First-time Home Buying Tips01.04.2009
Buying a home can be stressful. Buying your first home can be even more so. You may not know where you start. You may not understand all the lingo. You may not be able to differentiate between marketing ploys and practical procedures. You may not know what you’re looking for in a house or where you’d like to start your search. You may not know how much you can afford. As a recent first-time home buyer myself, I ran into a lot of the same issues. Having learned a great deal through my experience, I’ll offer what I can to other first-time home buyers:
Understand the lingo.
In real estate, if you don’t understand the lingo, you risk locking yourself into something you didn’t really understand. In today’s society, most people would call this “being taken advantage of”. I call it being irresponsible and unprepared.
Here’s my list of lingo items I feel each home buyer should know and understand. Each are linked to their respective Wikipedia articles, though you can find numerous resources online through any search engine like Google that I would recommend checking out.
- Mortgage Broker
- Mortgage Banker
- Realtor/Real Estate Broker (vs. not using a realtor)
- FHA vs. conventional loans
- Piggyback loan
- Mortgage points
- Origination fee
- Good faith estimate
- Assessment vs. appraisal
- Balloon payment
- Title insurance
- Property insurance
If you know what those mean and how to act upon them, I’d say you’re ahead of the game and well-prepared.
Determine if you need a realtor.
I’m not going to go through all the reasons you should or should not have a realtor; I just want to bring up the idea that it may not be in your best interest to have a realtor, especially if you already know the area and are willing to put forth the effort to research the local real estate markets, understand legalities, and schedule the inspection, appraisal, etc. Usually when you purchase a house, your realtor gets paid by the seller. While you may initially think there’s no down-side to having a buyer’s realtor agent, do realize that some sellers will offer some fairly deep discounts if you come without an agent. Most agents will require you to sign paperwork stating essentially that you will not go house-hunting without them. Understandably, they don’t want to be cut out of the deal after they have put forth effort to help you. Remember it’s easy to get a realtor, but difficult to get rid of one.
Determine how much you can afford.
Crack open Excel and crunch numbers. In our case, I had just recently changed jobs, we were weeks away from having our first child, and weeks away from my wife quitting her job to be a stay-at-home mom. And I’m supposed to know how much we can spend each month on a house? It’s not easy, but you have to do your best. Write down all your expenses that you can think of including outstanding debt payments, saving for retirement, saving for your children’s college fund (if you choose), and saving for an emergency fund. Subtract all these expenses from your net income (how much you take home each month). Don’t assume that this is how much you can then spend on your house. Give yourself a healthy padding for unexpected expenses, change in jobs, etc. Ask yourself some questions: What would happen if our car broke down and needed to be replaced? What would happen if I suddenly broke my back and needed a couple months off work? What would happen if I lost my job? If you can answer these questions and still feel comfortable with your estimates, you’re on your way.
Consider a short-sale or foreclosure.
Since you’re likely currently renting, you may have flexibility in your contract. If so, hunker down and go for a short-sale or foreclosure. They take time and patience but can be immensely worth it. There are plenty of options out there currently and ripe for the pickins.
Create a wishlist of everything you would like in a house. Sit down and make your MoSCoW lists (must, should, could, won’t haves). If you’re using a realtor, review these with him/her. It’s the realtor’s job to take this list and find houses that match. If they don’t know what you’re looking for, you’ll waste a lot of time. Be upfront with them on what you do/don’t like about the houses you see. Take photos and notes of all the houses; you’ll have a hard time remembering them if you don’t.
Be patient but realistic when trying to find the perfect house. There are always new houses available for sale to choose from, but it’s likely you’ll never find your perfect house. When you find a match, don’t be afraid to pull the trigger, especially if it’s a short-sale. Laws may vary by location, but usually you can submit offers on as many short-sales as you’d like. Even if one is accepted, you can still turn it down. With houses that are not short-sales however, you are under contract if your offer is accepted and cannot back out under most circumstances without a penalty.
In our case, we looked at approximately 15 houses in person and ended up buying the second house. We looked at many, many more online to drill down to the ones we actually wanted to visit.
Make the banker/broker work for your money, especially if you have good credit.
Do not just go to one broker and call him your broker. Go to several and ask a lot of questions. Send their good faith estimates (ask for digital copies) to each other and have them try to beat the others. Never feel bad for asking questions and doing things on your own terms. In the end, you’re the one stuck with your mortgage and it’s likely you’ll never talk to your broker or realtor again after you sign your life away.
Don’t feel pressure to go with a realtor family member or friend. Unless you really trust him/her, I’d actually suggest against it. The safety of having someone you know doing your work can easily be offset by higher interest rates (honesty and friendship do not always mean least expensive) or bad feelings if a mistake is made or expectations aren’t met.
Get an inspection.
An inspection may be a few hundred dollars, but they can save you thousands. Even if the inspection doesn’t turn up a faulty foundation or a roof that needs to be replaced, it can still highlight items that may be safety hazards or can be used for bargaining with the seller.
Lock in your interest rate.
Despite some popular beliefs, you’ll very likely have no idea whether mortgage interest rates will go up or down. You could wait and hope they go down (called floating the rate). Or you can take what’s currently available and ensure you get that rate (called locking the rate). By locking the rate, you’re guaranteed you will get the interest rate you locked if you complete the home purchase within a given period of time (usually 30 days). This ensures the interest rates don’t jump way up out of your budget range right before you sign the closing documents. If such were the case, you could end up losing a house you really like and paying a fat penalty for backing out. On the other hand, if you don’t lock or wait to lock you might get a lower rate. You weigh the risks involved and make your decision. There’s no clear-cut answer on whether the rates will go up or down and you’ll drive yourself crazy trying to foresee the future. Unless you’re up for a risky ride, be safe and lock your interest rate as soon as possible.
Recently a news story portrayed a woman who speculated in the housing market by purchasing a handful of condos in Florida with hopes that their values would soon rise as they had done in the past. She said she didn’t read the paperwork because so many of her friends were doing the same thing and they were all making big money. After the mortgage crisis, she reported she had lost a lot of money in her real estate purchases and was treated unfairly because she didn’t know what she was getting into.
Wrong. If you don’t read the paperwork, you have nobody to blame but yourself. If you don’t understand it, find someone who does or sign it knowing that you are the one opting out of understanding it.
Enjoy the ride.
While buying a house may be stressful, it should also be fun. It’s not every day you can throw down a John Hancock on something worth thousands of thousands of dollars. It’s now your house and you can do almost anything you want with it. Don’t like a wall? Knock it down. Don’t like the color? Paint it. It’s great to own a house as long as it’s financially smart. Figure out what’s financially smart and go have fun.