After the dust had settled from our move to southern Indiana in January, I dramatically said I was never moving again. “My grandchildren will visit me in this apartment!” I said.
The truth is, I was just sick of packing up and moving after doing it 3 times in 9 months. Now that we’ve had a chance to settle down and get to know our new area, I’m starting to feel the house hunting itch again.
Obviously, when it comes to homebuying, the more cash you have on hand, the better. Our original plan to stay in this apartment for two years would allow us to amass a larger down payment — possibly even 20%. On the other hand, interest rates are starting to creep up again as the economy rebounds. Buying sooner rather than later would allow us to lock in a sub-5% interest rate for the life of our mortgage, which could net us big money in the long run. There are also many bank-owned houses on the market right now selling for far cheaper than they’re worth.
Even without a full 20% down payment, we could easily find a really nice house and end up paying less per month than rent.
I’ve said before, though, that alone is not a good reason to buy a house. Just because your mortgage could be lower than your rent doesn’t mean you should buy. We’ve been happy renters for the past few years for a number of reasons. Now that we’re ready to settle down in this area for the next 5-10 years (at least), we’re ready to consider buying a home. The question is whether it will be in 2012 or 2013.
We have another 9 months left on our current lease, so I’m preparing now to begin the process. Here are the first steps we’re taking:
Learn about the costs of homebuying, and save save save!
I’ve spent a lot of time learning about the homebuying process to determine the real cost of buying a house. First-time homebuyers often qualify for FHA loans with attractive interest rates and a paltry minimum down payment of 3.5%. Even conventional loans only require a 5% down payment. It can be easy to assume that all you need to buy a home is a good credit score and a few thousand dollars. Not true.
There are a ton of additional costs, including closing costs (which can range from $1,000-$5,000 or more), points if you want to lower your interest rate, inspection fees, and other miscellaneous costs. A good rule of thumb is to assume you’ll need at least $5,000 in addition to your down payment to close the deal. This guide to homebuying taught me a lot about the associated costs and process in really simple language.
Obtain your credit reports and credit scores to clean up errors and fix problems.
We already use Credit Karma to monitor our credit scores throughout the year (it’s free, but not 100% accurate, so we’ll probably end up paying for credit scores from one of the credit reporting agencies). We also check our credit reports every year using annualcreditreport.com. You’re entitled to a free copy of your credit report once each calendar year. Our scores are both in the mid-700s, and everything looks as it should on our credit reports, so we shouldn’t have any problems there.
Get prequalified for a loan to determine a realistic price range.
Some people recommend that this step come later, but I think it’s important to do it in the early stages. You need to know what you can afford right now with your current salary and cash on hand. Once you’ve got a range, you can do some preliminary price checking. If it doesn’t look like you can afford the type of house you want, it’s best to wait and save for a higher down payment.
Don’t settle for a cheaper house just because you can afford it now! Buying a house is one of the biggest commitments you will make (especially in this market). It’s better to wait and get what you really want than be unhappy in a house you don’t love just for the sake of owning one.
There’s a big difference between being preapproved for a loan and being prequalified. When you’re prequalified, a bank gives you an estimate of how much they’d be willing to loan you based on your credit history, salary, and cash on hand. They take your word for it, and do not verify any information at this point, so it’s best to be completely honest to get an accurate estimate of your borrowing power. Don’t forget to factor in property tax rates, home owner’s insurance, and PMI (if you aren’t putting a full 20% down) when estimating your monthly payment.
Preapproval is a more official step that you’ll take when you’re ready to start house hunting. The bank will verify your financial information, and make an official offer. A preapproval letter is often necessary when making a bid on a house, because it shows the owners that you’re a serious buyer and you can afford the home. Most preapprovals carry deadlines with them, so it’s best to wait until you’re ready to buy before taking that step.
Over the weekend, I used Lending Tree and Mortgage Match to get prequalifications. This confirmed that we qualify for the price range I’d already estimated based on online calculators. I won’t be finding a lender online when it’s time for preapproval, but now I have an estimate of my price range.
Do preliminary research on houses (and neighborhoods!) in your range.
We’re not 100% sure we’ll be buying in 9 months, and even if we were we wouldn’t start searching for another few months, but we spent some time this weekend driving around looking at houses that are on the market in our price range. It’s unlikely that any of these houses will be available when we’re ready to buy, but window shopping will give you a feel for the market.
It is really surprising how deceptive listing photos can be! Several houses looked really nice in pictures, but weren’t so nice up close. Or they were in sort of a scuzzy neighborhood. Again, if you start looking at houses in your price range, and they don’t look like houses you’d actually want to buy in desirable neighborhoods, it might be best to wait and save some more.
Find a buyer’s agent.
This step can actually come first if you want. A buyer’s agent can help you wade through the details, find listings in your price range, take care of the dirty work, and advise you when it’s time to make an offer. It won’t cost you a penny, because their commission is paid by the seller after the deal is done. So there’s no reason not to use an agent! Just be aware that they are salespeople, and they can be pushy. If you’re not seriously ready to start looking, you might want to wait to contact an agent to avoid the barrage of emails and phone calls pushing you to “BUY NOW!”
We’ve now taken all of these steps, and things are looking pretty good that we might actually be able to buy a home at the end of this year. We have the money to cover the down payment and most of the closing costs now. All that’s left is to ramp up our savings so we can pad our emergency fund so buying a house won’t completely clean us out.
Our plan now is to start seriously looking at houses at the end of this summer. I’ll keep you posted!