around here that might be a little obvious but it's worth mentioning, just in case. The bank does not care about your other financial obligations beyond the minimum payments. Say you pay off your credit card every month in full, the bank does not care and will only remove the minimum payment from your monthly income. This leads a lot of people to believe they can buy more house than they can really afford and then they end up in a bad situation.
I would not ask your realtor for a recommended home inspector. I hired someone that was recommended to me once and it was a very negative experience. It's possible that the guy was just having a bad day but being talked down to is never appropriate. There's also the common belief that a home inspector you hire through your realtor might sugar coat real issues so that the deal does not fall through. I have not found that to be the case, but I would rather my home inspector only have a connection to me and not my realtor as well. You can use a website like thumbtack to find a home inspector, that's what I did most recently and it worked out well. Go to the inspection, ask a lot of questions.
Until you sign a document with a realtor you are not obligated to them, at least in my state. If you are not sure about a realtor give them a trial period if they are insistent on having you sign paperwork. There should be an option to "end agreement on x date," somewhere and you can set that out a few weeks if you have any reservations.
Good luck! Have fun! Enjoy looking at houses on Zillow. I'm not even looking for a house right now and it's still fun to check out Zillow.
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Thanks all for the suggestions! I think I will probably start by seeing if the library has any guides, and checking out that Redfin guide. We are not in a huge hurry to buy, but I do want to make sure we're well informed so we can be prepared if the right property shows up.
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Be sure to get recommendations on a realtor. Make an appointment with each of them and get to know them so you make an informed choice early on. We use the same realtor who bought and sold for us over 20 years ago. We used a couple of different folks before him. This guy meshes really well with my commercial electrician husband who is a property snob. Those two get along great. He's helped us with all our rental purchases. He and DH tromp through transient ridden meth lab properties, in hopes it will be that perfect investment... they are too funny! He hasn't steered us astray and is a great negotiator. We've never been the top offer on a property and yet somehow he wriggles he way in and has made deals happen for us. A great realtor is priceless.
Definitely research, research, research. Realize that to prequalify they will pull credit. Each time credit is pulled it is a little hit on your rating. Do understand your credit rating. Know the basics of the loand and purchase process. Be sure if your down payment is buried in the back yard that it sits in the bank for 90 days, anything newer than that must be quantified with detailed paperwork that is hugely annoying. Lets say you have to show enough reserves for 6 months payments, again, make sure that money is aged as well or you will have to explain it.
I learned the hard way and now keep my accounts separate, not exposing the active accounts like our personal checking to the underwriter. We stick with one savings account loaded with everything it will need for the transaction. Our broker is savvy like our realtor and he taught me alot. Early on I did go over all our accounts, he helped decide which were the minimum needed to get the job done with the least amount of hassle.
I don't think I've ever talked income with our Realtor, he sometimes throws us an overpriced property but rarely and only if he thinks it is a screaming deal worth checking out. Other than that he stays within our parameters readily enough. He is very patient, at times showing us 20, 30 or more properties before we land one. He never tires of it.
To me the realtor and my lending broker are key people on my "team". Even if you are just buying a primary residence you should feel that way about them through the process. If something feels wrong, dump them and move on.
How exciting for you to embark on this process, I am totally addicted to house hunting and really could do it full time! Not as a realtor, I want to be the buyer:)
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Some good points made about not showing your mustachian lifestyle. I have always gotten pre-approved for the most I can, but when I make an offer on a house, I have the Loan officer send over the paperwork showing my pre-approval as exactly what my offer is. example: say you are preapproved for $200k, but you want to make an offer on a house for $140k... don't send the preapproval of $200k, send over a $140k preapproval. This way you don't show your cards.