Since coming to Washington State I've realized that, though I'm working harder than I ever have before, the opportunity and net cost of living are dramatically different. This year, as a New Years Resolution, I resolved to do two things: (A) graduate college and (B) buy a home. Both are in progress (I told you about Western Governors University), but let me talk about (B), and let's see if I can help you.
There are a number of things you really do need to understand about buying a home. Things that can make or break not only the buying experience, but your credit and/or confidence with what you end up with. Some of that is easy, some is not. As such, I'll just treat this as a multi-part article. There's simply too much to put into a single writing piece; you'll see what I mean if you keep reading. The first thing though, and likely most common sense (yet people seem to neglect completely)...
DO YOUR OWN RESEARCH Before Contacting A REALTOR.
I'm sure you're like, "huh? Isn't that the REALTOR's job, to research the market/homes/crime/schools/etc. for me?" Yes. But they won't do as good a job as you will because they're not you. They're an agent acting on your behalf as best they can, but they can't read your mind.
Back in 2008 I just walked into the first RE/MAX office I saw on the way home because it was a nice building. No, I'm serious. Walked up to the receptionist and asked for an agent to help buy a home. "Dave" was a nice enough guy but he was not the right REALTOR for me (more on this in another article). I stuck with him because I assumed, naturally, that I had to let the REALTOR do all of the work for me. I didn't do due diligence, and the little searching I did do ended up in a bunch of short sales (more on that in another article).
My main issue was two-fold. First, my credit wasn't stellar. I knew that, but I also knew people who were getting loans despite not-so-good credit - and in fact, Chase had actually pre-approved me for a certain (low) amount. I could easily have gotten a condo in Rancho Bernardo, but it was way too small, didn't have a garage and the HOA dues were robbery (more on this in another article). So the temptation of other people getting homes they theoretically couldn't afford started to infect me. That was a mistake, and the REALTOR should have made that clear (but of course, the REALTORS were just as greedy, at least some of them. More on that in another article).
My second issue was more important. All I cared about was having a house that looked good. At one point I even considered a house out in Hemet, which was easily 3+ hours from my job, and Temecula, which was right next to one of the worst traffic corridors. I never considered crime, or public transportation (which, in case I needed to be without my car, might very well be the difference between life and death), or gas as I commuted to work every day. These are all things that need to be considered when buying a home - because the reality is, this is a place that you're going to ideally be in for at least 3-5 years. Minimum, if not more. What you never want to do is have a situation where you are stuck, dazed and confused, nor do you want to let the REALTOR dictate any of the above for you. It's got to be your decision and your drive that makes things happen.
So what's the answer? Research. Do it day and night. There are tons of sites out there on the Web, or if you're not computer literate, magazines and brochures, with tons of homes to select from. Online is of course easier as you can filter down to what you really want. The only thing you can't search directly on most sites is whether it's a short sale or not (which I'll talk to later), but everything else is mostly searchable with some work. http://www.trulia.com is the one I preferred, but http://www.redfin.com is another good one, http://www.estately.com is one I hadn't heard of until this most recent search, but it gives you more information about the home.
Once you settle on a site or other resource, you'll want to first think about what really matters most. Use a "order of importance" type of deal, write it down in order. If you don't have kids, you probably don't care about school now, but what might be in the future? Plan for that. If you're going to a reasonably upscale area, crime might not be a priority, but consider whether those areas are higher potential targets. Do you want to be in a high population area, or do you want to be off in the backwoods away from civilization and traffic? At this point, you're just trying to get a single list of things that you can search against on whatever resource you choose.
After that, you may need to run the same search in a few areas. This is where other not-quite-searchable pararmeters come in. How close do you want to be to your job? Are you planning to take public transportation every morning? How far would your kids (if any) need to go to get to school? How far are amenities? Figuring these things out should get you witttled down to a few select areas, where you can then focus on aesthetics. How nice is the house? Is it move in ready? Is the neighborhood reasonably well maintained and lit? Does the community have landscaping that's done? Is the house a split level or regular foundation? Is it wood construction, stucco construction, brick construction? All factors that will weigh on where you end up purchasing. Take copious notes of all of the above, and in the case of Trulia, you can even set up alerts that will send you homes similar to ones you think you like, which can speed up your search.
Before engaging a REALTOR with this information, there's one other thing you must get perfectly lined up and strategized: how will you pay for the house? It's a good bet you're not coming with 100% cash, so you'll need to understand what programs are available to you, and you'll want to make sure you are comfortable with whatever financing route you take. The best way to accomplish both of these tasks is to do some searches for your state's homebuying programs.
If you're a first time home buyer, or haven't owned a home in over 3 years, you are likely eliglble for a number of conditional programs that can make the financing part of the process tremendously easier. There are programs such as FHA, where you can experience lightened approval standards in exchange for more money paid over the life of the loan. There's VA, if you happen to be a veteran. There's USDA/HUD if you plan to buy a farm or a home in an extremely low population or distressed area. And of course, there are conventional loans, which best serve if you have at least 5-20% available for a downpayment on a home you want in your price range and can get approved for a loan. There's no right answer here. It depends on your circumstances. Most first time buyers go for FHA, but honestly, if you're going for a condo or something lower priced, you might be better off going conventional. Again, FHA will cost you more over the life of the loan but has more tax breaks. Conventional is cheaper over the life of the loan but more expensive up front.
You'll also want to do some home buying calculator searches to get a general sense of your 'buying power'. The buying power is a dollar amount that indicates how much home you can afford, taking any debts you have into consideration. In an FHA program this can be capped depending on your income and debts.
For example, say you make $60,000 per year, or $5,000 per month. The mortgage payment, in addition to other factors than just the price of the home, cannot exceed $1,550. You might think that's plenty. But FHA requires you pay other things such as insurance and of course, the interest and taxes, which can easily kick you over that limit. Your buying power then goes down, and you'll see a much lower total amount approved than you thought it should be.
As a general rule, the most you can reasonably afford is 3.5 times your annual salary, assuming your debt is managable (in other words, you pay less than 25% in recurring payments to your loans and credit cards every month). If your debt is out of control, you won't get approved. But you should be able to drill down to a single dollar amount that you can be confident in as your maximium buying power. You'll want to see how your home searches change when you apply this amount as a maximum, and remember, just because you're eligible to take $200,000, doesn't necessarily mean you should. If your intent is to keep your expenses managed, you might choose a home that is further beneath that threshold, say $150,000 instead.
Now, you're ready to talk to a REALTOR. But which do you choose? There's no easy answer, but the best guide is the state program website I talked about. Any homebuying program you choose to use will have specific REALTORs that are certified, and you should consider talking to them first. Barring that, you might try to get a reference from a co-worker or a classmate that has gone through the process with a positive experience overall. Understand that a REALTOR in a given area is not isolated to that area; their job is to be local to potential buyers and sellers that may be dealing with properties all over the various counties. They do have a radius sometimes, but most are flexible. They should be accessible to where you live currently if possible.
Once you've selected a REALTOR, they should be able to do some automated searches in the area you've chosen where it can send you alerts about properties. These results should closely match the searches you did before, and you can also block short sales unavailable listings in favor of ones that are going to be available to you. If you're in no rush to buy a home and just want to find the "right one" and it happens to be a short sale, don't let you stop you; but your REALTOR will likely warn you about how long they take to close. That's their job, let them do it. Your job is to take the information you gathered as part of your research and provide it to them, so they don't have to do much at all except help you complete paperwork and negotiate alternate offers (if any) on your behalf. Everything they're doing, you could do on your own, but that's a recipe for disaster. Use the REALTOR for their most valuable service: the administrative work necessary to get the home purchased and on the books. Use yourself for your most valuable service: deciding WHICH home(s) you want to buy, and why. Don't cross the two.
You'll need to sign an agreement to use the REALTOR's services at some point. Don't let that freak you out. You can always select a different REALTOR if you want prior to actually purchasing a home. But under no circumstances should you sign that agreement before meeting with the REALTOR and giving them a chance to set up your home search and show you what tools they're working with to help you find and purchase a home. If you find that the REALTOR is way behind the times, is slow to respond or not available/accessible on your schedule, or doesn't seem to be acting in your best interests, move on. Feel no obligations here.
When you get down to pricing ranges, the REALTOR will need to know if you're already pre-approved for a loan. This is because any offer that you later submit on a home mut be accompanied by a pre-approval letter from that mortgage company, so that the owner of the home can see that money is lined up and ready, and that the offer is genuine. If you've done your research already into which company you want to take the loan with, you can reach out to them at this point and begin the process. They will need to know what the desired loan amount will be at some point, but initially they will use your income and debt to determine (A) what loan programs you are eligible for and (B) how much home you can afford. This is critical: take note of this information as you will want to cater your home searches around this amount. Pay attention to how close your initial estimate was; if you were way off, you may have left something out somewhere, and you'oll want to identify it and make sure it doesn't put you in financial trouble.
At this point, you're ready to offer on a home. You should already have done enough self research to know what you want, and your REALTOR has all of the information they need to pull the trigger when you find the one you really want to offer on. Make sure you go see the property and walk through it - pictures will never tell you the full story. Beyond that, it should be a reasonably smooth process assuming you follow the information above, at least to get to the negotiation table.
The next article will come soon and I'll talk more about short sales.
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