Buying a New Home

Buying a new home

There's been so much misinformation and regurgitated stuff around here that I thought it may be helpful to walk you potential homebuyers through the process and give you some personal experiences (I just closed on my first house December 15).

Step 1) First things last: SET UP A BUDGET. Be honest with yourself. Know how much house you can afford- you don't want to mess this up and be stuck with something for 30 years (or at least 5-6- more on that later). Build a spreadsheet and put in ALL of your expenses (look back through receipts/account histories if you're not sure). I mean EVERYTHING: cell phone bill, gas, groceries, etc. Estimate the bills based on square footage and what you're paying now (i.e. if you live in a 1000 sq ft apartment and are looking at a 2000 sq ft house, double your power bill). The trick here is to err on the side of overestimating- it's WAY better to come up with extra cash than be short. Once you have an idea of what you'll be able to drop on a mortgage every month, use Excel's PMT function to see how much house you can afford- I PROMISE it's less than you think. Your sheet should look something like this:

Amount Financed: xxx
Years: yyy
Rate: zzz %

Payment = PMT(yyy*12, zzz/12, xxx)

That will give you a rough idea and a good start on modeling your mortgage (more on ARMS and IO stuff later).



1a) Mortgages- I could write a book here, Mortgages are very simple- they're just like your car note. Every month, you pay a certain amount towards the principle (what you owe) and a certain amount towards interest. Generally, you pay way more interest up front (this is known as amortization- the rate at which you pay principle vs. interest) There are a few basic varieties of mortgage, but first we need to discuss the terms:

Period- length of time of the loan (usually 30 or 15 years)
Rate- interest rate on the loan (use the APR to be on the safe side here)
Interest- the amount of money you are charged going forward for being lent money now
Equity- What you OWN. What you've paid for in the house through your monthly payment.

• 30-year fixed: 30 years of mortgage payments at the same interest rate. Very plain-jane and safe. Usually a slightly higher rate than the others.
  
• 15-year fixed: Same as above, but for a 15 year period
  
• ARM- Adjustable Rate Mortgage. Usually expressed as "a/b ARM" (e.g. 4.75% 5/1, 4.95% 7/1, etc.) The "a" number is the fixed rate period of the loan up front. You will pay a mortgage amount based upon the stated rate for the first "a" years of the note (in this example, 5 and 7 years respectively). The b number tells you how often that rate then gets adjusted. In this case, it adjusts every year (7/1, 5/1). Usually there is a cap on how much it can be adjusted at any oen time (traditionally one point). So, let's say I do a 4.75% 5/1 ARM. My payments look like this:
  
  Year 1 (for each month in that year): 30 year mortgage at 4.75%
  Year 2 (for each month in that year): 29 year mortgage at 4.75%
  Year 3 (for each month in that year): 28 year mortgage at 4.75%
  Year 4 (for each month in that year): 27 year mortgage at 4.75%
  Year 5 (for each month in that year): 26 year mortgage at 4.75%
  *Year 6 (for each month in that year): 25 year mortgage at 5.75%
  *Year 7 (for each month in that year): 24 year mortgage at 6.75%
  
  Note in years 6 and 7 the rate is climbing. This is based on how much your mortgage company wants to adjust it. It may not go up a full point, but it can. Note that my payments will JUMP in this case in later years.
  
• Interest-Only (I/O): You pay only the interest on your note, you do not build any equity. Therefore, if something happens and you have to sell, and you can only sell for what you bought it for, you lose money. More on that later.

You will also hear about PMI. PMI stands for Private Mortgage Insurance.  Generally, if you don't have 20% down, you have to pay PMI to some schmuck who pockets it and gives you nothing.  You can do what's called an 80/20 (or an 80/15 or an 80/10 ). This means you take out one mortgage (primary) for the 80% and a second (secondary- duh) for the difference between the 20 you need and what you have to put down. This is the single best way to avoid PMI.

There are other financial instruments out there, but I'll leave that to the mortgage guys to explain.

One more note- *when* you sell the house, you will have to pay 6% of realtor fees off the top. This comes directly out of your equity (be that through payments made, or through the house appreciating in value). For a standard 30-year mortgage, you don't have 6% paid back until approximately 7 years into the loan, ergo: if you sell before then, you take a loss. Note that this only applies if the house does not appreciate.


Step 2) PRE-QUALIFICATION: Now that you know roughly what you can afford, you can get pre-qualified. The only thing this does is allow you to negotiate for a house. You did not just get a mortgage- you just have a note saying they will most likely approve you if you DO apply. Most sellers looks at this as someone who is serious and ready to buy and will negotiate with you. You'll need to contact a mortgage lender or mortgage broker for this. Since you're just getting prequal'd, the rates don't matter- that's later on. You are also not locked into this lender at all, so don't be afraid to shop around later.

Step 3) Find a house: There are 2 ways to do this on a pre-existing home purchase- find it yourself or hire a realtor. If you do go the realtor route, make them EARN your money. They don't get jack until you close- make sure they are finding you houses to look at, know the area, and don't quit until you find a house. These people are working for 3% of the house sale on commission (you do the man- ~$6k on a 200k house), so make them earn it. If you want to do it yourself. Fire up the local MLS listings online and start searching. You will need to start contacting sellers agents to see the houses and setting up appointments. Note: good deals are found where people are forced to sell: relocation, repossession, divorce, etc. If you see something that's too good to be true, ask- maybe the owner had it repo'd and the bank just wants to get rid of it.

Important note at this point: You now have both a mortgage guy and possibly a realtor that your'e dealing with. Make sure you are comfortable with these people, trust them, and are OK with them negotiating on your behalf and giving you advice. These are probably the 2 most critical players in this transaction from your perspective, so be sure you're AOK with them.


Step 4) Negotiate: Now you've found the house that you can afford, it's time to hammer out a price. This part SUUUUUUUUUUUUUCKS. If you have a realtor, they will negotiate with the sellers agent for you. You tell your agent what you want to offer, they tell the sellers agent the offer and the sellers agent presents them the offer. Sounds fucked up? It is. There is one big thing your realtor can give you to help: comps. Comps is short for comparables, and it's a listing of what similar/close houses sold for in the last 6 months. This can help you find out what you should offer (figure out a price per square foot and then adjust your offer accordingly for the upgrades/shape it's in). Be sure to note your closing date- set this at LEAST 30 days from when you are sending in the offer. Repeat steps 3 and 4 until you have an offer that's accepted.

Another important note: most contracts offer an option-out clause where you can pony up $100 and get out of the contract no questions-asked within 15 days of it being accepted. DO IT. It's well worth the money for the security that you can walk away.

Step 5) Your offer is accepted: Congratulations! Now the fun part starts. You need to first find your mortgage company. Now is the time to start shopping around. I'll let the mortgage crew (Abraxis, ChevyGuy, and one other who doesn't like to be named  ) get into the specifics, but basically you want to compare the same brokers on the same day with the same rates. Get them to quote you with NO POINTS to compare apples to apples. (Points = 1% of the loan value up front to lower your interest rate a given amount, usually .25%). Once you've selected a lendor, have them approve you (TONS of paperwork) and get the shit moving. This takes time, so get this doen up front.

Step 6) Pre-Closing items: You could insert another list here, but basically, you need to get the house a) Inspected and b) Appraised. Expect to spend some cash here to get that done (~$450-$500 or so). The inspection will tell you what kind of shape the house is in and the appraisal will tell you what it's "worth" (Note: the appraisal is a JOKE- don't' take it too seriously. Usually they tell you it's worth about what you paid. Go figure). Make sure that you get the inspection done before your option period lapses so that if there is anything major wrong, you can walk away from the deal.

Step 7) Review paperwork: Your mortgage guy should get you all of your loan paperwork about 24 hours (or more) before you close. READ IT. Make sure it's all what you expect and there are no surprises. You're obligating yourself to this for 30 years (or whatever- 5-6 a at a minimum if you want to build enough equity to break even) so make sure you're cool with it all. ASK QUESTIONS- your mortgage guy is earning your money too- let him work, and expect him to deliver.

Step 8) Closing: You're finally there!! This is the easy part, assuming you've done all the footwork already. Show up, sign on the line (about 300 different ones actually), and the prior owners turn over the keys! Congratulations- you're now a homeowner!!

Step 9)Buy stuff.  Note that this gets EXPENSIVE if you're not careful. There's a ton of stuff you have to buy and you need to budget some cash for this. Refrigerator, Washer/Dryer, Decorations, Trash Cans- all kinds of shit. Expect to spend some dough here…. But this is the fun part.

That's about it. I'm sure this will spark all kinds of questions and debate if people actually READ it all.

 

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