Buying Your First Home

After eighteen years of wedded bliss, circumstances forced my wife and I to consider buying our first home. The six-month roller-coaster ride that we subsequently experienced provided its share of thrills (and chills), but here we are, resting our heads nightly in our own home (well, ours and the bank's home, that is).

Although I wouldn't recommend that anybody wait until they're nearly 50 years old to buy their first home, I also wouldn't want you to go about it in the half-cocked, unknowing manner that we used to find and buy our home, either. Learn from my sorry experience and make a vow to yourself to do it better than we did. Here are a few hard-won tips to help you along your way.

DO YOUR HOMEWORK!
Shop around for the best deal on a mortgage that you can find. Online resources like Lending Tree can be helpful, even if you decide not to go with any of their lenders, because you can see what sort of financial products are available and at what interest rates. Your hometown bank is another potential lender, and if you have a good relationship with your bank, you might be able to negotiate a more attractive rate.

Do the research, both online and through financial magazines, and see if there are any first time homeowner's programs that you might qualify under. Go with the cheapest rate that you can get, because even a quarter-point difference in percentage can mean a savings of thousands of dollars over the life of the mortgage loan. Visit consumer-oriented web sites like the Motley Fool and go through their tutorial on home buying. When you're comfortable with esoteric concepts like "points" and know the difference between "fixed rate" and "variable" mortgages and you've chosen your lender, fill out the initial mortgage application and get a "pre-approval" for a certain dollar amount that you can use as a guideline when shopping around for your home.

Get your financial ducks in a row. Go ahead and dig up the last couple of year's tax forms, recent paycheck stubs, bank statements and personal ID because the mortgage company and their underwriter will want to look at everything. If you have a bankruptcy in your history, be up front with your lender because they're going to ask you about it, but stress how well you've done with your rental history, work history, etc since the bankruptcy. Start saving money now (see below), because you're going to need every penny that you can get, and the more you have in the bank at the time, the better you look to a mortgage underwriter.

GET HELP!
Most cities and a lot of regions have real estate listings posted online that you can use to shop for your home. If you're buying local, you can follow up your online research with a casual "drive-by" to see if the house looks like something you really want to live in for a while. If you're buying out of town, you should plan a trip to the area to look at homes, but first you can eliminate a lot of legwork by finding potential candidates online and making a list of houses to visit to save yourself time.

You can also get help from a real estate agent. Since we were moving cross-country, the agent that we were working with, Lynn Bezon, was an invaluable ally in negotiating the unexpected turns and twists that you can expect when buying a home. A good agent knows the area that you're looking in and what a dollar will buy. They know the lingo and can explain terms like "points" and "P.M.I." and they'll have some idea of what utility costs and taxes might run and what the local schools are like. The agent is paid by the seller and although they'll naturally want to show you the houses that they're listing, they can get you in to see just about any home for sale that you want to look at.

SAVE UP!
Come up with as much cash as you can possibly scrape up. Even if you have enough money in the bank to choke a horse, you'll need more. Closing costs will land at 3% - 4% of the total cost of your house. We bought without a down payment, but I'd recommend coming up with something to put down on the house. It will end up lowering your final cost a little bit and if you can come up with a 12% - 15% down payment you can avoid paying monthly for PMI, or "private mortgage insurance" that allows your mortgage company to breathe easier at night in case you default on the loan.

Aside from your down payment and closing costs, you'll also have to pay your first year's insurance premium up front, and then there's always the expense of moving. If you're moving across town, a few buddies and a case of beer will pretty much cover it all, but if you're moving across country, work up a realistic budget and then double it. Any money you have left over after buying your new home and moving into it you'll undoubtedly spend at Home Depot or some sort of "bed and bath" store on hardware, furnishings and other stuff.

UNDERBUY!
When looking for your first home, you'll experience a lot of pressure to buy as much home as you can afford (and more). You'll be hyped on a home as an "appreciating asset" and that in a few years the growth of your real estate investment will outstrip your equity, yadda yadda yadda. Don't believe the hype! Forget about the upper-end of your "pre-approval;" we received a six-figure "pre-approval" amount that would have bankrupted us and instead bought a house at half the amount. Find a house that you like but that you can afford the monthly payments on. There are scads of mortgage calculators online (just Google "mortgage calculator") where you can plug in the price of the house that you're considering along with the interest rate, and you'll come close to what your monthly payment would look like.

If you can comfortably afford, say, an $800 a month payment, look for a house that costs you $700. Then make the $800 a month payment, applying the extra towards your principal. This achieves two things. First, just one extra payment per year that is equivalent to your principal and interest will cut almost a third of your cost on a 30 year mortgage. You'll build up equity that much quicker. Second, if something happens and you're a little short during the month, you have a bit of a buffer in your budget. When figuring out you budget, be sure to take into account other new monthly expenses as well, like utilities and cable TV. If you're moving into an area with stiff property and school taxes, include them in your monthly estimate because they'll be rolled into your mortgage payment and held in escrow until the tax bill comes due.

INSPECT!
When you find a house that you like (if you haven't done so already), MAKE SURE to have it inspected by a reputable home inspector. Don't let your real estate agent "find" you an inspector. Instead, go to the American Society Of Home Inspectors' web site (www.ashi.org) and look up a qualified inspector in the area that you're moving to. They can do a full inspection of the house and let you know what kind of shape that it's in and what you can expect in the way of (immediate) future repairs. This will cost you $300 - $400 depending on the house and it will be worth every penny. DO NOT SKIP THIS STEP! You will pay for it later if you do!

UNDERBID!
Here's a little trick. If you find a house that you REALLY like, put a bid in on it that is about 5% lower than the asking price, and make your bid contingent on the home inspection, to be completed within a week. Here's why you do this - first of all, everybody lists their house at what they think that it's worth, not what it's really worth on the market. If they want $100k for a house, bid $95k and they'll probably take it. If not, you can go up to, say $97k for your next bid and negotiate. Remember, though, that your bid is a binding contract, contingent on your financing approval (not the initial "pre-approval" that you have, but the approval that you will have to get).

Second, and this is important, MAKE SURE that the bid offer says (in writing) that your bid is contingent on the home inspector's report. Make the bid offer good for 48 or 72 hours (2 or 3 days) and wait until they accept or decline the bid before calling the inspector. The reason that you do this (and I know this from sad experience) is that if you have the inspection done BEFORE the owner accepts or declines your bid and they decline or go with another buyer, you've spent $350 on some guy named "Fritz" to inspect the house and you didn't even get it! Have the inspection done AFTER the owner accepts your bid and make the bid contingent on the inspector's report so that if "Fritz" or whoever finds a cavern beneath the garage floor, or the roof falling in, or the plumbing rotting out, you can go back to the negotiating table and either lower your bid or make the home owner pay for the repairs up front.

GET AN ATTORNEY!
Once you've found your dream home and entered your bid, you'll need to get a real estate attorney to help steer you through the final buying process. This is going to cost you $500 - $600 more or less, depending on where you're buying, and this is another expense above and beyond your closing costs. You will have to have an attorney present at closing to make sure that you're not getting taken to the cleaners, so you might as well look around and talk to a couple attorneys while you're looking for a house and choose the one that you like. Ask them what they're going to do for your money and don't be shy about asking them questions about the closing process. You should have an attorney in place at the time that you actually place a bid on a house, or shortly (very shortly) thereafter, and a good attorney can help move the closing process along a little faster.

ENJOY YOUR NEW HOME!
I know that this is a lot of info to digest but it's all important. Buying a home is the biggest hassle that you may ever go through, and it's a major expense, but there's a certain pride in owning your own home. A man's home is his castle, indeed...or at least until his wife gets home from work.