This is a guest post from Mike at Quest for Four Pillars, a Canadian financial blog.
Buying a house is a difficult process — there are large sums of money involved, the transaction costs and hassle of moving mean that you can’t just buy another house if you don’t like the one you end up with, and you don’t have enough information to make a completely informed decision. The best you can do is to educate yourself in all aspects of the house hunt, keep a clear head, and buy a house that fits your situation.
Here are some things for first-time homebuyers be aware of when looking for a new house:
- Consider location. How far is the house from where you work? Can you handle the time/money involved in the commute? If you have young kids or are planning to have them, how far are the grandparents from the house? (They tend to be the best babysitters.) What about schools and shops?
- Set a budget. It’s nice to say “buy within your budget” but that might not realistic. Do a quick budget estimate, look at some houses that you might be interested in, and then revise the budget or revise the houses. If you really can’t afford a house then don’t buy one. There is nothing wrong with renting.
- Know your market. It’s critical that you know the market you are looking in. The asking prices for houses are often not indicative of their true value. The only way to be able to estimate value is to look at as many houses as possible. Take notes and find out what other properties have sold for.
- Don’t trust your real estate agent. Most house buyers should use an agent. But keep in mind that although they may be very competent, their commission structure ensures a conflict of interest. Don’t trust your real estate agent.
- Don’t end up house poor. Sometimes homebuyers “fall in love” with a house or neighborhood (or even just the idea of owning a house). This can lead to regret when the novelty wears off and you don’t have any money to do the things you’d like. Try living for six months on a “pretend” mortgage payment and see how it goes.
- Take your time. Until recently, many buyers were afraid of missing out on future price gains or being “priced out of the market”. If you are renting and saving as much as you can, you will be fine. Here are some tips for renters to be able to keep up (or down, as the case may be) with their house owning friends.
- Make a decision. Once you know your market, you should be able to purchase a house fairly quickly. If you are looking for the perfect house or trying to time the market, then you will never buy a house. I know people who did ten year home searches, which is a big waste of time. The reality is that you could be happy with many of the houses you look at, so as long as you can eliminate the worst choices then you will be thrilled with your new home.
- Don’t worry about the down payment. Yes, I know — it sounds pretty shocking in the sub-prime era to suggest that a down payment of less than 20% is acceptable. But in my opinion, the ability to make the mortgage payments is the main factor for affordability. In other words, it’s the size of the mortgage that matters. Of course you can get better rates with a larger down payment so it’s better if you have one, but don’t sweat it if you have a small or zero down payment.
- Don’t blow your budget on remodels and furniture. When many people buy a home, the mortgage payments are so large that they have to be “made to fit” into their budget, straining other priorities. While this is not the best way to buy a house, some buyers then make things worse by spending more money on renovations and home decorating. Unless you buy a total wreck of a house, you do not need to spend big bucks on renovations. You can live with the non-granite kitchen counter and the couch set that doesn’t fit the room perfectly. I don’t care if the house has full-on 1970s decor — you can live with it for a year or more until you can fit the extra expenses in your budget.
- Be careful of flip properties. There are people and contractors who will buy a house, fix it up quickly, and turn around and sell it for profit. The problem with these houses is that they tend to look very good on the surface (nice paint, trim, granite counters, etc.), but deep inside they may be ugly (substandard electrical, insulation, etc.). If you are interested in one of these houses, then make sure they have closed permits, and check with the inspector to see their inspection notes. Better yet, just don’t buy one.
- Don’t buy the perfect house. If the house is livable and you have a good life, then you will be happy with whatever home you end up buying. If you spend more money on a “better” house, then you will quickly get used to it and will be no happier than if you had bought an “average” house. To me, a house is just a house. The people inside are what make it special.
Learn as much as you can about real estate, your budget, and your local housing market, but realize that buying a house is all about compromise, incomplete information, and a lot of doubt! If you keep at it, however, the odds are very good that you will find a home that suits your needs.
J.D.’s note: These are solid guidelines for first-time homebuyers, but not every tip is applicable in every instance. Kris and I have purchased two homes while violating several of these points. What about you? Do you have some specific tips to offer first-time homebuyers? And are there different things to consider with the current housing market?
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These are great tips
. Thanks Mike
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The number one thing I wish someone had told me:
If you’re buying in an older neighborhood, try to find out how many rental properties there are around you. A couple of bad tenants (or bad landlords) can drive a neighborhood downhill *fast*.
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I agree with most of the points but a few things irk me. Financially you should save up enough to put down a 20% deposit to avoid PMI, and to reiterate the general sentiment of this post and blog is to live below what you can afford.
My wife and I just closed on our first house two weeks ago, and the mortgage is half the rent (33% less including insurance) we’ve been paying over the past 7 years. It’s a house we can pay off within 15 years, and is not too much of a burden should we decide to upgrade and pay a double mortgage.
I would definitely reiterate point #11. Just be happy with what you bought and learn to take care of the house well.
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Whether you should save for a down payment to avoid PMI depends on a number of factors. For instance, whether the market is going up. You may be better off buying the house and refinancing to remove the PMI when your equity reaches 20% as a result of appreciation.
Another factor is your cost of renting. If your house payment is lower than the cost of renting, then it makes sense to buy immediately rather than waiting. That is true even if the payment includes PMI.
Of course, if housing prices are declining then it makes financial sense to wait even if you can put 20% down now. You will be able to buy the same house for less or more house with the same down payment.
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We just bought our first home a few months ago; these are some great tips.
Re: point #4 – in my state, the agent is required by law to represent the best interest of seller.
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Recently I went house hunting with 2 of my friends. They are getting married, and really look forward to settle down in their own place soon. I guess it is good to bring along someone knowledgeable who is not so emotionally attached to the house/s so they can snap some perspective or rationale back into you (not that I know how to buy a house…)
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I just purchased a foreclosed town home in Tamarac, Fl and wanted to let others know one issue I found with this buying option. In Florida, we have a homestead exemption, which like other states, offers the home owner a discount off their property taxes if the property is a primary residence.
Say for example, you purchase a home as a primary from a family that currently has the homestead discount. In this case, the discount would continue on saving your potentially thousands of dollars per year.
If you purchase a home foreclosed from the bank, you will not be eligible for the homestead discount until the following year, which could make your mortgage escrow payments potentially hundreds of dollars more per month.
In the long run of course saving thousands of dollars buying a foreclosure will save you money, but your payment could be a little higher at the beginning. Next year our mortgage payment will drop $120 per month, which will hopefully go toward a new refrigerator!
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Just some additional tips from experience of buying/selling houses. We’re on our third.
1. Get a home inspection done by someone from the American Society of Home Inspectors. And do not use someone that the Realtor recommends, obvious conflict of interest. It may cost about $300 but it is well spent. I am not associated with ASHI but have bought 3 houses and in the process their expertise was really helpful. They should look at the interior of the roof, foundation, heating/cooling system, etc. and give you an overall report. They won’t be looking at chipped paint or wallpaper but evaluating the overall structure and mechanics of the house. Things that cost a lot of money to replace or repair if they are defective. They’ll know if a crack in the foundation is normal or indicates structural damage and might be a potential cave-in.
2. Go with a 30 year fixed rate mortgage, no matter what. Use this for budgeting, you know the mortgage payment won’t change, just taxes. Unless you can afford a 15 or 20 year fixed rate.
3. Try not to let emotions show when looking at a house, keep an even keel. Realtors will pick up on this, buyer or selling Realtor. See if you can take digital pics as you tour since you might be looking at many similar houses. Save the emotions for later when you talk with you partner.
4. Try not to pay attention to the clutter if there is any or bad paint, wallpaper, etc. Look for the potential the house has and use any bad wallpaper, etc. as leverage in your offer.
5. Think about your future, are you going to have kids? do you have a near elderly parent you might need to care for? These might make you want a cul-de-sac or in-law capable suite. We know from experience of buying a house we liked on a fairly busy street, having kids and realizing we wanted a house on less busy road since it is safer.
6. When planning your budget for your new house, look at all the additional expenses: call the utility companies to find out what the current owners are paying and if it is on a budget plan; find out if garbage collection is included in your taxes or extra ($20/mo); find out if there are association fees in the neighborhood; budget 10-20 percent of your mortgage payment monthly for incidentals or emergencies. We had a few of these in our houses – broken sump pump, broken garage door, lock yourself out, wind storm knocks a tree down – tree removal, etc.
It is really exciting to be buying and owning your own home, just try to keep the big picture in mind and your emotions in check (at least when dealing with Realtors).
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I agree with AncientPC. One of the points of this website is to live within your means. Point # 8 above really seems to go against that. I understand that you have to be able to live with the payment fitting nicely into your budget. One of the best ways to assure that that will happen is to save up a 20% down payment.
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Most people are rushing out to buy a house without much research. As someone who has bought four houses I’ve come across a few things to consider:
-A house is not an investment. If the price goes up-Great! Just don’t expect it.
-Don’t listen to your agent/mortgage broker when they tell you what you can afford. I did this once and regretted it for years. It is in their best interest to put you in too large a house. The payment will take over your life and leave you with nothing else.
-Owning a house can be a great thing. It can also be a draining experience. There is always something that needs to be fixed or worked on.
-Also consider the upgrade costs when you buy.
If this sounds awful please be aware it can be. If you aren’t smart and look at the facts you can find yourself trapped in your biggest mistake. It can also be a rewarding experience. There is nothing quite like walking into your first house after closing.
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I have to disagree with #11, you’re house is where you are going to be in most of you’re time, if anything is worth spending that extra bit, it’s the house.
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I find it interesting that the title of this post indicates first-time homebuyers, but yet the advice has nothing to do with first-time buyers, as opposed to any buyer. I think you would do good to change the title, as this advice is useful to anyone house-hunting. You’re losing possible viewers by artificially limiting it in the title, and also creating false expectations for those expecting advice specific to first-time buyers.
I would also like to reiterate the point of “Don’t trust your agent”! I had several occasions when I was in the hunt (and ultimately decided to continue renting instead) where it was obvious mine was trying to talk a place up. This also from an agent that really did very little in the way of work… Basically gave me the MLS listings and told me to let them know when I’ve decided what houses I’d like to look at…
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Just a note about the downpayment and PMI–my mortgage is from my credit union. They are still giving 100% mortgages, and they never ask for PMI. They are also giving ARM mortgages at very favorable rates.
Our credit union is one of the most solid in the country, and they even have programs offering help to people facing foreclosure under mortgages from other firms.
On the other hand, they are VERY strict about giving the mortgage in the first place. I would say, if you are eligible to be in a credit union, check their mortgages first.
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#12 Seek out foreclosures
You can get a great deal. Be sure to have a full inspection of the house.
My wife and I bought a foreclosure for $30,000 less than the market value and had to put very little work into it.
#13 Buy the cheapest house in the nicest neighborhood.
All the home improvement shows repeat this over and over. Our foreclosure was the cheapest house in the nicest neighborhood.
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More on #4: Most agents work for the seller, not the buyer. You might have an agent, but the agent gets paid by the seller and in many states is legally bound to support the best interests of the seller, not the buyer. That’s why I always recommend that people hire a “buyer’s agent”.
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Don’t buy more house than you need. I bought my first home as a single woman. My plan was to live there for five years or so until I got married (note I wasn’t dating anyone at the time). That said, for some reason, I bought a ~2800 sq ft SFH, two story on an unfinished basement. That was much too much house for a single person.
While I loved my house (and have since gotten married and sold it), a small townhouse would have sufficed. Though I enjoyed the house, all the money spent furnishing/decorating the extra space was a waste.
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I wish I read something like this before I bought my townhouse. It was 1 of 2 that I liked, but because this one was cheaper, I went for it. Biggest mistake of my life. My neighbors had loud music every night (you know the boom, boom, boom), parties every weekend and the HOA did nothing about it. I lived there 8 months, sold it for a small profit, moved in with Mom (mistake #2) and am back to renting (my old apartment actually). I always think of the other townhouse I could and should have bought. It was closer to work and closer to family. It had a pool, a river and hiking trails. Oh, and I would also work with an agent. I didn’t, and had no idea what the heck I was doing. I’m still renting (luckily, my rent is very cheap). But someday I hope to buy a little house on a couple of acres of land. I consider myself more knowledgeable now.
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Also be aware of homeowner association fees. They’re common for condos and townhomes, but many neighborhoods assess them as well. They can add a significant amount to your monthly payment.
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I just attended a first time home buyer’s orientation class last night (and am going to blog about it a bit later), given by my local Community Action Project. The main thing I would add is that for low- to middle-income first time buyers, there are usually grants and other sources of funding available to help cover down payment and closing costs. Between CAP funding, county bond money, and seller contributions, we’re looking at very little out-of-pocket expenses when we close on our new house.
You might be surprised at the income limits, too. We almost made the mistake of assuming we didn’t qualify, because we live pretty well and consider ourselves middle class. But it turns out that we’re just a hair under the income requirement cut-off for our household size, and we therefor qualify. So, research! A good loan officer or real estate agent should be able to tell you whether you might qualify and point you in the right direction for assistance.
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think of all the interest you wouldn’t pay if you put 20% down… and how many years that would knock off your mortgage.
my sis and BIL overspent in a huge way to get into a popular neighborhood, and financed at 100%. they have barely touched the principal on the mortgage. hearing her stress out about finances every time i talk to her makes me relieved we’re renting for a few more years.
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Speaking of conflict of interest, don’t trust your mortgage broker. I have friends and acquaintances in the business, but a good broker will not mind you asking which parts of your loan affect how they get paid and making any adjustments if necessary.
You may even want to try using a site like Zillow Mortgage, which does not sell your information to a bunch strangers like other mortgage sites.
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My recommendation would be to not buy too much house than you can afford. There’s no fun in watching everything you’ve earned that month go towards a mortgage payment. Be absolutely honest with yourself regarding what you can afford to pay each month. You’ll save yourself tons of stress and money in the end by keeping it real.
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Right now — and maybe this has always been true, considering other costs, especially commuting/driving costs should be key. Living on a bus line has meant that we never had more than one car — a huge savings over the years. And, we’re close to shopping and our jobs, so overall those costs weren’t increased by our house purchase.
Also, along with the advice about not believing everything the real estate agent says is Don’t assume your mortgage broker/banker is working fo you, either. The banks benefit from your taking a bigger mortgage. We are still living in what our real estate agent called “a nice starter home.” It’s all paid for, and we have over the years done some remodelling (but only when we could pay cash). Because it cost less, our mortgage payments were less than the amount the bank would have let us borrow (and this was years ago, when banks were more careful!) so we got a smaller mortgage — and paid our house off quickly by paying the larger amount (the bank was right, we could affort it!) every month until we’d paid off our mortgage. In the years since, we have resisted the expectations that of course we’d move into something larger/fancier just because we can “afford it.” Instead, we’ve been able to save for early retirement.
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I second what @MoneyBlogga and others have said re: not buying more house than you need/can afford. Instead of going by what the lenders we consulted said we could afford, we’re going by what we can comfortably afford to pay each month without significantly altering our lifestyle. That means a smaller house in an older neighborhood, but that’s really all we need at this stage in our lives.
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I think there is some great advice in here, but I would change a few things one is the “Don’t Trust your Real Estate Agent”. I have a few problems with that blanket statement.
I think it is more accurate to say – interview several agents until you find one that you are comfortable with. AND do your due dilligence on what you can truly afford. Lower that number by 10K and give that number to the agent and stick to it. If you have indeed found a good agent they won’t push you into something you can’t afford.
I am not a real estate agent (nor do I play one on tv) but I have had the good fortune to work with a few excellent ones. I have also worked one that I realeased when they would not listen to what I wanted.
Actually I have had more bad experiences with mortgage brokers pushing me into loans that were not the best fit for me than I have had real estate agents pusing me into more house than i need.
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Agreeing with Post 22/ Elisabeth. A friend of mine bought a great house and didn’t really violate any of the other rules – good neighborhood, reasonable payment, put down a fair chunk of money. But he drives 50 miles each way in the era of $4/gallon gas! At least he drives a Mazda 3 and not a hulking SUV.
It is important to have “helpers” in the process that you can trust. Use a credit union that will be hanging on to your loan – they have a much larger interest in putting you in a property that you can afford as opposed to some fly-by-night broker that will immediately be selling your loan to Wall Street.
Also get a good referral for a buyer’s agent from friends/family. If you are a first-time buyer then they should know that you’re probably are going to need an agent again in a few years when you want a bigger/better house. They’ll be smart enough & honest enough to realize that putting you in too big/expensive of a house is a bad idea. (Get you into a house that’s $20,000 more than you can afford is only going to net them $600.)
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Believe it or not, I fall into the “don’t worry about the down payment” camp. I do think it’s best to put 20% down if you can, but for both homes we’ve purchased, we’ve put down less. Do I wish we could have afforded larger down payments? Of course. But in both cases we were very careful that the eventual mortgage payment would not exceed our ability to pay. In other words, even with the small down payments, we didn’t buy more house than we could afford.
Also, I think it’s important to be aware that there are all sorts of other expenses related to owning a home that you might not be aware of otherwise: taxes, insurance, utilities, and, epecially, upkeep.
Our first home was built in 1976, and the maintenance on it wasn’t very costly. Our current house was built around 1893. Upkeep on this thing is very expensive, and we’re always behind.
I think the best advice in this piece is to not get caught up in the search for a “dream house”. I agree that you’ll probably be happy in any suitable home. If I were buying a home today, I’d actually look for something smaller than what we currently own, buy something inexpensive, and put WAY more than 20% down (but only because we can afford to do so).
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My dad was a real estate agent. He would point out all the problems in a house to the buyers, and advise them not to buy houses all the time. His clients loved him. Not surprisingly, he left during one of the downturns. Telling people not to buy is good in the long term, but it’s bad in the short term and he hadn’t been doing it long enough to ride through the downturn and support a (then) young family.
My last agent has been a family friend for longer than I’ve been alive. We asked him his opinion on the houses we saw, he would rattle off a list of the problems we hadn’t seen. We finally found a house we liked. When we asked him what he thought, he pointed out some problems we missed, but concluded with something like “It’s not a bad house, it’s up to you.” We’re living there today, and while the renos are taking longer than expected, there’s been very little in the way of unexpected surprises.
My next real estate agent — whenever that is, next house or the one after — will be my best friend, who became an agent recently.
So I’d offer a slightly different piece of advise: If your agent shows any evidence of being untrustworthy, fire his ass, wait a while and try again. Money vs. people is not a conflict of interest for those with ethics and looking long term. There are enough honest agents struggling to make a living in the industry. Help feed them; you don’t have to line the nests of the lying weasels. The unethical will have no problem bilking their next client, so don’t worry about them starving (not that you should anyway).
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Also: being educated and informed puts you in the driver’s seat during the homebuying process. Knowledge can help prevent you from being screwed around by a mortgage broker or a real estate agent (or anyone else).
Finally: be sure to read your contract when you sign it. EVERYONE will be trying to rush you. Don’t let it faze you. Read the contract. I’ve heard too many stories of people caught by unexpected clauses in their mortgage. This is probably the largest purchase you will ever make in your life. Take time to read through the paperwork. (If you’re buying with a spouse or partner, you can split up the duties to make things go twice as fast.)
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I keep thinking of more to add!
I just wanted to point out that there’s LOTS of great advice in this thread already. Thanks, everyone.
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I’ve been slowly starting to look to purchase my first house. Financially it does not make sense (I’m paying very little rent) but I’m ready to move out by myself and not have roommates.
That said, I’ve started to estimate (over estimate in most cases) my expenses if I buy a house. I’ve decided that my bank account should pretend I already have a house, to ensure I can afford it.
What’s great about this suggestion is that it not only gets me ready for when I have little disposable income, but it also kick starts my savings.
I can’t speak to the rest of the suggestions, but living like you already own a place is a good one. The suggestion was to live as though you’re paying that mortgage, but don’t forget the costs of taxes, electricity, etc etc. While you may not be able to know the exact amount, it’s a good exercise just to try and budget!
I’ve found that I look at some houses and say “ok, I can afford that mortgage, but the property taxes are $1000 more, and my heating and electricity costs will be more, so that’s going to cut it close…”
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And think of all the interest you wouldn’t pay if you put 100% down!
I’m not sure why 20% is the magic number where any interest after it is ok, but any interest before it isn’t.
–
We’re currently house hunting. We probably won’t have 20% (more like 10% I think). I just barely left college so we haven’t had as long in a higher income bracket to save up for the 20% down.
Our reasons for buying a house and not waiting do kind of boil down to “We want it” reasons, but I think that it’ll pan out financially too.
* We want long term neighbors we can get to know, not other renters that change ever 6 months.
* We want the freedom to paint the walls, dig up the yard and put nails where we want
* We want to be somewhere long term where our kids can make friends and not have to switch schools
* We love remodeling and want an unfinished basement or something to be able to work on
* We want to never have to move again
For those benefits (or a good chance at getting them) we’re willing to pay the difference in interest between 10% and 20% down. Maybe even the difference between 5% and 20% down.
Regardless of how much we put down, we will keep our mortgage at a price we can afford comfortably. As long as that’s the case, I don’t see what’s wrong with a lower down payment.
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Good advice in general, but I’m going to disagree with point #11 (Don’t buy the perfect house.) We bought what we consider to be our perfrect house last year. It’s in an area that we had very carefully considered 12 years ago when we bought our last house. In the end, we found a better deal nearby and took it. This time, we weren’t really looking, but stumbled upon it by accident. We didn’t jump into it hastily, but now, every morning we wake up, look around and say “I love this place!” Of course, this is house #3, and we knew the first 2 weren’t our perfect house, but they were acceptable for us at the time, so maybe we did follow this advice until everything came together for us.
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Focus on the things that you can’t change rather than the things that you can. There’s nothing you can do about the location of a house for example, and there may be nothing you can do about the size. But you can always redecorate or improve the garden. It’s the best way of getting rid of potential properties and picking up a bargain.
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I agree with the author and J.D. about not putting 20% down not necessarily being a bad thing. As long as all of the expenses are within your budget. In other words, you may not be able to get as an expensive a house, but you can still afford it.
We were recently quoted on a 80/10/10 6% 1st, 2nd is interest only at prime (5 1/4 at the time), 10% down. No PMI, No origination fees and the local bank holds the paper.
The first key is finding the house that we can afford within the budget we set for ourselves. I can take advantage of the rates right now and don’t have to wait to save the second 10%.
The second key is immediately set up a plan to pay off the 2nd as soon as possible.
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Think of all the interest you wouldn’t pay if you put 100% down!
I’m not sure why 20% is the magic number. Maybe it’s because that’s what has traditionally been required by mortgage companies.
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We are buying soon (~6 months) and will have 5-10% to put down. Our monthly will be kept in an affordable range, but here are some things that we want and are willing to pay the extra interest on.
* We want to make long term neighbor friends, not have fellow renters who move every 6 months
* We want to be able to dig a garden, pound nails, paint the walls and remodel without asking the landlord
* We don’t want our kids to have to change schools in a few years when we move again
* We want to never have to move again
* We want to be able to buy (and make!) furniture and know that it will fit where we live for more than a year
* We want to be able to buy topsoil for the garden and be able to use that same spot of land again next year
* …The list goes on…
None of these things are needs. We’ve had our needs met just fine in the almost 5 years that we’ve been renting. Now that we’ll both be out of school though and be able to be earning more, we would like these things and are willing to pay that extra interest to get them.
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This hilarious Salon column made me so glad to be a renter. When I do decide to buy, I’ll have my eyes wide open.
http://www.salon.com/mwt/feature/2008/05/23/home_improvement/
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Thanks for the guest post JD!
Great comments.
As for the “don’t buy the perfect home” – I’m not suggesting that if you do find the perfect home that you don’t buy it but rather don’t wait forever for it.
Mike
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Great post and so true. My husband and I bought our first home in 2000. It is a townhouse in a fantastic location. At first it was at the top of our range in ability to afford. But that came down pretty quickly. Now its only 14% of our take home income. It’s also increased about 40% in value (yes, even in this market, cause the location is perfect). We’ve considered getting something bigger, but just can’t shake the idea of having such a small mortgage payment. Because the payment is such a small percentage of our income we can afford nicer furniture, timely repairs and lots of little extras that otherwise we might have to wait for. I can’t stress enough getting a low mortgage payment.
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Advice I learned the hard way: “If you like the view, buy it”.
Part of what sold us on our home was the gorgeous view of the mountains. Within four months of moving in, our neighbors built a two-story monolith of a garage at the edge of their property. I think I cried for a week. Now I get to stare at siding and shingles.
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My advice is to do good research and ask a lot of questions about the neighborhood, especially if you don’t know it well. We’re on our second house and have found that location has driven a lot of our homebuying decision making. We have kids, so schools, parks and playgrounds, safety, sense of community, etc. are of paramount importance.
Our neighborhood, schools, etc. are fantastic and we love living here. We could have had a nicer house somewhere else, but without the primo location. We can always upgrade our house.
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RE:4
It doesn’t seem too helpful to tell people not to trust their agent. In buying a home, especially the first time, the saying- “you don’t know what you don’t know” really applies.
Better advice would be to shop carefully for a good agent that you are comfortable with and then trust them.
After all, if you have chosen to work with a full-time agent who has been in business for 3 years or more, that person has shown thousands of houses, been involved in hundreds of negotiations, and been involved with hundreds of home inspections. Who wouldn’t benefit by that experience?
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I’m currently searching for a home (condo) and luckily have been through this process before so I think I’m being pretty smart and I’m uncomfortable with the ‘don’t trust your agent’ comment as well. My last agent felt I was lowballing my first offer on the home, but I told him how I arrived at my number and he made the offer. I turned out to be right, the sellers did come down. My current agent is someone I met recently at a film festival (she’s on the board) and we will be working together on the festival in the future, she also knows I’ll probably sell whatever I buy now in about 5 years and she wants to be the one to sell the place so she has reasons to keep me happy for our future relationships.
We had a FHA loan previously with no down payment, PMI and additional fees that went into went into escrow for real estate taxes. It wasn’t too much money for us, but when my ex became my ex and got a job out of state we sold because I couldn’t afford the house on my own. Unfortunately, it was a bad time to sell. My advice would be to be realistic about where you think you’ll be in 5 or 10 years.
The whole experience taught me a lot. I again have nothing for a down payment because I’ve been busy paying off debt (which I’ve almost done), but I have excellent credit and a stable job. The mortgage broker I met with yesterday recommended against FHA because the rates are higher and with my credit rating I can get a traditional loan with 5% only down & PMI, but in 2 years I can ask to have the PMI dropped if I have 20% equity, which you can’t do with FHA. I didn’t know this until yesterday and what a great thing to know. So I would say “shop for a mortgage broker”, make sure you feel comfortable with him/her.
I’m trying to be realistic, realizing I won’t get the nicest place or even the nicest neighborhood, but thinking about what to do in 5 years or so when the market has rebounded. Prices are so low right now I think we are close to rock bottom (prices have dropped by 50% or more in some areas of San Diego). So, I think it makes sense. Knowing the market is very important, last time I bought when it was up and sold when it was down, I won’t make that mistake this time. That’s because last time we bought emotionally and this time I’m single and buying intellectually.
My final bit of advice is don’t buy a place you can’t afford on your own. If your relationship isn’t 100% or you can’t afford the mortgage without a roommate, don’t buy.
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I’m beginning to resent everyone involved in the home buying process. agents, brokers, etc etc. All you hear are the same spiels, and no one’s ever willing to give you real numbers.
I understand interest rates are going to vary from day to day and that you’ll try to get me the best one you can. But, seriously, why am I going to invest 700$ (appraisal and inspection) in a house when if things turn the wrong way I can’t buy it because I can’t afford it?
It just sucks that you can’t rely strictly on the price of a house. In february I could afford one thing. since then I’ve saved even more money, and now I can afford less.
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Whoever decided that realtors should be paid a percentage of the sales price (especially the buyer’s agent)? What a stupid system.
Especially now with the ability to find home listings online, the need for a buying agent is much reduced. I would most want an agent just for the actual purchase process (making offers, going through escrow, etc.).
Seems like the buyer’s agent should be more of a flat-fee service, or even hourly.
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Things I wish we knew/did on our current home:
You have no business buying a home if you don’t have a fully funded emergency fund. Houses (and even condos) eat money, mortgage aside. I don’t care who is yapping about deals and interest rates and what you’ll miss out on. It’s marketing.
When you calculate your payment, it all looks great until you factor in the mortgage company holding your property taxes in escrow. Our $1183 a month payment on our first mortgage is $1401 with the taxes added in (plus the fudge factor they do to maintain lowest projected balance). Quite a difference when compared to our original “Whoopee, we can totally afford this.” Then homeowner’s insurance varies. We pay $650 a year. We pay another $350 a year for flood insurance. If you are buying a condo, your fee can raise at any time as expenses rise. You don’t have the option to not use your heat as much or cut back on watering the lawn, it’s all built in. Ideally, you should shunt a certain amount into a house-only emergency fund, separate from your “oh crap I lost my job” e-fund.
Plan to stay 5-7 years to be able to ride out a market downturn. The New York Times has some great “when is it a better deal to rent” calculators online.
Why the need to ride out a market downturn? We only put 5% down (HAHA to the don’t worry about your down payment point), and the market in our area has tanked. So we’re just about underwater on the mortgage. We will be paying out of pocket if we can even make a sale (once we factor in commissions, state taxes, other fees specific to our condo assoc., and lawyer fees). Something like a short sale is not an option because the payments are not a hardship for us. The living situation is just no longer remotely comfortable due to our changed family size. We thought we’d sell after 2 years and make a killing, hahahahahaha!
So do not jump unless you just want to live in the damn house vs. living in all your other options. You plan to stay there a reasonable amount of time. You love the neighborhood. Don’t buy based on what you think will happen or what an agent tells you. Stay in the moment and keep it about what’s right for you and what you can truly afford.
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Chris, I know banks in Canada will give you a mortgage guarantee for 6 months. If the rate goes lower you get that rate, but if it goes higher you get the guaranteed rate. That might solve your issues.
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I love your site & have become more comfortable being a longtime renter 16yrs since discovering your website. I was wondering if you’d be willing to do a series of posts on as you mentioned above the “unexpected costs with buying a home” like the assoc fees, more for water power etc. I know for myself I’d love to hear more about the “realities” of home ownership so I am able to eventually walk into a purchase like that with eyes wide open so to speak. Also a post debunking the myths of home ownership would be neat like ” you get your interest back at the end of the year when you file” other stuff like that. I’d also love to hear from your spouses point of view as well if she’s willing.
Aloha
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I have absolutely no clue how I’d be able to save up $70k for a 20% down payment.
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Wasn’t the location also perfect when you bought it?
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Richie, it could be worse. I have that much saved up and it’s not enough to put down 20% on anything decent.
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