As someone uniquely dually-qualified to report on how to buy a house for the first time in this day and age, I am going to share my knowledge from both ends of the spectrum. As a young family man, I’ve just purchased my first house. As a loan officer, I’ve guided people through the process and seen it from the financing end. This article will walk you through the process of buying a house for the first time (or second, or third…) from start to finish.
As a First Time Home Buyer(FTHB) myself, if you haven’t made a move yet, I have to say… what are you waiting for!? If you are reading this before December 1st, 2009, or even anytime around then, you are currently missing one of the best windows for FTHBs, ever! Low rates, low home prices, tax credits out the wazoo… it’s time to go!
If you’ve already decided to take advantage of some of the lowest interest rates ever and the least expensive home prices in years, then you’re in the right place. I’m going to take you through the steps you need to know (and some you might not, but hey, since when has too much information been a bad thing? …you’re right, when Aunt Gertie is recounting her latest BM, that’s definitely too much… sorry) to get you into your first home with a little hassle as possible.
One last disclaimer: this is not the only way to do this. This is not the comprehensive, one-size-fits all answer for everybody that is going to read this. Each house is different, each person’s financial situation is different, and each state and city is different. Can this be used to guide you start to finish? Yes. Will you fall flat on your face if you don’t? I certainly hope not, but I hope you know what you are doing!
Finally…
Step 1: Examine your own financial situation
These days, almost anybody can afford a down payment on a home. This is because there are loans out there that allow you take put down 0% and roll your closing costs into the actual mortgage itself.
However, if you want to do it the traditional way and avoid paying mortgage insurance, you will need to put 20% down. That’s right, 20%. If you are looking at $150,000 home, that’s $30,000 you’ll need in your bank account. You will also need about $5,000 to $8,000 for closing costs (we’ll get into those later). To go the traditional, safest route, you’ll need almost $40,000 that you can spend up front.
Luckily, for today’s First Time Home Buyers, there are programs like FHA (3.5% down), USDA (0% down), and others that allow you to put much less money up front. Let’s play with the numbers again, using a $150,000 house.
FHA – 3.5% of 150,000 = $5,250 + closing costs =$12,000 up front
Conventional – 10% = $15,000 + closing costs =$22,000 up front
Are there ways to get into a home for less? Absolutely. However, the less money you put down up front, the higher your monthly payment AND the higher your insurance. If you are interested, e-mail me. I’d be happy to help.
One last note about finances, and an important one, most lenders are going to require a good credit score, 700 or above. Again, can you get into a home with a credit score of 680? Or even 580? Yes, there is almost always a way. However, you will pay in other places, such as your interest rate.
Step 2: Get Pre-qualified
Did that seem like a lot to chew on in the last step? Well, if you go and get pre-qualified, you are essentially passing off all this responsibility to a loan officer. They will be able to help check your credit, align your income and debt, and come back with a number indicating how much you’ll be able to spend. Most will even do it for free! If you live in SW Florida, visit my website to get started today. Picking a loan officer is important. You will be entrusting them with lots of personal information and thousands of your dollars. Make sure you can trust this person! Check out the company they work for and its history–be sure it is reputable.
How does it work? Basically, the loan officer is going to add up all your income and assets, divide it into your debt, see what your debt-to-income ratio is. 40% is usually the magic number. Most banks will lend you as much as you can afford and still stay under the 40% cut-off. Keep in mind that you won’t be paying rent anymore, so this number might be higher than you think!
Getting pre-qualified for a monetary amount is going to help you know what you can afford, let you know where you can buy, and help you plan accordingly. A pre-qualification is not the same as a pre-approval, which is where the bank tells you exactly how much they are willing to lend you, but it is going to make the entire process much easier.
Step 3: Figure out the type of house you want
For some people this may not be an issue – there might only be one type you are interested in. For others, like those of us in SW Florida, there are going to be many options. There are single family homes, townhomes, villas, condos, coach homes, manufactured homes, gated communities, and who knows what else! This step, often over looked, can save a lot of time during the search process.
Step 4: Choose the area or neighborhoods you want to live in
Set up some parameters for your search. Knowing what you can afford, where you want to be, and what type of home you want to move into, you have enough information to start searching through real estate books, websites, channels, or any other mediums. Personally, I find Real Estate websites the easiest, especially those with a map search. You may also choose to enlist the services outlined in the next step: finding a real estate agent.
Step 5: Find a real estate agent in your area
This is one of the easier steps in the process. Real Estate agents are everywhere. Next time you are driving by a house that is for sale, look at the sign out front. It’s probably got the name of some hot shot real estate agent in your area. Most people know a real estate agent from somewhere, so ask around and see who is good. If you are in SWFL, just ask me! I’ll lead you in the right direction.
A good real estate agent is going to help find the exact right home for you. He or she will parade you around town, showing you what is available in your price range, location, and style. They will also keep track of all the new homes coming on and going off the market, and will be responsible for submitting the offers you make on houses to the sellers or banks. His/her duties don’t stop there, either. They will be holding your hand all the way through until the end, so again, make sure you trust this person!
Step 6: Get pre-approved
If you’ve already gotten pre-qualified, there is a very good chance you will get pre-approved, so long as all of the information you told the loan officer to begin with can be proved. Some information is harder to prove, especially if you are self employed. You’ll typically need:
*a W-2 for the last 2 years
*2 most recent paystubs
*1040′s if you are self-employed
*Two recent bank statements and statements of assets
*Contact info for realtor, insurance agent, title company, or attorney,
*Copy of Driver’s License and SS card
*Check for the appraiser
In general, this process shouldn’t take more than a few days. The pre-approval is crucial, because when you go to put an offer in on a house, the seller is going to ask how you are going to pay for it. If the house is worth $150,000, you’ll want to be able to hand the seller this piece of paper proving that you aren’t wasting his time.
Step 7: Put in an offer on the house of your dreams!
Now for the fun part–and the part that will leave you without fingernails. Tell your Realtor to put a bid in on that house of your dreams you’ve found. Depending on the location and the status of the market, this might go very differently. In a buyers market, you might put in a bid for $130,000 for $150,000, wait a week, and have the seller accept because nobody else is going to touch that house. In my experience, however, you might still have to contend with investors, often going in with a large wad of cash. Paying cash is almost always looked more favorably upon by sellers, as the whole process is easier and faster.
In a sellers market, you might get yourself into a bidding war. Here’s a scenario (much like the one I experienced recently!): You put in a bid for $138,000 on a $150,000 house the day it comes out on the market. Depending on your realtor, he may be able to tell you if there are other bids, and approximately what they are. It is technically illegal to share this information between buyers and sellers, but there are ways around it. If there are other bids, many times you will have an opportunity to beat it. In my case, for my favorite house there were 4 bids and ours was the 2nd strongest. We raised our bid but still got beat. Bidding wars are exactly what the seller wants, so most times they will just sit back and let the two or three prospective buyers duke it out. If you really want the house, get it! Don’t spend more than you are comfortable spending though. Set a limit, and don’t go a dollar over it. Trust the bank when they say 40% debt-to-income is all you can afford.
Step 8: The waiting game
A lot goes on behind the scenes while you are waiting. There are 3 typical types of sales now-a-days. I’ll briefly run through all three.
Standard seller-to-buyer sale - In this situation, you are buying directly from the seller, kind of. The seller will typically still owe some money to the bank, so they will have to negotiate with their bank how they are going to pay that money back. Their bank will want to talk to your lender, and that will take some time.
Short Sale - In this scenario, the seller actually owes more money to their original lender then they are selling the house for; they are selling the bank short. Why would any bank want to lose money this way? Most don’t, so the seller is required to submit a “letter of hardship” asking the bank to forgive some of their debt. If the bank accepts, they will get back to you, slowly(why would they put your deal at the top of the pile if they are losing money?), letting you know that the bid you put in was accepted. Short sales usually take much longer than other types of sales because there are 3 parties involved in placing and accepting a bid, the buyer, the seller, AND a bank that is losing money from the deal.
Foreclosures - Foreclosures occur when the bank owns the home that you are buying outright. They are the seller. Most foreclosures come with an AS-IS contract, stating that the are not responsible for anything wrong in the home. With the other types of sales, you can typically wheel and deal, asking for them to fix that hole in the wall, or pay for some of the closing, or get that gnarly smell out of the kitchen. With a foreclosure, it’s all on you, and the bank will let you know that, often harshly, in the contract. Foreclosures will generally move pretty quickly, mostly because the banks are eager to sell the property and get it off their books. They never wanted the property, just the money for it, but the previous owner defaulted and lost their house.
After your bid is accepted, your lender is going to want to take care of an appraisal and the title, both fees you will likely be responsible for as a part of closing. Your loan officer will sometimes take care of the appraisal. The lender wants to see an appraisal on the house, telling them how much it would be worth in a competitive market. The reason for this is simple: they want to know that if you sell the house, they will be able to get their money back. A title and title insurance is another fee you might have to take care of. Title insurance protects you and the bank against any past suspect activity on the house that you’ll be owning, such as forgeries, liens (money owed at time of purchase), and other things. You will also need to sure up homeowners insurance during this time. All of this typically takes anywhere between 15 days to 30 days, and even up to 90 days if you are involved in a short sale.
Step 9: The closing table
Hang on! You’re almost there. The closing table is the last step before the title and the keys are handed to you and the house is officially yours. The date for closing is usually set after you bid is accepted, and for a few weeks ahead of that time. At the closing table, most of the important players are going to be there. This is where the official documents including the deed are signed, ownership of the house is officially transferred, and you walk away a home owner.
The closing table is where you pay the closing costs. You will typically have to present a check or a number of checks for the down payment and the closing costs. This can total $1000 or hundreds of thousands of dollars, depending on the price of the house, the type of loan, the amount the seller is paying, and the amount you’ve decided to put down. When you leave the table, the house is yours! Go ahead and move your stuff in, start a family, grow old, and be happy. Don’t forget to take advantage of the $8,000 tax credit (if you closed before Dec 1st, 2009)!
Ryan Shore is a Senior Loan Officer with the Transcontinental Lending Group.
Glossary – what do these crazy words mean?
Appraisal – The process of determining how much a house is worth in a typical competitive market
Closing costs – fees required by the lender, seller, and loan officer that are paid at the closing table. Can also include escrow.
Conventional – a loan funded through Fannie Mae or Freddie Mac over a 30-year or 15-year term with a fixed rate.
Debt-to-income ratio – a percentage matching how much you make with how much debt you have.
FHA – Federal Housing Administration – a federally insured loan that requires 3.5% down
First Time Home Buyers – people who have never bought a home before (Duh), OR, as stated by the US government, people who have not owned property in at least 3 years
Foreclosure – A home that is owned by a bank
Lender – the bank or institution letting a buyer borrow money to purchase a house
MIP and PMI – Mortgage Insurance Premium and Private Mortgage Insurance – These are additionally monthly fees you will have to insure your mortgage if you were not able to put 20% down up front.
Short Sale – A situation when a seller tries to sell a house for less money than he/she owes the bank.
Title – a document that shows ownership; Title insurance protects this document from past activities
USDA – US Department of Agriculture – offers excellent home loans to people living in rural or rural fringe areas for nothing down and no closing costs
