In our financial advice column for the centsless, Michael Fleck fields questions on how to get your money right.
The other night, during a conversation about how broke everyone was, one of my friends perked up, put down her pint glass, and asked, “Ok, explain this to me. How in the world does anyone ever buy a house?”
I knew what she meant. How does someone in their late 20s or early 30s amass the $30,000 necessary to put a 15 percent down payment on a $200,000 house, and then shell out more than $1,000 in mortgage payments each of the next 360 months? The snarky, obvious, and truthful answer is that you have to save. Every paycheck. Getting a tax refund? Put it away. Still getting birthday checks from grandma? Stash them. I recognize that it’s a monumental task to try to amass such a large sum of money (especially when paying debt needs to come first) and I don’t pretend that it’s going to be easy, but homeownership won’t be on your radar until you start saving.
However, the Wealth Clubber in me recognized an opportunity to teach. Imagine some insane world where you actually have $30,000 in cash. Pick yourself up off the floor—I fainted too. You’re in a position where you can think seriously about buying a house and the question becomes, ‘what steps do I have to take in order to purchase a home legally and responsibly?’ Being fairly centsless myself, the thought of buying a home is both distant and terrifying. How do you go from having a down payment in a bank account to owning the deed to a house and paying a mortgage?
To help figure it out, I sat down with my coworker Hayley and her fiancé Brendan. They’re in the 25-35 age range, and recently became first-time homebuyers—well, almost first-time. The money is still in escrow; I’ll explain later. Here’s what they told me about first-time home buying.
Pre-search Soul Searchin’
Hayley stressed the importance of being true to yourself. She and Brendan knew they were getting married and that kids would not be too far away, so homeownership made sense. A typical mortgage can last up to 30 years, so if you can’t envision a stable and static timeline at least 10 years out, then buying a home probably isn’t right for you. Don’t feel bad. People value mobility differently, and if you’re a wandering Sagittarius like me, you may not want to be tied down. Staying liquid—having most of your net worth assets you can easily convert to cash, unlike a house—is a perfectly acceptable reason for not wanting to buy a house. My friends also knew that in this market, with relatively low prices, buying a house is a possible opportunity to make some money in the long-term, as the value of their home eventually will rise. Hopefully. In general, it’s not wise to think of buying a house predominantly as an investment.
Make sure you can afford it. Interest rates are low, but most times when you see or hear a mortgage rate quoted, it is for someone with good or excellent credit. I’ve previously stressed the need to check your credit report, but starting the home buying process is a good reason to actually pay the small fee to get your credit score. I suggest myfico.com. If your score is not so hot, it going to cost you more to buy a house. Focus on improving it.
Don’t Try to Go at It Alone
As well as consulting Hayley’s father, who has bought and sold a number of houses in his lifetime, they decided to use a buyer’s real estate agent. I suggest going to a buyer’s agent as opposed to a seller’s agent, as their interests are more closely aligned to yours. Buying a home is not the time to cut corners, especially if it’s your first time doing it. Sites like redfin.com and Realtor.com can help you find someone, or you can solicit referrals from family, friends, and coworkers. Hayley and Brendan’s real estate agent had helped her father in the past, so it was a natural choice for them. Trust is extremely important when choosing an agent. Look for someone who is familiar with the neighborhoods that you’re interested in.
Now do your research: Look at the home prices in certain neighborhoods over the past year. For recent transactions, see how much lower than the asking price the initial bids have been to gauge where your bid should be. Zillow.com, Elistit.com and Trulia.com can help you browse homes in your desired location. Remember, proximity to good schools is a huge driver of home value—don’t brush this fact off even if you don’t have or want kids. When it does come time to sell the home, it may be a deciding factor for a potential buyer.
Get Out of the Kitchen If It’s Too Hot
It’s hard not to be emotionally attached to the process, as this may be the single biggest purchase of your entire life. For precisely this same reason, it’s extremely important not to rush into anything or make stupid decisions. As Brendan put it, “it’s hard to separate emotions from being rational.” There comes a great deal of pride in owning a home, as there should be, but this alone should not cause you to make rash decisions.
Transaction (and Other) Costs Happen
On top of the down payment and monthly payments, you can expect up to $3,000 in transactions costs. Appraisals, home inspections, and title insurance (to make sure you don’t get hosed if someone challenges ownership of the property) are all normal extras that are generally charged to the buyer. For Brendan and Hayley, no one single item was egregiously expensive, but they were surprised at how quickly the little things added up. For example, they thought their home inspection was done and paid for. Nope. They recently learned they needed a termite inspection. You need to be prepared for the possibility of unexpected expenses at close.
Aside from the transaction costs, think about whether or not you’re breaking a lease and what that will cost. If your dream house is bigger than where you currently live, your utility expenses will increase. If you have a yard, think about upkeep, either with your labor or someone else’s. Think about what work need to be done, both aesthetically and structurally, once you buy. For example, get estimates on hardwood flooring if that’s something you want to upgrade.
When it’s time, you’ll put a bid down on a house. If accepted, you’ll work out a closing date (anywhere from 45 to 90 days out), put the money into escrow, and determine what the closing contingencies are—the conditions imposed by both the seller and the buyer before the sale becomes final. This may include another inspection once the old residents have moved out, or a provision that the sale is dependent upon final approval of certain rates and terms from your lender. Your real estate agent may suggest others. Use this opportunity to protect yourself. You have the right to ask for whatever you want at this point, but be careful. If you ask too much, the seller may simply decide they don’t want to deal with you, and you’ll lose out to a less difficult bidder. This risk can increase in a hot real estate market where demand is high.
When you’re buying a home, be aware of the dangers of predatory lending. Despite efforts to curb the pernicious practices have come to light over the past few years, villains still exist, and if you’re not careful, you could find yourself in a financially dangerous situation. If something sounds too good to be true, it probably is. Stick with a fixed-rate mortgage: Rates are currently low, but with the prospect of a healthy economy not terribly far away, rates are likely to rise, especially if your horizon is more than 10 years out. A fixed-rate mortgage ensures that you won’t encounter any surprises down the road. If you can eventually refinance, wonderful. But don’t rely on it.
Despite the cost concerns and the emotional gauntlet, the first-time home buying process went fairly smoothly for my two friends. They knew what they wanted and what they could afford, and used the right resources to guide them along the way (Congratulations Hayley and Brendan!). If you’re able to keep your cool and purchase for the right reasons, one of the biggest things you’ll ever buy won’t be all that big of a hassle.
