So you’ve decided to buy a house? Congrats! Welcome to one of the most exhilarating yet terrifying experience you’ll encounter. Your house will more than likely be the biggest purchase of your LIFE! It’s a major deal and it should not be taken lightly. You’re not trying to be jammed up for years because you didn’t take this seriously.
As with most personal finance topics, my site takes the less orthodox approach. If you have 20% lying around to put down on a house, that’s hella dope and you should be proud of yourself. If you don’t have 20% lying around, you can STILL afford a house. That whole “20% down” rule, myth, commandment, whatever you want to call it needs to go away. Anywho, that’s an argument for another day. Clearly you’re reading this because you want to buy a house. Shall we?
Should you even buy a house? I’m not here to persuade or dissuade you from buying a home. Buying a home is the most personal purchases one can make. It has to be looked at for multiple angles. Here are the 3 most important questions you should ask yourself:
- Is it truly time to buy a house? Don’t phone a friend or poll the audience. Sit down and answer this question truthfully. Low mortgage rates, a great deal, everyone else is doing it, or the “rent is throwing money away” *eye roll* trope are not reasons to buy a home. Buy because you’re ready financially and can commit to at least 5 years in this house.
- Do I really know what homeownership entails? Toilet is overflowing! Quick! Call the landlord. Guess what? Ain’t no landlord, bih! Well, there is…YOU! Owning a home means having to do all that stuff you could count on your landlord for doing. Appliances trippin’, broken windows, air filters…you NAME IT! It all falls on you. Now of course you can get a contractor but the bill will fall on you.
- Do I fully understand how a mortgage will work? I run into a lot of people who don’t realize that the Principal isn’t all she wrote. Principal has a couple buddies: Insurance and Taxes. Depending on your loan, Private Mortgage Insurance (PMI) may be waiting for you too. Principal is fixed, if you have a fixed rate mortgage. Insurance and taxes can fluctuate…yay market value increases!! PMI will hang around FOREVA with an FHA loan but will drop off a Conventional once you hit a loan to value (LTV for short) of ~79%.
You’re still reading? Hmm. Looks like you’re serious about this thang. Let’s continue.
Next, you have to know your credit. There is no point in even pursuing homeownership if your credit isn’t straight. Now if you’re paying cash…ain’t no problem. As much as I love free credit sites such as Credit Karma, they do not provide your FICO score. I recommend purchasing your reports from myfico.com to ensure you have the info that banks will see. It’s not uncommon for a FICO score to be 20-30 points lower than a FAKO score. A fake fico also known as FAKO is any score not pulled from FICO. Also you are entitled to a free copy of your Big 3 credit reports each year. Visit www.annualcreditreport.com Go over your report thoroughly. Make sure everything looks in order. Dispute any items that look out of sorts.
Ever hear someone say “I can’t afford it but I can buy it”? Don’t let this be your mantra when buying a home. Majority of the time, you will be approved for more house than you can afford. Reason for this is lenders will use your gross income. And we all know how our gross income looks like the bag of raw spinach and our net income looks like cooked spinach. A widely used rule of thumb is the 28/36 rule. This rule states that your mortgage payment (including taxes and insurance) shouldn’t be higher than 28% of your gross income. Strive for total housing costs to be at 20% of your net income. This is a good way to keep from being house-poor. Having your own house is cool, but don’t let that be the only thing you can own in this world. Keep in mind with condos, townhouses, and some single family houses there are additional fees from HOAs (Homeowner Associations). Be sure to plan accordingly.
At this stage, if everything is in line, you are ready to get some preapprovals. I know some of ya’ll are scratching your heads because I have not once mentioned viewing houses. Sure haven’t and I won’t. Let’s get the ducats straight then we’ll shop. Stay focused. As I was saying, it’s pre-approval time. Before we head off to our favorite bank, credit union, or other fine financial institution, a quick chat on the types of mortgages available. Mind you, lenders often have many programs but most loans will fall under one of these main categories.
- Conventional loan – A loan not backed by the federal government. These loans are in my opinion, top tier. Conventional loans have the highest minimum required FICO score. Borrowing costs tend to be lower than other types. Some lender programs can have down payments that are low as 3% and in some cases 0% down payments. PMI is also cancellable once LTV reaches 80%. This loan is perfect for folks with strong credit and solid income and job history.
- Government-backed – Think Federal Housing Administration (FHA), Veterans Affairs(VA), and U.S. Department of Agriculture (USDA).
FHA – These loans are geared towards borrows who may not have the strongest of credit and/or a sizeable down payment. Minimum FICO score for an FHA loan is 580 for 3.5% down payment. A 500 FICO can be accepted but the down payment shoots up to 10%. PMI typically lasts life of loan. Oof!
VA – Provided to members of the U.S. military; this includes active duty and veterans and their families. These loans require no down payment and do not require PMI. There is, however, a funding fee that has to be paid upfront.
USDA – These loans are strictly for rural area homebuyers. Some USDA loans do not require a down payment for low income borrowers.
Once you have decided which loan type works best for you, let’s delve a little deeper on terms.
- 30 year fixed – This one has been queen of the hill for the longest. 360 payments and that house is all yours! Fixed means your interest rate will not change. You can look forward to a lower monthly payment than a shorter term loan. You can also look forward to paying the most interest since the loan term is quite long.
- 15 year fixed – Thirty but make it fifteen. Same locked in rate. Payments will be higher but total interest payment will be less.
- Adjustable rate – WARNING! This is most likely for the more experienced Duc-hunters. Adjustable rate mortgage (ARM) starts out with a low “teaser” rate then adjusts after a certain period of time. Example: a 7/1 ARM will have a teaser rate for 7 years then adjusts annually. The new rate could be higher or it could be lower. I think ARMs are great if you don’t plan on staying in the house long AND you know what you’re doing. This is the loan that tripped up a lot of folks during the housing crisis back in 2008.
You now have enough ammo to go to a bank and get this poppin’. I suggest getting a preapproval instead of a prequalification. A preapproval means the bank has verified all the stuff you told them. You have filled out their mortgage application. They have your pay stubs, your bank statements, your credit history, the whole nine. It’s a pain in the neck but it’s worth the hassle. A preapproval means you are legit and a serious contender.
A prequalification is essentially the bank giving you a dollar amount based off info you TOLD them. If you’re not completely honest, a prequalification isn’t worth the paper it’s printed on.
Bottom line: a preapproval will get you a lot further in competitive housing markets or if you find yourself pitted against multiple offers.
Look at you. Preapproval letter in tow and you’re on top of the world. Only thing that is missing in this house buying process is umm a house. This is the fun part. Well it’s fun for the first 25 houses, then after it becomes a blur. I digress. I would never suggest a first time home buyer not use a realtor. It’s too daunting of a task to go it alone. I would venture to say that all of us know a realtor or know someone who knows a realtor. But if you don’t personally know a realtor, I recommend using Redfin. **Check back later for my review of Redfin.**
Fast forward 3 weeks later. You’ve looked at about 11 houses and you’re over it. Your realtor calls and says she has a house she wants to show you. Weary and tired but you manage to drive yourself over to this house. As you pull up closer, you perk up a bit. It’s a cute ranch style house with a garage and wicked curb appeal. “Nah, fam. Watch the roof be missing or it’s a trap house across the street”. You greet your realtor and ya’ll walk inside. BOOM! As soon as you walk in, you get this vibe. It’s the perfect house but you’re digging it hard. Next thing you know an hour has passed and you’re already smelling the bbq that you’re grilling on the deck. Of course you have to play it cool so you tell your realtor that you’ll holla at her.
Fast forward 3 hours later. The lie detector determined that it was a lie when you said you’d sleep on it. You tell your realtor that you want to make an offer. I already know what your realtor is top notch so she’s pulled all the comparables. You two have came up with a great starting number. Your realtor has helped you with any conditions you want i.e. the appliances and help with the closing costs. Away your realtor goes. What seems like an eternity ticks by. The phone rings and your realtor is going to tell you one of two things:
- The seller accepted and it’s time to pop some champagne.
- The seller says heck no and offers to hit you over the head with the aforementioned champagne bottle. They are open to negotiate either a better price or another object used to hit you.
If it’s Door 1…congrats! If it’s Door 2, your options are to either step off or step up. When I was negotiating with the seller of my house, we didn’t see eye to eye on the price. It took several rounds but we eventually settled on a price that we both could live with. The best piece of advice I can offer here is not be afraid to walk away. You would hate to walk away with a house and a whole roomful of regret.
Lucky for you, the seller is super cool and has accepted your offer! You paid earnest money and a little dough for something called an “option period” This is a time where you can walk away from the deal for any reason with no repercussions. If you don’t read anything else in this article read this: GET THE INSPECTION! Please, please, please get an inspection. Not just any inspection. Find the most thorough inspector out there. You want the person who is going to scale the roof, get in the attic, under the house. You want someone who is going to get all up and through your house’s business. Inspections will run you upwards of $500. Don’t skimp on this.
About 24 hours later, the inspector will send you a report. Don’t be alarmed if there are a lot of items listed. Most inspectors will break them down as either serious or “ehh I probably wouldn’t had done it like that”. Share this report with your realtor. They will help you decide which ones to ask to be repaired or come up with a discount. I’m not a fan of asking a seller to fix something because 7/10, they won’t do it correctly. Also, you can compare the inspection report to the seller’s disclosure. If there are serious defects that were not disclosed, you can rescind and get your deposit back.
You catch another break. The inspection report didn’t reveal any major issues and the appraisal came in over selling price. You also lined up your homeowners insurance and they have sent the binder over to your mortgage company. Time to sashay away towards the closing table. This is the time to keep your credit nose clean. Do not go make any major purchases. Do not deposit large wads of cash into your bank account. Ask your mortgage broker’s approval before doing ANYTHING. I wasn’t on the brink of my mortgage falling apart but I was uber careful. If you’ve gone this long without whatever the thing is, you can wait a little while longer.
You see that light at the end of the tunnel? It’s closing time. A few days before closing you will receive your Closure Disclosure. This document will give you all the tea on your mortgage. Here you will find mortgage payments, the loan terms, down payment amount, and closing costs (if you weren’t lucky to get them covered). This is also the time to correct any incorrect information such as misspelled names as such. It’s a pretty straightforward form and it is quite helpful. After you’ve perused this document, how about you and the realtor swing by the house and do a final walkthrough. Now go home and get some rest.
Okay champ, you ready? Do you have everything. How about a quick inventory?
Down payment…check! Wait, is that personal check? Nope! Rippity rip! Swing by the bank and get a Cashier’s check.
Photo ID…check! Closing company has to be sure you are who you said you are.
Ice pack…whet? Trust me on this. You will sign your name no less than 1,238 times. It’s gonna be sore.
Walk into the closing company like the boss that you are. Your realtor will be there. Wait for your name to be called. Take a deep breath. Bare minimum glance over the documents before you sign. If you’re confused about anything, stop and ask questions. You ain’t buying a toaster, fam. Take as long as you need to feel good about putting that pen to paper. Some documents to really keep an eye out for:
- Promissory note – You promise to pay these folks their money.
- Truth in lending statement – Shows interest rate, APR, and total cost of the loan. Double check this.
- Deed of trust – Your house is now on lien.
- Monthly payment letter – Meet your new bestie.
- Statement of identity – Double check this one especially if you have a common name.
Sign these bad boys and their friends, cough up that down payment, and VOILA! You are now officially a homeowner. Grab the keys and that big folder full of paper work and stroll out the joint. Your realtor will likely stay behind because they collect their check there. Head on over to your house. Unlock that door. Take it all in. Congrats yo!
Don’t fret if you felt like this article wasn’t enough. It will be updated quite frequently because I want to discuss each part more in depth. Now sound off. Homeowners: what do you wish you had done differently? Potential homeowners: what scares you the most about the process? Hit that comment box!