HOW TO BUY A HOUSE - IN 3 EASY STEPS
There is a lot of confusion out there about how to become a Homeowner so I thought I would take a moment and put it into Average Joe speak. That, and in my experience, some people go about it totally backwards which is counter productive to the end goal.
STEP 1. - ASSESS YOUR FINANCES
This is fairly simple. Eliminate non-essentials from your spending budget and stick it in the piggy bank. Modify spending habits to generate savings. Make short-term lifestyle changes.
It's just temporary and if canceling monthly memberships (Netflix, Gyms, Any Subscriptions), adjusting your shopping habits [I got some great tips for this], or eliminating other non-essential spending allows you to keep more money in your pocket to get a home versus flushing rent dollars down the proverbial toilet? Bit of a no-brainer if you ask me.
Bottom line is you have to have money ready-to-hand for the transaction. Even with the "zero down" options like VA and some USDA loans; just to name a couple.
There are inspections, appraisals, escrow funds, repairs, home warranty policies, property taxes, closing costs, and other such considerations that must be paid in order to get a home of your own.
"Do Not Save What Is Left After Spending; Instead Spend What is Left After Saving" - Warren Buffett
Figure out what kind of a down payment your financial situation will allow for. The more, the better, but very few people I know got 20% of the purchase price [a.k.a. - conventional/bank loan] sitting around collecting dust. Good news is you don't necessarily have to have that much.
One of the most common loans is a FHA that only asks for 3-5% down AND there are down payment assistance programs out there if you are really Stuck Like Chuck when it comes to finances. NOTE: This does NOT mean they are going to give you ALL of your down payment; you gotta have some chips in that poker game too.
I like to recommend that people shoot for at least 6-8% of the purchase price of the "kind of home they want" just to make sure all the bases are covered - down payment AND cost(s) of the transaction. Folks, that's a lesser down payment than Owner Finance options for the same "kind of home" as Owners generally ask for 10-15% down.
This total can be a combination of self-savings, down payment assistance, assets that can be used as collateral against the loan, monetary or tangible gifts from friends/family members in some few cases, and more.
Each person is unique and different in how that 6-8% manifests and lenders can vary in what form(s) of down payment they will accept.
FHA Down Pymt (3-5%): $4,500 - $7,500
Other Cost(s): (3% +/-): $4,500
Total Savings Needed: $9,000 - $12,000
Kill some bills, sell your "junk" - we all got crap laying around the house we don't use worth money in various amounts - and modify spending habits in a positive manner.
If you are a two car family... can you get by with just one vehicle on a temporary basis [turn that car, and its bills, "into" a house]? Perhaps you have a skill set or piece of equipment that can earn you extra cash here and there on your terms? What changes to your lifestyle can you make that will put another dime or dollar into that kitty bucket?
Finally, do whatever it is you need to do to put those greenbacks into a savings method you can stick with. Whether that is a traditional banking institution or an old shoe box under the bed; you do you. If this means you have to ask someone in a position of trust to hold it so you don't spend it? Guess what you should consider doing?
STEP 2. - TALK TO LENDERS
Let's talk about the "When" of contacting a lender. The only true answer to "When" is... When You Are Ready and only you know how Ready you feel.
I've had clients express the sheer dread they felt about reaching out to a lender and it's an understandable fear. One of my people even said that they felt applying to lenders and having them see their credit condition was akin to stripping naked in front of a total stranger.
But, and as I told my client... think of it like going to the doctor for a full physical exam. Hospital gown over your birthday suit and all. Lenders are professionals there to do a job. They do NOT judge or speculate just because they have intimate knowledge of or about you.
If you suspect you may have some homework to do, credit wise, then it's better to contact a lender sooner rather than later. This allows you to get a game plan together and knock out credit related targets while you are saving funds for your down payment goal. Once completed, you are able to resume your application with confidence moving forward.
"Everything You Want Is On The Other Side of Fear" - Jack Canefield
However, if you are one of the few who feel their credit profile will be a "non-issue" then my suggestion becomes waiting to speak to lenders until you have most, if not all, of your down payment goal met.
When applying to a lender always ask if they perform a Soft or Hard inquiry against your credit report. Most of the lenders I know [and I will list two of my favorites for you here in a second] will execute a Soft Credit Inquiry to determine credit worthiness. This Soft Inquiry does not impact or affect your credit score - should such be a matter of concern to you.
Something else I've noticed is that people don't seem to understand shopping for lender is very much like shopping for an automobile. The overall requirements of any one particular lender (or dealership) can be totally different from a fellow lender's (or dealership's).
Just because one says "No" does not mean they will all will say "No". And even if the first lender tells you "Yes"... I would still encourage you to apply to more than one who does Soft Inquiries. Compare apples to oranges to find the best fit for your home purchasing needs by reviewing interest rates, terms of repayment, mutual rights and remedies, and so on and so forth.
Only after you have secured lender approval (which may be conditional based on various factors) and they have given you the green light to shop up to the amount of $X.00 do you move on to Step 3.
STEP 3 - FIND YOUR REALTOR
The vast majority of the population feels the path to homeownership is "finding the home and then buying it" - through a Real Estate agent. This is NOT the case.
Selecting an agent to help navigate you through the complexities of The Offer and Purchase process is the absolute LAST step to be taken.
What Happens When You Do It Backwards:
You shop for, and find, that PERFECT place and then reach out to an an agent or contact the website that is listing that property. The agent involved determines you haven't spoken with a lender and may now recommend one to get the process started.
Just to let you know... most of us agents are unable to do much of anything at this point without your having secured a lender first. There are some agents out there who are also qualified mortgage consultants but I, personally, haven't met one yet so I don't know how they work.
At this point the agent may also put you on an e-mailer list that scouts the MLS's and regularly sends you properties "matching" the ideal home that you originally asked about.
Because "that home may not still be there when you are in a position to buy". That's agent speak for... this is gonna take a bit of second and that property will most likely have sold by the time we get you lender approved.
I can't emphasize enough the fact that we agents don't "GET" you that house - the lender does that by providing the loan to pay for it. Us agents help you shop for a home and protect your best interests when buying it.
We deal with the butt-ton of technical paperwork coming/going from every which-a-way at all hours of the day, manage the contract negotiations, handle scheduling and execution of services by professional providers involved in the transaction, are your personal defacto counselor/moral support during the stress mess of buying, and more. None of which can be done until a lender gives us the green light to begin.
Well, most folks aren't mentally or emotionally prepared to reach out to said lender on the fly like this. Fears of "what that lender will see" or personal misgivings about "not qualifying" due to credit condition can halt the whole process at this point. Perhaps leaving you with negative emotions about the whole experience thus far.
But, for the sake of argument let's say you muster up the courage to reach out to a lender anyway. You'll discover that they are people too - most with a generous heart and helpful personality.
You might even discover that your credit was nowhere near as bad as you had built it up in your mind to be. Or, the lender may come back with a little homework for you. Take care of This and That and we'll be able to get you into a home.
The "whammy" of doing it in reverse order like this is that the lender will also share that you will need X thousands of dollars as a down payment to make that happen. Talk about a case of sticker shock!
Obviously, this can be discouraging and disheartening. To overcome one obstacle only run smack dab into another you weren't prepared to tackle? It may start to feel like you are looking up the side of a mountain, the goal of owning a home clearly in your line of sight, but you lack the climbing equipment (not to mention the funds to acquire such) to reach the summit.
It may feel like "that's it, game over" at this point. I know because I, too, approached home ownership azz-backwards like this before I became a Realtor. Felt like someone had ripped a bit of my soul away and left me frustrated and crying inside my heart and mind.
DON'T give up on yourself or your dream of home ownership. Back up, regroup, and attack that goal again. This time, in the correct sequence of events.
"You May Have To Fight A Battle More Than Once To Win It" - Margaret Thatcher
Do this and I promise you that there will be no better feeling in the world than those you experience at the closing table when you are finally handed the keys to your very own home.
Disclaimer: Opinion Editorial for educational and/or informational purposes. Content presented is deemed accurate and/or reliable at the time of authorship. Any errors or omissions present in material(s) are unintentional. You are encouraged to execute your own research.
