Most people only buy a house once or twice in a lifetime. We’ve been through the buying process only three times – 2 homes and 1 condo. For the homes we had to get a mortgage, but by the time we bought the condo we were able to be a ‘cash’ buyer.
We bought the homes before the internet was around, so it was harder to find good up to date information (or at least that is my excuse). The truth of the matter was, we didn’t think to educate ourselves on the home buying process and were no doubt taken advantage of.
In hopes of helping my grown son do better, I recently read a book written by someone who used to be a loan officer and has been present at a lot of closings in various capacities. It was called Mortgage Rip-Offs and Money Savers by Carolyn Warren.
If you are currently looking to buy, I’d suggest that you can save yourself some money and mystery by spending some time educating yourself about the various parts of the process, from working with a realtor to inspections, obtaining a mortgage or making sure you have good representation at closing.
When buying a home, read up on the different kinds of mortgages available and discuss between yourselves what you see as the pros and cons of each. Know how long you plan to stay in your new home, as that can affect the best type of mortgage for you.
Research neighborhoods, home prices and real estate sales practices in your area to find the neighborhood you want and then find the best realtor that knows that neighborhood.
Hire a real estate lawyer to represent you and don’t hesitate to spend the money to get answers to your questions! Have that lawyer read over anything before you sign it and be present at your closing.
Even though we paid cash for our condo, even though we instructed our Realtor that we wanted to see every single closing document filled out before we went in to sign, there were still surprises at closing. Your surprises could cost you money up front or over the life of your loan.
Know what you can afford.
Pull your credit score, so you know what it is! Get a verbal ‘pre-qualification’. This is a verbal high level estimate from a loan company based on what you tell them about your credit, debt, income and asset information. You don’t need to supply your social security number as you don’t want the loan officers to pull credit reports on you just yet. You’ll be getting multiples of these and aren’t yet committing to any one loan company at this point.
Understand what you really think you can afford. Even if several loan companies tell you that you can afford a $2500 a month house payment, think about it! No one knows your situation better than you do. You want to leave yourself some breathing room – to handle future contingencies. Sure maybe today you can handle that $2500 a month payment, but what happens if one of you loses their job, or you decide to have a kid and need one of you at home. What happens if you get injured or sick and go on reduced pay for disability and so on and so forth. You won’t want the added stress of not being able to make the mortgage payment, or having to decide between paying it and eating.
Look within your range.
I know from experience that if you start looking at higher end houses, you are going to be less than satisfied with houses in your range. Stick to what you decided on. Know that the Realtor will want to put you in a more expensive house because he or she will then get a bigger commission. Don’t let them sway you.
Get several Good Faith Estimates before YOU select your loan company.
The Good Faith Estimate (GFE) is a required document from the US Department of Housing and Urban Development and it is supposed to be provided to every buyer working through a mortgage broker. However, the author indicates that companies can and do make up their own, or not even provide one to you. They also may put misleading information on the good faith estimate, to hide the profit going to the loan officer or the loan company.
You still don’t need to provide your social security number. You want to chose the loan company you will be working with before you do that.
We were so naïve that we didn’t shop around for our mortgage. We just went with the loan broker the realtor used! We didn’t know that there is a healthy ‘you pat my back, I’ll pat yours’ going on between realtors and loan officers! We didn’t know that retail loan companies get their loans from pretty much the same selection of wholesale loan companies!
Look for missing or hidden information on the GFE. Make sure the interest rate and term are filled in. Make sure the fees are listed with dollar amounts and that they seem reasonable. Educate yourself on ‘junk’ fees (like charging several hundred dollars for a document courier). Make sure that you know what the Yield Spread Premium (YSP) is and what it means (it is the loan officer’s commission and adds to your monthly payment amount AND it should be negotiable).
Compare the several GFEs that you get based on loan amount, interest rate, principal and interest included in monthly payment (don’t include the taxes and insurance), the points (which are the cost of getting the loan for you – origination fee; the loan discount and the loan officer’s commission. Also look at whether or not there is a prepayment penalty; the profit margin between the interest rate and the index; how much the loan can go up the first time it adjusts (if it is adjustable); the balance due date (especially if you have a balloon payment type loan) and whether the loan has ‘credit life insurance’. We stupidly bought this on our second home’s mortgage. It was costly and covered the mortgage if one of us died. It would have been cheaper to just buy term life!
The time to negotiate on fees is before you choose which lender you want. The author suggests that you don’t have to and should not pay any of these fees:
- Appraisal review
- Document preparation
- Document review
- Email fee
- Processing fee
- Title review
Once you dig into the good faith estimate and negotiate the fees, choose the lender that fits your situation and has the person you can work with throughout the mortgage process, then stick with them!
Find your house.
Know the neighborhood you want. Find the right real estate broker (the one that knows the area and with whom you will work best). Know what to look for to make sure the house is sound (don’t get mislead by the paint color or the décor, pay attention to what matters). Take a break if you tire of looking. Keep notes and pictures (ask permission of the owner if present) on the houses that interest you. Know the market – will you need to move fast or can you take your time?
Once you find several houses of interest dig deep before making offers. Talk to neighbors, research county records, land planning records, and newspapers of the area. Then and only then start making your offers. Don’t be afraid to negotiate. You’ve got to be willing to walk away from the deal. Don’t let the realtor bully you into more of an offer than you want to give. Don’t be afraid of ‘insulting’ the seller. Our current home is on a very busy state highway. It wasn’t busy when we moved in 25 years ago, it was a quiet country road. If we had checked the land planning county records, we would have seen that a new interstate was to be constructed down the way and that it would significantly increase back and forth traffic on our quiet country road.
Close with help.
Get that lawyer to help you close. Request papers beforehand so you know what you will be asked to sign. Let your lawyer review and advise. Take your time at closing to make sure your final mortgage costs are close to your good faith estimate (some of the costs can change, others should be the same). READ and UNDERSTAND everything you are signing. Take your lawyer with you. We wish we had!
What home buying lessons can you share?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.