I have been thinking about buying a house, and have absolutely NO idea how to go about it. The closest I’ve gotten is looking at real estate ads.
Here are the facts: I can afford $300 a month for the payment. I have better than average credit. I have $25,000 to put down. I’m thinking about a 15-20 year loan.
So, here are my questions.
When I do decide to go house-hunting, what is my price range? And how much will it change depending on if it’s a 15 or 20 year loan? I see ads for houses that are $49,900. Ok, I’m putting about half of that down, so yes, that’s feasible. But look! Here is a house for $59,900 and I can have a 2 car detached garage! No, wait, for $64,900 I can have a garage, AND 4 acres of land! I know they say “dream big,” but how big is too big? (Because, would you just look at that one for what I’m quite sure is way too much money?!)
Should I just get in the car and go to a realtor? Should I first go talk to a few banks to see what kind of loan I can get?
Go see a realtor to see what your money will buy. Then go talk to a loan officer at a bank about what they will loan you or pre-approve you for. Or the other way around.
For example, for a $50k house with $25k down and a 20 year loan at 5%, your monthly payment would be $165, excluding property tax. (You won’t need PMI if you’re putting 20% or more down.) A $70k house would have a payment of $297.
I recommend looking at online real estate tools like Redfin, Movoto, Trulia to see what is available in your area and what recent houses have sold for. Once you have a feel for what you want and how much you want to pay, talk to a realtor. It also couldn’t hurt to get pre-approved for a mortgage to speed things up if you find something you want to buy – try your local credit union or penfed.org (I used them for our first mortgage and they were quite reasonable). That will give you a better idea of how much you can borrow and at what interest rate. Get a fixed rate mortgage no matter what: interest rates are insanely low right now.
IF you can find a good realtor who you trust, they can be a great help during this process. But you have to find a good one that you trust, which can be hard. Ask friends for recommendations, or talk to several before you choose. It’s a huge decision, so take your time. All the above advice is good as well, but for us personally (just bought a house like 2 months ago) our realtor, who was wonderful, was our greatest help.
And do not delay. Rates are on the uptick right now, from the 3’s, heading into the 4’s.
Not only could it not hurt to get pre-approved, I highly recommend it. If you are pre-approved, you can make an offer immediately without a financing contingency dragging you down. If not, while you are dickin’ around with a bank for 60 days, someone else may buy the house that you had your heart set on. This is doubly true if you are looking for a foreclosure; owners of foreclosed homes (banks) usually won’t accept a financing contingency anyway and if the price is right, buyers will be lining up around the block. You’ll be last in line and late to the party.
The laws in your state may vary, but in mine, an agent is allowed to give opinions and advice about things like price and value only if he/she is your agent (a Buyer’s Agent), so I suggest you sign a BA with someone you like to work with. It’ll give you a leg up on those who don’t.
If you are unsure about working with a particular agent, sign a BA for only a short time like 60 days. It can always be renewed.
Loan officer FIRST. (Either one can tell you what you can afford based on formulas and tables.)
I feel strongly about this. If someone comes into my office and wants to see properties but they aren’t pre-approved or don’t have cash, they aren’t serious buyers and it’s a waste of time for both of us. I give them a list of local lending institutions and herd them that way.
First of all - when you own a house, you need more than just the mortgage payment. Beside utilities, which will be higher than you are paying now, you need to reserve money for the inevitable repairs, and also money for initial move in and fix up expenses.
Where do you live? I bought a house in Louisiana for $40K 35 years ago. It was very nice, but I’m thinking that a house for that price now in much of the country is not so nice. Check the ads for open houses, usually held on Sunday, and/or drive around looking for house with for sale signs and either look them up on-line or take the information page. That will get you an idea of what you can get for the money.
I think there are lots of mortgage calculators out there. Don’t forget real estate taxes!
Then, if it still seems feasible, interview a couple of realtors to find one you like. Make a list of ones on signs for houses near where you want to buy. If they are listing a lot of houses, they are probably successful. They’ll have a much better idea of what you can afford. The realtor is the seller’s agent, so you are not tied to one, IIRC.
Where I live the market is very hot, and houses for sale are getting multiple offers above the listing price. And selling very quickly. Look for news stories about what the market is in your area. Set a budget and don’t violate it, even if your realtor tells you you can get your house for “only” an extra $5K.
With that much cash to put down you shouldn’t have trouble getting a loan, and your realtor can tell you about pre-qualification at the bank. The last one we bought was a long time ago!
Where I live home prices are strongly connected to the quality of the local high school. You might want to check on this, especially if you have or are planning to have kids.
Once you start looking we can give you more advice on what to look out for.
OP, where do you live? Where you live makes a great deal of difference about how nice a house that kind of money will buy. I live somewhere that 50k won’t buy an actual house that isn’t basically condemned (ok 2 bedroom houses start at 150k here) but I’m hoping you live somewhere with a much lower cost of living.
I am curious where these cheap (well basically free in my mind) houses are. That makes a big difference. Just because the house is very cheap doesn’t mean that the total cost of ownership will be as well. It is the latter that you need to be concerned about rather than the mortgage payment when looking at properties in that price range. You need to learn about property tax rates at both the state and local level. There is a saying that you can’t ever truly own land in the U.S. You pay tax bills for it forever even after the mortgage is paid off and the state will take it from you if you don’t. Those rates vary wildly among different areas however and it could be based on land value or something else like how it is zoned and how many acres you have. You can ask to see copies of previous tax bills when you look at a given property.
No matter how cheap the house is, $300 a month isn’t anywhere close total cost of ownership. You have to look at energy efficiency. Average utility payments for most houses in many parts of the country are higher than that especially if you have poor insulation and need to either cool it during the summer or heat it in the winter (that is almost everywhere in the U.S.). You also have repairs and upgrades to worry about. Those don’t vary as much by area. A new toilet or dishwasher costs about the same in all areas of the country if you put it in yourself. Be super careful about upcoming big repairs however. A faulty roof, septic system, major electrical failure, furnace failure, or central air failure can cost thousands to tens of thousands of dollars to replace if they fail completely and you really don’t have a choice at that point.
Moving is expensive no matter how you do it once you have the utilities turned on and add up all the small things that you need that a new house basically requires. That is typically several thousand dollars at minumum on its own even if you are cheap.
I don’t want to dissuade you from home ownership but you are looking at the extreme low end of the market and there is a reason why those houses are so cheap. If you decide to go through with one, interest rates are so low that I would finance more than you are planning to as long as you can get a fixed 30 year mortgage (15 year mortgages offer slightly better rates but they aren’t that big right now and you can accelerate the payment schedule for a 30 year mortgage if you want at any time just by making extra principal payments). I wouldn’t put all $25,000 down on such a house unless you have more money than that on hand. You will need at least $10,000 and possibly more in free cash to cover moving expenses and any major repairs that you may need to do and maintain about that size of an emergency fund indefinitely.
Where the hell can you buy a house on four acres for $65k?!? Anyway, if it’s just you, I suggest a small lot. Mowing is harder work than it looks.
Budget for instant repairs. The home inspector will list certain things as “marginal”, as in “they are scheduled to be replaced and might not last long.” Expect at least one of those things to fail more or less immediately.
Ask the owners to see their last sewer, water and electricity bills. Houses consume much more utilities than apartments.
How did you come up with the $300 a month figure? Even a really conservative estimate of using 20% of your income for a mortgage payment still puts you at about the poverty line for a single person and below it for more than one person. If your income really is that low, the situation you presented still doesn’t make a lot of financial sense unless there are exceptional circumstances that you didn’t mention.
You seem wise enough and have free cash so it would be much better to use the money in some type of education or relocation that would give you much better prospects for the future. I don’t know your financial situation but the numbers you gave are very strange. People that have $25,000 to put down for a house can typically afford a mortgage payment much more than $300 a month unless there other factors are at play and those would a consideration too. You shouldn’t buy more house than you really can afford (that is how the country ended up in a huge mess) but you shouldn’t go the opposite way and live in a rundown shack when you could do better by using the money to do something better in the long-term.
Something to consider. If you limit the amount you mortgage to an amount that you can pay 1% extra monthly, you will have your house paid off within 7 years. At that point, the housing market will (maybe) be higher and you can sell that house and have the entire amount available as cash against a larger house, that you can do the same thing again (pay the 1% extra/mo, be paid off in 7 years). Keep doing this until you find that home that you want to stay in forever and you’ll be mortgage free pretty quickly.
That would sure beat paying on a crappy little home for the next 20 years. You could do almost three upgrades in that same time and pay SIGNIFICANTLY less in interest payments.
Example:
House for sale for $50k, you put down $25k and mortgage $25k. Each month you would pay an extra $250 against the principle of the mortgage.
For those who can’t believe that a house on 4 acres w/garage can go for $65k… they sell for those rates in my area.
Fixer-up / complete overhaul houses on small lots start around $8k.
I got my loan approval before I started looking for a house. That way I wouldn’t fall in love with something and find out I couldn’t afford it. I’d strongly advise that.
I found my realtor by just looking at houses on my own. I would find the houses online or by driving around the area I wanted to live in and then set up showings with the seller’s agent. I’d planned to get my own agent when I found the right place, just to help me negotiate and handle all the legal work. But then I met a really nice agent I felt comfortable with and I asked him if he would work for me. I still found the houses I wanted to see but had him set up the showings. Every time I saw a house, I’d bring him a list of two or three more. So that’s one way to meet a wide variety of agents and get a feel for what you want in one. Open houses are good for that, too.
I was very intimidated when I decided to buy a house after years of renting. I bought a book for first time home buyers and just read through it chapter by chapter as I went through the process. It’s much easier when you understand the steps you have to take and what they are all about. Good luck!
I can’t remember where I read it (I think Suze Orman) but it made sense to me to make sure that you can afford your mortgage plus 40% more per month to make sure you budget enough for repairs, upgrades, taxes, and the like.
Too many people figure out how much they can afford a month and then get a mortgage right up to that amount so there is no wiggle room. I had a friend who thought because she could afford $1200 a month in rent that meant she could handle a $1200 a month mortgage. Soon she was like GOB Bluth… “I’ve made a huge mistake!”
Just one warning about this. I don’t know about the OP’s location, but in California a copy of the current tax bill means nothing. Thanks to Prop 13 tax rates for existing owners go up very slightly year over year, no matter how the house value changes, and get reset based on the new value after a sale or major change to the structure. Someone buying my house today would pay about twice what I do - someone buying my neighbor’s house would pay 5X or more. This obviously depends strongly on location.
I think the first two steps (as have been noted) are getting your pre-approval to find out how much mortgage you qualify for, and getting to know your real estate market in your area. Start looking at all the MLS listings, start going to open houses, start driving around and looking at areas where you think you’d like to live and make note of where services are, where major highways are, where bus routes are, etc.
$25,000 is a great down payment; $300 per month seems kind of light for a maximum mortgage payment. If you’re looking for a condo, that might work. In that case, though, you’d be looking at a condo fee on top of your mortgage payment. We really do need information on where you live and what you’re thinking of buying to give you more specific advice.
So, uh, how do you get pre-approval? Can you just walk in to any bank? Is the process pretty much the same whoever you talk to?
I’m planning to be looking in the next year or so. I’ll have very little to put down, and property prices are crazy around here. But I will be needing an extra bedroom, and it will be cheaper for us to buy a two bedroom than rent one.
In DC, $65k will get you, no joke, a very nice parking spot.
Ask around to see what banks people you know use for their mortgages and whether they like them. And/or mortgage brokers. Then call around to those banks and brokers, and your bank, and whoever else you want and tell them you’re looking for pre-approval. They’ll have you fax or email over some documents so they can set up a quote for you. Then you might actually get to be the subject of a bidding war while they try to sell you a mortgage. They’ll sell you a max amount and a rate. Choose the one you like best and that’s your pre-approval.
Do note that you don’t have to (or want to) spend the max pre-approval amount. You also don’t have to go with the lowest rate or whatever. The rates they quote will probably be locked in for 30 days.
Note that this whole “bidding war” experience was what I went through in 2005, with really good credit (although a fairly low income). It may be different now since the bubble burst but as far as I know, contacting a bunch of different places to get your pre-approval is still the way to go. There just might not be a bidding war.
Good note; banks (as we’ve all noticed) will give you more money for a mortgage than might be good for you. You need to figure out for yourself what your upper limit is; don’t let the banks tell you that.
There will be, as long as you have decent credit. Our house (technically, my wife’s house) was refinanced last year and the second we contacted the first lender we started getting inundated with phone calls and preapproval letters.
So that’s one way to meet a wide variety of agents and get a feel for what you want in one. Open houses are good for that, too.