I am buying a house

[McC]

My girlfriend and I are planning to purchase a house. Today, I submitted my first mortgage application for pre-approval. We hope to be moved-in by mid-May. This will be the first house I've ever purchased, and the most money I've ever paid on a single thing. The monetary implications seem daunting, but I am sick of throwing away even more money every month on renting a place that will never be mine. The economy/housing market being what it is, I've been advised that this is an ideal time to buy.

A good friend of mine, who has moved more times than I can remember, has been coaching me along the way. I'd also like to get advice from the general SDN populace, though. Are there any things, obvious or obscure, that I should know? Things that could crop up as "gotchas!" later on?

[Alferd Packer]

Having bought a house myself this past November, I'll run down some things:

1. Get your own realtor. Don't use the seller's realtor, because they are prohibited by law from saying, well, anything other than the facts. Remember, they're not working for you; they want to sell the house and could give two shits to whom they sell it. Your own realtor, who represents your interests and who's seen way more houses than you have, can offer his or her opinion on items you, the first-time buyer, would never consider. It's probably easier to ask friends who they recommend, though you can walk into a real-estate office cold. It's also not out of the question to ask for references.

2. Get a good home inspector. No, get a great home inspector. Talk to friends who've bought a house. See who they recommend. Ask your realtor who they recommend. Assuming your realtor is good, they probably know a good home inspector. When you talk to the inspector, ask him how long he's been doing this. Ideally, you should both be there for the home inspection, so you can see stuff for yourself and ask your own questions.

3. GET A GOOD LAWYER! Do not think that you can handle this yourself, because you can't. If anyone tells you that lawyers are optional, or that you can get away with using the seller's attorney, they're idiots. Just like you need a realtor to represent your interests, you need a lawyer to make sure that you're not fucked over at any point during the sale.

4. Let these people do the legwork. There's a reason you're paying them all this money: so that you don't have a stress-induced heart attack. You're still going to worry and freak out, to be sure, but at least you know that you have people working for you--after all, they only get paid when you get the the keys to the house.

5. Since you're looking to buy when you won't need it, you might want to have a qualified HVAC guy to look at the furnace. Home inspectors can generally tell you basic stuff about the furnace, but you'll want to be intimately familiar with its condition. Same goes for the central air conditioning unit, if the house has one. Your home inspector will be able to handle most everything else with enough competence to give you a fairly accurate condition of the house. The furnace and the air conditioner are probably the most expensive single items within the house, so you may want to pay special attention to them.

[McC]

1. Get your own realtor.

Yeah, I don't plan to go browse for random houses, find out who's selling them, and then talk to them. I'm using a number of realtors right now to browse for listings tailored to what I want.

Get a good home inspector. No, get a great home inspector. Talk to friends who've bought a house. See who they recommend. Ask your realtor who they recommend. Assuming your realtor is good, they probably know a good home inspector. When you talk to the inspector, ask him how long he's been doing this. Ideally, you should both be there for the home inspection, so you can see stuff for yourself and ask your own questions.

Duly noted.

3. GET A GOOD LAWYER! Do not think that you can handle this yourself, because you can't. If anyone tells you that lawyers are optional, or that you can get away with using the seller's attorney, they're idiots. Just like you need a realtor to represent your interests, you need a lawyer to make sure that you're not fucked over at any point during the sale.

I've never had need of a lawyer in the past, so I don't know how to go about doing this. How does one get a lawyer?

4. Let these people do the legwork. There's a reason you're paying them all this money: so that you don't have a stress-induced heart attack. You're still going to worry and freak out, to be sure, but at least you know that you have people working for you--after all, they only get paid when you get the the keys to the house.

By "do the legwork" do you mean "handle paperwork"? Do I just say, "Here, handle this?"

5. Since you're looking to buy when you won't need it, you might want to have a qualified HVAC guy to look at the furnace. Home inspectors can generally tell you basic stuff about the furnace, but you'll want to be intimately familiar with its condition. Same goes for the central air conditioning unit, if the house has one. Your home inspector will be able to handle most everything else with enough competence to give you a fairly accurate condition of the house. The furnace and the air conditioner are probably the most expensive single items within the house, so you may want to pay special attention to them.

Definitely noted. Though I imagine that either or both of these may be irrelevant, depending on the house (i.e. window AC, electric heating, for instance).

[PeZook]

Packer covered most of what I'd say, but I'll just stress his point about the furnace. It's not only a critical piece of infrastructure, a malfunctioning furnace can fucking kill you.

Don't save money on inspecting it during the purchase, and do it religiously every year afterwards.

Also, make sure you get documentation for everything, especially things like the electrical setup, heating, water mains etc. - the previous owner should have those, and it's extremely useful to keep them for future reference (avoiding moments like "OH SHIT I JUST DRILLED THROUGH A POWER CABLE!" is worth some pretty penny )

[Count Chocula]

Take whatever you've budgeted for your payments, insurance, taxes and estimated maintenance, and add $300 per month to that. Things WILL break, you will need to buy yard equipment, you'll need to do roof repairs down the road, etc. etc. etc. If an appliance breaks, and it will, you'll need to buy a new one.

I'd advise looking for a house that's, perhaps, smaller and lower-priced than you can afford, assuming 20% down and a house price of 2.5x-3x your earnings. That will give you more wiggle room in your budget for all the things you'll discover you need when you buy a house.

Don't forget to budget for interior items, too: as an example, after I bought my house but before I moved into it, I ripped out all the old carpet and prepped it for wood floors, then put down flooring, painted the walls and ceiling, changed out ceiling lights and fans, replaced outlets, etc etc etc etc.... You'll probably do some home improvement, no matter how nice the house is, unless you buy brand spanking new.

I guarantee you'll get some more furniture, dishes, cabinets, tools, etc. etc., so make sure you have $$ set aside for those as well.

EDIT: Are you and your gf going halfsies on all of the costs? How solid are the two of you - getting married solid, or long-term relationship solid? If for some reason, things go sour in the relationship, have you thought about how you'd split up the house? In this market, unloading a house may be difficult to do if you break up, and if, for example, you piss her off enough that she moves out, would you have enough income to keep up the house payment? You may have discussed this with her already, or run the calcs, I'm just bringing them up as worst-case considerations.

Note that I am making absolutely no assumptions or conclusions about your relationship.

[aerius]

I'd advise looking for a house that's, perhaps, smaller and lower-priced than you can afford, assuming 20% down and a house price of 2.5x-3x your earnings. That will give you more wiggle room in your budget for all the things you'll discover you need when you buy a house.

3X income is about the most that a person can afford, any more than that and the mortgage starts getting out of the prime category, which means the chances of default go way up. If the home costs more than 3X annual income, the debt to income ratio gets uncomfortably high so that if your work hours get cut, something goes wrong with the home, one of you gets sick and can't work, or one of a million other things which can and do happen, you'll end up falling behind on your payments and risk default. People think that a debt to income ratio of 50-60% is normal these days thanks to the housing boom, but it isn't, normal is 30-35%. In other words, your mortagage payments shouldn't take up more than 1/3 or so of your annual income.

[McC]

Take whatever you've budgeted for your payments, insurance, taxes and estimated maintenance, and add $300 per month to that. Things WILL break, you will need to buy yard equipment, you'll need to do roof repairs down the road, etc. etc. etc. If an appliance breaks, and it will, you'll need to buy a new one.

The annoying thing, actually, is that from what I can tell, we will have a substantial monthly surplus that is not representative of what we'll be able to pay as a down-payment. I'm worried that this will get us shafted in the beginning, because we're likely to only be paying 8-12% down, not 20%. However, we'll be able to meet or exceed whatever the monthly payment will be, with some left over.

Of course, that leftover will undoubtedly go towards all the furnishings you mention.

EDIT: Are you and your gf going halfsies on all of the costs? How solid are the two of you - getting married solid, or long-term relationship solid? If for some reason, things go sour in the relationship, have you thought about how you'd split up the house? In this market, unloading a house may be difficult to do if you break up, and if, for example, you piss her off enough that she moves out, would you have enough income to keep up the house payment? You may have discussed this with her already, or run the calcs, I'm just bringing them up as worst-case considerations.

Totally fair question. We've been together for three years and have been operating under the assumption of marriage for the last two (i.e. we plan to get married, but I have not formally proposed). We've been living together (and not in the "oh, I'll spend almost all my time at your place" way -- in the legitimate shared residence, shared bedroom, both names on the lease, etc. way) for the last 19 months and were more-or-less living together for several months before that. It's a very, very, very solid relationship. *cough cough* It's not out of the question that I might possibly be thinking of perhaps proposing sometime in the near future.

Right now, I'm tackling the things from the financial end as if I were the sole buyer, with the notion that I'll pay the mortgage costs, while she picks up the month-to-month expenses, or some derivation thereof. I'm mostly doing this to simplify things, since banks are going to hear "girlfriend" and go .

[Alferd Packer]

I've never had need of a lawyer in the past, so I don't know how to go about doing this. How does one get a lawyer?

Generally speaking, when you find a house you like and want to make an offer on it, your real estate agent will draw up the initial contract. While he and the seller's agent begin the haggling process, he will instruct you to get an attorney and probably recommend a few that he's worked with in the past. You just call one, referencing your agent as a means of introduction. The lawyer will explain his role, assure you that he's working in your interest, and give a general idea of what his fee will be. Expect to pay about a thousand dollars, but it's due only at closing.

4. Let these people do the legwork. There's a reason you're paying them all this money: so that you don't have a stress-induced heart attack. You're still going to worry and freak out, to be sure, but at least you know that you have people working for you--after all, they only get paid when you get the the keys to the house.

By "do the legwork" do you mean "handle paperwork"? Do I just say, "Here, handle this?"

Problems will arise. The seller's attorney may note a typo in the contract a few days before closing. There might be an issue with the title search. It is for these problems that you need a lawyer and a realtor, because it's their job to bust balls on your behalf. You won't even need to say, "Here, handle this." They act as points of contact; all information goes through them before it gets to you. You should never have to speak with the seller, the seller's agent, or the seller's attorney until closing.

Definitely noted. Though I imagine that either or both of these may be irrelevant, depending on the house (i.e. window AC, electric heating, for instance).

Even if you have electric baseboard heat, you probably also have a pellet stove or coal-burning stove to mitigate the outrageous cost(because your electric bill could be $750+ monthly in the winter). The chimneys for these will have to be inspected (in this case, your homeowners' insurance company will probably insist on it).

[TimothyC]

3. GET A GOOD LAWYER!

While I'm not buying a house, knowing a good lawyer is always a good thing. I had one recommended by my parents look over the documents when I was setting up my photography business, and he caught a couple of mistakes that could have cost me well over the 3 hours that I paid him for. While I let the business go defunct, he's still on my Christmas card list, and I'll use him for future legal issues.

[McC]

Is there any reason to not submit several mortgage pre-approval applications?

[Count Chocula]

Not at all - but you may get better results if you go in person. A loan officer, if he's interested in loaning money to qualified buyers, will want to get a personal 'read' on a borrower, not just look at FICO scores. Also, some banks actually hold their loans (which usually means better rates and more scrutiny), so your presence may help answer any question the loan officer has, and you'll see if getting a loan through one bank or another gets you any other perks (free checking account, safe deposit box, mortgage rate Visa, etc.)

Personally, I'll go apply face to face every time I buy a house.

[The Star Marshall]

Is there any reason to not submit several mortgage pre-approval applications?

Depends on how many you submit. Each time you apply the lender will pull a credit bureau to determine your score and credit history, an excessive amount of inquiries can lower your credit score, though unless you start getting into double digits apps I wouldn't worry too much about it.

You said you'll be putting 8-12% down, in the current market you'll probably have to put ten down just to get the loan, many lenders won't lend more then 90% of the homes value. The best thing is if you can get 20% down you'll put yourself in the 80% LTV (loan to value) bracket which means you will not have to pay mortgage insurance which will give you a lower monthly payment. It also puts you in a much lower risk category so you could also be looking at a better rate, though that's not guaranteed since its based on the individual lenders pricing system.

Also, aerius is right you want to keep your mtg payment less then 1/3 of your monthly gross income, but that ratio is not what is meant by lenders when they say debt to income ratio, that is strictly speaking the housing expense ratio.

The housing expense ratio is the ratio of your principal and interest payment plus homeowners insurance and real estate taxes divided by gross income. Debt to income ratio is all those expenses plus all other monthly credit obligations (student loans, car loans, credit card payments, auto leases, basically everything on your credit report). Don't let your D/I get over 50%, hopefully you can keep it much lower (under 40%).

Also if you want to add your girlfriend to the application they can not take any negative view of that as long as she will be living at the property and will be on the title, otherwise it would be discrimination against unmarried people which is very illegal. That's assuming she has good credit of course.

Hope some of the above is helpful, or at least interesting. Feel free to ask for clarification if I phrased something oddly or you think I got something wrong.

[aerius]

Also, aerius is right you want to keep your mtg payment less then 1/3 of your monthly gross income, but that ratio is not what is meant by lenders when they say debt to income ratio, that is strictly speaking the housing expense ratio.

The housing expense ratio is the ratio of your principal and interest payment plus homeowners insurance and real estate taxes divided by gross income. Debt to income ratio is all those expenses plus all other monthly credit obligations (student loans, car loans, credit card payments, auto leases, basically everything on your credit report). Don't let your D/I get over 50%, hopefully you can keep it much lower (under 40%).

Well, that's how it is now thanks to all the easy (fraudulent) credit we currently enjoy, but if we go back to the historical standards for a prime mortgage it was 20% down, 36% total debt to income max, and 28-30% max for the mortgage itself. That's what my parents had and what we'll have again in the not too distant future. It's the standard you want to aim for, and with the crappy recession and possible depression that's headed our way, you want to get within it to minimize your chances of falling behind on the payments in hard times.

[The Star Marshall]

Also, aerius is right you want to keep your mtg payment less then 1/3 of your monthly gross income, but that ratio is not what is meant by lenders when they say debt to income ratio, that is strictly speaking the housing expense ratio.

The housing expense ratio is the ratio of your principal and interest payment plus homeowners insurance and real estate taxes divided by gross income. Debt to income ratio is all those expenses plus all other monthly credit obligations (student loans, car loans, credit card payments, auto leases, basically everything on your credit report). Don't let your D/I get over 50%, hopefully you can keep it much lower (under 40%).

Well, that's how it is now thanks to all the easy (fraudulent) credit we currently enjoy, but if we go back to the historical standards for a prime mortgage it was 20% down, 36% total debt to income max, and 28-30% max for the mortgage itself. That's what my parents had and what we'll have again in the not too distant future. It's the standard you want to aim for, and with the crappy recession and possible depression that's headed our way, you want to get within it to minimize your chances of falling behind on the payments in hard times.

I completely agree. Credit standards scare the shit out of me. I'm an underwriter and I'm currently moving from doing "super-prime" home equity loans (740+ credit score 80% CLTV or less) to conforming first mortgages; and the shit fannie mae lets people get away with blows my fucking mind away.

Now understand I'm a young guy (mid-20's) and have only been doing this for a few years but I always thought the guidelines I worked under were fairly good on the home equity side, even if I always wished the D/I maximum was set lower. Talking to the more experienced people they would talk about how our standards were stricter then other banks they'd worked at and I would always be blown away by the stories they would tell me.

Now doing conforming firsts I'd always kind of assumed Fannie's guidelines would be very strict since "conforming loans" have always been the gold standard. I soon learned I was wrong, DU (Desktop Underwriter) was approving loans that if they'd applied for an equity loan I would have turned down in a split second.

Anyway, in regards to the above I was just clarifying the difference between housing ratio and debt ratio. Obviously the lower you can get it the better, and I will never tell anyone different.

While I doubt we'll ever see the day of 36% D/I max again (though I'd love to see it), I am hopeful we will never see the days of 100% LTV loans and especially negative amortization loans again. I'd also like to see the death of interest only loans but I have a bad feeling there will always be a niche market for those, hopefully only at lower LTVs if they do survive. Of course the best thing to come out the credit crisis so far as been the death of stated income loans, stupidest idea anyone ever had in the mortgage industry, and that's saying quite a lot.

[Sea Skimmer]

People have covered things pretty well, but one thing I don’t see noted is when you’ve gotten to the point of having found a house you might make an offer on… visit the area a lot, and at different times of day. Places that look real quite at 2PM Monday might not be so great come say the start of rush hour.

[KrauserKrauser]

My GF and I have also just begun the process of buying our first house and I definitely have a few pointers I can share.

1) Make sure your real estate agent works for both of you. During the offer making period, I felt that our realtor was paying more attention to my GF's concerns and putting mine to the side. This put me off a bit and we don't plan on using her in the future for this and other related reasons. My advice is that if your real estate agent is giving you a hard sell, find a new one, there are plenty other people that will work with you the way you want.

2) Make sure your home inspector is experienced and follow him around as much as possible. During the inspection we thought very highly of our inspector as he was willing to answer questions quickly and knowledgably. Afterwards when we went over the final paperwork we found that his price estimates for repairs were in some places too low and in some places unreasonably high, this will vary between inspectors but it is something to conisderate if you are using sites like www.angieslist.com to find inspectors in your area. Also, make sure the inspector brings a tall enough ladder to get on the roof during the inspection, ours did not and we had to bring out a roof inspector to make sure it was ok.

3) Rates are really good right now and depending on the way the new administration handles finances, they might not get much lower. We read the same signs as you and have pulled the trigger as well on a home that we feel is a really great deal and a solid value. Make sure that you know the difference between all of the different types of loans and get the best loan you can qualify for. That does not necesarily mean 10% down regular first mortgage. While we could have handled 10% down without much cushion left for us, we opted for a 3.5% down and used the extra money for planned improvements and a point on our mortgage.

4) Depending on the percentage realtor's fees listed on the property, you can negotitate with your agent to get them to take a lower percentage and then request that difference to be applied to the closing costs. Our listing had been raised from 3 to 4% commision and we asked that that extra 1% be credited to us through a seperate contract worked out with the buying agent.

5) Make the decisions yourselves. I made the mistake of bringing my family along with me and my GF while we were determining what our offer would be and we ended up having a large fight due to the presence of so many opinions getting in the way of what we wanted to do. Make sure that you take all the advice you can get, but as it gets close to the making an offer stage, learn from my mistake and just make it between the both of you.

6) Make sure to run through the different offers you are planning to make and the effect on the monthly payment. Taking 5k off the final price vs. taking the same 5k towards closing costs shouldn't make too much difference to the sellers, but it will allow you to lower your down payment, get points on your loan, even make planned improvements as soon as you move in. You have a lot of options beyond simply offering less for the house, espeically when increased closing costs can get you an even lower rate.

7) If you are not handy yourself, either start learning now or get a bunch of new handy friends. I've volunteered with Habitat for a while and am much more comfortable with power tools than previously but I am by no means handy. You will have more little projects than you will know how to handle after moving and settling in, having some knowledgable resources to rely on / recruit for slave labor is invaluable.

That's all for now I guess. We close in early March and have leases to deal with until the end of May so I guess another thing would be to make sure you know the cancellation schedule of your apartment and to save a bit of money try to minimize excess rental payments.

I'll wish us both luck in this very stressful but very rewarding endeavor we have both decided to embark upon.

[Alferd Packer]

Well, that's how it is now thanks to all the easy (fraudulent) credit we currently enjoy, but if we go back to the historical standards for a prime mortgage it was 20% down, 36% total debt to income max, and 28-30% max for the mortgage itself. That's what my parents had and what we'll have again in the not too distant future. It's the standard you want to aim for, and with the crappy recession and possible depression that's headed our way, you want to get within it to minimize your chances of falling behind on the payments in hard times.

Another thought came to mind: If you don't have 20%, you can get a loan, but it could be at a higher interest rate--definitely an increased monthly payment for PMI. My wife and I only put down 5%, but because we bought a house priced way under 3x our annual income (~2.5x), because we had no outstanding credit card debt or automobile loans, and because our credit scores are both over 800, we were still able to get a loan without any problems and at an excellent rate. In the end, not having the 20% only cost us the PMI, which is about $50 monthly and goes bye-bye when we have enough equity.

More importantly, though, because our salaries are close together, either one of us could be laid off and we'd be able to keep the house. And even if both of us are laid off, we still have enough savings and cash on hand that we'll be able to keep the house for well over 2 years. If at least one of us (well-educated professionals with degrees relevant to practical, stable fields work and years of experience in them) can't find a job before that point, keeping the house is probably not the largest of our worries.

What all this boils down to is this: consider what your situation will be like after you purchase. Will your monthly payment go up? By how much? Can you build up a reserve of cash relatively quickly? While you can't guarantee anything, do your employment prospects look reasonable for the near-term? Even now, with no one lending, you can still get a loan(if that makes sense). I presume you've taken a good look at your finances, but even if so, you should examine them again. And again. This is, after all, the biggest purchase of your life so far, and prudence is paramount.

[KrauserKrauser]

Another option our loan officer told us about was the possibility of using a 80-10-10 combo loan to get around paying PMI. The monthly rate was lower and you could pay off the 10% interest only loan to eliminate that extra cost. We couldn't really pull off 10% down so we went with something less aggressive, but the option exists and you should cover it with whatever mortgage company you end up working with.

[Col. Crackpot]

Another option our loan officer told us about was the possibility of using a 80-10-10 combo loan to get around paying PMI. The monthly rate was lower and you could pay off the 10% interest only loan to eliminate that extra cost. We couldn't really pull off 10% down so we went with something less aggressive, but the option exists and you should cover it with whatever mortgage company you end up working with.

DISCIPLINE! Pay off the subordinate financing first! A safe way to handle that is when subordinate note is actually a home equity line of credit. Pump all of the money you can into paying it down first, but you have the ability to draw back from it if you get a little too aggressive in your repayment schedule.

Before you enter into any type of 80-20 loan program see first if you qualify for some type of State Bond Mortgage Program. Many states offer subsidized rates and minimal PMI for first time home buyers IF you meet income guidelines.

[KrauserKrauser]

Yes, definitely scour the State Housing Department or your corresponding Department for first time home buyer financing options. With our combined incomes and the value of the property we purchased, we did not qualify for any special deals from the state but had we gone a bit lower there were 0% interest down payment loans that you can use to make up the 20% required to avoid PMI.