Posted September 13th, 2020 by Zack Spellman
In which I ramble on about homebuying
I recently got a message from a friend asking for advice on buying a home.
[My] questions at this point are mostly of "what should we be looking out for", "what do you wish you'd known", "what are we perhaps caring more about than we should be", and of course anything about the process itself.
Two hours and 100 messages later, I realized that I had more experiences and opinions about homebuying than I had realized. I guess that happens after buying three houses in a decade.
Rather than repeating this entire thread with the next friend who comes asking, I thought I would take what I said in chat, edit it (sometimes heavily), and post the whole thing here so I could just share a link in the future and answer follow-up questions after that.
Before we get too much further, let me be really clear: This is not meant to be taken as 100% reliable. I am not writing a carefully researched how-to guide on homebuying here. Instead, I am sketching out broad strokes for a way to buy a house in hopes it might be useful to some of my friends someday. This will be very US centric, possibly only applicable in my area of the US, and almost certainly factually wrong at places. I may update this post later if I hear of the latter.
In general, though, the steps are as follows:
Step 6 is complicated enough I'll make a separate post for it after this one and link to it once it is complete. Think of this post as how to go from nothing to a contract to purchase, and the next as how to execute that contract.
Houses are the most expensive things that most people will ever buy. The US has entire industries built solely on connecting consumers with loans so they can even think about affording a house. And with loans come payments, so you're going to want to have a plan for how you'll pay off that fixed cost for the next 30 years.
Different people will tell you different numbers, but there's something that says you should only allocate 30% of your pre-tax paycheck to paying rent/mortgage payments. If you know what you generally make in a year, there are calculators online that know the general going rate for mortgages and can tell you how much you can afford to borrow.
The other consideration on how much to borrow is how much money you can bring to the table. Ideally, you'll bring at least 20% of the cost of the home to the table. With less than this mortgage lenders will require you to pay mortgage insurance (PMI), an additional monthly payment on top of your normal payments, until you actually own 20% of the value of your home. With only 5% down, for example, you'll be paying PMI for over 6 years. PMI costs upwards of $200/mo, so you'll need to add that to your budgeting considerations.
Finally - you can't cheat on bringing money to the table. That means no loans from family, or secondary loans to enable you to make a larger down payment. Mortgage brokers are required to ask if you're doing these things, and the reasoning is simple - they make your loan riskier. Ideally, you'll also not take out any other loans during the homebuying process either - no new car loans or credit cards - as these can invalidate risk calculations and delay getting your mortgage.
A mortgage broker is someone who can get help you get a mortgage. They use knowledge of your situation to find the best terms and rates. Brokers get paid a small fee from the bank for "originating" the mortgage, so they are motivated to find serious homebuyers. As such, expect to have a short conversation with them about your budget and loosely what kind of home you're looking to purchase.
At this stage what you're looking for is a letter of pre-approval for your budgeted amount. It usually takes a day or two to get one of these. You can work with multiple brokers if you like to shop around, or if you're in a hurry and just need one to get back to you quickly.
Redfin keeps a pretty good list of reviewed lenders in many US metro areas, I recommend starting there if you can.
Now that you've got your financial constraints figured out, it's time to get the rest of your thoughts about the house you want organized. Easily searched properties like number of bedrooms, bathrooms, and square footage are good starting points. Other things to consider include:
You should plan to be in any house you buy for at least three years, so think about your future needs as well as your present ones.
With all of these idea in mind, sit down and write out relative priorities: which pieces are more important than others. No house is perfect, so this ranking is a tool you can use to a/ decide if a house is good enough to warrant its cost, and b/ compare two houses which you're having a hard time deciding between.
If you're following along, at this point you're probably feeling like you've done a lot of work without looking at any houses. This is intentional - all of the work up until this point is necessary, but many people wait until they've found a great house to lay this foundation. The downside of that approach is that a better prepared person might buy the house out from under you while you're waiting for pre-approval or figuring out if the house really meets all your needs. In a competitive market, or if you need to be very particular, hours can make a difference.
Now that you have all your requirements, you can start finding matching houses and touring them to find your next home. Traditionally, you'd find a buyer's real estate agent and have a meeting with them where you outline your constraints and let them find good matches for you. This has the advantage of letting their industry connections find you things before they're generally available, and using their knowledge of the local market to gage how difficult meeting your requirements will be.
Alternatively, you can use an online service like Redfin or Zillow to find houses listed for sale. You'll build a list of specific houses you want to see and then either go to open houses without an agent, or get an agent to schedule private tours. This has the advantage of being a bit faster to start touring, as well as preventing you from looking at houses you know you'll never buy.
This step can take months, or it can be over in a weekend. Housing inventory is constantly changing, especially in larger cities, so if you don't find what you want right away, it can be worth it to wait. Generally, new houses come on the market Thursday or Friday. If they're well priced they can go under contract by Sunday, so you do need to keep your eyes open.
One final thing to keep in mind while searching - for a normal sale it takes 30 days from offer to keys in hand. You can speed this up slightly by making an all-cash offer, but most people are not going to be able to afford that. If your lease is up soon, you'll need to factor this delay into your search.
Once you've found a house you want to buy, you need to make an offer. The easiest way to do this is to have an agent do it. This is a straightforward conversation, and you can usually get your offer in on the same day.
One thing to note: agents can't directly answer the question "what price should I offer for this house?" They can show you what prices nearby similar homes have gone for in recent months, but ultimately you have to decide the exact number to put into your offer.
Offers are legally binding purchase contracts - once accepted, you're on the hook to pony up the money you promised somehow (usually by getting a mortgage). From this, you can understand why it is incredibly risky to have more than one open offer at a time. Thus, offers usually have a very short window for acceptance - 36-72 hours is common.
Perhaps because of these short windows, there is definitely first mover advantage when buying a home - frequently, the first offer received is the one accepted. As such, if you see a house you want, don't wait very long to make an offer.
Next time I get back to this topic, we'll talk about what happens after an offer is accepted, up to getting keys after closing. Until then, an agent can likely help with all of that as well - after all, that's what they do every day. Sometimes, though, it can be nice to know what's coming before it's upon you.