Roadmap to Buying Your First Home

by Brett & Kate McKay on April 16, 2013 · 41 comments

in Money & Career

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Almost two years ago, I became a homeowner.

I had no idea what I was getting myself into when Kate and I decided we were ready to buy a home. I naively thought there wouldn’t be much to it. Visit some open houses, talk to the bank, sign some papers, and boom, I’d have a piece of the American Dream.

Boy, was I wrong.

Buying a home is a complicated, multi-step process. Down the road we plan to devote entire posts to many of the steps along the way. Today, however, we’ve set out to provide you with the big picture of what to expect when buying your first home. It’s basically the roadmap I wish I had when I was neck-deep in the process.

It should be noted that each state (and country) has vastly different laws regarding real estate. This is a rough idea of the process, but especially when it gets to working with realtors, making offers, and the closing process, things can look quite different. Research you own state’s or country’s processes.

Determine If Buying Is Right for You

Before you start attending open houses and munching on free cucumber sandwiches, you need to figure out if buying a home is even the right move for you. It’s a big decision that comes with huge time and financial commitments. When figuring out whether buying makes sense right now in your life, take into account your finances as well as your future plans. For help in thinking through the pros and cons, check out our guide on whether you should buy a home or rent.

Get Your Financial House in Order

Once you decide to move forward, it’s time to get your financial house in order to prepare for buying a physical one. Here are some things to consider doing:

Start saving for a down payment. If you haven’t already, start saving for a down payment on your mortgage. Most traditional mortgage brokers require that you have at least a 20% down payment to qualify for a mortgage. Even if you’re able to secure a Federal Housing Administration loan (FHA loan – for first-time home buyers only), you’ll still need to have at least a 3.5% down payment (some loans will require a 5% down payment.  For a $250,000 mortgage, that means you’ll need at least $8,500 in the bank, and that doesn’t include all the other costs that go along with buying a home, as we’ll find out later. That’s nothing to sniff at. Start saving today.

Get a copy of your credit report and credit scores. When a bank decides whether to loan you money for a home, one of the things it’s going to look at is your history as a borrower. They want to know that they can trust you to pay back this massive amount of money they’re about to give you. To determine whether you’re creditworthy, the bank or mortgage broker is going to look at your credit report and credit score. Before the banks pull your report and score, it’s a good idea to take a look at them yourself to ensure that there aren’t any errors that could hurt your chances for securing a mortgage. Errors to look for include accounts that don’t belong to you, wrong addresses, incorrect payment status, and remedied delinquencies not reported as such. If you find any errors, take action to correct them as quickly as possible as they can sometimes take a long time (and be nigh near impossible) to fix.

If you don’t have any errors on your credit report, but your credit score isn’t that hot, start taking steps to improve it like paying your bills on time and reducing the amount of debt you owe.

Gather financial documents. When you apply for a home mortgage, your financial life is going to be put under a microscope. You’ll have to provide enough documentation to prove that you’re financially capable of paying back a large loan. I wish I had done this step earlier in the process and not waited until I was actually applying for a loan. Despite having most of my financial documents digitized, it was still a chore corralling them together. Below are the documents you’ll likely need when applying for a mortgage:

  • W2 statements (or 1099 income statements) for the last two years
  • Federal tax returns for the last two years
  • Bank statements for the last few months
  • Recent pay stubs and proof of other income
  • Proof of investment income

Get pre-qualified for a loan. Call up your bank and ask to get pre-qualified for a loan. When you get pre-qualified for a loan a bank takes a cursory look at your financial status and tells you whether you’d be able to qualify, and if so, roughly how much of a mortgage you can get. This can give you a rough idea of how much house you can afford when you’re out looking. Getting pre-qualified is quick and easy. You can usually do it over the phone or even online. One important thing to understand is that getting pre-qualified for a loan doesn’t guarantee that you’ll actually get a mortgage for the amount the bank pre-qualifies you for. That number can change as the mortgage broker takes a deeper look at your finances. Again, it’s a rough estimate.

Start Shopping for a Mortgage

One thing I wish Kate and I had done earlier in our home buying process was shopping for a mortgage. While we were pre-qualified, we didn’t start mortgage shopping until we actually found the home we wanted. There are a few advantages to starting the mortgage shopping process sooner rather than later, like negotiating a better mortgage rate or getting pre-approved (which is different than being pre-qualified – read on) for a loan. When it comes to picking a mortgage, we could write several posts about it (and we will in the future), but for now, let’s move on with the big-picture overview.

Where to get a mortgage.  

Start your mortgage shopping with your personal bank or credit union. They often offer good rates for long-time customers. But don’t stop there. Hop online and use a web-based mortgage rate finder like Bankrate.com. You’ll find dozens of mortgage brokers to choose from. It’s worth considering local institutions as well versus just big banks. As with anything, they often provide a personal touch of service that you won’t find elsewhere. If you decide to work with a realtor, they’ll also often have good recommendations or lenders they routinely work with.

What type of mortgage is right for you?

You have several choices when it comes to picking out a mortgage. Each type has their pros and cons.

Fixed-rate vs. adjustable-rate loans. The most common type of mortgage is a fixed-rate mortgage. With a fixed-rate loan, the rate stays the same over the life of the loan. The big pro with fixed-rate loans is the peace of mind that comes with knowing that your monthly mortgage payments won’t fluctuate dramatically from year to year.

On the other hand, adjustable rate mortgages, or ARMs as they’re often called, have an interest rate that changes based on what happens to interest rates in the economy as a whole, which can be good or bad. If interest rates drop, your mortgage payment should drop. But if they go up, your payment can quickly get out of hand. ARMs are tempting for first-time home buyers because their initial rates are lower. And because monthly payments on ARMs are typically lower at the beginning of the life of the loan, they can also be easier to qualify for. The problem with ARMs is that you’re taking a big gamble. If interest rates go up, you may end up paying much more than if you had gone with a fixed-rate mortgage.

30-year vs. 15-year. This refers to the number of years it takes to pay off the mortgage. 30-year mortgages are the easiest to qualify for and are the most common. 15-year mortgages are much harder to qualify for and have higher monthly payments because you’re paying off the house in half the time. The obvious benefit is that you pay off the loan and build equity faster than you would with a 30-year mortgage. If you have a goal to pay off your home as quickly as possible, just get a 30-year mortgage and pay extra. Making just one extra payment per year on a 30-year mortgage can reduce the life of the loan by five years. If you ever have to cut back on mortgage payments, you won’t be stuck with the high minimum monthly payments that come with 15-year mortgages. Just make sure you get a 30-year mortgage that doesn’t have prepayment penalties.

Balloon mortgages. Stay away from them. The way they work is that you make small monthly payments for a fixed number of years — usually five to seven — and then you’re required to pay off the loan in one giant lump sum. Balloon mortgages got a lot of homeowners in financial trouble during our recent housing crisis. Folks who thought they’d be able to sell their homes before the lump sum came due were stuck in homes they couldn’t find a buyer for. Consequently, they couldn’t pay their mortgage, which in turn resulted in foreclosure and bankruptcy.

Look into FHA loans. An FHA loan is a home loan insured and backed by the federal government. FHA loans offer low down payments and lower interest rates than traditional home loans. They’re geared towards first-time homeowners who might not have cash to pay the full 20% on a down payment. To apply for a FHA loan, you’ll need to find a FHA-approved lender and meet a few requirements. There are some downsides to FHA loans. First, you’re required to purchase an upfront mortgage insurance premium of 1% of the total loan. You also pay a modest fee with each monthly payment for the life of the loan. Check out the Housing and Urban Development’s website for more info about applying for an FHA loan. 

Get pre-approved for a loan. 

Whether you go for a 30-year fixed or a 15-year ARM, your goal should be to get pre-approved for a loan. Pre-approval is a step above pre-qualification. According to the Consumer Financial Protection Agency, when you’re pre-approved for a loan, “the lender has evaluated your creditworthiness and has committed to extending you a loan up to a specified amount.” To get pre-approved, you’ll need to provide a lender with pay stubs and W2s and two to three months worth of bank statements. When a bank pre-approves you for a loan, they’ll issue you a letter that you can show sellers during the negotiation process. Buyers with pre-approval often have a leg up on buyers who don’t. Put yourself in the seller’s shoes. Who would you rather say yes to? The guy with a letter from the bank that says they’ll pay the full amount for the home or the guy who has nothing but his word that he’ll be able to afford the house.

Pre-approval isn’t a guarantee that you’ll get the loan in the end. There’s a chance that something will pop-up in the more thorough loan underwriting process that will cause the lender to change its mind. Think of pre-approval like getting engaged. It’s a commitment, but until you get married (i.e. actually get the mortgage) each party can still back out.

Start Looking at Houses

Watch HGTV. I never watched a minute of HGTV before we started thinking about buying a home. But as soon as we decided to start looking, I was watching House Hunters all the time. While the show is definitely staged, I actually found it to be helpful in getting an idea of what I wanted in a house and how the home buying process, in a very rough sense, worked. It can also help tamper your expectations, as you often find happy-go-lucky couples who just expect to instantly find their dream home and for everything to be perfect. Not how it works in real life. (Watch episodes online even if you don’t have cable.)

Attend open houses. Browse through the real estate section of your local newspaper and find some open houses to attend on the weekends. You can also find listings on popular real estate websites and apps like Zillow, Trulia, and Realtor.com. Your goal at these initial open houses is to just get an idea of what you like and don’t like in a home. For me, I found this casual reconnaissance to be immensely useful. For someone who had only lived in one home his entire life (my childhood home), I really didn’t have a good idea on the different types of layouts and amenities possible in a home. Seeing several homes in-person helped me develop my preference. Open houses are also useful for scouting out possible buyer’s agents (more on that later).

Make a list of features your ideal home has and make a list of deal breakers. Once you have an idea of what you like and don’t like in a home, sit down with your spouse and make a list of the features in your ideal home, as well as a list of your deal breakers. What are the things you must have, and what are the things that you absolutely won’t live with? Housing and Urban Development has a nice little PDF to help guide you through the process. Make sure you and your wife are on the same page before you get serious about looking. It will take some negotiation and compromise, but the effort will be well worth it.

Decide whether you want a realtor. During the casual browsing phase of home shopping, decide whether you want a buyer’s agent. Kate and I initially wanted to buy a home without a realtor, but quickly discovered that finding homes that fit our criteria was super time consuming. I was spending hours each week browsing homes online and setting up appointments to look at them. It started to get tedious, so we ended up hiring realtor Ray Nash to help us out. Ray was awesome. We told him our list of likes and dislikes in a home and the next day he created a customized database of homes to browse through. When a new house came on the market that met our criteria, he added it to the database so we could check it out. All we had to do was tell Ray which homes we wanted to look at in person and he set up the appointments to visit them. Ray saved us a boatload of time. It was also nice having someone hold our hand and guide us through a completely foreign process. As we moved towards actually closing on a home, Ray took care of setting up things like the appraisal and inspections as well as ensuring all the loose ends were tied up before closing day.

Now you might be asking, “Will I have to pay for the services of a buyer’s agent?” The answer to that is quite complex, but typically it’s the seller, and not the buyer who pays the commission for the buyer’s and the seller’s agent’s services. However, the buyer and seller can negotiate the price of the home so that the buyer, in effect, pays for the commission of his agent. For details on how real estate agents are paid click here.

Narrow Down Your List of Homes and Revisit Them

It’s time to get serious about finding a home. Narrow down your list of prospective homes to three or four and revisit them. When you do, take along this checklist of things to inspect.

Make an Offer

Once you’ve found the home of your dreams, it’s time to make an offer. Before you do, know your “walk away” number — the price at which you’ll walk away from negotiations because it’s just too high. When crafting your offer, consider adding contingencies like having broken appliances repaired at the seller’s expense. You can even ask that the seller throw in a piece of furniture into the sale. Everything is negotiable!

Some things that can help you get a “yes” on your offer include being pre-approved for a mortgage and being flexible on the closing date. In our case, being flexible with the closing date helped us snag a deal. The guy we bought our home from hadn’t found a new place yet, so we offered to put off the closing date for an extra two months so he could find a new home. We still had a few months left on our apartment lease, so we weren’t in a rush. The other folks interested in buying the house needed to move in ASAP. Flexibility won the day.

When you make an offer, the possible answers are yes, no, or a counteroffer. Don’t expect to get a “yes” on your first offer. Unless you’ve put up a severely lowball offer, the buyer will likely return with a counteroffer. You can either accept it or give another counter. If the seller decides to end negotiations with you, lick your wounds and move on to the next house.

Get the Purchase Contract

Once you get a verbal “yes” from a seller, the next step is writing up a purchase contract. The purchase contract essentially puts everything you negotiated verbally into writing. The typical clauses you see in a purchase contract include the following:

  • Legal description of the property, including zoning information
  • Purchase price and terms of the sale
  • Down payment to be held in escrow, and future payment structure
  • Closing date — when the deed will change hands
  • Any items included in the sale, such as appliances and furniture
  • Disclosure of lead paint (lead-based paint disclosure form for buildings built before 1978) and other defects
  • Home warranties and warranties on appliances
  • Commissions, if any
  • Signatures

Your purchase contract will likely have contingencies that could void the contract if they’re not met. Common contingencies include passing the home inspection, the appraisal meeting the selling price, loan approval, and the title being free and clear.

Get Home Inspected and Appraised

After you’ve signed a purchase contract, your next step is to get the home inspected and appraised. As a buyer, you’re responsible for these costs, so have your checkbook handy. If you have a buyer’s agent, he or she will usually take care of setting up the inspections and appraisal for you.

We had two inspections done on our house. The first was a termite inspection to ensure that we 1) didn’t have termites, and 2) didn’t have any termite damage. The second inspection was a general inspection performed by a certified home inspector. This is a pretty thorough inspection. He’ll check the condition of the house’s heating and cooling systems, electrical systems, plumbing, as well as the structural components of the home like the foundation, walls, and roof. He’ll then create a detailed report that includes things you should be concerned about. It’s good to be at the house during the inspection so you can follow the inspector around and ask questions that you might have. If the inspector finds any serious faults with the home, you’ll need to decide whether to re-negotiate with the seller or just walk away.

The mortgage broker will typically provide a list of approved appraisers that you can call to set up an appointment with. The mortgage broker wants to make sure that the home is actually worth what they’re lending to you. If the appraiser reports that the value of the home is less than the contracted price, your lender will likely not give you the loan. They don’t want to fund something that’s worth less than the amount of the loan. The appraisal contingency will allow you to either 1) renegotiate with the seller for a lower price or 2) walk away from the loan.

Shop for Homeowner’s Insurance

Assuming the inspection and appraisal came out fine, the next thing you’ll want to do is shop around for homeowner’s insurance. Your mortgage broker requires it before they’ll finalize your loan approval. Buying home insurance isn’t that hard. I asked my friends and family which insurance companies they used, called them all to get a quote, and went with the best deal. The cost of homeowner’s insurance (as well as property taxes) is typically rolled into your mortgage payment. The mortgage lender puts that money in an escrow account and pays the cost of homeowner’s insurance themselves.

Finalize Loan Approval

In the few weeks leading up to the closing date, your mortgage broker will be underwriting your mortgage application. The underwriter will likely ask for more documents or they’ll have questions about the documents you’ve already provided. Because I’m self-employed the underwriter had a lot of questions for me. I had to make several trips to their office with stacks of financial documents. Just roll with the punches.

Close

After weeks or maybe months of work, the big day has arrived: Closing Day. Closings typically take place at a title company’s office. Depending on the complexity of the sale, closing usually takes about an hour and a half. Because you’re a buyer, you’re going to have a huge stack of papers to sign and initial, so make sure to warm up those finger muscles. To ensure that the closing goes off without a hitch, make sure to bring the following items:

  • A certified or cashier’s check. Federal law requires that you be told the exact amount of the check you need to bring to closing at least one day before settlement. You will have to pay the down payment, plus the closing costs — usually 3 to 5 percent of your home purchase price minus your earnest money deposit. The closing agent will tell you whether you need one check or two and to whom they should be payable. Do not bring personal checks or cash. 
  • Proof of insurance. The closing agent needs to see proof you have the insurance in effect on closing day. Your lender likely has a copy of your proof of insurance, but bring an extra copy just in case.
  • Photo ID. The closing agent needs to know you are who you say you are. A driver’s license or current passport will do the trick.
  • Your agent or attorney. Especially if you are a first-time buyer, you should have someone with you who understands the process and represents your interests. In some states, you’re required to have an attorney present. Check your local laws to find out if that’s the case for you.
  • Purchase and Sales Contract. Just in case you need to double-check a detail against closing costs.

Congratulations! You’re a Homeowner

Once you’ve signed the last document and the closing agent has dropped the keys in your hand, you’re officially a homeowner. Congratulations! Go out and celebrate with a big juicy steak. As soon as you’re done, though, it’s time to start thinking about moving in. But that’s a subject for another post.

Any other advice to offer a first-time home buyer? Share it with us in the comments!

{ 41 comments… read them below or add one }

1 Trevor April 16, 2013 at 1:39 pm

I just had my offer accepted on my first home yesterday. Everyone likes to say that buying a home is a wonderful experience, but they’re wrong. It’s the most stressful and frustrating thing you will ever do, and in the end, you owe $400,000 over the next 30 years. The goal is to stay calm and flexible through the process, but that’s easier said than done.

Thanks for the great post. Although it did raise my blood pressure to think of all the demands the underwriters will have for me in the coming weeks.

2 John April 16, 2013 at 1:40 pm

Great timing! We’re in the process of buying our first home now. We’ve got the purchase contract signed and are working on the inspection and insurance. Thanks for the great post!

3 Hunter April 16, 2013 at 2:13 pm

I too am in the process of buying my first home. Luckily, my realtor is very good at his job and trustworthy. My credit union (can’t overemphasize them enough) has been great at making sure all my ducks are in a row.

My three pieces of advice are this:
1) Over plan for the amount of money you’ll need. It goes quickly.
2) Make sure you have inspections done. Get too many rather than not enough. There’s much to be said about the piece of mind of having multiple professionals look at your purchase before you’re deep in it. I’d rather be out a few hundred bucks than dealing with a multi-thousand dollar nightmare.
3) Don’t rush it. This isn’t going to happen in 30-90 days for most people. You’re going to need a support network you trust to help you keep from rushing things and to help you ask the right questions. Not taking your time and running head first into a purchase could be the biggest mistake you make.

4 Seth April 16, 2013 at 2:18 pm

My wife and I bought our first house almost 2 years ago (June). Weighing all of the pros and cons related to the experience before entering into it, we decided to go ahead and buy our house outright, paying cash instead of paying the huge amounts of interest that add to the long-term cost when buying via mortgage. To that end, we saved aggressively for a few years prior, and were easily able to find a good sized house (for just 2 people) with good bones in a good neighborhood that just needed some good old TLC in order to gain equity. We were able to do this after only 3 years of marriage through frugality and good old fashioned saving.

If at all possible, my advice to any potential homeowner is that if you can, follow the same path. You’ll save a lot of money in the long run, and you’ll never have to worry about being foreclosed on if you lose your job or encounter some other financial hardship a few years down the road. All in all, it’s a very secure and stable path to home ownership.

5 JG April 16, 2013 at 2:22 pm

Great post. It does sound like there is a lot of work to it, but I wish every day that I could afford my own home. My wife and I enjoy gardening and are out of places around our townhouse to put planters and I am also rather tired of the landlord having last word over where I put my bird feeders and planters.

Sadly, it will be many, many, many years before we can even dream of owning our own place and in the mean time we get to hear from our home owning friends about how they hate having to deal with a yard and just want to lay concrete over the whole thing.

6 Kajunerd April 16, 2013 at 3:03 pm

When shopping for a home in a neighborhood visit the neighborhood at night and on the weekend. The neighborhood can change drastically when people are at home.

Also, after you purchase your first home visit your county’s tax office and sign up for Homestead Exemption, this can save hundreds on your property taxes per year.

7 Jon April 16, 2013 at 4:10 pm

I am 1.5yrs into an FHA mortgage and I will say that the monthly mortgage insurance is not necessarily a “modest fee.” it’s higher than PMI on a conventional mortgage in my understanding. works out to about 1/6 of the overall note for me (which includes taxes and other escrow payments).

8 Lance April 16, 2013 at 4:21 pm

Where were you 10 years ago?!?! Suffice it to say I learned by jumping in the deep end. Luckily it worked out.

9 Ken April 16, 2013 at 5:17 pm

Older, established neighborhood was my choice. Much bigger lot. You can always add on to a house. Unless the land around you is empty, the size lot you buy is what you’re stuck with, and in newer neighborhoods they are always much much smaller.

10 Phil April 16, 2013 at 6:57 pm

Re: Narrow Down Your List of Homes and Revisit Them.

This sounds like a simple step, but will almost certainly be the longest part of the house buying process.

My partner and I spent a year looking at more than 100 houses before we made an offer on a single house. As it happened, the house sold for much more than we thought it was worth. So we changed tack entirely and started investigating buying an empty section and building a new home.

It turned out to be the best decision we could have made, because we got exactly the house we wanted, and had more than 100 examples of aspects of houses we did and did not want incorporated into our home.

11 Shannon April 16, 2013 at 8:19 pm

The market in parts Texas is so hot right now that if you dilly dally, you will NOT get into a home. We just sold our home in the Dallas area and had three full price offers which included closing costs within 4 hours of being shown. The first people who walked thru the house made the first offer and got it. They RAN into the home bc they knew there were others right behind them. We have four realtors with their clients all in the yard at the same time.
ADVICE: Along with your home inspection, get a separate plumbing, electrical and HVAC inspection.
Good luck to all!!

12 Russell April 16, 2013 at 9:36 pm

As always, Brett and Kate, excellent advice. Additional suggesstions: consider not using a buyer’s agent supplied inspector, hire a true independent inspector; pay a little extra for a main drain video inspection; if house has a basement, get a radon test. Experience talking.

13 Laurinda April 16, 2013 at 9:49 pm

Love this post except I found House Hunters very unrealistic. I wasn’t looking for granite counter tops, hardwood floors and stainless steel appliances – all those things you can add later. Looking for flow and location were my top priority. I did end up getting the granite, hardwood floors and partial stainless steel appliances with my first home purchase. I think people miss opportunities with houses that need some updating. Love being a home owner despite the new responsibilities that come with it.

14 David April 16, 2013 at 10:50 pm

Don’t forget to schedule the utilities to get transferred over into to your name on the closing date. After you sign your name so many times that you question if you are spelling it right and get the keys, you’ll want to go to your new house. Planning ahead will ensure its warm, and has power when you get there.

15 Kevin April 17, 2013 at 7:32 am

This will sound odd, but:
NEVER look to buy a house while one of you is pregnant. Things will fall through, and you will have less time than you think.

My wife and I decided to buy a home when we found out she was pregnant with our first child. If things had gone according to plan (this phrase can occur frequently when buying a home), we would have signed on and taken possession of the house two months before our lease was up and the baby was due. What happened was: our original lender changed their mind several times (once, two days before the scheduled signing), and signing got closer and closer to the due date. We wound up telling them to release the account and going with a local mortgage company (instead of the bank where we had our checking accounts and what not). After we switched, we signed within two weeks. I say ‘we signed’, but what that really means is that my wife and I signed powers-of-attorney in the delivery room so that my mother-in-law and mother could sign the home purchase papers for us while our baby was being born.

We wound up taking possession about a month before our lease was up, but only one of us was able to finish up packing and moving. I wound up leaving work, going to the apartment, packing and loading, going to the house, unloading (not unpacking), going to my in-laws (about five miles away where we were staying), getting some sleep, going to work, and starting all over.

Also, make sure your Realtor doesn’t lock the keys in the house when showing it to you.

16 Kit April 17, 2013 at 8:39 am

One thing I learned the hard way 10 years ago about some inspections – make sure you know what they are checking. Specifically, we were required to have a termite inspection as part of the buying process. The termite letter we got had a 90-day “guarantee”, but because we were so overwhelmed with the whole process (including my wife actually being out of town for the actually closing) we thought we’d gotten termite service and/or insurance.

Needless to say, 4 months later when we found evidence of termite damage we were not happy.

17 Brock April 17, 2013 at 8:57 am

If you are looking for a home that is not in an urban area, and you don’t make a lot of money, I would recommend looking into the USDA rural development home loans. They offer direct and guaranteed loans for homes outside the defined urban boundaries at market rates (or even lower sometimes) with the option of 0% down. There are some income restrictions of course, property restrictions (location and value), and an extra step in the loan process (not all banks will do this either) but if the conditions are right it can be a really good deal. My wife and I bought a nice ranch house in good condition just outside the boundary last year, and we got a 30 year mortgage at a rate just below the best market rates for the area with 0% down. (Just out of college, so no significant savings, and our payments are less than many of the rentals we looked at.). More information can be found here: http://www.rurdev.usda.gov/RD_Loans.html . (For an idea on property eligibility, check here: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do )

18 rjzii April 17, 2013 at 11:21 am

One thing it looks like you forgot to mention are VA Home Loans (http://www.benefits.va.gov/homeloans/) for service members and veterans. You can likely do a whole article on just these by themselves, but for those of us that qualify for them they can put your a head of the game since you can do 0% down and they tend to have better interest rates than conventional or FHA loans. Granted they do have a funding fee associated with them (1.25% to 3.3% depending on circumstances) but in the long run you can save a significant amount of money over conventional financing since you avoid PMI if you are putting less than 20% down. There are catches involved though which is why they could make for an article of their own though.

19 Lee April 17, 2013 at 11:58 am

Silly question – what is the absolute simplest and most direct way to buy a house? Is there a law (or set of laws) that say one has to go through a mortgage broker or similar? Why, for example, can’t I offer to take over payments of a house I’m currently renting, plus a little extra to the landlord/current owner which would make him back the money he’s paid towards the house so far?

20 rjzii April 17, 2013 at 12:32 pm

@Lee – It really depends on where you live. Assuming that you live in the United States, the simplest and most direct route to buying a house is to make a cash offer to someone that has not listed their home on the MLS (i.e. through a realtor) and hire a real estate attorny to handle the transfer of ownership. Once you start involving more parties (e.g. banks, real estate brokers, etc.) things get more complicated.

21 Claude April 17, 2013 at 12:51 pm

I have to second what Kajunerd said about visiting the neighborhood at different times of the day. What seems like a quiet street at noon can be a dangerously busy street at 5pm. Also watch for street lights. A visit after dusk could reveal one side of the house flooded with light all night.

22 Claude April 17, 2013 at 12:52 pm

Im glad this article tries to mention everything, but I hope it doesn’t scare people away. If you have a decent experienced realtor, it can be a pretty easy and enjoyable process.

23 Stephenie April 17, 2013 at 3:35 pm

Having just gone through this, I’d add make sure your mortgage company knows how to work with the kind of loan you need/want. We were getting a VA loan with a VA grant and the first mortgage company had no clue about the grant. If the feds hadn’t shut them down, we’d probably have lost out on that money. 2nd, when they say “your closing date should be…” it’s never the actual closing date until you have an official time slot on that day with the lawyers. Our closing was moved three times over three months and we were living out of boxes the entire time.

24 Debbie M April 17, 2013 at 4:05 pm

Under the Start Looking section, I’d add a few other tasks.

One is to look up things like flood zones, earthquake fault lines, crime stats, zoning laws, and, if you’re into gardening, soil type (my city extends through three different zones–two have limestone and one has clay). Everyone knows to check out the school system, but also check out the grocery stores, libraries, and whatever else is important to be close by.

Then, in putting together your list of what you want, don’t just watch TV and visit empty houses: think about all the places you’ve lived and what you liked and disliked about them. Then think about other houses you’ve been to–your best friend’s house when you were a kid, etc. Dorms, summer camp, all that stuff. You may notice that some things really don’t matter–ugly carpeting does not ruin my life, but I do want there to be (free) parking available near by for visitors. Some people recommend asking the locals what they like and don’t like about the neighborhood and, in matchy subdivisions, about the houses themselves.

Another hint: While looking, it’s good to bring a list of your priorities and take notes on that and take pictures to help you remember–the houses all run together after a while. And remember it’s not just about looks–think about maintenance, replacement costs, insurance costs, etc.

For me open houses and other site visits helped me see what was and was not available. For example, every single house had, of course, indoor bathrooms and full kitchens but also big living rooms, small or nonexistent laundry rooms, and (except for the master bedroom) small bedrooms (bigger houses just had more of them). Not every house had a garage or a drier connection. And remember that some things are fairly easy to change, some impossible, and some are in between.

You’ll also want to see what the homeowner’s association situation is like. I had only heard of them in history books (where they are famous for trying to keep minorities out), but even in modern life, I would run far, far away. I don’t mind that some people paint their houses in hideous colors, that one of my neighbors edges his garden with bowling balls, and that another dresses up his dead tree as various things (currently a giant sock monkey). I just assume that anything that stands out must be something the owner really loves, so I choose to let it make me happy (even if I also want to look away). But if you care a lot about property values and eyesores, you might prefer an HOA, though you still never know how the majority is going to vote.

25 jd April 18, 2013 at 12:10 pm

Know that every dollar you add to your monthly mortgage payment goes straight to the principal. Paying an extra hundo per month will save you thousands of dollars in interest over the life of the loan AND you will pay it off faster. That’s money in the bank.

26 Mike April 18, 2013 at 1:24 pm

Good Article.

I want to point out that you should generally get a 30yr. over a 15yr. mortgage because you can always make two payments each month. (Effectively making the loan a 15yr). The reverse is not true. If you need extra $ you cannot pay half of the 15yr mortgage without penalty.

Food for thought.

27 Literacy-chic April 18, 2013 at 1:50 pm

You forgot the most important–don’t go to graduate school. And if you have a spouse, don’t let him/her go to graduate school, either. We will never own a home, and this post makes that even more apparent than it already was. *sigh*

28 wizOfWoodward April 18, 2013 at 10:20 pm

Great article, although I am scratching my head a little at the 20% down thing. For sure, 20% is totally awesome and of course you should do it if you can (just like you should buy in cash outright if you can). But plenty of people are getting mortgages at 5% down. Probably should shoot for a minimum of 10%, but again, when I was looking my bank was definitely willing to do 5% down. I do know that in Canada, they are much stricter, and that might be true up there.

@Literacy-chic – sorry to hear that :( Just do your best to make it through your situation- one thing I’ve learned in life, is that you never know where you’ll be in a year or two, even if you think you are going nowhere. Also, if you still want an ownership experience without the cost of a typical home, you might consider manufactured housing? Those homes have markedly improved over the years. Some of them are barely distinguishable from typical tract homes. Of course your mileage will vary based on where you live.

29 FeatherBlade April 19, 2013 at 2:45 pm

@Wiz:

The idea behind the 20% down is to give you a large amount of instant equity in your home., and as a hadge against a drop in the value of your home. The problem with 5% and 10 % down is that even a small downturn in the market can reduce the value of your home to less that the amount you owe on it. That was a large contributor to the US housing crisis a couple years back: people buying overvalued houses with little to no money down, and then abandoning both home and mortgage payments when the market fell and they found themselves owing more than their houses were worth.

30 Rob April 19, 2013 at 3:13 pm

Hate to point this out, but while FHA is traditionally used by many first time homeowners, it is not “for first-time home buyers only.”

Also, remember to check out local credit unions in your area. They typically will have lower interest rates and much lower closing costs, even if you’re not a member. Some may require you to open a savings account or the like, but the $25 to open that will be worth the significant savings in closing costs. When folks go to internet based lenders or internet based services who pair you up with lenders you’ll notice the interest rates might be a little bit lower, but closing costs will (in the many many cases I’ve seen) be quite a bit higher. You also lose the face to face interaction you get with local banks, which to me means a lot.

On your last section about the closing… I’m a closer and I could almost hug you. Spot on. Great article.

31 Tim UK April 22, 2013 at 6:40 am

An interesting article on how the process works across the pond.

I am nearly 50, and now live in only my third home, my first as a married man, but I would say a couple of things relevant to any market. The most important thing I can say is this: be honest with yourself about your attitude to debt and be realistic about how much you can afford (and be comfortable) to borrow.

I bought a 50% share in a tiny apartment back in 1990 when loan interest rates were 15%. I knew the market was overvalued but I also knew that I was buying my first home, not a speculative investment, and so I was content to sit tight. I also refused to borrow more than my preset limit, although I could have done if I chose. 8 years later, and with a fixed rate repayment mortgage I sold my 50% share at a tiny profit and moved on and up.

The moral for me was that if you can comfortably meet your mortgage payments then interest rate rises should hold no fear. Likewise, even if prices crash then you may have to sit tight but you won’t lose the roof over your head.

One of the earlier commenters was lucky enough to be able to save hard and buy with no debt; the closer you can get to that ideal the safer you are.

32 Kevin April 22, 2013 at 12:09 pm

I just finished renovating and moving into our first home! This information is really good advise, however one thing to be aware of is to go out and constantly be on the lookout for a house. Here in California many starter homes receive cash offers and kick out a lot of us first-timers. We had our Realtor write up a nice letter about my wife and I, and how we were eager to start a home and build up our little part of the neighborhood. After loosing out to cash investors 17 times!! We finally landed a home owner who was excited to pass their home off to someone who didn’t want to just have an investment rental. I cant stress enough how much help a good Realtor is worth when it comes time to start making offers in a competitive market…. good luck!

33 Ben April 24, 2013 at 12:58 pm

It is very stressful. I bought a house last year with the VA Loan. A few more hoops to jump through, but it was worth it! Extremely low 30 year fixed, Nothing down, and you don’t pay P.M.I. To all the veterans out there take pass up this benefit, it can save you hundreds even to a FHA loan. Don’t let someone not familiar with a VA Loan talk you out of it!

34 Michael Mueller April 25, 2013 at 12:21 pm

One tip that I wish I had been given before buying my first home is take a walk/look around the yard. I liked my house so much that I kind of overlooked that. The yard looked fine from the house but once I moved in and had to take care of it I realized it was awful. Soft “holes” where the previous own left tree stumps to rot away, shady areas that will only grow moss, tree roots stick 4-6″ out of the ground, etc. All of these make it a pain to mow and quite unsightly at times. The next house I buy, the lawn will play a big factor.

35 Jim Emmett May 10, 2013 at 12:10 pm

Good article but a few comments from a Mortgage Loan Officer (that’s me).

1. First step really should be to talk to your Bank/Credit Union to get preapproved. That is, talk to a trusted bank that will do a thorough job on the preapproval not just a wham bam pre-qual. Most brokers won’t even accept a prequal anymore.
2. FHA is a worthwhile program. I did one myself a year ago on our latest home in order to put down a minimal down payment. (got slammed in the market downturn a few years ago) That being said, FHA is NOT only for first timers. FHA allows for less down, lower scores etc. But the UpFront PMI is huge now as is the monthly PMI. You might be better served with a loan that has Lender Paid MI. Ask your Lender about this. The rate will be a little higher. But remember, for the time being anyway, interest is deductible for most folks. PMI is too but there are limits as too how much and income limits as well. Which is why I’m refinancing myself right now.
3. Check for state funded programs. In Mass we have MassHousing. Not just for First Timers either. Rates sometimes a little higher but depends on the situation.
4. By all means, shop around. But as with most things, if a deal sounds too good to be true……… Again, your friendly local bank is often your best advisor even if they don’t have the best rate.
5. Credit-again talk to your lender. Let her/him advise you. Do NOT dispute things with the credit bureau. As of right now, FannieMae and FreddieMac will NOT approve loans for folks that have disputed accounts on their credit. By all means, try to fix errors but the word “disputed” should really be a four letter world in today’s market. Also, your lender might have some creative ways to reduce your debt profile by paying down or off certain items if your need to reduce your monthly debt profile.

I don’t quite understand the part of the article about appraisals. The appraisal is ordered by the bank and is handled by the Listing Broker. You will be told the value when it’s done and you can certainly try to renegotiate if it’s low but really, it’s a bank thing.

Anyway, it’s stressful, stomach turning etc. But owning a home is part of the dream and the best way for most people to build wealth over time.
Good luck!

36 Joe C May 14, 2013 at 8:57 am

This is all very good info. I’d like to add, look into USDA Rural Redevelopment Loans and especially in Oklahoma there is a HUD Section 184 loans for Native Americans. I purchased my first home one year ago with a USDA RR loan. 0 Down, market rate interest 4.25%, points were rolled into the total loan amount. Also, I had the home inspected and had contractors estimate the various repairs needed. With those estimates I was able to petititon the seller to either repair or provide funds for repairs to the tune of $6500. Also, at least around here, it’s typical for the seller to cover all or at least half of the closing costs. Mine covered all of it. I offered the asking price, which was fair and allowed me to beat another concurrent offer and obviously bought me alot of lenience from the seller. At the end of the day I spent around $1500 on earnest/inspection/appraisal, etc and walked into the house with a $6500 check from the seller. I do not regret the decision at all. For $200/month more than I was paying for a small rent house in a bad ‘hood I have a house, 1/2 acre, and 2000 ft2 of shop/garage space.

37 Kevin May 15, 2013 at 10:58 pm

I’d like to point out how tiny that house is in the title picture – holy cow! One-car garage (if you have a very small car), and well under 1500 square feet.

How the American Dream has changed…

38 Shane May 19, 2013 at 10:54 pm

Trevor – you are spot on! The first night we put in our offer I didn’t get one ounce of sleep! Luckily I calmed down throughout escrow, but it was a crazy process!

39 Austin June 1, 2013 at 7:57 pm

Excellent guide if you will. I think that having a plan and knowing what you need to do to get your finances in order and working with your spouse (if you are going together) are all very important factors. Great post and I will be sharing this with my clients.

40 Brad Felmey October 9, 2013 at 11:40 am

Something that may be of interest to some prospective buyers is to travel to/from a potential home to/from your place of employment during peak periods (read: rush hour). I find that I only get a certain number of hours to live and spending a bunch of them staring at a sea of brake lights is abhorrent.

41 Laffey Fine Homes December 6, 2013 at 6:22 pm

New York has several first-time home buyer programs that offer fixed-rate mortgage financing at competitive rates and down-payment assistance. It is still best to seek advice from a local realtor to educate you and assist you with your home buying decisions.

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