Buying a house was daunting since I didn’t really know anything about it, so I’ll try to communicate some of the process here, in my longest blog post ever. Between getting pre-approval, to selecting an agent, visiting houses, choosing a lender, and getting through escrow, there’s a lot to learn.
Before You Do Anything
Figure out what kind of house you want, make lists, draw on a map where you’re willing to live, figure out how much you can afford. There are tools online for all of this. Obviously I recommend Zillow for pretty much all of your needs. The generally accepted practice is that you can spend up to 27% of your gross income on housing.
Resources:
– Saved Search
– How Much Can I Afford Calculator
Get Pre-approved for a Mortgage
Pre-approval shows the seller that you’re financially able to buy, and serious. That’s it. If you aren’t pre-approved and you find a house that is going fast, you probably won’t be able to get in your offer in on time. Even if you place an offer, they might not take you seriously. To a seller, the pre-approval letter assures them that they won’t waste 30 days waiting for you to get your loan together and then have it fail.
You’ll need a ton of paperwork for the actual loan application, but pre-approval is much lighter. Ask “what is the bare minimum you need for the pre-approval?” and you might find they asked for more info than they actually needed.
Once you’re pre-approved, you should get a few pre-approval letters for different price points, which lets you make an offer in a hurry. If your lender thinks he can turn around a pre-approval letter on the day of your offer, that works too. If you make an offer for $367,339, you want the letter to match exactly, which means the seller won’t say “I see you’re approved for way more, let’s negotiate.”
It doesn’t matter who pre-approves you. You can switch lenders later at no charge. Ask a friend who they used, or go fill out a pre-approval form on the internet.
Pick out an Agent
When you’re buying a house, the services of a real estate agent are free. Seriously, you don’t pay them a cent. The seller pays about 6% of the sales price to the agents involved – 3% to the listing agent, and 3% to the buyer’s agent.
I highly recommend interviewing agents. It is pretty low-key, and they are open to it. I posted “I need a real estate agent!” on Facebook and got a ton of recommendations, so we interviewed three that we felt good about, and picked one of them. We met them for coffee at Grateful Bread, talked for an hour about what they do, how they work. Actually they asked us a ton of questions too.
Find someone you won’t mind driving all over the place with, because you’ll be spending a lot of time together.
Find a Home to Buy
Take your sweet time picking out a place to buy. There are always more and more houses coming on the market, and if you miss out on one, you’ll find another, better one shortly.
On Zillow (and other websites too) you can set filters like price, beds, baths and region boundaries (you can draw a squiggly line around the area where you’d like to move) and then get a daily email with new listings that come on the market matching your requirements. This was awesome for us. Set up a few different ones if it makes sense.
Visit a lot of houses. If you only shop online, waiting till you see the perfect house with perfect photos, you’ll miss something good. Also, check out some open houses. It’s fun!
Placing an Offer
Once you find a house that you’re serious about, you’ have to make a move. This involves a lot of paperwork, but that’s what your agent is for. Putting together the offer took about an hour, maybe an hour and half.
You’ll have to decide on things like offer price and other basics, but there are lots of ways to make your offer more competitive if you’re up against a lot of others. You can pay cash (that would be nice) or waive the inspection, or put more earnest money up front. (Earnest money is what you can’t get back if you “back out for no reason.”)
After you place an offer, you sit back and wait until you hear back…
Getting a Mortgage
Woohoo, so your offer was accepted, and now you need a bunch of money. Time to apply for a loan.
The first thing you should do if your offer is accepted, is do a price comparison on one of the many mortgage comparison sites (google “mortgage rates”). I highly recommend getting Good Faith Estimates from more than one lender. You can get quotes all over the internet but make sure you can find real reviews of the lender and make sure the lender handles purchase loans. (ZMM has reviews you can filter by loan type.) In our case, we worked with a super nice broker named Jeff Brown to get the pre-approval, but it turned out he couldn’t compete with the price of one of the other brokers that I found on ZMM.
In the end, it is critical that you get all of the lenders to pull you the GFE on the same day, and with the same criteria. Let your lenders know that you’ll be getting GFEs from other lenders, and give them a day or two of notice, so that they can all deliver at the same time. For example, as of this writing, you could ask for a $300,000 loan at 3.375%, 3.5%, and 3.625%, but make sure you get an apples to apples comparison from each lender, on the same day. I would ask them to do it in the morning so that you can review and lock it in. I made the mistake of not doing this the first time, then Friday ended and I had to wait until the weekend was over to do it again. Rates went up and it cost a little bit more.
Insider tip: fill out the mortgage application form with the same names that you commonly sign on your checks. You’ll spend about an hour at escrow signing whatever name you put down on the application. I made the mistake of putting my middle name on there, so I had to learn how to sign my middle name on the fly. 40 or 50 times. Not fun.
Bankers vs Brokers vs Lenders
The lender is the person or entity that has the actual money to loan. They usually work through a broker or a banker. You’re not likely to get a better deal by trying to get rid of the middle man. Lenders don’t have time to work directly with you.
A banker is working on behalf of a collection of lenders, and has quite a lot of authority to approve loans. If you need to close a deal in a couple of weeks, it’s likely that a banker can hook you up. The downside is that you might not get quite as low of a rate, but it will be close.
A broker is strictly a middle man. Brokers could work with tons and tons of lenders, and may be willing to take on clients from all over the country. We used a broker (Petros Christophilis) and were totally pleased.
Loan Costs – Evaluating Mortgages
Here are the costs you care about.
The rest do not matter, because they’re just an estimate and they will end up being identical no matter which lender you pick.
Origination fees – what the lender is going to charge you as a fee. This is straight cash revenue for them. Box A + Line 3.
“Your Credit or Charge for the specific interest rate chosen – Depending on the interest rate you’re comparing, you will see a credit or a charge here. This is where you can “buy points” off of your interest rate. If you sacrifice $5,000 here, you might save .25% on your rate.
Required Services that we select” (section 3 under “Your Charges for all other Settlement Services”) – 3rd party fees that they pass on to you, like appraisal and credit report. They can charge whatever they want for this.
You can find breakeven calculators to check how much you can save over 30 years, if you pay more up front for a lower interest rate. If you can’t picture yourself living there for more than 10 years, it’s unlikely you want to buy any points.
There are a few items on the GFE that you don’t care about.
These items are either flat fees that your lender has no control over (like title insurance) or they are items where you put a deposit down, and the money is actually still yours.
– Taxes: the government is going to charge you the same amount no matter what.
– Home Insurance: you get to pick an insurance provider, so it doesn’t matter what it says on the GFE
– Title Insurance: this will just be an estimate, and no matter who you pick, it will be the same.
– Recording Charges: you’ll probably get charged for filing with the county. Flat fee, pay no attention.
– Transfer Taxes: also a flat fee from the government.
– Initial Deposit for Escrow Account: this is just an estimate and brokers have no influence over the real deposit.
– Daily Interest Charges: this is just a guess at what will be required. Let’s say you close on the 15th. Escrow would require you to pay for 15 days of interest for that month. You pay the first month up front and after that in arrears (after the month ends.)
Other Stuff to Know
It’s likely that your loan will be sold to another lender or Fannie or Freddy, so don’t get hung up on that. It doesn’t affect you and they keep track of it.
Your broker/banker will always be available to help with random stuff. They want your business in the future.
On a $400,000 loan, saving 0.25% on your interest rate comes out to about $22,000. $61 doesn’t seem like much when you look at the monthly payment, but try multiplying it by 360.
Make sure you verify whether the loan is fixed rate and whether there are prepayment penalties (which you don’t want).
I Picked a Loan and a Lender, Now What?
Your lender gets down to business. As part of your offer on the house, you set a closing date, which you need to beat or there’s a tiny risk that the seller will put the house back on the market and keep your earnest money. (Most sellers won’t do this unless they give up on your ability to get a loan. They’ve come too far, and you’re probably only days away.) Our offer said that we’d close on the 31st of January, about 40 days after our offer. That was unusually long to compensate for the glut of holidays that were going to take place over Christmas and New Year.
You’ll need tons and tons of financial information. Even when you give them everything, they’ll ask for more. Plan to turn over all of your monthly statements from all of your accounts for the previous 2-3 months. You may need to explain in writing some of the entries from your checking account if they can’t figure out who you’re paying or who paid you. You’ll need to show multiple years of tax documents, and explanations of all debt. Get ready, it is time consuming.
Pro Tip: use something like Google Drive or Dropbox to keep track of all of your files, and name them in detail, so you can update or add to your stuff. If you keep everything scanned and digital, it will speed up the process when you’re at work and the broker needs you to update something random.
Escrow
After the lender deposits your funds to escrow, the escrow agent will have you and any co-signers come in for a meeting. You’ll spend about an hour signing copious amounts of paperwork. Most of it will be familiar, the general gist of which is that you’re going to pay the bank back, and if you don’t, they get the property.
After you’re done with that you basically just wait.
Getting the Keys
Assuming you have a real estate agent, the seller’s agent gives your agent the keys, who then passes them to you once the county has recorded the transaction. The county recording process actually only takes a few hours from start to finish, so you might not even know it was happening. It’s illegal for the agent to give the keys to you before the filing confirmation is submitted.
That’s About It!
Now you just move in and make it your home! Please write in the comments below about your experience. We’d love to know if there’s anything we can add to the guide, learn about your new house, and celebrate with you via the internet.
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