Disclaimer: All of the information included in this series of posts are a personal account of my experiences and my personal opinions. I am not a real estate agent, mortgage broker, financial advisor, or attorney.
Y’all. We just bought a house.
Many of you probably already knew this. What you may not know is that I NEVER thought I would be able to buy a house before the age of 30 due to my student loan debt.
Forget for a minute that we were busy paying off $10K in credit card debt nine months ago. If you had asked me one year ago if we could possibly purchase a home, I would have said, “Hell to the NO!” Even when we completely paid off our credit card debt in April, we still didn’t think we could purchase a home. At that point, we had (combined) six figures of student loan debt, a few thousand dollars in savings, and no concept what the home-buying process entailed.
Just like us, people with student loan debt are under the impression that they can’t purchase a home until they have completely paid off their student loan debt. They assume they can’t afford a mortgage or they won’t be approved by a lender because student loan debt has become the financial bubonic plague of society. Well, here’s a little truth bomb–your rent is probably outrageous and banks still want people to buy homes.
Little did we know that there are A LOT of details that lenders view as part of their pre-approval of potential buyers. The way we saw it, a mortgage could potentially be the same or cheaper than what we were paying in rent and at least we would be building equity rather than paying into the obscene rental abyss. The only way to find out where we stood was to actually speak to a mortgage lender, which is what we eventually did. In doing so, we learned SO MUCH, most of which (in our case) was good news.
After navigating through the home-buying process, I realized there are so many things I didn’t know before that prevent new grads and young professionals from even considering home ownership. As a result, I decided to create this 7-part blog series chronicling our home-buying experience. There was frustration, there was hilarity, and there were surprises along the way, which has made for a very stressful, yet entertaining summer!
My hope is that it gives you a taste of what to expect in the home-buying process and helps you decide whether it’s something that you would like to and are able to pursue in the near future. Even if you can’t afford to buy right now, hopefully it will help you fearlessly plan for the future.
How much is this all going to cost??
Before doing anything, I firmly believe it’s best to let your fingers do the walking first. Get online and explore. We used Realtor.com A LOT during our home-buying process. You can search for real estate AND rental properties on their website and since they are one of the largest websites in this arena, you can scope out the most up-to-date listings.
But first of all…
Should you buy or continue to rent?
This is the million dollar question, right?
Rent is outrageous these days. However, buying can potentially cost more depending on how long you plan to stay in one place.
But how do you know??
There’s no magic crystal ball to know for sure, but Realtor.com offers an awesome tool to help you decide whether to rent or buy. The Rent or Buy Calculator below uses the latest mortgage, tax, and insurance rates to compare different renting and buying scenarios based on your location and how long you plan to stay in one place.
After having a serious conversation about our 5 Year Plan (you also need one of these) and running the numbers of buying vs. renting, we felt better about our decision to purchase a home.
But what do we do next??
I don’t think it’s a surprise that the idea of spending large amounts of unplanned money completely stresses me out. This is where we had to buckle down and speak to a professional.
Do some research–there are mortgage brokers and mortgage originators at banks and credit unions. Don’t be afraid to call a few up and interrogate them. Tell them your situation and see what they can do for you. After speaking to a few different ones, it turned out that the rates they could offer were about the same, so in the end we chose to meet with the mortgage originator at our credit union.
Initially, look for associated savings and benefits.
Are you looking for a home closer to work? Will you have access to public transportation? Are you interested in an area with lower taxes? Will a mortgage be less expensive than your current rent (definitely a possibility)? Buying a home can potentially lower your housing costs.
Even if your payments will be about the same, will you have more space? Better school districts? Consider the things important to you and what you want to gain by owning a home. This will help you decide where to start when you actually start searching for homes. By picking a suburb across town, I am now 10 minutes away from work, rather than 45. This makes all the difference in the world and cuts down on fuel and vehicle maintenance costs. Plus, now we have a yard!
All the paperwork in the world.
Whichever lender you decide to go with, they will require about 9,000 pages worth of paperwork to complete your application for pre-approval. NONFICTION (OK, maybe some fiction). Fortunately, this costs nothing except your sanity.
First and foremost, they need your credit score. It is SUPER important that your credit score is in good shape because this will affect your interest rate. They will also need information about your income, assets, and debts. They will ask for your tax returns for at least the past two years, current employer information, past employer information, past addresses, student loan statements, bank account information, etc., etc., etc.
I will say that it’s probably best to initiate the pre-approval process when you’ve been at your current place of employment for at least one year. Lenders like consistency, and when you can show that you’ve earned a stable income with the same employer, that’s reassuring from a financial standpoint.
Debt to income ratio is evaluated on a monthly basis. This REALLY helps if you’re repaying student loans (or any debt, for that matter). For example, if you’re on an income-based repayment plan, your payments are likely more manageable and don’t eat up as much of your income, making your debt to income ratio better than it would be if you viewed the ratio of your total debt to annual income.
Discuss how much of a mortgage payment you want/can afford.
According to our lender, we qualified for a $550,000 home loan.
Yeah. Right. Obviously, we didn’t consider that a realistic price range. We’re saving that for our next home with a pontoon boat on a lake or our wooded property that backs up to a National Forest…
We discussed with our lender what kind of payment we wanted to shoot for and what price range that included. Remember that your monthly payment will include taxes, homeowner’s insurance, PMI (Private Mortgage Insurance), etc. Initially, we wanted to find a home with a mortgage payment less than our current rent.
Ultimately, we had to raise our limit due to some of our preferences changing, so our mortgage payments ended up being roughly the same as our rent and living expenses. However, we ended up in a better and more convenient area with more space, so it can be a balancing act. Just make sure you don’t overextend yourself!
But don’t worry, your lender can help you calculate these numbers and decide what is feasible and realistic for you. Seriously, we were texting him as we walked through houses, asking him what kind of payment we would be looking at…
The Down Payment.
We thought we needed to be able to put down 10-20% for a down payment to even have a prayer for home ownership.
Our mortgage originator informed us that we didn’t even need to apply for an FHA (Federal Housing Administration) loan, which can be a slow and much more tedious process than a conventional loan. We were able to take out a conventional loan and only needed to put down 3% for a down payment! This didn’t even include a first-time home buyer’s credit, which we missed out on anyway because our credit union’s funds for this ran out earlier in the year.
Obviously, the more you put down initially, the lower your monthly payments will be. Fortunately, we were still able to stay within our budget while only putting down 3%.
To PMI or Not to PMI?
Private Mortgage Insurance protects lenders against an owner defaulting on their home loan. It’s a monthly cost (part of the mortgage) and most lenders require this if a buyer puts down less than 20% on a new home.
However, borrowers are able to “buy out” the PMI up front in exchange for a slightly higher interest rate. But even with a higher interest rate and no PMI tacked on each month, a buyer’s monthly mortgage payment will still be lower than if they had to pay PMI each month. The trade-off to this is that the borrower must keep that higher interest rate for the duration of the loan, while borrowers who are paying the monthly premium can ask to cancel the PMI once their equity equals 80% of the original value of the home.
For us, buying out the PMI was still a better option. We’re planning to stay in our home for 5-7 years before seeing where life takes us. With this plan in mind, we decided we wouldn’t live in our home long enough to build 80% equity. I’m sure my parents are scoffing at this outrageous statement right now since they moved into their “starter home” and didn’t leave for 25 years…
The Lender Fee–$325.
This amount will depend on your specific lender. I don’t really understand what this is except more money the lender can charge you for pushing papers. It’s probably just as well I don’t know because if any of it goes to the underwriters, I might have refused to pay it due to their inefficiency (not really–because I wanted a house, after all).
The Home Inspection–$550.
Once you find a home, this will become your saving grace. A house might look like your dream come true, but it won’t be if there’s mold all up in the crannies or the floor is two termite meals from a cave-in.
Don’t believe ANYONE who says you shouldn’t get an inspection. Those people are FOOLS.
Plus, I thought this part of the home buying process was really cool. We had no idea how extensively a home inspector combs through a house looking for problems. Always do your own research and choose your own company rather than one recommended by a realtor, the seller, etc. That way, you are the one paying the company and they are accountable to you and no one else. If there’s a flaw somewhere in the home, you need to know it!
A home inspection, complete with radon testing and termite inspection, ran us $550. It seems like a massive chunk of change, but it’s totally worth it to avoid costly problems later on.
Immediate Repairs or Remodeling.
Are there things that you’d want to update or add that would not be included in your buyer/seller negotiations? For example, we wanted to add a privacy fence regardless of the home we purchased because we have a large dog. This wouldn’t be something we could realistically request, unless a fence existed that needed to be repaired, so we planned ahead for that expense.
At first, we were totally into the “fixer-upper-lite” concept. We can remodel a bathroom! We can take care of aesthetic issues! We can put in new flooring! This might have been us if we’d found our dream home in the first week of house-hunting.
After a few weeks, we turned into the I-don’t-want-to-fix-anyone-else’s-shitty-flooring-and-tiling-job people. After seeing about 50 houses, you start to get really judgy because you just want to find your house and you feel like you’re wasting yet another evening walking through someone’s house that they didn’t even bother to clean before potential buyers walked through it (more on that later). Basically, consider what you’d be OK with fixing/remodeling/adding to the property and prepare for any related costs.
The Home Warranty–$524.
GET. A. HOME. WARRANTY.
Seriously. Get one.
Why would you not? For $524, we purchased a basic home warranty that will repair or replace covered various elements that fail due to normal wear and tear. This is a contract, not a policy, and covers items that homeowner’s insurance does not. There are also tiers of warranty, so you can choose how much you want covered. Our warranty, for example, covers the HVAC but not kitchen appliances.
For example, kitchen appliances and your HVAC system would be covered under this. If something happens to them, the warranty will buy you a comparable one (unfortunately, you can’t game the system and ask for a snazzy fridge with a touch screen on the front unless you already own one).
Nothing may ever happen, but that’s how insurance of all kinds works, right? But I’ll tell you what–it’ll all be worth it if that $10,000 HVAC system or our refrigerator dies and we can’t afford to throw down a couple thousand dollars right away!
Seriously, GET A HOME WARRANTY.
The Closing Costs.
Basically, closing costs are like a lender fee–a complete blanket of lies. I’m also not sure what this money goes to, except people who have no personal stake in your home purchase and leave your paperwork to the last minute and, thus, threaten your closing date with their incompetence. Can you tell that I have no patience for the bureaucracy of the home-buying process?? Our realtor assured us that our closing costs would be no more than $3,000, which was correct. This is also something you can ask your mortgage people about and they can give you an idea of what to plan for.
Moving Costs and Logistics–$420.
This just depends on your specific situation. We were considering hiring a moving company and just having them do everything, but the truth is that we are still major cheapskates. It was going to be about $800 to hire a moving company to pack up a truck, drive it to our new house, and unload.
Instead, we discovered that U-Haul offers a deal where you can rent the truck from them and hire contracted labor from different moving companies that they partner with. We chose a company from their list (with prices available on the website) and paid two movers to come load up the truck and unload it at our new house. The only catch is that we had to drive the actual truck across town to our new place. However, it was HALF the price at $420 for the U-Haul truck, movers, and tip.
The last cost we needed to consider was when we would stop paying rent and begin paying our mortgage. Our mortgage originator was great at working this out with us (since this is something they deal with all the time). No one can afford to pay rent AND a mortgage during the same month.
We needed to give 30 days notice to our landlord prior to moving out, which is pretty standard for rental properties. When we found a house and our offer was accepted, our mortgage originator worked with us to schedule a closing date (if all went well with the underwriters, etc.). We made an offer in June and our closing was scheduled for July. That way, we could give 30 days notice, pay rent for July, move into our new home in July, and not make our first mortgage payment until September 1 (as long as we closed in July and not before). That left August to recoup our moving costs and catch back up from the inevitable extra expenses that come with moving.
What I learned was that this process is primarily about communication and being realistic about your goals and financial limitations. If you’re not able to meet the financial demands of buying a home, your lender will let you know (because they need to get paid!). That being said, I was under the impression that we couldn’t buy a home when, in reality, it was actually feasible!
In the coming days, I will take you step-by-step through our home-buying journey and give you the juicy details about what the process was like. There was hilarity, drama, horror, moments I thought only existed on HGTV, way too much craft beer drinking, and way too few workout sessions. Stay tuned for Part 2: Making a Plan!