I’ve always been a sink-or-swim learner, but when my husband and I started shopping for a home this summer, I quickly realized the limits of this particular strategy.
I thought I’d come in reasonably prepared and well-researched. I’m a freelance writer, and my husband is a public-interest law student, so I knew we’d have to look outside New York City, where we rent, if we wanted any shot of affording a place for us and our four — yes, four — dogs. (Opacity in real estate helps no one, so here’s where I mention that much of our down-payment savings came from money I inherited about a decade ago. Plus, my husband and I are white and benefit from several layers of privilege, including a system of inherited wealth and a lesser chance of being discriminated against during the home search and mortgage approval processes.)
By the time we narrowed our search to an area about 90 miles north of the city, I’d gotten myself up to speed on the basics: how much we needed for 20 percent down, how to factor property taxes into our monthly payment, money-pit red flags like a cracked foundation or a saggy roof.
But still, there was a lot I didn’t anticipate. When we hit several roadblocks, I realized just how much I had left to learn — and that doing it on the fly probably wasn’t making the process any easier. Here, with help from real estate experts, are some of the things I wish I’d known about home buying before diving in.
Figure Out Your Mortgage Before You Look
Don’t make the mistake of casually “seeing what’s out there” before finalizing a mortgage. Getting one, from approval to appraisal to securing the actual money, can take weeks or even months. In a quickly moving market, not having that process well underway means you could fall in love with a house only to lose it to another buyer who came fully prepared.
Plus, you won’t know for sure what kind of house you can afford without at least a mortgage preapproval, which lets you know ahead of time how much money you can borrow and gives you a better idea of interest rates (which are currently at record highs). “Start by getting some real clarity about what you can spend and ideally, a prequalification from a bank,” says Megan Brenn-White, a real estate salesperson in the Hudson Valley and Catskills areas of New York. (If you don’t, a “mortgage contingency” will be built into your offer, which basically says the offer is good if you can obtain a mortgage — but in a competitive market, this doesn’t look attractive to a seller.)
“I recommend talking to a mortgage loan officer before you talk to a real estate agent,” says Holden Lewis, who covers home buying for NerdWallet. “That way you know your price range up front, and you can tell your agent to stick to your price range.”
You should shop around for a competitive mortgage — and don’t rule out less traditional options. “Credit unions often offer much better rates than big banks or traditional lending companies,” says Kristin Wong, author of Get Money: Live the Life You Want, Not Just the Life You Can Afford. “You’ll pay tens or hundreds of thousands of dollars’ worth of interest on your home loan over the years — make sure [you’re getting] the best rate you can to minimize this cost over time.”
Keep in mind that your credit score is important to a mortgage lender, and if you’re buying with a partner, some lenders will use the lower of your two scores. (Others will consider the higher score or the midpoint between the two, so be sure to check what your lender’s policy is before applying.) In some relationships, it may make more sense for just one of you to be on the application — it means you’ll qualify for a smaller loan, since only one income is being taken into account, but it’s one way to make sure your mortgage isn’t bogged down by a lower score.
A Down Payment of 20 Percent Is Still the Standard, but You Have Other Options
“The biggest advantage to putting 20 percent down is that this serves as a litmus test as to whether you’re ready to buy a home,” says Paula Pant, founder of AffordAnything.com and a real estate investor who currently owns eight homes. “If you haven’t saved for the down payment, it’s possible that this particular home is outside of your price range.” (With some exceptions: Pant says putting less than 20 percent down can make sense if you’re an investor or if you’re sure you won’t need to move for at least 10 years.)
“You don’t want to be ‘house poor,’ meaning you drain every cent of your nest egg into your new home. That’s a financial hazard.”
But saving up that much money at once isn’t realistic for a lot of people, especially with wages consistently stagnating. Thankfully, it’s not the only path to homeownership. “For conventional mortgages, the minimum down payment varies by lender, but it’s fairly easy to find one that will allow a down payment as low as 3 percent,” Lewis says. Another option is a loan from the Federal Housing Administration, which has lower requirements for credit scores and minimum down payments as low as 3.5 percent. Other government agencies, including Veterans Affairs and the Department of Agriculture, offer loans that don’t require a down payment at all, provided the borrower meets certain qualifications. Lewis also tells first-time buyers to check their state housing agency’s first-time buyer programs, which often provide down-payment assistance.
Even if you have enough saved for 20 percent or more down, that doesn’t mean you should spend it all. “You want to have some savings left over after you buy, because you don’t want to be ‘house poor,’ [meaning] you drain every cent of your nest egg into your new home,” Wong says. “That’s a financial hazard.”
If You’re Self-Employed, You’ll Need to Do Some Extra Work
To get a mortgage, you need to show your income and the ability to make your payments on time, which can be tricky to prove when you’re self-employed. “Self-employed borrowers’ tax returns are more complex,” Lewis says. “Their returns don’t always reflect their true income and ability to repay a loan. Plus, [their] income isn’t as steady as employees’ income; it has its ups and downs.”
To combat this, Wong says, “Prepare to have years of tax returns on hand, and keep everything organized in a Dropbox or Google Drive folder so your lender can easily access it. I found this easier than sending every document one by one via email.” The more information you can provide, the better, so get ready for a mountain of paperwork.
It’s Going to Get Competitive
The market favors sellers right now (though it does show some signs of tipping), meaning there are more people shopping for homes than there are homes for sale — so properties are selling fast, at top dollar, and without much room for negotiation.
Most buyers can’t afford to get into a bidding war or make an offer far above asking price, so you might have to get creative. “Our agent recommended writing a personalized letter to our seller explaining why we loved the home and wanted to buy it,” Wong says. “It was cheesy, but it worked.”
Brace yourself for some unexpectedly strong feelings, too. The fear, stress, and exhilaration of finding a place you love and picturing a life there, the heartbreak of losing out on a home to a quicker offer or higher bidder — for even the most level-headed buyer, the process can become an emotional roller coaster, one you’ll be better equipped to handle if you know from the start that it’s going to be a wild ride.
It’s Also Going to Get Really Expensive Really Fast
It’s easy enough to figure out your down payment and your estimated monthly payment, but there are so many other expenses to consider: transportation costs if you’re traveling to look at homes, closing costs, moving expenses, inspection fees, homeowners’ association fees, home repairs or renovations, pest control, utilities, cleaning, furniture, appliances (if they aren’t included), lawn care, homeowner’s insurance, and at least a dozen other things I’m forgetting. If you don’t put 20 percent down, you’ll also be responsible for private mortgage insurance (PMI), which lenders require to offset their risk, or a mortgage insurance premium (MIP), which applies to borrowers with FHA loans and smaller down payments.
For even the most level-headed buyer, the process can become an emotional roller coaster.
“The single biggest mistake first-time homebuyers make is underestimating the costs associated with homeownership,” Pant says. “The rule of thumb is that you should set aside 1 percent of your home’s value for routine maintenance, or $83 per month for every $100,000 worth of home.”
Remember That Homeownership Is Not the End All, Be All
My husband and I would happily rent for life if we didn’t need extra space for the Brady Bunch of dogs — but people often make homeownership a goal without stopping to consider if it’s right for their lifestyle or financial goals. (This calculator can help you decide which is a better money move.) “We’ve been sold this idea that homeownership is some success milestone that we all have to reach, and many of us don’t question the process or take a look at the numbers to figure out how this all works,” Wong says. “Owning a home is great, but contrary to the cliché, renting is not throwing your money away.”
It’s a soothing thing to keep in mind as my husband and I continue to make our way through the process. We’re still in New York, still renting, still looking for the the right house with the right canine-friendly yard. But being armed with all this information makes me more confident as we continue the search, as long as it takes.