Loans Answers

Newbie: how to buy a house?

Question: Hello there,

So I’m having a really rough time trying to find an apartment down here in Charlottesville, VA. So, I’ve started to consider buying a house. On the one hand, it seems like a ridiculously big step. On the other hand, it seems to make alot more sense to put money into a home rather than into a landlord’s pocket.

Are there any good resources on the net that explain some of the ins and outs of buying a home? I’m finding that there’s a whole lingo to it: closing fees, FHA loans, points, etc…

I’m also curious about tips wrt. what to look for in a home. I know it should be in a desireable area, etc…

How about any good books on the subject?

I see no reason why I shouldn’t make a home that I just want as a nice place to live … also be a profitable investment.

Thanks all,

Answer: My wife and I just bought our first house in San Francisco bay area, for the same reasons you are thinking of buying – housing competition, being your own landlord, investment, etc. I hope that we can be of help.

First off, it’s wise to see how much house you can afford. There are many mortgage calculators on the web (e-loan on Yahoo, elliot ames, etc). Follow their instructions to get a ballpark figure of what you can afford in a loan, keeping in mind that most of these calculators make some assumptions, like downpayment percentage, interest rates, etc. In general you want your mortgage payment to be under 40% of your gross monthly income, and you’ll have show that you have cash in the bank for the downpayment, the closing costs (6% of the loan?), and 2-3 mortgage payments. 20% is a wise downpayment percentage if you can swing it, since you don’t have to get certain property insurances. That said, you can probably afford 30% more house than you think.

Next, get a city map and cruise around neighborhoods you love, like, hate, etc, and mark them on the map. Pay special attention to areas on the edge of places you love. Areas you love are probably in high demand and may be out of your range. Fixer uppers on the edge of a great neighborhood can go for less and are the classic “good buy.” If you see any houses for sale, try to get a sales flyer to see what houses are going for in those neighborhoods. Also, check out www.listinglink.com which has slighlty delayed property listings. You’ll get a sense of what houses are going for in areas of the city you’re interested in.

Now that you know what you can afford in a loan and house and what areas you can afford, you need to set your priorities on what you are looking for in a house. Make a list of needs, wants, dislikes and prioritize them. Be realistic when it comes to needs, especially if this is your first house and you’re in a competitive market. You’re going to have to compromise. Now, using this information, I’d use the search feature on listinglink.com and plug in the minimum number of bedrooms/baths you need and your top price, keeping in mind that houses in competitive markets can go about 5% over list price. Use the mapping functions to found out where these houses are located and check against your map, your priorities list, and print out the ones you like. Cruise these houses to see what they’re like in reality, and visit open houses on Sat./Sun. from 1pm-430pm to see what things like “cozy,” “as is,” look like.

At this point, if you’re serious about buying, you’ll want to get a pre-approval for a loan. What we did first was to get our credit reports from all three reporting agencies and see if their were any errors, problem areas, etc. Fix what you can. Don’t assume that a bad credit past means you’re out of luck. My wife has sterling credit and I have bad credit, and we got an A grade loan at a competitive rate, and all I had to do was write a short explanation for my bad credit and why things are different now. Even if you’re the principal buyer and have bad credit, you could get a lower grade loan at a higher interest rate. The best alternative in that case is to get your parents to cosign the higher grade loan and take you on as coborrower. Just be careful not to hurt your parents’ credit by being late on mortgage payments and whatnot. You can shop around on the web and local papers for mortgages and see what the going rate for your area is. Buy a couple of books on house buying to study up on what the different loan types are and what is best for you. Basically, you’ll either get a “conforming” loan for under $207k or a “non-conforming” loan for over $207k (“jumbo” loan) at a slightly higher interest rate, with interest rates either adjustable or fixed over a certain standard period of time (5 years, 15 years, 30 years, etc). Look at the APR figure to see what true interest rate is for a certain loan with hidden costs and whatnot figured in). An alternative to shopping for the loan yourself is to get a mortgage broker like Elliot Ames and have them shop around for you, at a cost. In any case, you’ll end up with a pre-approval letter that shows how much total house you can afford. It also says to real estate agents and sellers that you’re a serious buyer, and you’re going to get much more attention and respect. In a competitive market, the pre-approval letter is a must-have.

Now, you know what you want, and you have the proof that you have the means to get it. You now need an agent. Ask your homeowner friends who they recommend. Look on the web for agents that specialize in the areas of the city you want to live in. Set up appointments with them or conduct phone interviews. Prepare for the interviews by reading up in some real estate books. Good advice is that if you get a referral and get a good feeling from them in your interview, look no further. You want some you feel comfortable with, someone who is frank with you. Avoid the typical car salesperson. I’d try to pick someone who responds very fast to your calls. We were very happy with using a real estate agent who was not new to the area but new to the business (1-1/2 years in the biz). She had fewer clients, more time, more enthusiasm and hence gave us a lot of attention. Since we did all our homework (see previous steps), this wasn’t the case of the blind leading the blind. Try to find someone who ultimately wants to find you a house you’re happy with, not just try to get in you in any house so she can get her commission asap. It’s in her best interest to do so anyway, because you’re more likely to pull out of a deal if you’re not truely happy, not likely to give a good referral to your homebuying friends and not use her services when you decide to sell down the road. Look into Buyer’s Agents or Buyer’s Brokers, since they represent only you and not the seller or the seller’s agent’s brokerage. If not, at least avoid buying a house from sellers using the same brokerage where your agent comes from.

From this point on, it’s time to go shopping. Visit all the leads your agent supplies you with, check listinglink.com everyday and ask your agent about any that come up before she gets a chance to search again, attend open houses. Cruise the neighborhoods you marked on your map and look for the listings on listinglink.com. If you don’t see them, ask your agent to call the numbers from the real estate signs and make appointments to visit the houses. We found our house on the way home from looking at a house our agent sent us to. We spotted the sign (which had just gone up a few hours before we saw it), took down the info, and had our agent phone the seller agent. We then were the first people to get a packet containing the seller-required inspection reports, listing info, etc), first to see the home, and had enough time to set up our own inspection appointments in the week that followed. We then knew what the house was worth, what the repair costs would be, and what we were going to bid. In a competitive market, you have to get the jump on a property, so that you have time to arm yourself with all the information you’ll need to decide if this is the house for you (and only at $xxxK dollars, no more). I would definitely read up on how much you should offer/bid. There are lots of strategies and advice. The best advice is: don’t bid more than the house is realistically worth – it’s probably not worth more, and you won’t get the loan. The most valuable service your agent can provide you is to give you comparitive analysis on properties in the area you found a potential house to buy. You’ll get a list of recent sales: the list price and the closing price, and the details of the houses. You’ll get an idea of what the percentage is between list and closing for similar properties. Try to check out those houses to see the differences: more/less privacy, a view, condition (move-in vs. as is), size of rooms, functional layout, value-adds (storage, new roof, remodeled kitchen/bath, etc). You’ll get an idea of what your house is worth or could be worth if you make some improvements in an “as is” property.

The most attractive bid to a seller is one that has the least complications. Try to avoid contingencies whenever possible. A low-risk, quick close is the most desirable to a seller. Anything in a bid that says you may be difficult in escrow will lower your place in the bidding war. Your agent can help you with contingencies. I would highly recommend that you with your bid you submit a short, personal letter to the seller that states who you are and why you want this particular property. Our letter stated where we were from originally, where we worked, and why we liked the particular area we were currently living in. Then we stated a couple of personal reasons why this particular house fit our needs and wants. In our case, it was this letter that put us over the top and got us the house. The sellers had inherited the property after their parents’ death and were out of state. The bids were read off over the phone. Our letter made us real to the sellers, and combined with a solid offer and no contingencies, made us the ideal buyer. Our strategy in the case of a bidding war was to present our highest offer that we felt the property was worth and we could afford and what the house would realistically appraise for, and sell it with pre-approval, no contingencies/quick close, and the letter: basically, take it or leave it. Let someone else make a bad deal and pay more. As it turned out, our bid was accepted and the house appraised fine. We get the keys tomorrow!!

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