Tuesday, November 11, 2014

Buying a House in the Next Six Months?

I recently wrote a long email to a close relative who hopes to buy a house over the summer.  I thought I'd share it in case there were any prospective first-time home buyers out there who wanted the whole process all spelled out.

I know there is a big rent vs. own controversy among frugal folk.  (Plus there's the guy who says its cheaper to live in hotels....)  Home-ownership works for us.  For one thing, dollars and cents aren't the only considerations.  But if you have run the numbers and renting works for you, go for it.

Tips on buying a house

I love being a homeowner. Here are a few tips I learned along the way….

The Budget: Why houses cost more than renting
OR How much house can we afford?

Here are all of the bills you have to pay when you own a house.  Some of them you don't have when you're renting: gas, electric, water, trash ($35/month), maybe cable, and phone, cell or otherwise.  You will also want to review your life insurance policies.  It is not unusual to have an $80 a month electric bill during the summer or a $90 a month gas bill during the winter.  There are also some incidentals that aren't really a big deal unless your budget is very tight: furnace filters, salt for the water freshener, snowmelt for the sidewalks, leaf bags, etc.

One-time stuff that you may need to purchase: curtains, washer, dryer, lawnmower, garden hoses, snow-blower or shovels, rake and/or leaf blower, and a ladder to get to the gutters.  I think an edger is optional, although Robert doesn't.  You may also decide you need carpeting, extra furniture, new paint, et cetera. We had to buy a mailbox because the previous owner had lived their long enough to be grandfathered in and not have to follow the new law about everyone having one along the curb.

You need a bigger emergency fund than you do as a renter.  I would recommend having at least $2,000 still in savings after the down-payment, the closing costs, and the incidentals.  You can add to that slowly since you will probably need to replace the roof at least once during the time you own the house, but something inevitably breaks during those first few months.  Monica S. says they happen in threes, and they did for us -- garage door, furnace, and some plumbing.

I love being a homeowner for two big reasons: I can make changes to the house and yard, and eventually my mortgage will go away.  But it is more expensive.

The Process

Right now:
1. Start saving paycheck stubs.  The bank can ask for up to a year.

2. Decide which a ZIP code you want to live in.
-- Crime reports are posted online.  Get in the habit of watching them and looking for patterns.
-- Talk to people about schools.  Which goals to substitute teachers hate going to?  Which schools have happy teachers?
-- Access to a bus route is handy, especially when you only have one car.
-- Ask yourself what neighborhoods you would feel comfortable in walking after dark
3. Every week, check online to see how often houses in your target area come up for sale and how much they cost.  Notice how much they fluctuate and what factors seem to drive the price up or down.
-- Knowledge is power.  You need to know when something is a good deal.  The guy we bought our house from was in a hurry.  He probably could have gotten $10,000 more, but he just wanted it over with.  We got a deal, but we had to move very quickly.  If our house had been priced at market value at the time, we could not have afforded to buy it, but because we knew what we wanted we were able to get a house in a much nicer neighborhood than our budget would normally have allowed.
-- Doing this will also give you an idea of how soon you need to start the process and whether or not you would ever move before the school year is out.  (I'm not suggesting that your daughters switch schools -- there are other ways to get her there if you are in a different neighborhood, like her Aunt Jen who will be done with school after the first week in May.)  For example, if in the period of a month, there has only been one house for sale in your target area in your budget and it was on the market three days, that will give you an idea of how quickly you will need to move.  On the other hand, if most of the houses in your target area are within your budget, then you have a good deal more flexibility.

4. Go to Open Houses and figure out what your non-compromisable wish list looks like.

5. Figure out how much you have to spend each month on housing.
-- Online mortgage calculators do not always include taxes and mortgage insurance, both of which will vary considerably depending on the house you pick.  I think we estimated an additional $200 more for those.  Your realtor will have a better idea.
-- You may want to get utilities estimates for the type of house you want early in the game.  When it comes time to put in an offer on a highly desirable property, you may only have a couple of hours to make a decision if there are already other offers on the table.
-- If your budget doesn't match what you want, don't despair.  First, the prices are open to some negotiation, depending on the market.  Prices may also change dramatically if the Fed actually raises the interest rate in early 2015.  Plus you also have some time to save.
-- It is likely that your income will increase as your husband continues along his career trajectory.  Are you willing to have the budget be a tight squeeze for a few years?  That is probably better than ending up in the neighborhood where you don't feel safe.  On the other hand, foreclosures are messy!  It is a fine line.  We went $15,000 over our budget for our house, but we have easily been able to meet our mortgage payments and then some.

6.  Do as much packing and discarding early as you can.  It's going to get kind of crazy later.  I did not do nearly enough of this when we moved.  When you pack away your winter clothes, label the boxes.

In the spring

7. Get pre-approved for a mortgage before you go house-hunting in earnest.  This took an afternoon.  The bank will loan you up to a specific amount of money based on what it figures you will be able to pay off.  As I recall, the bank was willing to lend us much more money than we thought was sensible. (We left thinking, "Ah, this is where the foreclosure crisis came from.")  It's based on what percentage of your monthly income will be going toward the mortgage.  I think they figure something like 25-30 percent is reasonable.  I think 18-to 20 is more reasonable, but that is up to you. 
Note that there are sometimes special interest rates through government programs for first-time homebuyers.  The interest-rate was the same as for a regular loan at the time we were applying, so we didn't go that route, which turned out to be good for us because the seller did not want to mess with the extra inspections that come with that those special loans.  However, 30 years of a lower interest rate is kind of a big deal, so I wouldn't say no to the idea.  But I would add an extra week or two on to the whole process.

8. Get a realtor.  The realtor's fee is paid by the seller, so there is no cost to you at all.  Ours was a husband and wife team with 30 plus years of experience.  He is also a contractor, and it was very useful of someone who know how much it would cost to put I- beams on a particular basement, or hire someone to paint the two-story house.  They're also quite laid-back, and not at all pushy.  They did a nice job of helping us figure out what we really wanted.  I thought I was pretty open and flexible, but I kept finding houses that I didn't like and couldn't figure out why.  They helped us figure all that out, and they were extremely patient.

9. Make an offer.  Usually the seller has 24 hours to decide whether or not to accept your offer.  If they don't accept it, they can either decline or counter-offer.  This is the first negotiation period in the process.  Try not to get so emotionally invested in the house that it makes you less logical about the negotiation process.  Sometimes people figure out where their furniture is going to go, and then they can't let go of the house when the seller won't fix things that ought to be fixed or the price goes too high in a bidding war.  (“But termites won’t be so bad, honey!  We’ll name them and they’ll be our new pets!”)

10. Do lots of waiting on other people.
After our the price is agreed on, there is an inspection, which you will probably have to pay around $500 for.  (You do not get this money back if you decide not to buy the house.)  Your realtor will meet with the inspector at the end of his tour through the house, and you can be there too, if you like.  I was, and I found it quite helpful.  There will be an entire book of everything that inspector thinks is wrong with the house.  It is quite daunting and scary, but your realtor will be able to sort out what things you should be concerned about and what things are boilerplate.  (For example, ours listed a cracked driveway.  I suppose there are some cracks, but nothing out of the ordinary and certainly nothing that needs to be fixed.  There was even some electrical stuff that didn't turn out to be a big deal either.)  After the inspection, you come to the second part of negotiations.  You can request that the seller fix things OR use whatever problems the house has to negotiate a lower price or both.  This is the second negotiation period in the process where the deal can fall through or change significantly. 

During this time the bank will be deciding whether or not it really wants to give you a loan.  First, it will evaluate you -- your credit score, your income, the amount of money you have in savings, etc.  Next, it will evaluate the house to make sure you're not paying too much for it since the bank will get the house if you default on the loan, and it wants to still make money in the event that that happens.  So if you are planning to pay $136,000 and the bank decides that the house is only worth $130,000, they will refuse to loan you the money.  (This actually happened to some friends of ours.  Fortunately for them, the seller was so eager to be done with the house that he lowered the price $6,000.)

Towards the end, there seemed to be all these little costs that popped up, including closing costs which can be $2,000-$3,000 dollars, title fees, etc.

If everything and everyone is in agreement, then the rest is pretty smooth sailing.  The real estate agents do a walk through the morning you sign the papers to make sure that everything that was supposed to be done has been done.  When you sign the papers, then you get the keys, a mortgage, and usually a gift from your real estate agent.

For us, it took about five weeks from when we made the offer to when we got the keys.  However, there was a lot of luck in that.  Here are some reasons that the house hunt can take six months or more:
-- Not finding anything in your price range that you would actually want to live in.
-- People buying desirable houses before you can get to them.  (This kept happening to Dave and Sarah.  They would plan to go to an Open House, only to get a call that the house had sold the day before.)
-- Sellers not accepting your offer and choosing someone else's instead
-- Something coming up in the inspection that is a deal-breaker
-- The bank not agreeing with the price you want to pay, or giving you a higher interest-rate because it doesn't like something in your financial profile, or otherwise sinking the deal

None of this means that you can't buy a house over the summer.  But it does mean that you need to be prepared.  If you want to move in late May or early June, I would suggest making an offer by at least May 1.  That way if the house falls through on May 20, you have time to start the process over again.  You would need to start with the bank and the realtor, I would think, by at least April 15.  Ergo, you need to figure out the ZIP code and the wish list before there.  To figure out where you want to live based on what you can afford, I would start now, so that you can do the process in a leisurely, low-stress fashion.  It’s actually a lot of fun.  But the more you know, the easier it is.

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