Congratulations – you’re going to buy a house! (If you’re not sure you’re ready to become a home owner, check out the homeowner’s pre-check list.)
In my experience, buying a home feels something like this:
You want the one close to work with the extra room. Your SO (significant other) wants the one with the large tub closer to the school. The real estate agent wants the highest priced one they can convince you to buy (obviously). The seller wants you to pay 15% above market value. The loan officer just wants you to buy the thing as fast as possible so they can move on to the next one. In all this chaos, who’s on the side of your wallet?
Consider these things when buying a house, so you can enjoy this major milestone in your life with the confidence that you’re making the right decision:
Seek Pre-approval First
The first legitimate step when beginning the home-buying process is to seek pre-approval through a lender. There are three basic stages you’ll go through when applying for a loan:
Becoming pre-qualified is the first step toward home ownership. Mortgage loan pre-qualification will give you an estimate of what you’ll be granted to spend on a home. There are some important distinctions to note:
Pre-qualifications do not:
– Pull your credit reports from any of the three major credit reporting companies.
– Provide any kind of commitment or guarantee between you or the financial institution.
– Carry any weight with seller or real estate agent / Realtor.
A pre-qual is a simple conversation with a lender. You’ll tell them something like “I make $90,000 per year, have $45,000 in the bank and am interested in a home for $240,000”. When you leave, usually a lender will provide you with a Good Faith Estimate, which includes expected interest rate, loan maximum, etc. These are estimates and are not commitments! Remember that. This is a ballpark figure, which can change, especially if the numbers you provided in your conversation weren’t completely accurate.
Personally? We skipped the pre-qualification and went immediately to step 2 – pre-approval. I had done a rough calculation of what we could ‘afford’ according to the bank, and knew we’d be spending under that number to avoid overextending ourselves.
Pre-qualification is the first step in obtaining a loan, but Pre-approval is the first serious step. You’ve got a commitment from the bank to honor the loan agreement (subject to verification of your information), which is typically valid for 60-90 days. In order to obtain pre-approval, you’ll need to provide the following:
– Social Security Number
– Zip Code (If you are looking across multiple Zip Codes for a home, just pick one)
– Employment Information
– Income (either annual or monthly, before taxes)
– Net Worth
3. Loan Commitment
Loan Commitment is the real deal. This occurs when you’ve selected the house, agreed on a price with the seller and intend to buy the house. The truth is that with residential loans, no deal is 100% finalized until the deal is closed, but this is as close as it gets.
Find a Good Real Estate Agent
- Real Estate Agent = Anyone who has passed the real estate agent license exam.
- REALTOR® = Passed agent license exam + member of National Association of REALTORS®, which means they follow the association’s code of ethics.
- Broker = Passed agent license exam + Passed broker license exam. Can work independently and hire other agents to work for them.
If you know people in the area, word of mouth referrals can be a good way to find an agent who will work for your needs. If you don’t know anyone to give you a referral or can’t find a good agent this way, cold calling is probably your best bet. Meet the agent to interview them and make sure that they have some of these qualities:
- Willingness to help you buy a home
- Experience in the geographical area you’re looking to buy
- Considerate of your needs/desires in a home
- Someone you can build a rapport with
Learn the Market
Know what city or even neighborhood you want to live in? Great! Take some time to understand the market for your area. By spending some time looking at listings, you can learn what factors drive price most for your area, and what you can reasonably expect to get for your price range.
Think Twice (or Three Times) about HOAs
Home Owners Associations (HOAs) may seem like a great idea: pay a yearly fee into a community fund and get a gazebo, or park, or pool, or gym, or landscaping, or… you get the picture. The reality is that HOAs are unpredictable and restrictive. They act as a mini-government, without the same checks and balances. A committee can choose to charge everyone a special assessment to cover expenses or add a new feature you may not want. If you don’t pay, the HOA could foreclose your home. Additionally, many non-condo HOAs are extremely restrictive. One of the great perks of buying a home is the freedom to do what you want with it (within the limits of the law, of course). HOAs seem great on the surface, but really fall flat in practice. I’d recommend avoiding HOAs at all costs if possible.
Hire an Inspector
Visual Inspections are not guarantees, but they can go a long way to protecting you from buying a lemon. A good contractor should belong to one of the National Association of Home Inspectors or the American Society of Home Inspectors. Ask for a sample inspection report, make sure that it is thorough, detailed and easy for you to understand. A good inspection should take 2-3 hours on average.
Also, don’t follow your real estate agent’s recommendation. Even if you know your agent personally, real estate agents tend to have a go-to inspector they use. If an inspector was consistently calling out problems with homes and holding up deals, the real estate agent probably isn’t very likely to continue working with that inspector. I’m not saying all real estate agents are out to hide facts from you, but I am saying it’s worth your time to research and find your own inspector.
Check for Outstanding Permits
This is something your home inspector might do, but it isn’t a given by any means. Before you remove the inspection contingency on your agreement, go to your local city planning office and check the property for any open or expired permits. In addition to causing problems if work was done not up to code without a permit, open and expired permits themselves can cause issues for new homeowners. Depending on your location, your city could require you to reopen an expired, unused permit and finish it before opening a new permit for another reason. For example, if you wanted to add an in-ground pool but there was an expired permit for a new roof, you may have to pay to reopen the permit and pay to roof the house before you could build your pool!
If you find something not up to code or an outstanding permit, negotiate price with the seller or ask the seller to bring it up to code and/or close the permits by finishing the work. These things can be extremely costly, but catching them before the sale is final is much easier than pursuing litigation after the sale on the house closes.
Buying a home can easily become a long, complex, tiresome marathon. By following these action items, you can be sure you’re making the best possible choices with your hard-earned money.