Posted by Calli.
As mentioned in Part 1, priming myself for this investment was the tip of the iceberg. In retrospect, it seems like a piece of cake compared to the actual buying process. I don’t regret my decision whatsoever, but it would’ve been nice if I’d studied up a little more before taking the plunge. So here’s my contribution to the cause; a layman’s guide to help navigate you through some of the more difficult points……
Finding an Agent. You’re going to be spending a significant amount of time and communicating a lot with your agent throughout the home buying journey so you need someone who’s dependable, responsive, an expert in his/her area and, simply put, pleasant to be around. I strongly suggest finding an agent through personal recommendations from people you know and trust. Chances are, if they’ve had an enjoyable experience with their agent, you will too. My friend recommended my agent, Eve Holder, when I was looking for a rental home before buying was on my radar. I solicited Eve again when I was ready to make a move because my previous experience with her was great.
If word of mouth isn’t an option for whatever reason, you can browse sites like http://www.realtor.com/, www.zillow.com, www. trulia.com, etc. to search for active agents in your area and read ratings/reviews.
Getting PREqualified & PREapproved for a Loan. It’s pretty easy to find a company that’s willing to lend you money. My agent streamlined the process for me by providing a referral list of reputable lending companies. If you want to search around and find your own company that works too. Just know that you’ll want to have a prequalification letter from a lending company in hand before making any offers. What’s a prequalification letter, you ask? It’s a letter from the lending company which more or less states you are financially eligible and qualified to meet the requirement of the loan, which at this point equates to the list price of the property you’re making an offer on. In order to get your hands on this golden ticket you’ll need to provide some basic information to the lender such as your annual salary. Boom. You are now prequalified.
To actually get preapproved for a loan you will need to provide documentation materially similar to the following:
- Copy of your DL
- Recent pay stubs
- W-2s dating back 2-3 years
- Recent account statements for account intended to fund down payment
There’s a big, fat caveat to all this, K?!
It’s why I took the liberty of making the pre part of prequalified and preapproved all caps. Know that a prequalification/preapproval does not necessarily mean you are eligible for a loan. The fact that you provided the above documentation doesn’t mean that it’s been verified by a loan underwriter. In fact, your lending company probably won’t verify it until your offer has been accepted by the seller. So, while you can and you should hope for the best, know there’s a chance that the loan will not get approved.
Side note: The fact that I had to provide documents like W-2s and account statements felt like an invasion of privacy to me. Even though I knew my lending company was 100% legit, I was wary to send confidential info. via email because of hackers. To give myself some peace of mind I signed up for identity protection through my insurance company. It monitors for activity outside of the ordinary that relates to my social security number and alerts me if there are any risks or areas of concern. I was going to cancel the service but it’s so cheap and I feel at such ease having it that I’ve stayed enrolled.
Determining Your Price Point. If I’ve engaged you whatsoever at this point you may be wondering how to ensure your loan will get approved (if you weren’t wondering just pretend). Make offers on homes you can afford. This whole process can get a little, and by a little I mean very, emotional. Determining your ideal price point before you ever make an offer will help you make informed decisions and save you from getting attached to something that’s out of your grasp.
Before I sat down and determined what was actually in my budget, I got approved for a loan and made an offer on a condo that was WAY out of it; like, $100,000 out of it. While the lending company deemed me creditworthy enough to borrow that amount of money, the down payment and monthly mortgage payments would have put my checking and savings accounts under extreme pressure. Draining my savings would’ve defeated the point of making an investment to build equity. Yet the lending company still prequalified me. What I’m saying is, don’t let the amount they will prequalify you for go to your head. You don’t want to be “house poor.”
A good rule of thumb for gauging what you can afford is that no more than 28% of your monthly gross income should go towards a mortgage payment. The more conservative you are the better. For instance, 28% of my net monthly income goes towards my all in house payment which includes the obvious mortgage payment and escrow. Escrow is comprised of my homeowner’s insurance and property taxes. You may choose not to escrow and instead make these payments to your insurance company and county tax assessor/collector yourself. I locked in a lower interest rate by escrowing and I don’t have to worry about huge annual payments.
Here’s a straightforward tool to help determine what you can afford.
I used this mortgage calculator time and time again to see what the projected monthly payments would be on each house I made an offer on.
In some cases, even if you’ve done everything right, the appraisal, what the lending company values the home to be worth based on sales of comparable properties in the surrounding area, does not go through. Ex: The list price is $190,000 and you offer the seller $200,000 because you know you’re in a multi-offer situation. The appraisal comes back under $200,000. This will cause an impasse and the sale will very potentially not go through. Hot markets where prices are driven up by a plethora of willing buyers who make offers above asking price are especially susceptible to this.
Inspecting & Negotiating. As if you don’t have enough on your plate already you’re going to have to get the place inspected. Inspections aren’t free or cheap but they’re necessary. A professional inspector gadget will look at every nook and cranny of the house. Things like electric, plumbing, HVAC, foundation, etc. will be scrupulously reviewed and anything they deem to be a noteworthy issue will be reported on the inspection report.
Knowledge is power. If a big issue comes up in the inspection like cracked foundation you can walk away. If smaller issues come up you can request that the seller repair them or at least give you an allowance to do the same. Don’t be scared to negotiate. Remember that it never hurts to ask so be your own advocate. Most importantly, do NOT feel pressured to walk into a large financial commitment if you’re uncomfortable in any way.
Champagning. It should go without saying that the realization you’ve just bought your first place will need to be celebrated with lots of bubbles ’cause you’ve always been a socialite and now you’re a homebody, too. Bonus points if you close on your mom’s birthday.
Have anything to add? I want to hear about your experience and/or answer questions!