Like any area of personal finance, there’s no big secret to buying a house — but it does involve thinking differently than most people.
I’m talking about the folks who make the biggest purchase of their lives without fully understanding the true costs. That’s why I decided to update my article on buying a house to help you understand those costs … and show you exactly how to go about doing it.
Obtain your credit reports
If you plan to buy a house in full with cash, you can just skip this part (and also, you must be a student of mine!).
However, if you’re within the majority of people who don’t have the funds to do that, you’re going to need to get a mortgage. And to get a mortgage, you’re going to need to get your credit score and report.
Find out “how much house” you can afford
Unfortunately, finding out how much you can afford is a bit complicated — involving intense algorithms, big mathematical equations drawn on chalkboards, and an abacus.
Just kidding! You can easily find out how much you can afford using the 28/36 rule.
This is a rule of thumb used by creditors to determine roughly how much they’re willing to lend to you. Here’s how it works.
- Household expenses should not exceed 28% of your gross monthly income.
- Household debt should not exceed 36% of your gross monthly income. This is also known as your debt-to-income ratio.
Let’s take a look at those areas more deeply to understand why it matters to you and the creditors.
Meet with a Realtor
Much like a good lender, a good Realtor will be an agent who is going to represent you and your interests. Unfortunately, there are a lot of real estate agents out there who just want to make a buck and keep their companies afloat. This means it’s going to be a little bit of work on your part to find a trustworthy real estate agent — but it’s absolutely worth it.
In general, there are two types of real estate agencies out there:
- Seller’s agency. These agencies represent the person selling the actual house. They are there to protect the interests of only the seller. You’re not looking for a seller’s agent.
- Buyer’s agency. Like the seller’s agent but … well, for buyers. These agencies represent you and want to protect your interests. You want to find a buyer’s agent.
Find a direct lender
Lenders are the actual institutions that will be providing a mortgage for buying your home. They include companies like banks and mortgage banks.
When it comes to finding a lender, direct and correspondent lenders will typically be able to provide you with solid rates and low closing costs. Here’s a more detailed description of the two:
- Correspondent lender. This is a lender who provides the money for your mortgage but sells it to you through a direct lender such as a bank.
- Direct lender. These lenders will provide you with a mortgage directly with no additional fees.
I suggest going with a direct lender and cutting out the middleman.
From here, you’re going to want to do a bit of research into lenders that’ll provide you the best rates. A few options on that end:
- Ask a friend. If you have friends or relatives who already own property, call them up and ask them if they know of a good, reputable lender.
- Call up the bank. Since most banks provide mortgage lending, you should call up any and all major banks in your town and ask to talk to someone about getting a mortgage.
- Check online. The internet is a vast resource at your disposal. Be sure to leverage it then by visiting sites like BankRate.com to see if you can get a good deal.
REMEMBER: Your lender is an integral part of you buying a house. To that end, you’re going to want to make sure you have someone who you like and is honest with you. As my friend Owen Johnson says, “A good lender representative pays attention to their clients through closing, and makes sure the deal happens. Be open and honest with your lender … and triple check everything your lender sends you.”
Make an offer
When you find a house that you like and want to make an offer, your next step to buying the house is to find out what the property is actually worth. Though it might be tempting (read: incredibly stupid) to just throw out a ballpark number, do the smart thing and research the ever loving crap out of this house.
To do that, I suggest a number of tactics:
Hire an outside property inspector.
These inspectors are third-party professionals who will go through your home and examine it for structural flaws, damages, and repair suggestions. When they’re finished, they’ll provide you a full report of the house and you can use this as leverage in your negotiations.
They’re allowed to go through the house as long as you ask the real estate agent for permission, so be sure to ask permission.
Ask your lender for a home appraisal.
When your loan is approved, you’ll be able to attain an appraisal from your lender on the house. That means that your lender will take into account a number of factors regarding the house including price of houses surrounding it, number of rooms, how large it is, whether or not it has a swimming pool, etc.
Depending on where you are, the appraisal might take a little while — though no more than one to four weeks. The appraisal will not only give you a good idea of what a fair asking price for the house is, but it will also protect your lender from overpaying for a house.
Look at things other than money.
Remember: There’s much more to life than money — and that sentiment is very true when it comes to buying a house. When you’re negotiating, remember that you can always ask for other perks such as a washer and dryer, a sprinkler system, or even things like new windows or paint. You don’t have to just focus on money.
During this time, you’ll be able to negotiate on things like property repairs if the inspector found something, as well as plan your move.