~55~On Buying A House, Part 1

For most people, the largest investment they'll ever make is buying a house.  Recently, Jake and I purchased our 1st home.  We are all set to close in just 12 days, but there was a lot of research, time, and waiting that was involved in the process.  There is a lot of information out there about buying a house from websites such as Homes.com, Realtor.com, Zillow, and other expert authorities on the topic.  However, in my own research, I did not find anything that clearly explained the process through the eyes of a buyer.  Therefore, I thought I'd share my perspective and experiences of buying a house.  This first part will outline the information, research, and decisions we made or considered prior to making an offer.

**Disclaimer: I am by no means a real estate professional or expert.  The information presented in this post is simply a summary of my own perspective and experiences regarding the home buying process.**

For the past 2 years, Jake and I had discussed buying a home, but hadn't felt completely ready quite yet.  It wasn't until about a year ago that we started seriously looking.  In March, 2012 we met with a mortgage loan officer at our local bank and discussed what things we need to do and consider before purchasing a home.  We also discussed what we could afford.  Prior to meeting with the bank, we took a look at what we're currently spending on rent and determined what we'd feel comfortable spending per month on a house.  When we went to the loan officer, instead of asking him how much we could afford and going from there, we told them what we wanted to spend per month and asked how much house we could get at that rate.  We knew that the bank might tell us that we could afford more, but we wanted to make sure that we felt comfortable with the cost.

We stumbled upon our realtor by happenstance really.  We were looking on Realtor.com and found a property that we were interested in seeing and I sent an email to the listing agent to set up a time to do so.  She let us know that if there were any other houses we were interested in, she would be happy to show them to us.  We liked her a lot-and she seemed to really understand what we were looking for, so we decided to stick with her.  She was very knowledgable about the home buying process-particularly with first time home buyers.  She was easy to communicate with and was always prompt in returning calls or emails.  If we hadn't found her, we would have asked our friends for their personal recommendations.

There are 2 major types of home loans that we considered when starting the process, FHA (Federal Housing Act) and Conventional Loans. After weighing the pros and cons of each, we decided to go with an FHA loan.  FHA loans only have a minimum of 3.5% downpayment; whereas conventional loans usually require 5% down.  While ideally, we'd like to put more than that down, realistically, with what we were paying in rent, that just wasn't going to happen within the timeframe that we were wanting to buy a house. Typically, FHA loans have a slightly higher interest rate than conventional loans, but with the way the market is, we were able to get an excellent rate of 3.25%.  Also, while it wasn't a factor for us, FHA also has a lower minimum requirement for credit scores than conventional loans.  

Regardless of which loan is chosen, if you put less than 20% down, Private Mortgage Insurance (PMI) is required.  This fee is escrowed into the monthly mortgage payment and is calculated based on purchase price of the home, downpayment amount, and credit scores.   It is imposed as an insurance to lenders in case the borrowers default on their loan.  Once either 20% of the principal balance is paid off, or 20% of the value of the home is added, PMI payments cease. However, it is the borrowers responsibility to keep track of this and bring it to bank's attention once either of those points have been met. 

The major difference between conventional and FHA loans is the type of home you can buy.  In order to be FHA approved, the home must be in good condition, without any structural issues.  FHA can be very strict on this and even something as insignificant as peeling paint on the windows can prevent a house from being FHA eligible.  Therefore, a "fixer-upper" is not going to qualify for an FHA loan.   However, FHA does have what they call a "rehab" loan, known as an FHA 203K loan.  These loans provide upfront money to make renovations and repairs to a home, of which, the cost is rolled into the mortgage.  For example, if we bought a house for $100,000 that needed $40,000 in repairs, the lender would provide the $40,000 needed-paid directly to their approved contractors-and your actual loan/mortgage amount would be for $140,000. 

Over the years time that we spent looking at houses, we learned a lot about the different types of sales a house can be sold as.  Within our price-point, many of the houses we looked at that also fit many of our "must haves" were listed as short sales (SS).  This put my researching into overdrive.  Here's a summary of what I learned:
1. The owner owes more on the home than it is worth. 
For example: They bought the house in 2000 for $200,000 and still owe $170,000 in 2013.  However, the home is only valued at $150,000 today.  The owner may be selling because they no longer can afford the home and need to downsize their living costs, or they may be relocating and thus sell the house,
2. The list price is set by the seller, but must be approved by the bank.
Remember that the bank is the one taking the hit by basically giving the home owner a pass on the difference between what is owed and what the home sells for.  This is why the process is actually not so short.  It could take as little as 30 days, but can also take as long as 3-4 months to get approval. The term short doesn't come from the amount of time it takes to close, but rather the fact that the home is selling short of what is owed on it.
3. Just because the house previously sold for $200,000 and you buy it for $150,000 does not mean you've gained $50,000 in equity.  
The whole reason the house is selling for less now is because it's not worth as much.  It's quite possible to get an approved offer that's lower than the homes current value; however, the bank is going to want a sale price as close to market value as possible.
4. You might have a harder time getting an FHA approved loan on a home that is also a short sale
Remember, FHA loans have stricter guidelines on the types of homes you can buy and they condition that they are in.  A lot of the short sales we looked at needed some work.  One home was in the middle of a remodel project when they ran out of money.  The basement was only 1/2 finished.  The upstairs was missing framing around the doors.  Only half of the kitchen cabinets had the proper hardware on them.  Other homes weren't kept up once the seller realized they weren't going to make any money off of the home anyway.  Additionally, SS are going to be sold As-Is.  The bank is losing money as it is, so they're not going to pay extra to have things fixed that would cause the home to fail inspection.

In the end, the home we bought was a traditional sale.  While we weren't opposed to a short sale, they do take a lot of time and patience.

Next post, I'll talk about the process from choosing a house and putting in an offer to close.
Until then,  


  1. It’s a smart move that you ask for advice from a professional first before purchasing a home. That would give you better understanding of the things that you should do. Your article here is very helpful for people who are first-time home buyers. Good work! -Oscar Lang

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