Unless you’re a hipster that lives in a converted van (I’ve got no beef, good on ya!), most of us want a piece of the American Dream…to own a home of our own! For many of us that dream may seem like it may never be more than that. However, though I’m not saying it’s as easy as simply renting a home, buying a home can be easier and less scary than you think! This post isn’t going to turn you into a real estate tycoon (we’ll get to that later)…but if you’re new to or inexperienced in real estate, there will be some fan-freakin-tastic tips to assist you in making an educated and (relatively) stress free purchase in the future. Done smartly and within your budget, buying a home can be one of the best and most financially smart decisions that you’ll make in your life. Let us get started…
Alright, lets get the scary part covered first! Fact: buying a house is likely going to require you to sign paperwork for a loan for six-figures. But, as long as it works with your budget and projected future income, this is completely ok…you’re buying an appreciable asset, not a sports car. In many cases, your mortgage payment is less than what you’d pay monthly to rent the same home. If you’re not sure if you can afford to purchase a house, consult a financial planner (like Dennis Lott) who can assist you in determining how a mortgage will fit in your budget and with your financial goals (you don’t want to end up being house poor).
For qualified military veterans, taking advantage of the VA Home Loan program is a no brainer. This program will allow you to purchase a house with zero money down….and if you negotiate closing costs to be paid by the sellers, then you can literally move in to your house with zero money out of pocket (I call this the “Big Baller” maneuver)! There is one catch…the VA charges a “Funding Fee” that will get added to the total amount borrowed for the loan. If you think the VA Home Loan program might be for you…do a little research (5 Things to Know) and let me know if you have questions.
If you aren’t prior or current military, a low down payment option is a Federal Housing Administration (FHA) loan. Qualified borrowers can purchase a home through the FHA program for as little as 3.5% down. Again, there’s a small catch and because of the low down payment, borrowers are required to pay a 1.75% premium up front (similar to the VA funding fee) and a mortgage insurance premium (MIP) every year (which runs approx. 0.8% of the loan annually) which is added to monthly payments. However, if you don’t have the ability to make a 10-20% down payment, educate yourself on the facts and determine if perhaps this program is a good option for you.
Now, these aren’t the only types of home loans out there. If you have the 5-20% down payment then a conventional loan may be the way to go. Saving up enough for a down payment and pursuing a conventional loan has significant benefits over a VA or FHA loan in that it will save you thousands of dollars in funding fees and MIP (FHA only) as well as allow you to move into your new home with some equity. Your lender can tell you how much of a down payment would be required to avoid MIP.
There are also some other programs that require no or low money down. Navy Federal Credit Union, in particular, has some interesting options for people eligible for their services. Bottom line, do a bit of research into the different types of mortgages that are out there. Once you have a rough idea on which lending programs might be good options for you, it’s time to find a…
You won’t make it far on this journey without finding a lender who is willing to write that six-figure check on your behalf. So, how do you find someone to loan you money? First, ask around…likely friends and family have had good and bad experiences with different lenders. Also, don’t settle on the first one…take time to talk to a few different lenders until you find one that you’re comfortable with. Your lender will likely be a part of your life for the next 15-30 years be certain it’s a company you want to deal with.
IMO, it’s important to find a lender that specializes in the type of mortgage program that you’re trying to use. A simple Google search can give you a list, but also ask around your network for recommendations from friends/family that already own homes. Personally, I’ve had a really good experience using Quicken Loans, Caliber Home Loans does a fabulous job and I’ve always heard good things about working with Navy Federal Credit Union (NFCU). For my military peeps, I don’t not recommend USAA (I bought my home in Oklahoma through USAA) but I believe that you’ll have a better experience with a lender, such as Caliber or NFCU, that specializes in VA loans. There will be very little variation in interest rates among lenders and I highly urge you to select the lender that you feel comfortable doing business with and that will continue to service your loan after the buying process is complete (ask the question because some companies sell your loan to a different company).
Once you have a lender selected, you’ll want to go through their process to secure a pre-approval letter. This letter will state the maximum amount that you are approved to borrow. Many sellers won’t entertain an offer on their home with a pre-approval letter attached to the offer. I always ask for pre-approval up to my maximum budget…this gives me the flexibility to go higher if I desire…usually I’ll ask for about 10% more than I plan to spend. Having a pre-approval letter will also give you a leg up in negotiations, especially if there’s another interested buyer without a financing pre-approval. Now that you’re pre-approved with a lende, it’s time to go out and…
Find Your Home
Obviously the easiest way is to get a real estate agent…again, ask your network of friends and family that live in your target area (if you’re looking in Panama City, hit up Aaron Payne and in Jacksonville area, my cousin Wade Wheeler and his wife are VA specialists). When it comes to finding your home, you can certainly scour the many real estate websites such as Zillow and Realtor, but also leverage your realtor. Real estate agents have access to the multiple listing service (MLS) and can easily pull a list of houses for sale that meet your specific search requirements as well as set up notification emails when a house that meets your desired parameters gets listed. Important things to consider when deciding where to buy include school districts, crime rates and resources such as restaurants, shopping and access to the interstate/hwy. Here’s another blog post with some other great things to consider when looking for your dream home! So, you’ve found your dream home, time to…
Negotiate the Deal
Once you find that perfect home you need to get it under contract and agree to terms with the seller. Your realtor will initiate this process and should be able to make recommendations that are appropriate for your market. I’m certainly no master negotiator but here are some things to consider:
- Pay a little more but ask for seller to pay all closing costs. Closing costs will run from 1-3% of the purchase price (depending on your state and city) and unless you’d like to pay that amount out of pocket at closing, negotiate it as part of the deal. Example, there’s a house listed at $205K, you’d like to offer $190K and you estimate that closing costs will run $5K…so, you offer $195K with seller covering all closing costs. Boom-shaka-laka! Zero out of pocket!
- Be prepared for back-and-forth offers and counter offers that can take a few days to a week. There will likely be a counter offer or two in the negotiation process but be patient and don’t sweat it if you don’t hear back for 24-48 hours from the seller.
- Ensure there is an option in the offer to renegotiate terms after an inspection. Talk to your realtor, but make sure you have time to get an inspection and then renegotiate terms after that inspection is complete. Generally this time period will be 10-15 days after the contract is officially signed. Your real estate agent and/or lender can likely recommend a good inspector.
- You will likely have to make an earnest money deposit (EMD)! Generally it will be a $1-2K deposit that you pony up as the buyer (this shows the buyer you’re serious!) and if you dip out on the deal (once it’s agreed to and under signed contract) the seller gets to keep that money. If you have the inspection or other clause and leave the deal for a reason covered in the contract you’ll get your money back (Example: Inspection discovers roof needs to replaced but seller won’t fix it or give you the money as part of the deal to fix it). However, if you get cold feet or change your mind, that EMD money will be gone. Usually the EMD will go towards closing costs. If you’d like to get your EMD back at closing (because you’re a badass and got the seller to cover all closing costs) then talk to your lender and agent to ensure this is possible under your deal/loan and that it is documented correctly.
Now that you’ve agreed to terms, you’ve got to…
Get an Inspection
I highlight this portion of the closing process because it is vitally important! First off, get it scheduled as soon as you’re under contract. Also, make it a point (if geographically possible) to arrange to meet the inspector at the house at the end of their inspection so he/she can do a walk-through with you and show you any major findings. You’ll get an inspection report with pictures, but it’s better to see it in person. Additionally, have a list of questions to ask the inspector if there’s specific concerns or questions you have about the house. Here’s some things that I always look at/ask about:
- Roof – there’s nothing less gangster than having to replace a roof out of pocket! Every inspector should do a detailed check of the roof. Keep an eye out for water spots on the ceiling inside as this is the telltale sign of current and/or previous water damage from a leaky roof. Also, check out underneath the roof outside (known as the soffits and fascia) for rot or deterioration as replacing and painting these can be expensive as well…I know from experience bro ($2.5K)! If you live in hurricane alley…aka Florida and the Gulf of Mexico, ensure your inspection comes with a Wind Mitigation Report…your insurance company will need this to determine your insurance premium.
- Heating, ventilation and air conditioning (HVAC) – You won’t be able to survive very long in your house without a functional HVAC unit unless you live somewhere where the weather is glorious year round…like San Diego…but who can afford to live there…am I right…I’m right! Seriously though, having an HVAC system that works is a necessity in almost every state and fixing or repairing an HVAC system can easily costs thousands of dollars. Look at the unit(s) in the house you’re trying to buy (you can usually find model numbers and years on them) and ask the inspector about the condition of the system if it looks old or you’re just not sure.
- Old Houses – If I’m looking at a house built more than 40-50 years ago, I want to know as much as I can from the inspector about the condition of the electric and plumbing. There’s nothing more sh!tty (pun intended), inconvenient and expensive than a massive plumbing leak under your house…yikes! Also, having to replace all of your electrical wiring can but quite pricey…but it’s better than burning your house down. If there’s doubt, consider hiring a plumber or electrician to come over and check it out for you.
- Pests! – The last thing you want is to discover your new home is infested with termites, cockroaches, etc…after you move in. Some areas of the country are worse for certain kinds of pests so ask your inspector what to look out for in your area. Most home inspectors don’t due an in-depth pest inspection and if you live in an area known for serious pest issues, it may be worth paying an extra $100 or so to have a pest company come out and do an inspection!
- Foundation – Cracks in the foundation of your potential home could be nothing…or they could cost $10K+ to fix…if you see cracks, ask your inspector about them.
This is just a short blurb on inspections, what to look for and the importance of doing them. Here’s a great post from Zillow with some great inspection points and an actual inspection checklist. After you get your inspection report, talk with your realtor and determine if the report identified anything that will require you to renegotiate terms with the seller. Once all of the inspection items are addressed, it’s time to…
Once you get your dream home under contract, the last thing you want to do is wait 30-60 days until you can move in…but…you’ve got to be patient. The underwriting, inspection and appraisal process takes time. During this time, prioritize getting the inspection done and issues fixed (as discussed above). Other stuff…
Insurance – During this time you’ll need to line up your homeowner’s insurance. USAA is usually competitive in most markets but I’d recommend shopping around…for example, they are significantly overpriced in Florida and Oklahoma. Ask your realtor or local friends if they can recommend a good insurance broker. An insurance broker will shop around for rates with a bunch of companies to find you the best deal on insurance (PRO TIP: If your dream house is near a body of water, check with an insurance broker/company to see if flood insurance will be required for that property BEFORE YOU BUY, this need will significantly increase your insurance cost and could make your mortgage unaffodable).
Underwriting – This is where you lender does all the things with calculators and paperwork and junk in order to fund your six-fig loan. They may ask you for additional documentation on some items but there isn’t much requirement. Just be sure that if they ask for something you get it to them ASAP as this stuff can delay closing. A good lender will have a case manager that assists you through the closing process.
Appraisal – As part of the underwriting process, your lender will conduct an appraisal. If you’ve done your due diligence with your realtor, your home should appraise for about what you have it under contract for and there isn’t likely to be any major issues. If you go VA, they’ll conduct one as well and if it comes in under the agreed upon sales price then it’ll require the seller to come down to that appraisal value since the VA is effectively co-signing with you and they won’t co-sign for a house that you’re overpaying for in their eyes.
Bottom line, the closing process takes some time. Buyers should also brace themselves for the potential for the deal to fall apart and be mentally prepared to walk away. If appraisals or inspections highlight significant problems that the seller is unwilling to address the deal may no longer make financial sense…the last thing you want is to move in to your dream house which has a problem you can’t afford to fix (one nice thing about VA is that they’ll require major items be fixed prior to close). Be excited, but also be rational…I mean, you’re going to be signing a six-fig loan after all.
Goodness gracious, that was a lot of information…I apologize if your eyes are bleeding! There are certainly a lot of steps to the home buying process but what I wanted to show you today is that if you break it down into small chunks, it becomes more manageable. Simply take things step-by-step and stay calm through the whole process. Remember, you’re investing in your families’ future when you buy a home…not only will your family live there for a significant time, but this home will also likely increase in value over time and become an asset that you can pass down to your children. Another important thing to remember is that you’re not the first person to buy a home…use the resources and network of friends, family and real estate professionals around you to ensure you’re making a good decision. Understand that owning a home doesn’t have to be just a dream…with low and no money down lending options you can potentially move in to a home of your own for practically zero out of pocket! Lastly, I want to reiterate the importance of discussing your home purchase with a financial planner…no and low money down options are great but it’s important to make sure you don’t overspend and find yourself in a housepoor situation.
Real estate is an incredible tool for building generational wealth! This post focuses on the basics of buying a home. My next post in this series will focus on utilizing no and low money down lending options to build your real estate empire. Obviously, purchasing a home is a major financial undertaking and before doing so you should evaluate your personal finances and consult a financial professional because, disclaimer, I’m not a paid finance professional. The last thing I want to see is someone getting too much house for their budget and finding themselves under water on their mortgage…again, I highly recommend discussing the purchase with a financial advisor before you act.
Please ask questions if you have them…I am here to help you in your financial endeavors and get you the resources you need to be successful! Godspeed! ‘Merica!