You may recall that in March of last year we bought a house. We’ve been loving it, but that isn’t the point. The point is that the whole process is terrible and arcane and a pain in the ass.
Well, a friend of mine recently reached out to me to ask if I had any tips or basic information because he was just starting to think about buying a home. I ended up writing a pretty lengthy email back to him and thought I would share it in case it helps anyone else out there who is looking for a basic overview of how the process works.
Future homeowners, how exciting! Unfortunately the process is really arcane and overly complicated. But I’ve got a few tidbits that may (or may not) prove helpful.
[ Warning: this ended up being really long, so settle in before continuing 🙂 ]
The first thing you should get sorted out is the financing. It’s the most complicated part, and the part during which you get the least guidance. Essentially, you can get pre-approved for up to a certain dollar amount by your mortgage lender, which means that the people who own your potential future home know that you can afford to buy it which, of course, makes it more likely that they will accept your offer.
Note that there is big difference between “pre-approved” and “pre-qualified.” You definitely want the former. It’s much more rigorous and means a lot more to the seller. If they aren’t asking for bank statements and tax documents then you aren’t getting pre-approved.
As to finding a specific lender, we used a local credit union but I’ve heard good things about Quicken Loans online program, and I’m sure that there are a lot of places that are easy to work with.
Also, don’t be concerned if pretty much immediately after you take out the loan it gets sold to another lender. It’s my understanding that that is how it works about half the time. The terms of your mortgage won’t change even if the original lender sells the note to someone else.
A couple of things to watch out for regarding mortgages. Of course, you want to shop around a little to make sure you are getting the lowest interest rate. There is also something known as “points” on a loan, which essentially means that you can pay extra cash up front for a lower interest rate. You’ll have to crunch the numbers for yourselves to see what’s better. Here’s some extra info about it http://www.bankrate.com/finance/mortgages/mortgage-points.aspx.
Another thing is you want to make sure that there is no “pre-payment penalty”. This just means that if you want to pay the mortgage off early you won’t be charged a fee to do so. It’s effing insane that they can even legally charge a fee for this but they can so make sure you read your documents when you sign (don’t just take their word for it).
Also, I would personally stay away from adjustable rate mortgages in today’s interest rate environment, but that’s a personal preference. [Mrs. Dragon] and I went with a plain-vanilla, no pre-payment penalty, 30-year fixed rate mortgage.
Mortgages are a pain in the ass but making sure you get the right one can literally save you tens of thousands of dollars over the life of the mortgage, so make sure you shop around, ask lots of questions, and read all your documents before signing them.
OK, that’s probably more than you wanted about mortgages so moving on …
We recommend that you use a “buyer’s agent” when looking at houses. The house seller (not you) pays them. And if you don’t find something you like, you don’t have to pay them. It’s no-risk for you and they will be able to tell you information about the local market. That being said, make sure you meet with at least two (and preferably 3-5) to find one you think will genuinely listen to you and have your best interests in mind.
The agent gets paid at the purchase and, of course, some people are better than others. Some won’t care if you are happy in two years. You want to avoid someone who seems too “salesman” like, plus you just want someone that fits your personalities. You’re basically going to be hanging out with them for an hour or two several weekends in a row (probably).
The agent will help you navigate making the offer (they will do all the paperwork for you), reading the contract, setting up inspections, etc. It’s really important to get one that is easy and transparent to work with.
Also, if you want to start shopping around, we find that realtor.com is the best and most reliable of the real estate websites. It’s directly linked with the MLS so you know that the properties aren’t scammy. Of course, your agent will also be showing you houses, but it’s a good idea to be looking around on your own to see what prices are like and what sorts of homes are available.
I would recommend talking together and setting caps on price and square footage, and maybe the least room/bathroom combinations before you meet with agents. For example, we knew we didn’t want to spend more than $135k, we didn’t want larger than 1500 square feet, and ideally we wanted at least 3 beds and 1.5 baths.
The Realtor makes more money the larger/more expensive the house you buy (and so does the bank). But don’t buy more house than you want/need. That is the number one financial mistake people make. If you guys want a large house that’s great, but just make sure you talk together and decide before you go looking at houses. It will give you a much clearer picture to describe to your Realtor what you are looking for.
I know this is already a novel, but I just want to throw in a quick timeline for what to expect once you actually find a house you like and make an offer. Of course keep in mind that this is all very rough and I am far from an expert.
1.) You make an offer on a house you like.
2.) The seller generally responds within 48 hours either accepting your offer, making a counter-offer, or just declining.
3.) After you reach an agreed upon price, you will have to put up some earnest money to ensure that you are serious. Generally 1% of purchase price (roughly).
4.) Once the contract is signed by both parties you generally have a 7-14 day window to get inspections done and if you find something you don’t like, you can back out with no obligations (and you will get back your earnest money). This is the window where you will have a home inspector come check all the general stuff (plumbing, electric, condition of the roof, foundation, etc), and a pest person (make sure there aren’t termites, or raccoons living in the attic and such). Depending on the area there may be other standard inspections. Your Realtor should be able to tell you about this.
5.) After the inspection window clears, you are officially under contract and if you decide you don’t want the house you will forfeit your earnest money. Depending on what you work out with the seller in the contract, the closing date (when you get the keys and sign the mortgage documents) will be anywhere from 15 – 90 days after the inspection window.
I guess that’s probably more than you were looking for, but hopefully there’s some helpful stuff in there 🙂
Good luck with the house buying process. We’d be happy to talk/skype and tell you more details or about our specific experience if you think it will be helpful.
Just remember not to let anyone rush you during ANY step of the process. This will probably be the biggest single purchase you ever make, so do your due diligence and if something doesn’t feel right then walk away.
Love you guys!