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What is the process of buying a house?
samsam7
Registered User regular
Registered User regular
Ok so I've just graduated and I got a new job that pays well. I'm tired of cramped apartments and I want a house. I live in Arizona where housing is pretty cheap compared to other places and I'm wondering how I go about getting a house. I really don't understand things like mortgages and house loans and their pros and cons and how people manage to afford these things or sell it before they've actually paid it all off or what kind of down payment to expect. I was considering just renting a house but it makes more sense to be putting that money towards owning the dang thing. I have excellent credit and one credit line that is my own and another that I'm on under my parents.
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It is not as easy as it once was to get a mortgage. Down payment wise, expect at least 10%, with 20% being a possibility depending on your length of credit history and your highest previous limit.
So basically I'm understanding that a mortgage is a loan to buy a house? I've always been under the impression that a mortgage was a bad thing to have. Does it make sense to simply get a mortgage and pay it monthly as opposed to paying around a 1000 month? Feels like I'm missing a gigantic catch. What happens if I decide in a given number of years that I want to move to a different state or something? Do I have the option to sell? Is it better to (assuming I make more as experience comes) just keep paying the mortgage and have that property on the side that hopefully goes up in value?
For instance, if your salary is $65,000 the house ranges you'd be looking for are probably $150-200,000. You'll want 30% of that. $60,000. $40,000 of that is going towards a down payment. The rest is closing costs, inspection, minor repairs, appliance upgrades (spending the $1000 for a new fridge might save you $300+ a year in electricity costs for instance and upgrading your central air, etc).
If you can deal with a smaller house? That's fine too, adjust accordingly.
Mortgage- This is the loan you will obtain for the purchase and financing of your home. They come in many varieties, shapes and sizes. The most commom ones are either 15 or 30 years (As in, you will pay it off with monthly payments over the course of 15 or 30 years), and are either a fixed rate ( Your interest rate never changes - Generally a GOOD thing) or an Adjustable rate (You interest rate may start lower than a fixed rate, but if interest rates go up, so does your rate. Quickly. Alternatively, if they go down - and they can't go down much lower- your interest rate goes down)
Now, in terms of obtaining a mortgage, no, it's no longer as easy as it once was but it's not impossible either. Especially if you have good credit.
Your first steps should be this: Find out how much money you have saved that you could use as a down payment. Figure out what your monthly expenses are. Talk to a loan person and have them run your numbers for pre-qualified/pre-approval. This in NO WAY obligates you to accept their offer, but they will tell you what type of loan you qualify for (Most likely an FHA loan) and what the ball park is for your "maximum" you could afford. You can also ask them what this translates to in a monthly payment sense.
DO NOT TRY TO GO TO THE MAXIMUM THEY GIVE YOU. You want to stay a fair bit below it if you want to live comfortably still.
Now, here is the "catch" as you put it.
They will quote you a number on what your monthly payment would be. This does NOT include property taxes, PMI (Private Mortgage Insurance. Required if you don't have 20% to put down. Means the bank gets paid if you default), or insurance (As in, if your house burns down or a tree falls on it insurance). Taxes, insurance and I think PMI are lumped together under an "Escrow" account. Depending on the property you look at, this can make a significant difference in your monthly costs. I.e. 1200 in taxes/year = 100 a month. 2400 in taxes = 200/month.
The next step is finding a realtor. This is where the fun begins. There are good realtors and bad realtors. I lucked out in that I used a family friend. Anyway, they will ask what you're looking for in a house and then their job is to find what you want/can afford. When you find something you like, go see it. Then either you or your realtor need to talk with the loan person to run all the numbers and get a rough estimate on what the monthly payment would be. You can also request copies of past utility bills to see what gas/electric/water would run you.
After that comes the bidding and negotiating. This is a crap shoot, and your realtor should help guide you through this. Basically, you and the seller try to agree on a price (Very rarely do you offer them the full price they are asking). If you come to an agreement, you ABSOLUTELY SHOULD get a home inspection and make the contract dependant on the results. Check the inspection company's references. Walk through with them during the inspection. Take note of everything they point out and everything in their report. Also, get a termite inspection.
If there are any issues with inspection, you can (usually) try to renegotiate the price or request the seller correct the problems. If you make it past that, you wait a couple weeks for paperwork to be drawn up and then you and the seller meet with your realtors and loan people, have a pow-wow and sign a bunch of shit. then you get the keys, a handshake, and a lot poorer.
I may have glossed over some things so feel free to ask for any clarification or more details. I'm sure a bunch of other people can chime in too. My experience wasn't exactly like this (I bought a foreclosure which is a whole extra set of problems) and I got a special loan type (Homepath loan/house. Pretty good deal if you can swing it)
Oh, and one last thing. The other "catch". With renting, when the hot water heater goes bad, or the roof leaks, the landlord (is supposed to) take care of it. And it's not your problem. With a house, when the hot water heater goes out or the roof leaks, that's YOUR problem, comes out of YOUR pocket and it generally not cheap.
This one is mostly general information.
This one is about just mortgages.
The difference being that with a mortgage, you have an asset, whereas renting just gives you a place to live till the lease runs out.
And yes, houses take work. Realize you will either need some money and a lot of time to do it yourself (and there will be some things that you really shouldn't do yourself anyway), or a whole bunch of money to pay someone else to do it.
First, head to a place like Zillow and look at houses for sale in the neighborhoods you're looking to live. See what the average price is for the properties that appeal to you, and what you get for your money. Then, compute 20% of the price of those houses. For example, a 120,000 house would be 24,000. Then, compare against your bank account. If you have 20%, consider buying a house.
If you're close, then: pop your house price into a mortgage calculator -- these are quite common around the internet. Put in the price of the house, interest rate at 6%, and the amount in your savings account. Hit compute. Is that number substantially lower than your rent?
My general advice is not to buy a house unless you're absolutely sure you want to stay in an area for at least five years?
This, for the closing costs to be worth it, you need to stay in a house for 5 years at least. and that's assuming you sell the house for the same amount you bought it for.
You also pay the interest over equity at first, so you are paying down very little of your principal balance in the first few years. I've been in my house going on 3 years and i think i have about 6k in equity (i didn't put any money down, which in hindsight was a mistake. But the payments are affordable, so whatever.) on top of my house losing (allegedly) about 50k in value, i'm pretty screwed loan wise. As long as i can afford to make payments, i'm ok though.
Basically, unless you are loaded, nobody just graduating from college has enough stability or money to buy a house. try to find a house to rent, and keep track of all the times you have to call the landlord to fix stuff. When you buy a house, YOU are the landlord, and you are on your own.
1st question to ask yourself is are you prepared to live in the same place for at least 7 years (range really is 5-10)? If so then your holding period has a good chance of innoculating you against housing bust cycle, there are of course exceptional markets. Often if you need to sell a house you have to make concessions to move it (bounties to a selling/buying agent, closing costs for the buyer, repairs) that are going to cut into sales price.
Another consideration is whether it's worth your while to buy instead of rent. The old rule of thumb was if the property value is less than 15 times the annual rent it can command, then it might be worth buying (e.g. $1K monthly rent, $12K yearly rent, if the house next door can be had for $180K then it might be worth it to buy); however in a lot of highly in-demand markets you cen seldom acquire property at that price. And in poorer markets most properties could never command 15*annual rent. So what you see is in areas where the demographic shifts are not favorable and there aren't many jobs availabe you find affordable houses for sale, and vice versa.
Address whether or not you have the discipline and want to make the lifestyle compromises to service a mortgage and take care of a house, then you can look into the particulars of securing financing and buying a house.
Luckily we had bought a house that appraised at 20% over what we were paying so we already had 20% equity in it (over that actually with our 3.5% down).
Since we had 20% equity in it, there was no need for PMI insurance.
A rare story, but it can happen.
If you can make payments bi weekly, do it.
I believe I shaved 27 months off my mortgage (25 year) by making my payments bi weekly.
You save a metric fuck tonne in interest.
Correction. You only have an asset in what you've actually paid off. The remaining balance and interest is a very real liability.
More so than that, by paying over your monthly (or bi-weekly) payments by even $50, you can save a lot of money on the life of the loan.
First off, I bought a condo. A lot of people here aren't fans, for understandable reasons...you have to worry about neighbors, condo fees, and depending on the market they can be very volatile in relation to the market. Where I am in Maryland, the job market is pretty stable and there's a lot of yuppies, so condos have held their value pretty well. I also bought a short sale. Short sales are basically someone that's been defaulting on payments, and just short of foreclosing. They sell the place, and the sale is mostly handled/administered by the bank.
It was 3-4 months of hell. My lease was running out in my current place and I had no month-to-month option. I was dealing with a huge bank that was slow to get back to me, and missed deadlines. If something failed inspection, the bank told me I could fix it myself or find a new purchase.
I added up all the numbers, and came out way ahead. I got a condo that appraised for 200k for about 150k, despite having no credit (read: not bad credit, just no credit whatsoever). Being able to do the 20% down was clutch, without that you get the dreaded PMI which is both expensive and in my experience got me crappy treatment.
As mentioned, homeowning can be expensive. I paid to fix the things that didn't pass inspection (water heater, bathroom sink, etc.). I put in a lot of money and "sweat equity" to make my place feel like a real home...new paint everywhere, putting up new fans and light fixtures, granite countertops, etc.
The point is that you can, at your age, get it done. You'll just need good credit and/or a good down payment, then you have to be willing to hunt for deals and buckle down for a lot of work and some stressful months. Things will go wrong, people will miss deadlines, and you'll be amazed at how bad realtors and bankers are at their job.
In the end it was worth it to me; I can do whatever I want to my condo and don't have to worry about finding a new place to live or the landlord jacking up rent on me. I live with other owners, instead of renters, which makes a huge difference. You just need to consider all of these things because it's an enormous purchase and an enormous commitment of time/effort/willpower.
I have that inkling. I know I'll be here in Arizona for at least 2 years and I know if I do stay long term, I'll want something better by 5-7 years. My main reason to get a house is that I'd be putting around 1000-1500 in rent anyways and my main reason that I want a house as opposed to a condo or something is I'm seriously wanting to live somewhere with space, no shared walls, a backyard etc, basically the complete opposite of what I've been dealing with for a very long time up to this point.
It sounds like I'm underestimating how hard it is to actually sell a house once I want to move and the number of things that can and probably will break and all the extra little fees. I appreciate the info guys.
In my experience (and that of some friends), houses that are being short-sold are a giant pain in the neck. Both the owner-occupier and the bank(s) in question have to approve the sale. Foreclosures seem to be a better deal, the banks are more interested in unloading those than they are in approving short sales. Buying from an individual is also an option, and they might be more willing to negotitate.
You can get an FHA loan with only 3% down. Which is handy if you don't have the down payment cash on hand, but do have a steady income at the moment. People here say you might break even at 5 years, I've also heard 7 years is a good rule of thumb, so yeah, if you are planning to leave town or move, maybe a house isn't the best thing. Renting a house can be nice, although you're basically helping someone else pay off their mortgage... which might not necessarily be a bad thing, unless they end up being foreclosed upon.