Home buying process...

Factual Questions
1

OK, so now the Steinhardts are going home hunting! This is the first time for both of us and the process seems a bit daunting. I’m hoping that I can count on the Doper community to help me out.

We’ve figured out how much house we can afford. Specifically, we figured out what the maximum mortgage payment we can afford is, plugged it into a 30-year loan calculation at a rate that we think we’ll get and got a figure on the largest possible loan we can afford. I understand that there are some variables in here. I know that we may not get the rate I’m hoping for, forcing us to lower the amount of house we can afford. I know that I may get a lower rate with an ARM instead of a fixed-rate mortgage, but with rates as they are now, I don’t really see them going much lower and I’d like to lock in the rates as they are.

We’ve looked at a few (three, really) homes but none of them appealed to us. In effect, we’re viewing those as “dry runs” for when we find a house we do like. Those viewings were done simply by looking in the classifieds and calling the numbers listed. However, is this the best way to handle the matter?

For example, what exactly is a broker? What does s/he do? Should I have one? If so, do I pay for him/her, or does the seller do that? What’s the difference between a broker and a real-estate agent? Should I have one of them (I don’t think so, but please confirm.)? Can I go about this without a broker? Or is doing so being PW&PF?

I wouldn’t consider going through the closing without a lawyer. I know that there are simply too many things that can go wrong and that I’d like a little protection when the big day comes.

But before we get to the closing, what should we be looking for? We have an idea of what we want in terms of bedrooms, layout, neighborhood, etc. We also know, of course, that we may not get everything we want and may have to settle for a bit less (especially since our budget is not all that large).

How does one go about getting a mortgage? Do I just walk into the bank and say "Here I am, open the vaults? :slight_smile: Aside from knowing what’s on my credit report and the current rates, what else should I know going in to the bank?

Am I putting the cart before the horse? Should I have the mortgate first then go looking for the house? That doesn’t sound right, but I just want to make sure. I don’t want to find the right house but then lose the house to someone else who started the mortgate process two days before me.

Obviously, I should have the house inspected before plopping down a suitcase full of cash. However, I don’t know any inspectors personally. I’d be leery of using one recommended by the seller (can you say ‘conflict of interest?’), but I don’t want to simply pick one at random from the phone book. What if the inspection turns up problems that we can live with but that need fixing? Do we ask the seller to fix it, or lower the price to accomodate the needed repairs?

I’m probably, out of sheer ignorance, probably missing some important questions. I’ve started doing some reading on the subject (I have the ubiquitous “Dummies” book on the subject) but I can use all the help I can get.

Thank you all for your time.

Zev Steinhardt

2

zev,

Go to http://www.realtor.com and click on the link called Real Estate 101. A lot of the questions you are asking are answered there. You can also use that site to browse listings in your area from the comfort of your own home or office.

3

When calculating how much you can afford, don’t forget to include taxes, homeowner’s insurance, and mortgage insurance (if you’ re not putting at least 20% down). That will vary depending on the location of the house. In my case, it added about $200 to our monthly payment. Don’t get an ARM unless you expect to move before the fixed period is up. Interest rates aren’t going to get much better than they are now. Getting an ARM just means you’re going to give more money to the bank eventually than you would have to with a fixed rate.

Get yourself a real estate agent to work as a buyer’s agent, where their responsibility is to you and not the seller. Have them arrange all the viewings.

An agent works for a broker. The broker is typically the person who own the real estate agency and agents work under the broker. Interview several agents and select the one you feel can help you best. Get references.

If you have an agent working as a buyer’s agent, a lawyer may not be needed. That’s up to you. If you don’t, definitely have a lawyer look over everything.

Get a pretty firm idea of exactly what you have to have, what you’d like to have, and how much you’re willing to spend on the “likes”. The difference between needs and wants can creep up on you a little bit at a time. Suddenly, you find yourself looking at more expensive houses than you ever planned.

Getting pre-approved for the mortgage makes things easier, and can help when you put an offer in on a house. If you put in an offer at the same time as someone else and you’re pre=approved and their not, your offer can look that much better to the seller when they know your financing is already lined up. Plus, what you think you can afford and what the banks think you can afford may be two different things. If you have a bank you deal with that has good mortgage rates, talk to them. Otherwise, find a good mortgage broker.

Your buyer’s agent can help with all of the details as far as finding an inspector, letting you know what to expect at closing, and making sure everything about the transaction goes smoothly. If something goes wrong, their first on your list for complaints, so, if you’ve got a good agent, they’re going to do everything the can to make sure you have nothing to complain about.

4

Over your lunch hour, just walk into a bank and say “I’d like to talk to someone about getting a mortgage”. Then a mortgage guy/gal will ask a few questions about how much you make, your financial obligations, etc, and then while you sit there he will crunch the numbers and say, "It looks like right now, with a 30-year fixed rate mortgage at 5.25%, you can afford a house costing $XXX,XXX, and your monthly payments will be about $Y,YYY per month. At this point you are pre-qualified. It’s just an informal meeting. This gives you more knowledge as you scan the For Sale ads.

Prior to putting in an offer, you want to get pre-approved. Your lender will require several documents to prove your income and assets, and will then do a credit check on you. This will put you in a much stronger position when you make an offer on a house.

Definitely get a home inspection. When you give the offer, make sure to state that the offer is contingent on a satisfactory home inspection.

5

I just went through this for the first time, so I can tell you the things which surprised me or I thought were interesting. Experts can correct me if my understanding of anything that went on is incorrect – there was certainly a lot going on, and I’m sure I missed a few things.

The loan officer will quote you a price for the mortgage by telling you the interest rate and the origination fee, which is usually (always?) expressed in percentage points. You’ll get an array of choices based on what type of loan you want (length and whether or not the rate is fixed, for example). At some point, you’ll decide that somebody’s deal is good, and you’ll want to take it. The officer will then double check the rate, possibly adjusting it for small fluctuations (mine went down by half a point when he did this), then ask you if you want to “lock” the rate in.

Now, I’m not exactly sure what happens when you “lock” the rate, but I was not led to believe that I was committed to a loan at this point (and indeed I was not). There was still an approval process to go through, and my attitude was that as long as they haven’t approved me, I haven’t signed anything, and I’m under no obligation. It has since been explained to me that this is a slightly jerky attitude. You’re not supposed to lock a rate in and then continue to shop for a mortgage, because once you lock, the mortgage company is doing a bunch of good-faith work on your behalf. So what I did was to see a slightly better interest rate with a much smaller origination fee, and I mentioned it to my loan officer. He seemed somewhat annoyed, and told me that he’d meet me halfway on both, but that’s not really something you do once you lock. I sensed that I had committed a faux pas and asked a friend about it, who confirmed it.

Above and beyond that, the origination fee plus the down payment is far from the total of your up-front costs. There are a bunch of small fees for various things, plus title insurance, plus I had to pay for some number of months of property taxes and homeowners insurance in advance.

Another thing that was news to me was that I get to make an offer on the place pending inspection, which means that I pay a guy $350 to come out to the house with me and we poke around in the attic spaces and basement and check for termites and bad wiring and water damage and all manner of awfulness that could be lurking. If you’re not happy with the inspection, you can get out of the deal or make amendments to the deal (e.g. “seller agrees to pay for a new roof”). I’m not sure who is the arbiter of what constitutes a “failed” inspection. If the inspector says there’s something major wrong with the house, it fails, but I’m not sure if you could reject the inspection on the grounds that the attic was dusty or something like that.

Another interesting point which some first-timers don’t realize is that the bank might say you’re trustworthy enough to borrow $200,000 from them, but then they’ll only actually loan it to you if you’re buying a house that’s worth $250,000. In other words, you can’t get approved for a $200,000 loan and then go buy a $100,000 house and pocket the difference. They’ll generally loan you up to 80% of the appraised value of the house*, which they determine by hiring an appraiser (and tacking the bill onto your closing costs, naturally). This means that you can be approved for a million dollar loan, but if you have $50k cash and you’re buying a house for $250k, you better hope it appraises for at least $250k. If it appraises for $240k, the bank will only loan you $192k, so you have to come up with an extra $8k in down payment (or don’t buy that house, which makes more sense, considering an appraiser just offered their opinion that it’s not worth as much as you’re paying for it). The offer you make is also generally “pending financing”, which I believe also gives you an opportunity to renegotiate the price if financing fails due to the appraisal coming in low.

*I understand there are special “first time buyer” loans where you can put less than 20% down, but I’m not sure why the lender is willing to expose themselves to more risk. At any rate, I wanted to make as big a down payment as possible, because I’m debt-averse.

I didn’t use a lawyer; just a buyer’s agent. And I have to say that I definitely see the conflict of interests here. My buyer’s agent’s job is to help me find a house that’s worth the money, negotiate the price, and cross the t’s and dot the i’s on all the paperwork I didn’t even realize I had to fill out. Now, I did lots of research and found a candidate house before I ever picked my buyer’s agent, and I picked her based on a recommendation. After it all was done, I have to question whether or not I made a good choice on the agent, because at times, I was definitely wondering whether she had any incentive at all to help me. She knew I was interested in buying this house, and if it went through, she stood to make $10,000 for a few days’ work. So during the inspection, she downplayed things which were wrong with the house and gushed about trivial nice things. The motivation was clear: if I didn’t like the house, she was going to have to do a bunch more work to make her $10k. The inspection turned up that the house needed a new roof, and she tried to talk me out of negotiating the price based on that. I said I wanted to push it, so she managed to negotiate a measly $2000 with them. Honestly, I was happy with the initial offer, so it didn’t bother me too much, but it struck me that she didn’t even try, and what’s more, had no incentive to. The more work she did negotiating the price down, the smaller her commission would be. Sure, this is a very small disincentive to help me out, but it’s still a disincentive. Then once the deal was done, she became a pain in the butt about getting me the keys, flaking out on one meeting and then having the gall to ask me to drive across town and “meet her somewhere” to get them, rather than her bringing them to my office like she originally agreed to. And it’s a lot smaller, but: no damn gift. Isn’t a gift customary, especially when you’ve done so little to earn your $10k?

So that last little rant bears this message: I’m not sure how to pick a good buyer’s agent, but try to figure it out before you get too far into the process. Once I got to a certain point, I wanted to ditch mine, but was worried that while I was screwing around finding a new one, my house would be sold to someone else.

6

FHA loans can be 100% loans, although I don’t know if they’re just for part time buyers or anyone, nor if there’s a limit.

If you’re lucky enough (well, lucky’s not really the right word) to get a VA loan, you can do 102% financing up to no limit at all, although most banks will limit you to $240,000 currently (your guarantee in lieu of down payment is 25% of $240,000).

Everything else is the same, though.

7

Because you end up paying an additional premium for mortgage insurance (either through the government or a third-party insurance company, depending on the loan) that guarantees the lender will get their money back if you default.

It sounds like you had a flaky buyer’s agent. Maybe she genuinely thought that if you went much lower than the $2000, the seller would refuse your offer and you’d lose out on a house you obviously wanted. If so, she should have made that clear to you.

One thing to remember is that you are the one who ultimately has to show up at closing and sign all the papers. You’re the one in control. If an agent isn’t doing what you think should be done, it might be helpful to remind the agent that a smaller commission is better than no commission. That doesn’t mean you should expect to be able to force the agent into accepting an unreasonable percentage for the commission, but once that percentage is agreed upon, the agent shouldn’t be allowed to try to manipulate your offer to put a few extra bucks in their pocket.

8

The reason for this, of course, is that a mortgage is a loan with real estate as collateral. They aren’t about to loan you $200,000 at a nice (relatively) low interest rate with $100,000 of real estate in collateral. If you want more cash, you can take out the rest the normal way and pay more interest. (I’m not really directing this necessarily at you, just as further edification for the teemings)

** I wish more buyers out there had this attitude. It’s not like us appraisers are trying to screw people, we’re just paid to tell people how much a property’s worth, as an unbiased third party that has no financial interest in the sale one way or the other. Many of us, in addition, sort of know a thing or two about property values…

9

When we bought our first house we lived in Pittsburgh and were buying in Baltimore. We found a real estate agent and she took us around. Several things of note occured. First, she began by showing us houses higher than the price range we wanted. This went on about two weeks. Then she began showing us mediocre houses in mediocre locations. Generally a sellers listing is for 6 months, and I am sure she was showing us all the stuff that didn’t sell fast and was closing in on the 6 month mark. She clearly thought we would buy quickly because we were from out of town. Finally, on the seventh weekend we drove down and monopolized her time we saw three houses we were willing to bid on. Moral is, take your time. There are many secondary motivations working and eventually you will find what you want for what you want to pay.

Also, the agent will say things like “I can’t give them that offer, it is insulting.” Offer what you think the house is worth and make them tender the offer. You really never know what is going on and what price they will take.

I don’t think that buyers agents really give you much added value to just a traditional agent. While officially working for the seller, the agent is really working for themselves. They want to make a sale and collect the commision and will do whatever they need to to do so.

10

You’re in NY so houses are expensive. I would try to negotiate a flat commission rather than paying a percentage. It galls me when the agent puts only a few hours in and makes thousands. In CA we have title companies, which handle all the legal stuff and the closing, but in NY you have to pay an attorney to do a title search, etc. I didn’t have an attorney when I bought my first house in NY because I couldn’t afford one and I also knew the bank would have one to make sure their collateral checked out and everything was legal. In buying my last house, the realtor was concerned when I said I was going to have it inspected. It seems I was the first one in their experience (very small town); he told me they were going to remove the “out” in the purchase contract if the house failed to pass inspection in future contracts. So be sure it’s in there. Good luck and I hope you find the perfect house.