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How does the process of purchasing a home for the first time work, exactly?
November 15, 2011 4:17 PM   Subscribe

I hear that now might be a good time to buy a house. I have no idea how this process works, having rented my entire life. Beginning with the basics, how does this work?

We would be getting a mortgage, presumably, as we do not have enough cash on hand to buy a house outright.

Do we approach the bank before having a property in mind, or after we've selected the property we want to acquire? Do we approach the same back we have a checking/savings account with? Does the choice of bank have a significant impact on the outcome? In what ways do the general current economic circumstances affect this process? What pitfalls should we be on the lookout for?

We have no desire to purchase something above our means. We're a married couple, mid-30s, single income, no kids, looking for a small-to-modest home to call our own. I'm hoping we can get our mortgage payment in the range of our current rent payment (sub-$1000 per month).

I know a great number of people are losing their homes under tragic circumstances right now and that home values are falling rapidly as the market corrects itself. Is now even a good time to get into the home ownership game, or does that actually make it a good time to be in the market to buy? Are the qualifications for loan approval more stringent now as a result of the current situation?

I'm sure I don't even really know what questions to ask, but I'd certainly like to know what our options are.
posted by radiosilents to Home & Garden (17 answers total) 33 users marked this as a favorite
 
Yes, it's much, much harder to get a loan now than it has been in recent-ish past.

Before you apply for a loan, one thing you should check out your credit report at home to make sure it's accurate. You can do this at annualcreditreport.com - if you see something that is not accurate, there is a process to dispute errors.

As to whether it's realistic to have a sub-$1000 mortgage, that really depends on how much you have saved up for the down payment and your location.
posted by insectosaurus at 4:35 PM on November 15, 2011


You approach a bank first, because nobody (realtors, sellers) wants to deal with you unless they're fairly confident you can get a loan (since many people can't now). If you're not going to be able to actually pay for the place, then they don't want to waste your time on them.

You can go to any bank you like. The one that holds your checking account could be a good place to start. You should also shop around though, you want to find the lowest interest rates you can, because even half a percent will make a big difference in the long run.

I don't know where you live, but you can probably borrow about $150k or so and have payments under $1000/month. Keep in mind you will need to pay property taxes and homeowners insurance, which are bills you never had a renter. Homeowners insurance can be pretty inexpensive, but property taxes can be more than you think (mine are about $6500/year for a $550,000 house in California). You will also have to borrow more than simply the cost of the home minus your down payment, as you'll have to cover paying for various closing costs and loan fees and such.

Loans are harder to get than they were a few years ago, but houses are cheaper than they've been in a long time. The prices might continue to drop further, or they might bottom out and start coming back up. It's a gamble. I took the gamble and we purchased our house over the summer. My purchase was a little unusual, though, as we bought the house from our landlord (we had been renting it), so there were no realtors or searching for a property involved. Also, interest rates are historically low right now, so even if housing prices drop further, interest rates may rise to counteract that.

We also hired a mortgage broker. He charged a not insignificant amount of money (1% of the loan value) for his services, but I don't think I'd have been approved for the loan otherwise.
posted by tylerkaraszewski at 4:37 PM on November 15, 2011


You can definitely talk to banks (your own and others) and mortgage brokers before you even start looking. It might be a good idea to get an idea of how much you qualify for before you start looking around. You can get pre-approved for a certain amount, so you know that if you come to them within a certain period of time (say, 60-90 days), you will be able to secure that loan. That makes it a lot easier to house hunt because you know that you are guaranteed a certain amount. As to how smart it is to buy a home and how difficult it is to get a loan, that has a lot to do with your location. Investigate the market in your area and talk to a lot of people that you trust. Finding a trusted realtor can be a help. As much as some people bash them, I found ours through a referral and he was very knowledgable and helpful. If you can put down a reasonable down payment on a modest property, it is not impossible to get a mortgage payment around $1000. You also have taxes on top of that, though, which can add a few hundred a month on to your bill. Good luck!
posted by Nightman at 4:41 PM on November 15, 2011


Before I bought my place, I used to joke that what I needed was "Buying a house for dummies" or something.

As it turns out, "Buying and Selling a Home For Dummies" is an actual book. I have the 'for Canadians' version (which I sincerely believe should have been titled 'for Canadian Dummies' instead of 'for Canadians for Dummies'), but I am certain there will be an American version, as well.

I found the book very helpful in that it walked me through the answers to the questions I had, as well as walking me through the questions I didn't know I should have.
posted by jacquilynne at 4:48 PM on November 15, 2011


I just bought a house this summer, and last winter I was just like you in that I had no idea where to start. Here's what we did:
posted by rhapsodie at 4:53 PM on November 15, 2011 [4 favorites]


Look into first-time homebuyer programs in your state - these programs can offer informational workshops and decent interest rates for mortgages. See what your local credit union's offering, too.
posted by Iris Gambol at 4:58 PM on November 15, 2011


I'm no expert, but let me warn you of a mistake. (This is touched upon in the how-to books, but it's hard to avoid when it happens.)

Essentially it's this: When the deal is in the offing, you see something amiss, but the urge to own a home is overwhelming, and you let it go. It could be anything; with me, it was a balloon on the second mortgage.

I had gotten explicit agreement from the lender that the second loan would be 30-year fixed. Don't know if that's realistic or not -- but as I say, the lender had agreed to it. During the last exchanges of paperwork the day before closing, I noticed that she repeatedly changed it to a balloon, and I dutifully changed it back. Except for the last time -- at closing.

We signed the balloon. It wasn't a disaster -- all paid now -- and maybe that's the only way we could have afforded the house. But still, we should have resisted.

The same thing happens when you buy a car -- you overlook some details, and some of them can bite you.

Good luck!
posted by LonnieK at 5:21 PM on November 15, 2011 [1 favorite]


Hit Zillow (or whatever equivalent you prefer, there are lots, including local realtor's websites) first and get a feel for home values in your area. It will generally tell you the annual property tax bill for each house. Don't just look at asking prices, but try "Recently Sold" to see what houses are actually going for.

Ask friends who own houses about their utility bills. Water, sewer, garbage, heat, drainage fees (in some areas). Ask about insurance costs too, if you dare. They vary widely. Bear in mind that interest and property tax are tax deductible, but only if you itemize. Figure out your monthly nut by summing all this up. Here's a simple explanation of how to figure out if you will save by itemizing.

Get a loan preapproval, either from a bank or from a mortgage broker. I used a mortgage broker but I don't think it makes that much of a difference. Don't apply too many different places, lest this affect your credit. Friends and relatives can probably recommend a bank or broker. It doesn't matter who your accounts are with (although your bank will be glad to help you out, they may or may not have the best rate).

Stringency of a loan depends on your credit and financial situation. I got a loan without anyone so much as blinking at me, but I have very good credit. YMMV.

Find a house you like. That often, but not always, means going through a buyer's agent, who will select houses for you. Everyone has their own opinion of whether a buyer's agent is a good idea. Instead of using a buyer's agent, I did my own legwork, called sellers' agents directly, then hired a lawyer to negotiate the contract and close. (NYC. YMMV.)

Decide how much you want to pay. Your realtor will help, but take their advice with a grain of salt, since they don't get paid unless you make a deal. Go back to Zillow (or whatever) and do the math yourself to make sure you know how much your offer should be. When in doubt, err on the side of "low".

Once you find a house and want to make an offer, the process varies greatly between states. (It would be helpful to know what state you are in.) For example, in New York offers aren't actually binding until you've signed anything. VARIES GREATLY, I say again, louder.

At some point during the offer process, you will give a home inspector several hundred dollars to inspect the house. You (or your broker) call the seller and demand that any problems he finds be fixed, or the price reduced to compensate. Eventually you reach a final offer (or the seller walks away). (P.S., Pick your own home inspector, don't use the one the realtor recommends. Ask friends, ask Yelp, ask neighbors and co-workers.)

Once your offer is accepted you notify your mortgage broker (the realtor handles a lot of this stuff), who goes through the appraisal process and lots of other stuff you aren't very involved in. Eventually they clear you for closing.

At closing, you bring a certified check for your life savings and hand it to the seller, and they hand you a key. Oh, and you sign five thousand things.

==

As for "is this a good time to buy?", who can say? If I knew that I'd be rich. I felt it was, since prices have gone down a lot and mortgage rates are stunningly low. Low enough that even if my house loses most of its value, it's still comparably priced to a rental. Plus, you'll never be screwed out of a security deposit again.

Just make sure you can handle all your payments, plus have some cushion left over for emergencies. Plan to spend between 0.5-1% of a house's value on yearly maintenance.
posted by zvs at 5:43 PM on November 15, 2011 [1 favorite]


Oh, and as always, nothing works better than the NYT Buy vs Rent calculator.
posted by zvs at 5:43 PM on November 15, 2011 [1 favorite]


If you have good credit and a good down payment, this is an excellent time to buy.

Since you're a first timer, I suggest that you scour the internet for a non-profit org in your area that offers work shops and info for home buyers. The go-to guys here are the Community Housing Works. They may be able to hook you up with someone in your area.

I suggest that because while this is an ideal time to buy especially with interest rates being what they are, realtors and sellers are desperate to squeeze properties for every last penny so there are lots of shady dealings going on.

Search through AskMe too. There have been at least a couple situations lately in which people got stuck during the process due to some shady dealings.

Good luck and go for it! This IS the time!
posted by snsranch at 6:59 PM on November 15, 2011


Your mortgage payment will depend a ton on where you're buying, but in Atlanta it is absolutely possible to buy a decent house (3 bed/2 bath no major renovation needed) for a sub $1000 payment. I do have an agent but mostly found properties on my own. There was nothing an agent showed me that I wasn't able to find online myself. Drive around neighborhoods you like, look for For Sale signs, write down the addresses, and go home and Google them. I eventually found the house I'm getting by doing that and got to be the first person to look at it and offer on it. I wasn't prepared for how hard the bargaining process would be--apparently lots of people have similar tastes to mine. I've lots out on 3 houses so far because I didn't offer enough, and one of those times I offered $3k over asking.

Once you decide on an area you like, search for down payment assistance programs or first time buyer programs in the county/city and go from there. It is hard and there's a lot to learn, but if you're interested then now is definitely the time!
posted by masquesoporfavor at 7:21 PM on November 15, 2011


ugh. lots out = lost out
posted by masquesoporfavor at 7:26 PM on November 15, 2011


Home Buying for Dummies is indeed a book and it's actually a pretty good one.

Be sure you want to own a house. It is a ton of work. Mowing the lawn, shoveling snow, painting, cleaning, fixing, it honestly never ends. It can hit you hard with unexpected expenses that absolutely will not wait.

Buy a house if you really want to own a house. Don't get me wrong - I love my house and I'm glad I own it, even though we bought it at a relatively poor time. I love not having people above me or on the other sides of my walls, I love my yard and garden and being able to keep it up and improve it as we wish. It feels like a home in a way no apartment I've lived in ever has. And I'm confident I'll make it pay off in the long term.

Don't buy a house though because you feel like it's the thing you ought to do. It's too much work and commitment for an investment that is slow an far from a sure thing.

A book like the one above or information you can search for online will help you estimate how much it will cost to own property. Don't omit an estimate for maintenance and repair expenses.
posted by nanojath at 7:31 PM on November 15, 2011 [1 favorite]


Just a note, going to multiple lenders (when getting a mortgage) for home loans within a short period (a month) should NOT affect your credit any more then a single check. Credit Ratings account for loan shopping of things like mortgages.
posted by bitdamaged at 7:33 PM on November 15, 2011


Have you thought about why you want to buy a house? Here are some bad reasons:

1. All your friends bought one.

2. OMG they're so cheap. This is going to be a great investment!

Here's a good reason: Because you've always wanted a house and now seems like a great time.

It's the same principle behind not getting buying random stuff that's on sale just because it's on sale at the store.
posted by StrictlyVague at 10:26 PM on November 15, 2011


You should only buy if you know you will be in the same place for some (5?) years. Don't buy if you think you might need to move for jobs or family things soon.

You should only buy something you can really afford. A house eats up a bunch of your savings (for down payment and other lump-sum transaction costs at the time you buy), and it puts you on the hook for fixed expenses into the future (because it's hard to sell right now). You need to look at your budget with a stern eye to figure out what you can really afford.

Seconding the book Home Buying for Dummies. They have a copy at your local library, and it describes the process in clear terms. There is a lot to learn, and this book is very helpful.

The basic money things are these:
Downpayment+Mortgage. You'll contribute some money up front as a down payment - this might be 5% or 20% of the purchase price of the house, it depends what kind of loan you get. (For example, FHA loans require less down payment.) You'll get the rest of the purchase price as a loan. There are several important terms to know about your loan: the length of time the loan is for (the "term", 30 years is common), and the interest rate (a current example might be 4% of the loan value). You can get fixed-rate or variable-rate mortgages, but fixed are commonly recommended and the interest rates are very low now so it's a good idea to "lock them in", since a variable rate would probably mean a higher rate later. The interest rate you get is determined partly by your credit rating. Using these numbers you can figure out what your monthly payments will be on the mortgage.

Other costs.
"Closing costs" are transaction costs that you pay at the time you buy. These include various fees and taxes and whatnot, and can be in the thousands of dollars. Normally these come out of the buyer's pocket, but cost-sharing arrangements are possible.
PMI - Private Mortgage Insurance - depending on your down payment, you may be required by your mortgage lender to buy this, a continuing yearly cost
Property taxes - a continuing yearly cost, varies by area
Homeowners' Insurance - a continuing yearly cost
Maintenance - a variable but everpresent yearly cost

You can plug your numbers into the How much home can you afford? calculator (this one is by Michael Bluejay and he has a bunch of other useful info about home buying on his website) to see how the varying amounts affect what you can afford.
posted by LobsterMitten at 12:34 PM on November 16, 2011


"I hear that now might be a good time to buy a house."

It might. It might not. There are certainly some good arguments to be made that prices will keep falling. If that happens, how will you feel?

Here are a couple of things that make me think prices will continue to fall:

* This week in the Washington Post: There may be a new round of defaults on the way

* ARM resets are set to continue through 2012 at least, so some people are going to keep getting priced out of their own homes for at least the next year or two

* Mortgage rates are (fairly) likely to rise. If they do, that's likely to push prices lower, because buyers qualify for loans based on the monthly payment they can afford. If your rates go up, you can only afford a lower-priced house.

As LobsterMitten says, if you know you're going to be in the house for at least 5 years (10 is even better), it might be a good decision. If it's actually cheaper than your current rental after you figure in all the added costs (and if you don't have an adjustable-rate mortgage), it might be a good decision.

But if I were you, I would NOT buy a house just because some people say it's a good time to do so. I would only buy if (a) I really, really wanted a house, (b) I felt confident I could afford it for the next x years, and (c) I was planning to stay in it for long enough that I wouldn't really mind seeing prices in my neighborhood go down another 10% or even 20%.
posted by kristi at 10:04 AM on November 17, 2011


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