In December 2017 I completed the long and emotional journey of a first time home buyer. While my experience was not as bad as some, it took almost a year from finding a home to closing.
This site is going to be about paying off a mortgage so why am I giving tips on how to buy a house and get into the most debt a person can accumulate?
Home ownership isn’t for everyone.
I’m targeting that person who is done renting or done living with room mates /family that eat your food and leave their clothes in the washer and dryer and never do the dishes.
The person who is ready for the challenges of home ownership. Who is ready to crawl on their belly into the crawlspace to patch a plumbing leak, who will climb on the roof to wash the outside of the windows and inspect the roof. Sure a mortgage is a lifetime of debt for some, but the reward of home ownership is far greater then owing the bank a large amount of money. The freedom is worth it.
My take ways from buying my first house:
1.Getting pre approved before starting your house hunt
I didn’t realize it at the time but having a pre approval from the bank I chose was a real time saver. The bank told me how much I could afford based on my income and gave me an estimate on how much house I could buy. This saved me and my realtor a lot of hassle of looking into houses I could not afford.
There is also the issue of which lender to go with. I decided that since I already bank with Wells Fargo ever since my first job at Safeway back in 2006, I decided to go with them. I didn’t realize it at the time but they offered the lowest interest rate. Being a first time buyer and not shopping around, I got really lucky. I only submitted pre approvals with Wells Fargo and US Bank. Remember, being pre qualified and pre approved are two very different things!
Learn from my mistake: Do research for your lender. What interest rate and loan terms are they offering? Will they have an option to add principal to every mortgage payment? How much are the closing costs? Don’t just go with one lender and hope for the best like I did. You may end up with loan terms that don’t work for you.
2. Finding a good realtor.
Here is my next mistake. Being an introvert and having phone anxiety, I didn’t call realtor companies in my area and interviewed each one to find one that worked for me. What I ended up doing was going to a home listing site and requested a showing at a house that I liked. I got a call later that day from a realtor who ended up maker herself my realtor. Luckily, she was good with first time home buyers but there are some out there that are not so first time buyer friendly.
Before I worked with my realtor, I had some other realtors I “worked” with. There was a gentleman from another company that talked me through a listing I had requested for more information on Zillow. He was knowledgeable about his work but he lacked something that I needed most: Local knowledge. When choosing a realtor, you want someone who knows the area better then you. They may know about the noisy 24/7 convenience store that has nightly revving competitions by the local car club or the nearby rendering plant that melts hog fat but is closed on the day you go see the house in person.
Your realtor must know how to handle problems. My first accepted offer was on an older manufactured home that had tenants living in it. The owners of the house had planned to give the tenants their 60 notice to leave after the house would close. Me being a first time buyer had no idea what I was getting into. After telling my family about my exciting (to me) home purchase they told me to back out. The owner of the house, after closing, would not have to be liable to kick out their tenants after the house closes. It would fall on me to do that. I wasn’t a landlord at the time and I didn’t know what to do so after a frantic text to my realtor, she figured out a way to get me out of the contract without losing my earnest money.
Learn from my mistake: Choose your realtor wisely. They represent you in the buying process. You want someone who is in the 21st century. By that I mean, you want someone to send you documents to sign electronically and someone who knows how to text. You will be signing a lot of documents if you put in lots of offers and it helps to do in from home on the computer to save you trips to the realtor’s office. If a realtor cannot do things electronically, move on and let the dinosaur find other clients. Don’t waste your time.
Find someone that works in the area you want to live in. They will know the area and which houses are worth looking at. They will let you know that the $200,000 house has plumbing problems and the $100,000 house is all cosmetic problems.
3. House hunting. Patience is key.
This is a big one. Let me tell you my situation. I was living in an apartment and they just raised the rent from $800 to $1050 per month. At the time, typical house payments were in the $700 range. Along with this rent hike, they removed the month to month option that I was on and forced me to sign a lease. Timing the lease ending with a house closing is not an easy task.
House buying is already expensive. I haven’t even gotten to the down payment yet! And now I’m going to tell you to have extra money to cover extra rent payments? Reluctantly, yes if you are a renter. Getting a house to close at the time time as a lease ending is very hard. But it is possible.
Finding the right home takes patience. I personally went to 25 houses with my realtor before I found the one I live in now. Most of the time I didn’t get a house was because of competition. People were offering more then the asking price. How is a first time buyer with a measly $125,000 pre approval supposed to compete? The answer? Patience.
There was always another house for sale. There is no sense in getting into a bidding war with other buyers and raising your mortgage payment higher then the area average rent. This is why you need a calm head while looking at houses. Don’t get too attached to a place you like. Just put in your best offer and wait. Sure there are things you can do like sending personal letters and cookies to the seller but I won’t get into that here. I found the home I live in now with the alerts on Zillow and as soon as I saw it, I sent a text to my realtor to schedule a time to see it. Turns out she was already thinking the same thing! I saw the house, I loved it, my girlfriend loved it and it had everything that I wanted in my house. I put in an offer but there was already an offer in place that was accepted. My realtor jumped in before I said forget it and told me to put in a back up offer. She said that first offers fall through and back up offers do end up getting the house. So I did just that. Long story short, my back up offer got accepted and I closed on the house. Woo!
Learn from my mistakes: Research as much as you can about a house. There are tools such as the County Assessor that lets you access public files about properties for free. Learn if the house is up to date on it’s taxes, who the owner is and (depending on your Assessor’s website) loads of other things. Just Google your county assessor office and it will give you the website of the assessor’s office. Just type in the address you are interested in and it will give you the information.
If you are stuck on a lease at your apartment, talk with the manager on site. You might get lucky and end up living an extra month lease free so you don’t have to sign a new lease as you close on a house. The manager at my apartments didn’t care too much and let me live for 4 months on a 3 month lease and I was able to get out in time for my house to close without signing a lease.
Be patient. If you miss out on what you think was the perfect house, keep looking. Don’t give up. More houses will come up for sale and you may find one that is even better then you one you found before.
4. Don’t forget about closing costs!!!
If you ask any first time buyers if they are prepared for the closing costs, a lot of them will say, “Closing costs?”
That’s what I said when I found out about them, The secret about home loans is closing costs. They can range from $2000 to $6000 depending on how much you buy the house for.
Closing costs are the bank fees, escrow fees, tax fees, fee fees and the fee fee fee. There is a lot of details in closing costs but what you need to know is when you have a house under contract (accepted offer) and you get the necessary information to the lender (W2, pay stub) and the loan underwriters will accept your loan application and you will enter what is called the closing phase. The money is sent into an escrow account which is a fancy way of saying third party that distributes the money.
Your down payment, insurance payments (you have to pay a year worth of home insurance and or flood insurance upfront) any taxes owed and any loan fees. Good news though! Remember that earnest money check you wrote when they accepted your offer on a house? That comes back to closing and goes towards the closing cost. Put down $1000 earnest money? Your closing costs went down by $1000!
So your total will be the down payment, and all those upfront costs combined. Yikes! That’s a lot of money!
Learn from my mistake: Don’t just budget in your down payment. Budget in your closing costs. If you talked to a lender that you went with, ask them the typical closing cost amount. It will help you a lot when it comes time to close.
The biggest hurdle for potential home buyers is the down payment. Good news that these days there are way to circumvent the down payment hurdle. Some exmaples:
Some lenders offer FHA loans which are insured by the Federal Housing Authority. What you need to know about FHA loans are they allow down payments as little as 3.5%. Found a $100,000 house you like? All you need is $3,500 for the down payment!
The downside to these loans are, super long closing time. There is a lot of paper work involved with FHA loans. Also, you are required to live in the property for 1 year if you use an FHA loan. Most first time home buyers this won’t be an issue but if you move a lot in short time frames, this may be a problem. Don’t try to get an FHA loan, move in for a few months and then move out and put renters in your house. That is mortgage fraud and it is a felony.
Down payment assistance
A quick Google search will show you many options for down payment assistance. These can work as interest free loans, grants, or debt you pay off when the house is paid off. Depending on where you get the assistance from will determine what terms you will get.
USDA Rural Housing loans
The same USDA that grades the meat you buy at the grocery store offers home loans. The best part? You could get a loan that is 0% down! The downsides? You have to be in a rural area. The USDA site has a map where you can type in the address of a house and you may be surprised to see it is considered rural. Some obvious points, if you are in a big city such as San Francisco, don’t even bother looking. But if you are considering living out of the big city, this is definitely something to look into.
Learn from my mistake: I didn’t know about low down payment loans at the time I bought my house and I could have saved a ton of trouble coming up with the down payment for my house. I planned on living in my house full time so I was the perfect candidate for an FHA loan but went with a conventional loan. Luckily my lender had a first time home buyer program that didn’t require 20% down and I was able to put less but had I known about other loans, I wouldn’t have had to scrounge out the money for the down payment.
If you’ve read this far, Thank you! It is a giant wall of text but these are actually experiences I went through during my home purchase and I hope that future home buyers will find something of use here.