Published February 26, 2019
The Ultimate Guide to Buying A House
Let's talk real estate: Buying a house
is one of the biggest decisions of your life. Here’s the ultimate guide to making the important decisions and navigating the process.
The first part is understanding your own motives for buying a house as those motives should determine many of the early choices.
Many people go into the process hoping to achieve too many life goals with the first purchase and set themselves, or their partners, up for failure. Is this a house you need for less than 5 years or do you want to stay put in one location and raise a family there? If it’s the latter, space should be a priority. If it’s going to be a short term home, other priorities should prevail. Do you want the home to give you a higher quality of life and time with your family? If so, commute time and turn-key condition are going to be important. Want to use the home to add sweat equity? Perhaps you want a house you can add value to by remodeling or updating. It’s important to understand what you want from the house. It’s just a house and can’t possibly solve every problem. Understand why you and your partner are buying a house so you can begin finding the right fit.
Written by Matt Lavinder, President of New Again Houses®
So, what DO you want?
Most buyers’ answer is “everything” and it sets them up for a disappointing home search. Like everything else in life, the search will become a process of deciding what is important to you AND your partner. Take much of the stress out of the process by making these decisions before you start looking at houses
Here is the smartest thing you can do to start your search: Go online with your partner and together find the answer to this question, 'If we can only see three houses of all the houses online, which 3 would we choose to look at?' This will force the two of you to decide both what is important to you and what is not so important to you. Chances are you are incorrectly assuming what is important to your significant other. If so, this will come out quickly and it will spark some much-needed conversations. This only works if you choose 3 (and only 3) houses that you both agree on. It’s cheating for each of you to choose 3 because you’ll eventually have to buy a house together. You will have to go through this relationship introspection at some point and it’s better to do it before you start looking at houses in person. It’s not easy though, because below is a list of some of the bigger items you’ll have to prioritize.
- Maximum Price
- Location Requirements (include school districts)
- Minimum Bedrooms
- Minimum Bathrooms
- Minimum Square Footage
- Parking Situation
- Minimum Quality of Yard
- Level of Updates
- Curb Appeal or Style
There are certain needs and an unlimited amount of wants. It’s important to identify the needs first and then tackle the wants.
Your budget will force you to prioritize. Once you agree to what you NEED on this list, start identifying houses online that meet the needs. The process of narrowing the search to 3 houses will be a process of prioritizing the wants. If you’ll force yourselves to limit the first list to 3 you could both be happy with, you’ll set yourselves up for success rather than failure. Having answered the “Why do I want to buy a house?” question first will make this negotiation easier.
For example, if you currently have no kids but want to have 3 kids, how many minimum bedrooms? Well, is this house for the next 3 years or 10 years? If only 3, you may only need 3 bedrooms. What about the importance of a guest room? Is it a want or a need? Perhaps Air BnB’s are always available nearby and it’s just a want. Start with the needs and then see how many wants your budget will allow.
Here is why this initial process is especially important: If you don’t define your own needs and wants together, others will do it for you.
Your real estate agent will be happy to tell you what you need if it’s clear you haven’t decided. Even worse, family members will assert themselves. If you think it’s difficult for the two of you to identify needs and wants, try adding the opinions of in-laws into the mix. It’s hard enough for a single house to satisfy two people. No house can satisfy the wants of those two AND extended family with strong opinions. Do your relationship a favor and spend time on the front end narrowing down the list to 3. You’ll learn a lot about yourself and your partner. Then, once you understand what the two of you want, start looking for a house that can give you those things.
How much space do I want and need?
Everyone wants more space, but this is an important question. The cost of housing is often a direct correlation with square footage. Real estate agents might push back, but square footage is the most important filter because every additional square foot will have a corresponding cost of purchase, updates, maintenance, and utility bills.
There’s no way around the fact that every additional square foot comes with a set of costs now and for as long as you own the home. The costs of updating or remodeling a home are directly related to the number of square feet. Flooring, painting, electrical systems, plumbing drops, windows, roofs, and HVAC systems are all costs based on square footage. For a light remodel of just paint, carpet and fixtures, figure $10/sq ft and closer to $30/sq ft if you want to get into any bathrooms and kitchen. When it comes to remodeling costs, square footage is not your friend. Want a 2000 square foot house that needs to be updated? Be prepared to pay $40,000 for that in most markets. If you aren’t disciplined and set limits, make it $50,000 - $60,000. If it’s 1000 square feet you can cut those costs nearly in half.
Agreeing on your minimum square footage is one of the first decisions you need to make as that is going to dictate many of the other options. Remember, sellers don’t give away square footage. If you think you are getting additional square footage for a deal, you probably aren’t. Instead, you are likely getting square footage that you will need to remodel at $30/ft.
How much can you afford?
One of the most important questions is "how much house can you afford?" As a rule of thumb, your house payment should be somewhere below 31% of your gross monthly income.
Make $4,000 per month like most Americans? Your maximum house payment (including property taxes and insurance) should be less than $1200. Most financial advisers would encourage you to be under 25% of your gross monthly income, but that’s just not possible in some markets.
Don’t trust the online mortgage calculators because they will lead you to inflated expectations. Most of the interest rates advertised online are teaser rates and probably don’t include things like mortgage insurance, property taxes, insurance, and other fees. The best way to find out what you can afford is to go through a prequalification process with a quality local lender.
Choosing a Lender
The lender is one of the most important partners in the home buying process. Like you’ll find in most areas of real estate, there are a lot of people, including lenders, who just aren’t very good at what they do. Don’t choose people you know. Choose people who are the best at what they do
Lending options fall into two large groups: secondary market mortgages and portfolio mortgages. Secondary market mortgages are backed by a federally insured agency so they must be conforming. This means the lending guidelines have to meet certain requirements. As a result, most secondary market mortgages look very similar, regardless of the lender that is selling the loan. For example, if you are getting an FHA loan, the requirements are going to appear fairly similar at every bank and mortgage lender in town. On the day your loan is closed, it is typically packaged with thousands of other such mortgages and sold on the secondary market to another lender. Since all these secondary market loans ultimately end up with the same investor, the bank selling the loans (i.e. your loan officer) has very little discernment over the guidelines. Those guidelines are set by the secondary market and every mortgage being sold on the secondary market must “conform” to those guidelines. There are many different types of conforming mortgages, including USDA, VA, traditional, and many others. Each has its own unique guidelines, but those guidelines will be similar from lender to lender.
Portfolio mortgages are different. Portfolio mortgages are mortgage products, sometimes referred to as “In House Mortgages”, that are held by a particular credit union or bank. Since they are not sold off to the secondary market, the lender keeps the loans in house and, therefore, has more discretion over the guidelines and lending decisions. Each local bank or credit union will have its own set of portfolio mortgages and most will also offer secondary market mortgages. Keep in mind that all mortgages, including portfolio products, are highly regulated and most of the lender’s discernment is limited by federal regulations.
All lenders are not the same.
Most banking institutions offer mortgage lending and will have loan officers who sell both their portfolio products and some secondary market (conforming) mortgages. The advantage of working with a bank lender is you will have access to their unique set of portfolio loans. Keep in mind that each bank or credit union’s portfolio loans are unique and it’s beneficial to shop around for products that might fit you better. The disadvantage of such lenders is they run at the speed of a large organization, meaning slow.
The other option is to work with a mortgage broker. Mortgage brokers typically offer the widest range of secondary mortgage products, because they can shop amongst multiple investors. Banks, on the other hand, are typically locked into their own particular mortgage offerings. Brokers have the ability to find a mortgage product that will best fit your particular situation. Since they typically work on commission, they can also be faster and have less bureaucracy to deal with when there are problems with the loan. The downside of brokers is they have little to no access to portfolio products.
Spend some time researching lenders in your area and talk to at least two of them so you can compare offerings and rates. The mistake many people make is to go to the loan officer of their personal bank and assume this is their best option. It’s often not the best option. Be honest with the lenders about your income and downpayment so they can best match with a product that fits your particular situation. They will collect your w2’s, paystubs, and tax returns so don’t exaggerate your financial situation. As you begin thinking about purchasing a house, keep a folder with any new pay stubs and bank statements. This will be helpful as the lender will request updated documents throughout the process.
There are three levels of mortgage approval. The first and most basic is pre-approval
. This often consists of an online form or telephone conversation based upon the financial figures you submit. The process is quick and none of the claims are reviewed or validated.
Pre-qualifications typically require more documentation. For a pre-qualification, lenders will often require paystubs and a w2 along with a hard credit pull. Good agents will require a pre-qualification letter before showing you houses as they don’t want to show you houses that you can’t acquire financing on.
Don’t have your credit pulled until you are serious about buying a house.
The credit pull will ding your credit as it alerts the credit bureaus that you are looking to borrow money. Once you do pull your credit the first time, the credit bureaus will not penalize you for shopping around and having other mortgage lenders pull your credit, so it shouldn’t hurt your credit anymore to have 3 mortgage lenders pull your credit than just having one do so as long as they are all done in the same window of time. If you are getting your credit pulled every 30 days, that will be a problem. Mortgage lenders can use a credit report for 30 days. This is another good reason to know what you want in a house before you start the process of shopping for one. You don’t want a lender to have to update your credit report three times while you figure out what you want in a home. This is very important.
Never allow your credit to be pulled online.
There are online brokers who will take your permission and shop your file to multiple online lenders. You don’t want your information shopped around online and it’s unlikely there are better mortgage options online than there are locally. Remember, most of the mortgages end up with the same investors so the guidelines and rates will be similar. There’s really no need to share your financial information on the web.
If you are denied qualification for a mortgage, don’t panic. There are many lenders and each has its own set of qualification standards. It might be that you went to a lender that didn’t fit you. For example, some lenders are far more accommodating of self-employed workers than others. If your credit score is lower than you expected, there are some simple things to do first on your own.
- Check your credit card balances and try to get them all under 7% of the credit card limit. If you can’t pay them down, ask for a limit increase so it reduces your utilization rate (balance divided by limit) as low as possible. Credit scores can be affected significantly by credit card utilization percentages and this is one of the easiest ways to move a credit score.
- If you don’t have enough credit history, consider getting a secured card with a local bank to add a credit line to your history. This can have a significant positive effect after a few months as long as you keep the balance at a minimum amount.
- Check CreditKarma or equivalent to see if you have any recent late payments in the last year. If you do, call the source of the loan (doctor’s office, auto dealership, etc) and offer to pay the amount in full if they will remove the delinquency with the credit bureaus. Mistakes, especially with medical collections, are often made so be proactive about getting those mistakes removed.
Be very careful with hiring credit repair companies on a contract. They like to file disputes on all negative credit files on your report. This will give you a bump in credit score, but you will have to take those files out of dispute before you can get a mortgage. Oftentimes, the credit score will fall when those items are taken out of dispute. You will have spent months of time and money and be in a worse place than before. Do your own research on fixing your credit. If you do need help, make sure you work with an excellent credit repair company with solid reviews.
Using a Real Estate Agent or Not?
You can purchase a house without a real estate agent. You can purchase For Sale by Owner houses or any house that is not listed with an agent. There is nothing wrong with doing so and the process can be easier without agents involved because you can negotiate directly with the seller. There are online tools that will help you through the process, but you should consider using a good real estate attorney if you are buying a house without an agent
You cannot purchase a house that is listed on the market without an agent. If you contact the agent listing the house, she can show it to you, but she will then expect to represent you as the buyer’s agent. This puts her in a dual agency situation where she is representing both the buyer and seller. Agents like this because they can collect double the commission, but it’s not always in the buyer’s best interest. Don’t call the phone number on the sign of a house you are interested in. Select your own buyer’s agent to represent you and your agent will contact the listing agent of any house you want to see.
“Calling the sign” is one of the biggest mistakes first time home buyers make. There’s just no advantage to contacting the listing agent. It’s better to have your own agent who is representing your interests and not the sellers.
How do you find a good real estate agent?
Don’t search for them at church, work, or Thanksgiving dinner. It is not difficult to obtain a real estate license so the market is littered with part-time agents who are not very skilled or experienced. Chances are you have at least a couple agents within your family or circle of friends.
The quality of your agent matters a lot. You do not want to go through this process with an unskilled agent. In reality, a bad agent is going to cost the same in commissions as a good agent, so seek out a good one.
Spend the time to find a full-time agent that does real estate for a living
This is a common theme, but it should be repeated. Real estate professionals are not all the same. There are a few really good ones and there are a lot of low-quality people. This is because the barrier to entry is low. Surround yourself with the best people. There are different profiles of real estate agents. Here are the most common:
- The single agent. This is the most common type of agent. He is under a brokerage like Keller Williams or Remax because all agents must be affiliated with a brokerage. The single agent is a one-man team. He will list houses and he will represent buyers. This type of agent has minimal support and must do everything on his own. As a result, his time is often limited. The advantage of this type of agent is they will work with you directly and they might be highly skilled. They also might be a novice. Ask good questions about their process and look at review sites.
- The real estate team. These are becoming more and more popular. When a single agent gets maxed out, she’ll often form a team around her. A team will normally include a showing agent and, oftentimes, a team of showing agents. The team leader will normally focus on listings or lead generation and will have minimal contact with buyers. Buyers will be assigned to a showing assistant who will get a portion of the commissions. Showing assistants on teams can be entry level agents with little experience or they can be seasoned buyer’s agents. If you choose to work with a team, make sure you know who the showing assistant will be as that will be your primary representative. Teams can have the advantage of having a transaction coordinator and other specific support roles which make the operation more professional and efficient. The downside is the risk of being pawned off to a green showing assistant who got her license last week.
- Mega agents. Mega agents are similar to teams but larger. They might have a large marketing budget and a team of showing assistants with high-pressure sales goals. Just don’t expect to talk to the agent whose picture and name are on all the billboards.
One of the most important characteristics in a showing agent is her ability to listen to you. A good showing agent will spend a lot of time listening to what you want as opposed to telling you what you should want
. A poor showing agent will jump in the car before listening to you and waste everyone’s time showing you houses that don’t fit what you want or need. If you feel as though your agent is doing more talking than listening in the initial conversation, keep looking. A good showing agent will spend at least an hour listening to what you want and looking with you online before ever showing you the first house in person.
You’ll also want to know who handles the process after you have a contract. Does the buyer’s agent stay with your file and negotiate the inspection process, or will you be passed on to a transaction coordinator? That’s not necessarily a bad thing, but it’s something you’ll want to know at the beginning because you’ll want to make sure there is someone representing you through the difficult post-contract phase of the transaction.
The buyer’s agent fees are paid by the seller. In a typical transaction, the seller will pay a 5-6% commission at closing. Half will go to the listing agent and half goes to your buyer’s agent. The percentage is dictated by the seller so there’s no need for you to negotiate a percentage commission with your buyer’s agent.
Shopping for Houses
Shopping for houses can be stressful and exhausting if you don’t approach it the right way. Start by coming to a shared vision with your partner as to what you need and want.
If you show up to the first half with two sets of wants, this process will turn ugly. Sort out the different expectations before you go to your first house. Once that is complete, narrow down the list to a few prospects you both agree on.
When you get to a house, make a general walk through the house gathering a feel for the “big picture”, including the overall curb appeal, layout, and feel of the house. Avoid getting bogged down in the details and focus on the overall feel of the house. If that’s not right, the details don’t matter. It’s easy to get focused on details in every room when the overall feel of the house isn’t the right fit.
Once you’ve walked through the house and like the general feel, spend time in the rooms that matter the most to you. Make notes somewhere, because the details of the individual houses will get blurred after a few houses.
Don’t take the family along with you to look at houses. It’s hard enough to find a house that meets the needs and wants of two people. Adding a third person’s desires just makes it even more difficult. Parents are especially difficult. They are at a different place in life with a different set of expectations for a house. While their approval might be important to you, wait until you are further along in the process to ask them their opinion. Be warned: If you do ask family their opinion, be ready for them to have one.
Making an Offer
When you find the right house, it’s time to make an offer. If you have an agent, she will guide you through this part. The main decisions you’ll have to make on the contract offer are:
- Offer amount
- Earnest amount
- Inspection period
- Closing costs
There is more to the contract than these and it will differ from state to state, but these will be the most difficult parts of the contract. The offer amount is obviously the price you are willing to pay for the house. Your offer will depend on many things, including the length of time the house has been on the market (days on market).
As a rule, you’ll have a better opportunity to negotiate the price if it’s been on the market longer. Your lender will order an appraisal and most contracts are contingent upon the property appraising for the amount offered. If a property appraises for less, there will be an opportunity to negotiate again at that point. The earnest amount is the amount you place as a downpayment with the closing attorney. Those funds will be held and credited toward the purchase amount. If you fail to execute the contract, the seller is entitled to keep the earnest amount.
You should make the contract contingent upon a property inspection and financing. If you can’t follow through on the contract for either reason per the contract terms, you would receive your earnest amount back. $500 - $2,000 earnest amounts are normal, but a higher earnest amount will tell the seller you are serious and may make them more likely to accept your offer.
The inspection period is the amount of time you have to do a property inspection. The normal length is 10-14 days as inspectors must be scheduled out.
Closing costs are different from the real estate agent commissions which are paid by the seller and any downpayment. Closing costs include the legal costs of the transaction, title insurance, recording fees, state transfer taxes, document preparation, and fees associated with your mortgage.
There are also prepaid insurance and property taxes the lender will require you to pay up front. These are your insurance and taxes for the coming year, so the lender will be able to keep a year’s worth of tax and insurance payments on hand in an escrow account.
Closing costs and pre-paids will typically be between $5,000 - $12,000, depending on the price of the house. A $150,000 house would normally be in the middle of this range, but that depends on the state. Your lender will be able to tell you exactly what your closing costs will be early in the process.
In some markets, it is expected that sellers will pay the buyer’s closing costs, but this will vary from market to market. If you don’t expect the seller to pay your closing costs, you can increase the amount of the offer by the amount of closing costs and then ask the seller to pay for them. For example, if you want to make a full price offer on a $150,000 house with $7,000 in closing costs, you can offer $157,000 with the seller paying $7,000 in seller paid closing costs. This way, you don’t have to come up with $7,000 in cash for closing costs. The property must appraise for the full $157,000 rather than just $150,000. Otherwise, your lender won’t loan on the additional $7,000.
Once the seller receives your offer, she will have three options. She can either reject the offer, accept the offer, or make a counteroffer. If a counteroffer is made, it will terminate your offer and replace it with the counteroffer. You, the buyer, will then have the same options. You can reject the counter offer, accept it, or make your own counteroffer. This back and forth continues until one party rejects or accepts the contract. When a contract is accepted, the contract to close period begins.
Choosing a Title Agent
The title agent’s role is to facilitate the transfer of ownership and ensure you get a clean title to the property. A clean title means there are no liens or interests that are transferred with the property. The title agent ensures the seller has paid off any loans or judgments against the property. If the house has ever been foreclosed upon or part of probate, the chain of title can get tricky. The lender will most likely require you to purchase title insurance. Title insurance steps in if there were any issues your title agent missed. There are other issues, as well. A good title agent will check for right of ways and other issues that could affect access to your property or that of neighbors.
A quality title agent is really important. You might not discover a title agent has been negligent until you try to sell the property and the next title agent discovers a title issue. It could cause significant problems for selling your house. Here again, not all title agents are the same. Some states require title agents to be licensed attorneys and others don’t. In such states, there title companies with various levels of expertise. Don’t trust your real estate agent on this decision. Agents are incentivized to use title companies that get contracts closed. You don’t want the title company who has a reputation for getting contracts closed.
You want a real estate attorney who is going to make sure you get a clean title and won’t close a house with a clouded title.
A real estate attorney will also be better equipped to solve title and other problems that can come up during the contract to the close period. Typically, the costs aren’t that much more to use a quality real estate attorney, so work with the highest quality people.
The Inspection Process
The most perilous part of the house buying process is the inspection period. This is where most deals fall apart. As soon as a contract is accepted, you can hire a property inspector. The property inspector will typically spend 4-8 hours in a house and produce a detailed report. It’s common for you to meet the inspector at the house at the end of the inspection so he can go over the report in person. Stay calm during this. Property inspectors are by nature very detailed individuals and not known for their delivery or bedside manner. You will likely get a very long report with room by room items that have been identified as possible issues.
Inspection reports can intimidate first-time buyers by the sheer volume of items. Typically, the report will include a summary of important items at the end. This is where you should focus your attention so you aren’t overwhelmed.
Take special note of foundation issues, electrical systems, plumbing systems, water intrusions, and other systems related issues.
At this point in the process, you can normally terminate the contract if you choose to do so. This will likely be your last opportunity to get out of the contract. Don’t panic. The inspection will trigger a second round of negotiations. You can submit a list of things to be repaired or a cash sum to repair them yourself. The seller can again choose to accept the repair addendum, reject it and terminate the contract, or submit a counteroffer.
If a proposal or counter is accepted and the contract survives the inspection period, the lender will typically order an appraisal. Independent appraisals ensure lenders are not loaning more money than a house is actually worth. Some lenders require you to pay for the appraisal at that time and others will allow it to be paid as part of closing costs.
The appraisals are typically a blind process where neither the lender nor the buyer has any control over the selection of the appraiser.
If the appraisal comes in under the contract price, the lender will typically only loan a percentage of the appraised value rather than the contract price. The buyer can renegotiate the price, cancel the contract, or pay the difference between the appraisal and the contract price. Most sellers will be willing to renegotiate the price when there is a low appraisal, but it is at the discretion of the seller. Technically, appraisals can be appealed but they are typically upheld.
There are two professions that have very little accountability: sports referees and appraisers. There are times when two appraisals are required, but the lender will often pay for the second appraisal in these situations. In the case of a low appraisal, a second appraisal doesn’t normally help because the lender will normally only take the lower of the two. Portfolio lenders may have some discretion here, but secondary market lenders are typically bound by the appraisal value.
The appraisal is one of the final hurdles to overcome. Once the inspection period is over and the appraisal has come in, the closing agent will order the title work. Once that is complete and there is a clear title, the file will return to the lender for final approval. At this time, the lender may do a work verification to make sure the buyer is still employed.
It’s really important not to make any major life changes during the process.
Don’t quit your job and don’t take on any additional debt for furniture or anything else. The lender will likely request your credit information again at the very end to make sure nothing has changed. The final step for the lender is to issue a clear to close, which gives the title agent permission to close the sale of the house. At the closing, you will sign transactional documents along with the seller that transfers the ownership of the property. You will then sign the loan package, which is significant. Once that is complete, you will receive the keys to your new home.
Keep the gutters cleaned and enjoy until it’s time for a bigger house with more bedrooms.