My Top 3: Tips for Buying a House

9/3/2017

Buying a house is one of the largest financial decisions that most of us will ever make. I have bought two houses in my life. The first, I made many, many mistakes that I’ll share here for your amusement and general edification. The second, after having more experience in adulting and all things personal finance, I did in a much more planful and intentional way.

Through these two very different experiences, here are my top three tips for buying a:

Assess your housing wants and needs
Work with a buyer’s realtor
Learn about the financial implications

A Note on the Use of Information in this Article

Here is my disclaimer regarding the content in this article. (We all know there has to be one of these just to set the record straight.) The ideas included are for educational purposes only, and should not be construed as financial advice. Concepts covered here are overly simplified examples of basic finance related information. Please consult a qualified financial professional to learn additional details about each financial concept and to help you figure out what is right for you.

Buying a house is a project.

A List of Don'ts: My Life as a Clueless First Time Home Buyer

The first time I bought a house, I did things in a way that hurts my current, better financially educated self. At the time, my then husband and I, were recently married and realized that more adultier adults bought houses. Here are the highlights of the poor decisions we made during this process:

Bad Decisions:

We didn’t really figure out what we wanted in a house. We just went to open houses, partly for entertainment at first, then realized we wanted to buy a house sooner, rather than later.
We didn’t work through a budget to figure out how much house we could afford.
We looked into financing after we had made an offer on the house we wanted to buy.
We financed our house through a mortgage broker and took out an adjustable rate mortgage with a 7% interest rate.

Worse Decisions:

We didn’t think about costs for maintaining a house like fixing appliances, doing home repairs, finding people to work on our house, buying new appliances, landscaping or getting a lawn mower.
We didn’t think about the time needed to maintain a large house—including gardening, cleaning, general maintenance, painting or shoveling snow.
We bought a house with some weird characteristics that made reselling trickier including no air conditioning, oil heat, a flat roof, 4 bedrooms and a one car garage.

Downright Awful Decisions:

We bought way more house (4 bedrooms, 2 living rooms) with way more yard (2 huge lawns) than we needed--or were willing to maintain.
When we made an offer, we asked the people who were selling the house how we did that. (I kind of want to punch my younger self in the face for this one.)
We used the inspection of the people who were selling the house instead of getting our own independent inspection.
We did not use a realtor.

Buying a house the right way.

A List of Dos: My Life as a Much Smarter Home Buyer

Years later, after having worked in the financial services industry for a bit, my soon-to-be fancy new husband and I decided to consider buying a place together. This time around, being 10 years older and a ton smarter, we had a more methodical process.

We talked about how we wanted to live our lives and bought a house that would support those wants and needs. We also worked with a realtor, who helped us through the details of being a smart homebuyer. Finally, we had a greater understanding of the financial aspects and what we were getting ourselves into.

Tip 1: Assessing Housing Wants and Needs

Before looking at houses, we talked about what we each wanted, and what was important to us collectively. We took our lifestyle into consideration and turned those abstractions into our list of must haves and nice to haves. Our list of requirements included the following:

Housing: Must Haves

Enough house to live in, but not too much to maintain; no excess rooms we wouldn't use
A balance between privacy and the convenience of living in an urban area
3 bedrooms (2 for bedrooms, one for a guest room/office)
A garage
A patio or deck
Close to the train (I take the train to work)
South of downtown (to make it easier for him to drive to work)
A condo or townhome with an association (people to help with external maintenance and upkeep)
Air conditioning
Washer/dryer
Dishwasher
Parks nearby
Wider hallways so his ridiculously wide shoulders wouldn’t hit the wall

Housing: Nice to Haves

2 bathrooms
Gas heat
A basement
Grocery store nearby
A two-car garage
Ceiling fans

Once we assessed our needs, we knew what we were looking for. We could also then assess if we were in a financial position to purchase a house that met our needs, or if we needed to wait longer.

Tip 2: Working with a Buyer's Realtor

When buying a house, there is no earthly good reason not to work with a realtor. Realtors get paid a percentage of the cost of the house being bought, which is paid by the seller. In short, it costs you no more money to work with a realtor than to work by yourself.

Realtors will also help you save time, money and frustration because this is what they do for a living. They will help you find possible houses that meet your needs. They arrange house showings so you can privately view a given house. They may also know about houses that are going on the market before they are listed to give you a head start on other potential buyers. They also typically have relationships with people who do financing and home repairs, so they can help with recommendations throughout the whole process. They can walk you through the paperwork from start to finish.

Typical realtors represent people who are buying and selling houses. We worked with one who only helps people buy houses—a buyer’s realtor. Part of the reason why we chose a buyer’s realtor is that their only job was to help us buy a house, not to also sell other people’s houses. This means that they do not have a possible conflict of interest (unlike realtors who both buy and sell houses) since there would be no temptation to try to sell us a house that they had listed.

Figuring out home financing.

Tip 3: Learn About the Financial Implications

Some people, mostly homeowners, tout the financial benefits of owning a home—and believe me, there are many. However, buying a home is also a multi-pronged financial commitment that goes beyond the desire to stop "throwing money away" on rent. Here are a few financial factors to consider when considering buying a house.

Figure Out How Much House You Can Afford

There are several calculators available online to help you figure out how much house you might be able to afford. If you look at guidelines for how much of your income should be spend on any given thing, typically they recommend spending 25-35% of your income on housing.

Personally, I think a lot of calculators suggest an amount that is higher than it makes sense to spend. (A calculator I ran recently suggested that I could afford to spend more than twice what I currently spend on my house—which is not something I would ever do on purpose). One more conservative recommendation is that you plan to spend 25% of your net income. (As a reminder, your gross income is the amount that your employer says they pay you, and your net income is the amount of money that actually shows up in your paycheck on payday). In the end, you need to figure out what makes sense for you.

Housing Costs: More Than a Mortgage

Financing Your Home Purchase

It’s not just the purchase price of your house, but how that translates into monthly payments for you. Most people obtain a loan to buy a home, which is called a mortgage. The amount you pay on a monthly basis depends on the interest rate, the term (how long you plan to pay it back) and the amount that you borrow.

There are several loan options, but here are two common ones:

Fixed Rate Mortgages: This is probably the best option for most people. A fixed rate mortgage has a specified rate of interest that is effective for the length of the loan. 30 year and 15 year loans are the most common terms. The shorter the term, the less you’ll end up paying in interest, and therefore overall for your house. With a fixed rate mortgage, your monthly mortgage payment will stay consistent for the term of your loan.
Variable Rate Mortgage: Variable rate mortgages may also have the same 15 or 30 year term, but the rate of interest is subject to change. The loan may have a set amount by which it can vary (like 1%) and a frequency for how often the rate can change (like once per year, or once per month). This means that the amount of your mortgage can change significantly (going up or down) over the term of your mortgage.

I have had friends who have lost their houses because they borrowed more money than they probably should have AND they got a variable rate mortgage. When the rate went up, they were unable to make their payments and they ended up going into foreclosure.

House Buying Expenses

Down Payment: This is the money that you need to have in addition to the amount that you’ll pay for using a loan. Depending on the loan program, the amount you’ll need for a down payment can range from 3% to 20% of the cost of your home. Some programs, like FHA loans, expect at least a 3% down payment. To put this into numerical terms, if you’re purchasing a house that costs $100,000, you may be expected to have anywhere from $3,000 to as much as $20,000 to pay for your house up front. There may also be programs where there are different down payment related rules.
Closing Costs: When buying a house, there are a multitude of additional expenses accrued that may total 2%-5% of the cost of the house. Items included might be home appraisals, assessments, pulling credit reports, home inspections, title insurance and fees. In some cases, closing costs can be rolled into the final amount being borrowed.

Ongoing Housing Costs

Escrow: In many cases, lenders also set up an escrow account along with a mortgage. This is an additional amount of money you pay to your lender that the lender then sets aside to pay annual expenses. Typically, things like real estate taxes and home insurance policies are payed from escrow accounts. The amount your lender asks you to put in escrow may change from year to year depending on the change in tax and insurance costs.
Association Dues: Above and beyond what you pay back to your lender for your mortgage, you may also pay things like association dues or condo fees (if you live in an association that collects fees for common expenses). This is a monthly fee that continues as long as you live in the condo regardless of whether or not you still have a mortgage.
Maintenance: Furthermore, it’ll be easier if you plan ahead for things like house repairs, replacing appliances, home improvements or paying deductibles for claims (like a fire or damages from a storm). In short, remember that you are now your own landlord. Instead of having someone to call when your heat is out at 2 am, you now get to either fix it yourself or figure out who to call and pay them to come fix it.

So Now What?

After you have a big long cry after realizing there is more to this than you thought there might be, realize that looking at houses is a part of adulting. Get thee a good buyers realtor, who has been through this a bunch of times, and then can help talk you through what you need to do. The more you know about the processes, the better off you’ll be.

What Do You Think?

What advice do you have for people considering buying a home? What missteps did you make that you’d like to help others avoid?

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