Home Ownership and Taxes

You are probably aware that the interest you pay on your mortgage and the property taxes you pay are both deductible.

If you go from being a renter to a homeowner, you should expect to pay lower taxes or receive a larger refund come April.  But how about boosting your monthly take-home pay to help your monthly budget?

By filing a revised W-4 with increased allowances, you will increase your net pay on each paycheck.  You could wait until you file your tax returns in April, but you are essentially giving the government a free loan (well, the government certainly needs it).

Each allowance on your W-4 is worth $3,700.  If you add your annual mortgage interest and property taxes, then divide by $3,700, you should get the number of allowances to file for (relating to your home; you may already have other allowances).  You can then use a paycheck calculator to estimate what your new net paycheck will look like.

Of course, consult a tax professional before you take the advice of a blogger.  Your individual circumstances will differ.

Step #8 - Onto Closing!

As you work with your broker / banker to get the final "clear to close", I would advise that you keep an open channel of communication with the seller's team.  They will be quite anxious themselves - it has probably been weeks since you signed the contract and there isn't a lot of information flowing back and forth.  I think it helps all parties to say "just fulfilling the final conditions; we are still on target for our scheduled closing date".  Surprises near closing are never good.

On or About
The closing date you've put in the contract of sale is referred to as an "on or about" date.  That means if you can close early, great.  If not, neither party should be surprised..  There will likely be language in the contract that will put some brackets around that date giving both sides room if delays occur.  Unless you have penalties written into the contract, there isn't much that can be done to force someone to close.


In our case, while we were ready to close on time (and ahead of our lease expiration), the seller wasn't ready.  This can happen for a host of reasons - is the seller closing on a purchase of his/her own new home?  Are they packing up and traveling far away?  Or, perhaps the seller doesn't want to begin packing the house up until he/she knows there is a deal in hand.

If you have some sort of inflexible timeline, such as a rental lease expiring, my first advice is to schedule a closing well in advance.  You'd love to have your lease end and move into your new home the same day, but as in our case, how big of a challenge will it be if you have to move out of your apartment but you and your belongings have no where to go?  What if the seller says he/she needs an additional two weeks?  You could make all sorts of empty threats about walking away, but #1) you won't and #2) depending on your contract, you might lose your deposit if you do so.

In that situation, you'd be livid about the injustice of it all (oh, I know), but there isn't anything you can do about it.  When drafting your contract of sale, you should discuss with the lawyer the idea of putting penalties in place if the closing is delayed outside of the brackets.  More often though, those delays will be the buyer's fault, so be careful.

Scheduling
Closing will require the presence of the buyer, seller, and their respective teams (agent, banker, lawyer).  This can also lead to slight delays, but everyone at this point wants to close the deal and get paid.  A few days before closing, you'll get your Closing Statement - this will be the final tally of closing expenses.  You'll need to get a certified check in this amount.  Take a good look over these expenses and have every item explained to you.  Most of these expenses should be the same as what you've seen on your Good Faith Estimates.

One area that can be a surprise is taxes.  You are required to reimburse the seller for the taxes that they've paid that cover the period beyond closing.  So if the seller paid a tax bill in June that covers July through December, and you close at the end of July, you'll have to reimburse the seller for August through December.  The amount you have to reimburse the seller depends on how many times per year your municipality collects taxes.

Once you've scheduled closing, I would suggest telling your cable / internet company of your planned move.  You can always cancel your request if closing gets pushed back or called off.  In our case, we waited until just before closing and then found we'd be without TV and internet for almost a month!

What Happens the Day of Closing?
On the day of closing, you'll first do a final walk-through of the house.  This is your last chance to spot anything amiss.  If the seller (accidentally or not) took an appliance that was part of the contract, and you don't notice for a few days, you are out of luck.  You'll want to look for the key items in the contract such as washers, dryers, and water heaters, and anything that was specifically written into the contract as an inclusion.  You'll want to check that all the appliances are in working order too.  Check the house to look for any damage caused when the seller moved out, and look for any damage that was maybe hidden by a piece of furniture or decoration.

After you have completed the final walk-through, you'll head to your lawyers office to sign the documentation.  It turns out banks won't lend you hundreds of thousands of dollars without asking you to sign an enormous stack of paper.  Depending on the type of mortgage you've applied for, document signing can take several hours.

At closing, there can be final negotiation of any outstanding items.  Sitting down and discussing things face to face can help bridge any gaps, although there is always a chance that the opposite could happen.  The others in attendance though are very close to getting paid and will likely help to push the two sides together.  In some cases, Realtors have agreed to reduce their commission if there is a small dollar difference on an issue that seems irreconcilable. 

Once the paperwork is signed, the seller should hand you the keys to the house.  Make sure to have the seller explain which key goes to which lock.

At this point, the house is yours!  You've just purchased a house and locked yourself into a mountain of debt.

Update - This is No Fun

It's Friday and we should be cruising into closing.  We've got to finish packing and be out of our apartment on Sunday.  One night in a hotel, then close on Monday.  Not fun, but not terrible.

Things began to fall apart today at around 3pm.

Dealing in Bad Faith
A few weeks ago, the house sustained significant flooding in the basement during Hurricane Irene.  The seller described this as a once in a decade type event, and we also confirmed with neighbors that flooding was unusual.  We were concerned though that the washer, dryer, water heater, and central air equipment might have been damaged.

We were told through the seller's attorney that the water heater was being replaced due to damage, and that the seller had paid for the basement to be pumped, cleaned, and treated so that mold wouldn't grow.

We inquired about the other equipment - we were afraid that it might be damaged or destroyed.  We requested that the seller have all the equipment inspected and pay for repairs if necessary.  The seller's attorney stonewalled us saying that it was their duty to deliver the items in "working order".  We want back and forth, but in the end, unfortunately that's the wording of the contract.

Flash forward to today - my attorney sends along the detailed final closing costs (more on that later) and it includes a $200 credit for the dryer.  He contacted the seller's team, and we find out for the first time that the dryer was destroyed.  We had inquired about the equipment and asked for them to be inspected, but we did not specifically ask what condition they were in.

Such a headache!

In the contract, the seller had included a rider which said if any of the equipment was no longer in working order, we'd get a $200 credit per item.  We included a rider subsequent to theirs, which said all equipment must be delivered in working order and that our rider supersedes theirs in all cases.  Therefore, the seller is obligated to deliver the equipment in working order.

So now we are headed to a standoff.

The dryer, new, cost >$1,000 (it really is a high end machine).  We think $750 is fair compensation, as it is a few years old and I found several listings on the internet for the machine ranging from $750 to $1,000.  The language in the contract is clear that the seller needs to deliver a working machine.  Since that is not an option, we're in a bit of a gray area.

The worst part is that we are heading into this standoff with no leverage.  The seller and his team know that we are out of our apartment and will be staying in a hotel.  The dollar difference is only $550, and it's not worth it for us to refuse to close and burn through the $550 in truck rental and hotel costs in a few days.

I think the seller and his team are clearly acting in bad faith - we inquired about the equipment weeks ago but we first hear about this just before closing.  Their $200 offer is ridiculous given the value of the machine and that we are legally in the right.

I can't say I feel that this is going to work out well for us.

Surprises in Closing Costs
We've discussed what closing costs would be for months with our mortgage broker as we knew we'd be tight on cash.  We found out today that we need to pony up several thousand dollars more on Monday, and there's nothing we can do about it.

The first increase in closing costs is expected - at closing you have to pay for the interest due on the loan for the remainder of the first month.  When we had scheduled closing to be in late September, that total was four or five days worth of interest.  Now that we are closing in the very beginning of October, we owe almost a whole months worth.  The good news, though, is that our first mortgage payment won't be until December.

The second area where we were surprised was in the property taxes due up front.  Property taxes can be collected by a municipality annually, semi-annually, or quarterly.  Our broker assumed it would be quarterly.  At closing, the buyer has to reimburse the seller for the property taxes paid that cover the days, weeks, and months after closing.

In our case, White Plains collects taxes semi-annually, not quarterly, so the two payments are much larger and cover longer periods of time.  We found out today that the seller recently made a payment covering many months ahead, so now we have to reimburse him for that.  There wasn't really a way to know this ahead of time, but the end result is a few thousand dollars due Monday that we weren't expecting.

On To Closing
Our attorney and Realtor are contacting the seller's team over the weekend to try and work something out about this dryer.  They are in the wrong, but we have zero leverage, so we'll see how this plays out.  It will be interesting to see the seller and his attorney face to face on Monday - I'd like to sign the final document then tell them both how I really feel.

Tips to Avoid Being Stuck in a Bind

• Communicate frequently with the seller.  We should have explicitly asked him if anything was no longer in working condition.
• Avoid being forced to close - if we had our apartment for 15 more days, we could threaten to delay or threaten to walk away if they don't settle
• Every time an important date changes, make sure you know how that affects all the closing costs
• Ask the seller or the municipality about taxation policies and due dates

Tips for Checking Out New Neighborhoods Online

If you are moving from out of town or out of state, it can be a challenge to get a feel for a place you may be moving to.  While nothing compares to visiting and talking to locals to get a feel, there are some good online resources you can use if that is not an option.

Virtual Stroll
Pamela and I used Google Maps and its StreetView functionality to actually see what "Main Street" looked like and whether it was inviting.  You can do this by zooming all the way in on a map.  Once you hit the final zoom, the map converts to a view of the street, which Google takes by driving cars equipped with cameras and GPS devices around town.

Forums
I found that the forums on City-Data were very useful.  A lot of the questions you would like to ask have probably already been asked - "how are the schools?  what is the nightlife like?  what is there to do?  pros/cons?".  There is also a vibrant community of forum users who provide helpful responses very quickly.

Local News
Finding the local newspaper isn't always the easiest, but with a few good Google searches, you can probably be successful.  Through the local news, I found out about local events and attractions and you can also learn about the key local issues such as upcoming tax hikes, crime, new developments, etc.

Search
"Where to live in ____".

Will Assaulting the Seller Help Closing?

More than two weeks ago, the seller (through his attorney) asked us if we'd be ready to close on Friday, September 23rd as scheduled.  We said "Yes".

We got the "clear to close" on Monday, September 19th, but then the seller said he needs at least 7 days notice to close.  So we said, "Fine, let's do Monday, September 26th".

We next were told the earliest the seller could close would be Monday, October 3rd.  Our rental lease ends on Sept 30th, so this is a problem.  Could we move our belongings into the garage ahead of close, we asked.

Well, we've waited five days and finally were told by the seller's attorney "Well, there might be space in the house for your belongings, but I will advise my client against allowing you to do so because of the liability".

Should we physically assault the seller and his attorney?  (Just a joke!  I bet a lawyer could make a big deal out of this).

Because the seller apparently doesn't care about screwing us over (by the way, he is moving in with his mother 15 miles away, so it isn't like he's waiting on his next home to be ready) we will be moving our belongings into a U-Haul truck on Friday night.  We'll then need to find a place to park it.  Pamela, Akina, and I will then find a dog friendly hotel or stay with a friend until Monday.  We'll go to closing on Monday, and depending on when we get the keys, move in Monday night or Tuesday morning.

Lessons Learned

• If you are up against a deadline (lease ending) leave yourself PLENTY of time.  Besides delays in getting the "clear to close" you could run into a slow moving seller.  Or, perhaps the seller is waiting on their own new house to be ready.
• Put strong penalties into your contract if closing gets delayed due to laziness.  Once you have received "clear to close' make sure there are monetary penalties in place if either side fails to move at a reasonable pace.
• Communicate often.  I would've thought when the seller asked if we'd be ready to close in 2 weeks, that'd be the signal to start the clean up and move out process.  Apparently not.

Addendum
I have a sneaking suspicion that the seller's attorney is behind all of this.  We'll get to closing and the seller will have no idea how much trouble he has caused us.  "Oh, I thought you wanted to close on October 4th.  I was ready to go a week ago!".  That's my hypothesis at the moment at least.

Furniture Shopping

Pamela and I haven't owned much in terms of furniture over the years.  Dorm rooms and then NYC apartments aren't particularly spacious.

My parents, who live in the tri-state area, have offered to let us take our pick of furniture they have in storage or sitting in a garage.

We'll still be in need of a lot of items, but at the same time, we aren't in any rush.  We don't need to have a bed in every bedroom and for the most part, we'll only use two chairs at the dining table (Akina's bowl sits on the ground).

A Few Tips
While you probably don't need help selecting furniture, let me just add a few comments from our searches:

• Make a priority list - you can go without a tea cozy for longer than you can go without a place to sit while you eat.  This also goes back to proper budgeting.
• Find furniture you like even at stores you can't afford - lower priced retailers will likely carry something similar.  You can also use key words from a high end retailer's description of its product to help you search online.  This seems particularly true about lighting fixtures.
• Measure - "Measure twice, (purchase) once"
• Move in, then purchase.  There isn't much of a point in loading up on bulky items that you or movers will have to haul.  Also, once you are in your home, you can better understand the space you have to work with.  
• Buy on sale - A couch is not a phone or an iPad - technology hasn't evolved making last year's products obsolete.
• Sign up for the store's credit card - you could spend thousands of dollars on just a few items.  Store credit cards will often offer a discount or some sort of rewards currency for future purchases.  These cards often have very high interest rates, so I would advise you to purchase, get the rewards, then pay off in full.  *Warning* Don't sign up for new credit cards while your mortgage process is ongoing - lenders really really don't like that.

Pamela and I bought a sectional sofa several months ago from West Elm.  We weren't yet house hunting, but Pamela felt it would fit in our apartment.

Akina likes the couch!

This sofa design was being discontinued.  The store had it out on the floor but didn't have any others to sell, so it was doing little more than taking up space.  We didn't necessarily want all the pieces, but the store manager gave us a huge discount if we'd take all of it out of the store that day.  Soon we'll have a full living room and it'll fit a bit better.

Where to Shop
Below is a rough ranking of stores in terms of the pricing of items they sell (cheapest to most expensive):
IKEA - everything you'd want in one location with low prices
Brooklyn Flea - we haven't had a chance to go, but friends have come home with great pieces at great prices
Bob's Discount Furniture - the ads might be a bit on the cheesy side and you might be reluctant to shop here.  Pamela didn't even want to stop the car but I convinced her to check it out with me.  What a great store!  Big selection and very low prices.  The store we visited near Paramus, NJ has a complementary cafe. Pamela fell in love with a recliner with massage controller... maybe next time.
West Elm - a personal favorite of ours
Crate & Barrel - speak to a sales rep about a "Homebuyer Coupon".  You fill out a form which needs to be approved, but you are then granted a one time coupon for 10% off.
Restoration Hardware - most of the items here are a bit above our range.
Ethan Allen - a high end store with quality products and prices that reflect
Drexel Heritage - high end, lots of customization options
Stickley, Audi & Co. - high end, lots of customization options

There are a lot more options out there including other chain stores and Mom & Pop type stores.  Heck, you can even make your own furniture.  Have fun, but don't break your budget!

Conflicts of Interest

There are a few inherent conflicts of interest that you will likely run into during your home buying process.  I think it is useful for you to be aware, although hopefully you won't run into any bad situations.  You should interview as many real estate professionals as possible and rely on the advice of your friends to find someone who is trustworthy.

Your Realtor (Buyer's Agent)
The Realtor only gets paid a commission if you purchase a house.  So, like any other salesperson, you should have some skepticism if you aren't finding anything you like, but the Realtor is pushing you to reconsider.  A good Realtor will help you to understand if your expectations aren't realistic.  A bad Realtor will pressure you to move forward on a house that you are only luke-warm about.

This conflict can also come up after you've had your offer accepted - perhaps you discover something during the inspection that makes you consider walking away.  If you walk away from the deal, the Realtor's time to that point could be considered "wasted".  A good Realtor, of course, will be happy to help you look for a new house.

The buyer's agent also gets paid a percentage of the sale price.  It is in your best interest to pay the lowest price possible, but this does not help your Realtor.  Consider this when you are placing an offer on a house.  If you are a first time home buyer like I am, you'll probably rely heavily on your Realtor's advice.  If you feel strongly about what you want to bid, but your Realtor thinks you should go higher, take this advice with a grain of salt.  Consider the extensive budgeting and spreadsheet work you have done and don't let anyone push you into a house you cannot afford.

Your Banker / Mortgage Broker
Your banker / mortgage broker's job (I'll just refer to this person as a broker) is to generate business for his/her firm.  He is trying to make the most profit off of you as possible, without scaring you away.  Your best defense here is to shop around.  You can speak to multiple brokers and you can compare what they are offering on Bankrate.com.

Now, just because Bankrate says you should get a 5.00% mortgage but your broker is offering 5.15% doesn't mean he is trying to take advantage of you.  Rates on Bankrate are quoted using the most basic parameters (zip code, purchase price, % down, range of credit score).  Some lenders on the site will also show a rate such as 5%, but they will charge substantial fees.

Brokers earn money in two ways - fees and selling your loan.  Fees are pretty straight-forward - they'll charge you an application fees, processing fees, bank appraisal fees, etc.  If your broker doesn't work for a major bank, there is a good chance that they will not hold your loan.  In this situation, their goal is to charge you as high of an interest rate as possible (without you going elsewhere).  They are then able to sell that loan to a major bank which, for example, is happy to buy a 5.15% 30 year loan if you have a 800 credit score, when they know that would usually be priced at 4.75%.

It might not be a "conflict" but I think it is also important to make clear that once you've started down a process with a broker, it is difficult to change.  Over the past few years, new legislation has been introduced that requires brokers to provide a "Good Faith Estimate" or GFE which should detail all the costs of your mortgage.  Pay close attention to this, ask lots of questions about what each item means, and ask what numbers could change.  As you get closer or reach closing, make sure these numbers don't change.

Your Lawyer
You should actually feel pretty safe here.  Your lawyer gets paid whether you complete a deal or not.  The only conflict that could arise might be if your lawyer and your Realtor or broker have a close relationship.  If you are being charged hourly, of course they have incentive to bill you for more hours.

Your Inspector
Again, not much to worry about here.  He/she gets paid either way.

The good news is that Realtors, brokers, lawyers, and inspectors find a lot of business through referrals so it is most definitely not in their interest to treat you unfairly.  They also could face serious consequences for treating you unfairly.  It is up to you though to seek out real estate professionals you can trust.

Bad Home Buyers and the Real Estate Professionals Who Hate Them
From their point of view, there are a few bad behaviors that will leave them frustrated and less willing to help you:

• Home buyers who are unwilling to sign paperwork saying they are represented by a specific Realtor
• Home buyers who think house hunting is a fun way to spend their weekends but have no real intention of buying (and don't say so)
• Home buyers who get too excited, make offers, but then realize they can't afford the house
• Home buyers who get cold feet and try to create ways to get out of a deal
• Home buyers who try to negotiate with a seller on the side to reduce the purchase price on paper - this can lower the loan amount you need or could allow you to pay with income you haven't declared, but a lower purchase price means less commission for the Realtor and can raise red flags with your broker and lawyer
• Home buyers who drag their feet in getting paperwork to their broker, but then dump a pile of documents on them and get frustrated at the turnaround time

Our Timeline

Many people ask: "How long does it take to buy a house?" to which the answer is always "well, it depends".  Below is a quick outline of the process Pamela and I went through to give you at least one real-life example.

I would say that for us, the time it took to find a house was extremely short.  We certainly were looking online a lot, but we really only did two days of actual house viewings before we put in an offer.

Our Timeline
Spring and Summer 2011 - Thinking about rent vs. buy
Summer 2011 - Start casually visiting Zillow, Bankrate, and other sites to look at houses and learn more about the process
July 2011 - Really looking in earnest at what is out there and ask friends for referals
July 21st - Filled out a pre-qualification application on a major bank's website
July 21st - Called a Realtor who was referred to us and subsequently called a mortgage broker
July 24th - Looked at houses online, visited a few houses with our Realtor, then did drive-bys of houses for sale and their respective neighborhoods
July 25th -  Viewed more houses and visited more open houses - found the home of our dreams
July 26th - Put in an offer on the home of our dreams
July 27th - received counter offer, countered the seller's new offer, our offer was accepted!
July 28th - went to house and performed the inspection
July 29th - received memorandum of sale; contacted and hired lawyer
August 1st - received first draft of sales contract
Early August - sending financial lives to mortgage broker for mortgage application
August 9th - received executed contract of sale
August 24th - received mortgage commitment with conditions
Late August - sending financial docs to mortgage broker to answer remaining questions / fulfill conditions; called around for home insurance quotes
Mid September - more document requests; purchased home owner's insurance
September 20th - received "clear to close" from mortgage broker; scheduled closing for one week

Financial Budgeting Tips

The following blog is a more detailed view into financial budgeting.  Whether you are making a large purchase (a house!) or taking a deeper look at your savings, these tips could be helpful for you.

Becoming "House Poor"
A classic piece of advice when buying a home is to avoid being "house poor".  This is the situation where you spend all your money to get the house, but then end up with an empty home because you can't afford to buy anything.

I am a bit torn on this concept - the advice is sound, but I think it really depends where you are in life.  Buying a home is a long term commitment andI think you need to think about both sides of the coin.

You didn't spend enough
You bought a house that you can somewhat easily afford.  You are paying off your mortgage and saving a substantial amount each month or maybe paying down the mortgage at an accelerated rate.  You also have plenty of money for surprise repairs and you get to go on vacations.  You aren't stressed about your monthly budget.  Sounds great, right?

The downside is if you bought a smaller home in order to save money.  Your family might be growing and you don't know where they will all fit.  What if you bought in a less desireable neigjborhood?  Are you concerned about crime or maybe don't get along with your neighbors?  Are the local schools decent or will that become a problem?  A lower priced house might prove to be more difficult when it comes time to sell.

You stretched your budget
You bought a great home in a great area.  You love your neighborhood and are proid to show off your home.  You also think you won't have trouble selling down the line.

The downside - you are embarassed to have an expensive home but have cheap furniture.  You have extra rooms in your house that you don't need and they remain as empty as the day you moved in.  You aren't able to save much money, much less go on vacation.  You are concerned that if the car breaks down or some surprise pops up, you may have difficulty paying for it.  This kind of stress can really weigh on your family life.

There isn't an answer to which one is better, but I would recommend that if you are younger and think your income and family may grow, you should probably stretch a bit.  If you aren't in that camp, do you really want to spend your next 30 years stressing month to month about the effect a flat tire might have on your finances?

Great Resources for Budgeting
I would highly recommend that you sign up for a free account with Mint.com.  By entering your credit card, banking, and other information and passwords, Mint will automatically pull your monthly statements and help you categorize.  And don't worry, Mint uses the same encryption technology that your banks use so it is just as safe.

The real value here is that you can track your spending in as little or as much detail as you like.  The site also provides charts to show the breakdown or how your spending has changed from month to month.

I've always been a bit fanatical about tracking my spending as well as my assets and liabilities.  I have an excel spreadsheet that I've updated every paycheck for years with this information.  While this has become more of a habit now than a valuable resource, I would recommend putting this information on paper and calculating your net worth.

Broadly, your net worth is the value of your assets minus your liabilities.

Monthly Budgeting Tips
The most important part about budgeting is putting together an actual monthly budget.  I've accomplished this using Google Docs.  I recommend Google Docs because it is a simple interface that is accessible anywhere, even on your phone, and it's free.

The key to good budgeting is making fair estimates.  This is where a site like Mint can come in handy and you might be surprised.  I thought, for example, that I probably spent $15 a month at pharmacies.  These trips were often because I needed something specific or was sick, but it was hard to remember how frequently I would make these mundane trips.  I would buy some contact lens fluid, toilet paper, Nyquil, etc., and be way over my budget every month.

Budgeting Walk-through
I put together a spreadsheet which you can access here.  It's a little bit rudimentary but hopefully it can help you get going on a budget of your own.  If you are signed into your Google Docs account, you should be able to click File then save a copy to your own directory which you can then edit.

I'm going to run you through some of the categories and inputs into my spreadsheet to help you through a real life example.

• Income - obvious, but I would suggest putting your income and your spouse's income on separate lines (we'll get to that later)
• Individual Expenses - I split individual expenses into separate sets just as I did with incomes.  I think this is a smart, fair, and open way to budget with your spouse, as you don't want to be in a situation where you can't support your bills with your income and are instead borrowing from their income.  Our expense line items include: shopping, golf (yes, I have a real weakness), trips, credit cards, and work-related.  Credit cards are a tough one - if you pay minimums, you end up suffering the most.  You'll probably be better off using monthly savings to pay down this type of debt first.
• General / Household Expenses - these are a set of expenses that can generally be viewed as "shared".  These items include groceries, restaurants, gasoline, car payments, insurance and other cash expenses.  Some of these are set amounts each month while others can be harder to estimate.  One month you'll do a lot of cooking, the next will have more restaurant trips, the next might include a special (expensive) dinner.  Again, this is where Mint can help you come to reasonable estimates.

So how does it look?  Are you surprised by how much your budget tells you that you are spending or saving each month?  Do both partners contribute and spend fairly?  

If you've really sharpened your pencil to come to your savings amount, I would take that monthly amount and multiply it by 12.  I think that yearly amount is a fair representation, while the monthly amount tends to be very volatile.  I would also note that you should keep in mind whether you tend to have a tax bill or receive a tax refund after you file.  Owning a house does provide additional tax benefits, but I've always thought of this, in terms of budgeting, as a happy surprise I'll hope to see come May or June.

The second tab in the spreadsheet "Cash Flow" is something I used a lot as we were approaching the date our down payment was due.  Even if you know you are saving money each month, it may be important to know how much cash you'll actually have on the 13th of the month.  To use this, I entered a long list of expenses on the dates that they are due.

Keep in mind that your monthly budget will be volatile when thinking about how much you can afford to spend on a house.  A volatile month of spending can't lead to you missing your mortgage payment.

Lastly, it's a very good idea to pull your credit report in this process.  You can do it once per year for free through the government - be careful of ads you see on TV as these companies are simply providing you what the government is offering you, but they will try and upsell you on monthly monitoring services.

Buyer's Guide - Step #7 - Offer Accepted, Now the Real Work Begins

You've come a long way and you should be full of energy at this point - and you are going to need it.

Once a seller accepts your offer, Realtors refer to this as "having an AO on the house".  This means an offer has been accepted and no further showings or bids should come in or be accepted.  This, like a buyer's down payment, is to show that the seller is serious about getting this deal done and that a buyer shouldn't worry about having to deal with competing bids.

The next few steps all are done in parallel.  You need to have an inspection of the house done, have a lawyer draft or edit a contract for you, and have your mortgage broker / banker work towards getting you a mortgage commitment which will include a home appraisal.

Home Inspection
Your Realtor should be able to refer you to someone who can do an inspection for you.  You'll schedule a time for the inspection with the seller - it's an added bonus if the seller is at the house so that you can ask any questions.

The purpose of the home inspection is to make sure you are getting a house that is worth your offer.  To this point, you've probably only walked through the house, but you don't know if there are termites or if the roof is leaking into the attic, etc.  The home inspector's job is not to tell you if you are getting a good deal or not.  He'll instead point out any safety concerns or items that need fixing or replacing, and help you understand the overall condition of the house.

The inspection is also your last real chance to make adjustments to your offer.  If you find out that the roof needs replacing, you can go back to the seller and ask them for $15,000 to fix the roof or ask them to fix it before closing.

Drafting of a Contract
Your lawyer will receive a draft contract from the seller's attorney outlining the deal.  There are some key points to look for or have added to the contract if they aren't in there already.  I'm not a legal expert, but you'll find that the horror stories you'll hear often relate to details left out of the contract.

• Inclusions / Exclusions - the contract should clearly let you know what you are buying.  The seller must list any exclusions and you should check this list to make sure that new washer/dryer you were excited about aren't on the list.  Make sure that if there is anything out of the ordinary that you think should be included is listed.
• Down payment - make sure the draft of the contract has this correct.
• Types of mortgages accepted - our original draft said "no VA, FHA mortgages" which was clearly not acceptable to us
• Contingencies - this is the area to focus on.  Contingencies are ways in which you can legally back out of the deal.  If you back out of the deal for reasons outside of the contingencies, the seller can keep your down payment.  You'll read that often a seller won't choose to do this because it usually leads to lawsuits.
• Mortgage Commitment - this says that if your bank won't commit to a mortgage, you can get out of the deal.  Even though you've been pre-qualified and pre-approved, banks can change their minds and you could be in a terrible bind.
• Satisfactory Appraisal - this is becoming more and more important.  Without this contingency, if the bank's appraisal came in below the agreed on sale price, the buyer would have to fund the difference in the purchase price in cash.  Therefore, it is important to have this contingency and have it give the buyer an exit if the appraisal comes in more than 1% or 5% below the sales price.  Here is a story about how low appraisals are blowing up deals more frequently.
• Good faith - there will usually be a paragraph that will say the buyer must pursue a loan in good faith.  In other words, if you decide you want to back out, this would prevent you from dragging your feet or not being cooperative with the bank in the hope that the seller gets frustrated and cancels the contract.
• Condition of Property - this is a paragraph that says the Buyer has done a full inspection and is fully aware of the condition of all the elements of the property.  It'll be too late after this point to say "oh, I didn't realize the house had a radon problem".  There will also be language that will say "plumbing, heating, appliances" etc., will be in "working order".  This means that if the neighborhood experiences flooding and the basement is full of water, the seller doesn't have to buy a new washer/dryer if they are still in working order.
• Defaults and Remedies - read this one carefully.  It usually will say something like "if the buyer willfully defaults, the seller keeps the down payment and no one can argue that they are owed more or less".
• Closing Date - this is generally described as an on or about date.  It is understood that things may turn up that delay the process slightly.  Some contracts though include penalties such as $100 per day for each day of delay.  Keep an eye out for something like this - you can put forth your best efforts, but delays can often occur because of things that are out of your control.

Working Towards "Clear to Close"
Your mortgage broker will give you the final word that your loan will be funded with a "clear to close".  To get to this point will take some work.  Everyone that I have spoken to recommends you call your broker regularly to check in and to push them on your loan documents.   

Pamela and I became frustrated when we were asked for piles of documents about our financial lives, only to find they hadn't even been looked at for weeks.  Your mortgage broker will likely be working on several mortgages at the same time as well as trying to drum up new business.  It is important to keep an eye on this part of the process.  We ended up missing our scheduled and ideal closing date because we received requests at the last minute for documents that we didn't have.  We had to have her parents mail documents to us and I had to reach out to another bank and have them send me the original mortgage note on a different house before we could close.

You should be working with your mortgage broker and not against him/her.  Some people share stories about how they didn't disclose an asset or liability and got away with it - the last thing you need is to have the entire process come to a halt because you've been hiding something.  This could lead to your loan being denied and would then likely lead to you losing your down payment.

Onto Closing
Once these different processes all come together, you are now ready to close. 
* To be updated once we have closed *

Buyer's Guide - Step #6 - Make an Offer

If you've found a home that you really want, it's time to make your offer.

At this point, it's very important that you are already pre-approved for the purchase price or that you can get it done quickly.  You should also take some time to really sharpen your pencil on your budgeting.  You'll be entering a negotiation and you won't necessarily have all the time you'd like to sit back and think about it.

* Warning * When we found the home and felt "this is it!" you really do feel this internal pressure to put in a bid immediately.  I remember being afraid that the next person to see the house would make a bid at the asking price and the seller would accept on the spot - we'd have missed out on our dream home!


In reality, this kind of a quick acceptance of an offer doesn't happen.  The seller's agent may tell you or your agent that he's had a lot of interest in the property and try to persuade you to put in an offer, but I emphasize this enough - go home and sleep on it.


The most important thing you can do is go home and really take a look at your budget.  Figure out what the highest amount is you could pay for the house.  I think it is then also very useful to compare this house to the listing prices of the other houses you saw.  If this is the best one in your eyes, is it also the highest priced?  Is it somewhere in between?  I think this is a better way to decide what the real value of a house is.


You will need all this information in order to put in a good offer.  Unless your Realtor knows that the house is unlikely to sell otherwise, you need to put in an offer that is high enough for the seller to respond to.  You have to expect the seller will then counter.  And don't think that if you offer 20% below the listing price, the seller will then move down to 10% below his original ask.  He might move down 5% or only 1%.

I can't stress enough here how important it is to know your limits.  You'll soon be asked to provide your down payment, and while there are valid ways to get out and get your money back, if not handled correctly, your money could be lost.


Pamela and I didn't heed all of the above advice, particularly around taking time to step back before making an offer.  We had a great sense of what we could afford before we made an offer, but we felt we had to put in an offer.  We left the open house and went out to dinner with our Realtor who suggested we take our time to think about the offer.  We'd seen so many houses and felt that this was the perfect house and it wasn't as expensive as some of the others we had seen.  We felt that would make the house sell quickly and that the open house seemed busy enough that another bid might come quickly.

Given these feelings, we told our Realtor that we wanted to put an offer in that night.  Our Realtor advised us that in more normal situations, a 10% or even 15% discount to the asking price would probably be a good opening bid.  Since we were telling him that we really really wanted this house, we decided to put in an offer about 7% below the asking price.

After a day or so of waiting on pins and needles, the seller's agent told our agent that the seller was making a counter-offer at about 2% below his original asking price.

By not moving down much, we felt it was more likely that the seller felt he had a good chance of getting another offer in around the asking price.  Or he could have been bluffing.  So, you've got the house of your dreams somewhat within reach and there's a 5% difference between you and the seller reaching a deal.  What do you do?

Here's where it's good to again think about all the houses you have seen and remind yourself of your budget.  You could accept the counter, you could hold firm, or you could counter his counter.  Holding firm essentially guarantees that the seller will wait at least a few more days to see who else might step up.  He certainly won't jump at your original offer after just rejecting it.  Do you want the seller to sit around and stew on it and perhaps get a competing offer?

Your second option is the most straight forward - accept the counter.  You can feel good that you are getting some discount to the asking price.  And in the grand scheme of things, whether you are paying 100% of the ask or 98% shouldn't make that big of a difference.

Your last option is to counter his counter offer.  You could move up a little or a lot and hope that the seller will just accept.  You risk a situation where the seller might counter your counter of his counter offer, at which point you'll probably be very close on price, but maybe in a staring contest.

What did we do?  We countered.  Our new offer was to "split the difference" with the seller at a 2% discount, and us at a 7% discount.  Our final offer of a 4.5% discount was accepted.  We were thrilled!

A funny thing seems to happen as soon as your offer was accepted - doubt creeps into your mind.  It's not quite buyer's remorse, because you should still be very excited to be on your way to owning the home.  It's more of a feeling that you may have overpaid... maybe even overpaid significantly.  We were very fortunate to find out later that a competing and "competitive" offer did come in.  Now, that could have just been the seller's agent trying to light a fire under us and make sure we were moving forward swiftly. 

As we'll discuss in the next post, having your offer accepted is a huge step, but you aren't even close to the finish line.

Cleared to Close!

Those are the three words I've been waiting to hear for the past few weeks.

This means that the mortgage will get funded, and that in about seven days we should be signing a ton of paperwork then getting the keys to move in to our first home!

Buyer's Guide - Step #5 - See Some Houses (Part 2)

The Walk-through
Through your online searches, you have already eliminated the "No Interest" houses.  Now you want to narrow the remaining "Maybes" into a manageable pile of houses that really interest you.  Through this process, you'll also begin to get a sense of what is really out there - are there a lot of houses on the market that could potentially be yours, or are few good houses up for sale now?  You'll also begin to see the volume of new listings that meet your criteria.  If the volume is low, it may be safe to assume your purchasing options are in front of you.  If the volume is higher, there's always that chance that the perfect house at the perfect price might come on the market tomorrow.

Pre-Walk-through Preparation
I would recommend printing out the one-pager for the listing you are going to see before you go.  This will serve as a good sheet for taking notes and will later help you get organized.  You should also consider writing down some questions on this sheet before your visit - we would make notes such as "can't tell if back yard is big or not" or "how far from the street is the house / is it noisy?".

You should also feel free to bring a camera.  This is a good way to make note of parts of the house that may need more work - again, the pictures in the listing are taken to present the house in its best light.  Also feel free to bring a measuring tape.  Understanding the dimensions of a living room or bedroom might help you decide if your sectional sofa or your queen-sized bed will fit and whether there will be much room left over.

What to Look For
Pamela and I found that as we visited houses, we pretty quickly got a sense of whether "this could be the one" or not.  I would make the recommendation to you, that if you step into a house and you start to think that this could be a candidate, feel free to start the house tour over again with that mindset.  Sometimes you'll be headed out the door thinking, "wow, I really liked that house... but what did the second bedroom look like again... was the basement finished... will our bed and nightstands fit in the bedroom?".  During our house touring sessions we did end up asking our Realtor "can we go back to 123 Elm Street and see it again?" on a few occasions (including the house we ended up purchasing).  Sometimes, this will not be possible - the Open House is over, or maybe the seller is now back home and doesn't want more viewings that day.  It's clearly better to do the walk-through once and do it right.


If you end up putting an offer in on the house and it is accepted, you'll come back with an inspector to do a real top-to bottom poking and prodding of the house.  I mention this here, because for your walk-through you should be trying to decide if the house "makes the cut".

Below is my non-comprehensive checklist of things to look for.  Your Realtor will be able to help you pay attention to the interesting things about the house you are seeing, as he/she has ample experience in seeing houses and knows what other houses in the area have to offer.

• Outside
• Is the yard in good shape?  Does it look like it gets damaged by heavy rain?  Are there patches of shade where grass won't grow?
• Is there a front and back yard?  Are they big enough or too big?
• Is the exterior of the house attractive?  Will I want to re-paint as soon as I move in?
• Is the roof clean or is there moss (this can shorten the life of a roof)?  Does it look new?
• Do the windows look new?  Will I want to replace with newer windows to save energy?
• How close are the neighbors' homes? 
• Will we have enough privacy?
• Do we have a garage?  Will our car fit?  Will having two cars in the driveway be a problem?
• First Floor
• Are there ample closets?  A coat closet by the front door?
• Do I like the flow of the house?
• Do I like the floor materials?  Do they need re-finishing, re-carpeting?
• Can I set up the living room in a way that I like it or is there some feature (i.e. fireplace) that will dictate how it will be arranged?
• Is the kitchen large enough for our normal cooking adventures?  Is there ample counter-top space?
• Does the oven have an overhead vent that goes outside?
• Do I like the size, style, and newness of the appliances?
• Is there a full / half bathroom?
• Are there enough electrical, cable, internet plugs for our needs?
• Second Floor
• Will I be happy with the size of the master bedroom?
• Where do your windows face?
• How many bathrooms are there?  How are they shared between the rooms? Will that be sufficient for our size of family?
• How large are the other bedrooms?  Will they all be used for sleeping or perhaps an office?
• Are there enough electrical, cable, internet plugs for our needs?
• Basement
• Is the basement well lit?  Will I be able to do things down here or is it simply for some storage?
• Is the basement dry?
• What kind of electrical service is coming into the house? (Older houses may not have enough amps running into the house to suit a modern family with lots of electronics)
• How is the house heated - oil? gas?  Where is the oil tank? 
• Does the house have central air?
• Are the washer and dryer in the basement? (A typical location, but will you get annoyed carrying loads of dirty laundry down from the second floor to the basement, then up from the basement once clean?)

If you like what you've seen, perhaps it is time to make an offer!

Buyer's Guide - Step #5 - See Some Houses (Part 1)

Now that you've got a Realtor lined up, be sure to fill them in on your process so far and what you've seen and liked versus what you've seen and didn't like.  Without a good sense of what you are looking for, you and your Realtor are likely to waste time looking at houses that aren't interesting.

Your Realtor - Access to Information
Your Realtor has access to more information on the houses you might be interested in.  This includes the listing history of a home and the history of the asking prices.  This type of information is very valuable, particularly when it comes to putting in an offer.  Houses that have sat on the market for some time may still be over-priced.  The seller may be asking too much, but may also be willing to accept an offer that is much lower than their ask.  Seeing the history of asking prices can also clue you in to how serious the seller is about getting the house sold.  Consider a house where the seller has reduced the asking price by 1% every three months for the past year.  That likely indicates that they aren't willing to move much lower, perhaps because they owe a significant amount on the home, or they aren't in a rush to move, or maybe they just feel very strongly about the true value of their home.

Now consider the same house where the seller has reduced their asking price by 10% each of the past three months.  That's a pretty clear indication that the seller "needs" to get a deal done and might entertain a low-ball offer.

You also may find that a home you are interested in was taken off the market after an offer was accepted but is now back on the market because the deal fell apart.  Did the potential buyer find something wrong with the house?  Does the seller feel pressured to get a deal done quickly?  These are the types of questions your Realtor may be able to answer for you by calling the seller's agent.

Seeing a House with Your Realtor
Your Realtor can schedule a time for you to see a house that you are interested in.  Sometimes, you'll go to see an Open House, which is when the Listing Agent looks to host many potential buyers and other agents at the house to generate some interest.  Other times, the Realtor will contact the seller's agent and schedule a time for you to walk through the house on your own.

* Warning * I would advise against going to an open house on your own if you have begun working with your own Realtor.  The Listing Agent running the open house is not on your side and could potentially put some pressure on you to make an offer - you can already hear the agent saying "I've got another interested couple coming here in an hour and I think they are going to be putting in a offer", right?  While some undo sales pressure is the last thing you need, the other issue has to do with your relationship with your Realtor.

As we discussed in an earlier post, your Realtor ends up splitting the commission on the house you buy with the seller's agent.  Well, if you've gone to an open house without your Realtor, the seller's agent may not be required to split the commission with your agent if that is in fact the house you end up buying.  This is because at the time you weren't exactly represented by your agent.  So if you then tell your Realtor "hey, I went to this open house on Sunday and I really loved the house and want to make an offer" they may then be unwilling to help you along as their is no commission for them at the end.  You can then be stuck without a Realtor on your side, or you may have to make a separate arrangement to pay your Realtor to compensate them for their efforts.

The other purpose of an Open House is for the seller's agent to generate more business for him/herself.  The seller's agent will want to get your information knowing that you are in the market to buy.  Maybe he/she can help you with that?  Or maybe you are looking to buy a new home and will also need to sell your existing home - again, the seller's agent will be happy to give you his/her card.  This again gets back to the relationship you have with your Realtor.


Next, we'll continue our discussion on viewing houses in Part 2.

Buyer's Guide - Step #4 - Getting Pre-Qualified and Finding a Realtor

Up until this point in the process, it's been your time and energy spent on this endeavor and you will feel no shame if you wake up one day and decide you don't want to pursue this any further.  In this next step, you'll start to involve some others so it's probably a good idea to be past the point of just casually browsing.

I will pretty much guarantee that if you get pre-qualified or find a Realtor earlier in your process, they will be absolutely supportive if you all put forth some effort but decide to bail on your plan to buy a home.  They will tell you "I understand, you've got my card, please think of me if you start looking again" and they will mean it.  So I will also say, if you want to get others involved earlier in your process, go for it.  It might make more sense too - maybe you've got more debt than you'd like to admit to and you'd rather have a professional run some numbers to see if you can really get as big of a mortgage as you think.

I think the key message here in the intro is to recognize that these professionals are spending time with you when they could be with another potential client, so be respectful of their time.

Getting Pre-Qualified
Getting pre-qualified helps you find out (again, in rough terms) how much money a bank would be willing to loan you.  Once you have been pre-qualified, it's also a good signal to a Realtor that you are serious.

You can feel free to get pre-qualified online through a big bank like Bank of America, or go to your local bank to do so.  You might want to consider calling a Realtor first, if you have a reference, and tell them "I want you to help me look for a home, but I'd first like to get pre-qualified so that I have a better sense of what I can afford.  Could you recommend someone to me?".

Real Estate is a local business, and you'll find that many Realtors and mortgage brokers work together frequently and have a good sense of who gets deals done, whose deals tend to be hectic, and who shouldn't be dealt with at all.

The process of getting pre-qualified is simple.  A website or banker will ask for some basic information about your income, checking / savings levels, and your social security number so that they can pull your credit report.
* Warning *  I was told by one banker that I should be concerned about having my credit report pulled by multiple bankers / brokers because it can negatively affect my credit score.  I was later told and have more or less confirmed through research that this is not true.  Yes, having your credit pulled multiple times can affect your score, but the systems are actually more sophisticated - if your credit is pulled for a real estate related transaction, it doesn't matter if another mortgage broker pulls it.  I think the erroneous statement stems from the generalization that having your credit pulled means you are opening a line of credit, which isn't always the case, and it also might come from those who don't want you to shop around / go elsewhere.  There isn't a real purpose to shopping around for a pre-qualification, but don't feel like getting pre-qualified by Bank of America somehow obligates you to choose them for your mortgage.  They will, however, call you and follow up to try and get your business.

After the bank has your information, credit report, and credit score, they will give you a piece of paper saying you are pre-qualified for a $xxx,xxx mortgage.  It by no means says they are ready to write you a loan, but more says "based on our initial impression, we'd guess we could give you a mortgage of this amount if everything checks out".

Finding a Realtor
If you're reading my blog then you are likely new to the home purchasing process.  So the answer to the basic question of "do I need a realtor" is YES.  If a realtor is representing you, they are known as a Buyer's Agent.  When you and your Buyer's Agent go to an open house that you are interested in, the agent running the open house is known as the Listing Agent or Seller's Agent.  One more complicated situation can arise if your Buyer's Agent is the Seller's Agent for a home you want to purchase.  In this case, his allegiance is to the Seller, so you should be aware.

First things first - in the most simple terms, the Buyer's Agent works for free.  You will never receive a bill from a Buyer's Agent for anything.  He or she gets paid when you buy a house.  The Seller's Agent might get a 5% commission on the value of a house that he/she sells.  If you come make an offer with your Buyer's Agent, and you are the winning bid, the seller of the home will have to pay 6% in commission, which is split 3% and 3% between the Buyer's and Seller's agents.

You can also make the argument that this commission is baked into the sale price, and therefore you, as the buyer are paying both agents.  I agree this is a more accurate statement, but as a buyer, you are likely working through the math of what your mortgage payment will be and are worried about receiving a bill from a Realtor for his/her commission - it won't come, so don't worry.

Finding a Realtor seems to most often come via reference.  If you know anyone in the area who has bought or sold a home, ask them about their experience with their broker and for a referral.  Sites like Zillow.com have lots of Realtor listings and advertisements.

Finding a Realtor who has completed lots of transactions goes back to my earlier point about being connected.  A good Realtor will know the other Realtors and be able to help you in your negotiations if and when you put in an offer.  He/she will also know lots of mortgage brokers, lawyers, and inspectors and they will all owe him/her a favor which could come in handy for you.

In our case, our Realtor helped us find our mortgage broker, lawyer, home inspector, and was also able to push them a bit since we were trying to get a deal done on a shorter time frame.  He also was able to speak with the Seller's Agent and work with him to get the seller comfortable with the idea that we would be buying using an FHA loan and that we would not be putting much down.  I could easily see us having lost our home without this kind of help.


Now you are pre-qualified and you've found a Realtor.  You know about how much you can afford, and you have someone on your team ready to answer you question (simple, complex, or in between).  You are almost ready to Get Out There - See Some Houses

When to Get Pre-Approved?
Getting pre-qualified is simple.  Getting pre-approved is more involved.  A letter of pre-approval will be necessary if you are putting in a bid on a house.  So if you are going to go out and see houses with the hope of finding the right one, it would make sense to be pre-approved so that you can put in a bid if you are ready.

To get pre-approved, you must first choose your bank or mortgage broker.  This is a serious decision and will have profound implications on your home buying process.  I will probably write a completely separate post on whether to get a mortgage broker or not, but I will try to quickly distill the concepts here.

A mortgage broker is someone who will hold your hand through the process and make sure you are moving along at a fast enough pace.  They have access to many ultimate lenders, and therefore can likely get you very good rates.  Your Realtor should have some recommendations as to which mortgage broker to use.  You want someone that is local and someone that will be available, not someone at a 1-800 number that you can only get on the phone on rare occasions.

So why not use a mortgage broker?  They will charge you origination and/or processing fees, and they also might be earning a spread between what the lender is willing to quote and what you will ultimately have to pay.  This can increase your costs.  There are also plenty of horror stories out there where an unscrupulous  mortgage broker can provide you with false information and end up blowing up your whole deal.

On the other hand, you can use a site like www.bankrate.com to see what kinds of mortgage rates you might be able to get.  You can then work directly with a bank of your choosing, which will assign you to a loan officer.  This may be someone at your local branch or it could be someone from the loan division which is located hundreds of miles away.

In either case, the person you work with has plenty of incentive to make sure you get a mortgage.

Onto the Pre-Approval
Now that you've got your broker / banker lined up (we selected a mortgage broker), they'll start requesting every financial document you have and you'll have to put together a mortgage application.

After they've reviewed your documentation, a pre-approval letter is issued.  This letter enables you to make an offer on a house, but really doesn't mean much.  No one has committed to loaning you the money you need and a lot can change.


Whether you've gone ahead with pre-approval or decided to wait, it's time to get out there and start searching.

Buyer's Guide - Step #3 - Searching Online and Offline

So now that you've got a rough dollar figure in mind of what you can afford, have some fun searching online and looking at houses.  Sites like Zillow.com can be a great resource to look at houses for sale or see the price of houses sold in your area.  I've been told though that the houses for sale data can be stale.  Your best option is likely to find the website of a regional realtor.  You can find these through simple searches, or the next time you are out driving around, look at those "For Sale" signs in front yards.  They will always give an agent's name and his/her firm.


While we'll discuss serious budgeting a bit later, don't feel afraid to look 10% or 25% above your budget.  While you may not be actually able to afford houses in these price ranges, i think they can add some real benefits.  Firstly, it helps to understand what you can afford, and what you could potentially afford with a bit more saving.  Good house now or great house in a year?  Secondly, more expensive houses generally have better locations and better features.  You will start to get a better sense of what types of houses you might like, how important your acreage is, what features you'd like in a house, and whether there are some locations deserve premium prices (or not).  For this latter point, think about two identical houses across the street from each other that have a significant price difference.  One could be in a much better school district, or one could have a much more significant assessment which leads to higher annual taxes.  Maybe one is located on an exclusive street or subdivision.  This kind of searching should help you flesh out what is most important to you.

You've heard it before and I'll give my support to it as well - location, location, location.  When Pamela and I started our online searches, we were immediately attracted to houses that looked newer and had more features, regardless of their location.  We were advised to think differently and I'm glad we did.  There's a lot to be said for being in a good neighborhood - your neighbors will become your friends and the value of the surrounding homes will in part dictate the value of yours down the line.  If you move into a less desireable neighborhood, maybe your loud neighbors become a nuisane and maybe if you do eventually sell, you'll find fewer buyers that want to move into that neighborhood.  At the same time, we also looked at houses with the best location but dismissed them.  We weren't interested in paying up to be part of a neighborhood or school district where you were paying for a name / address (think 5th Avenue in NYC).  We also found that these locations attracted more affluent people but also charged significantly higher taxes.  Your property taxes are much like your rent - it's money that is "thrown away" and in some areas, it can be significant.

So you've searched online and found some listings of homes that look nice and are within or near your budget.  I would next suggest taking your search offline.  Pamela and I printed out the one-pagers for dozens of homes, grouped them geographically, then did drive-bys.  Each house for sale has a sign in the yard saying "For Sale" which makes them easy to find.  We found this to be some of the best research work we did.  You can likely see a lot of houses without spending a ton of time because they are often in similar neighborhoods.

While you won't be able to go into the houses, you can really learn a lot about the neighborhoods and even the outside appearance of the home.  Don't forget, sellers upload pictures of their homes that frame them in the best light.  They'll try to avoid a picture that shows their gem of a home is surrounded by slums or the photo that shows the front yard floods an is often a mud pit.  All the pictures, both indoors and out, try to use perspective to make rooms and features larger than they are.  Driving by the houses can help you put this all in your own perspective.

Now that you've perhaps figured out a few neighborhoods where you'd like to live and maybe even have a shorter list of houses you are really interested in, my next post will discuss the next steps you can take to Get Serious - Getting Pre-Qualified and Finding a Realtor.

Buyer's Guide - Step #2 - How Much Can I Afford?

Simply because you decided you might want to be a homeowner doesn't mean that its the right track quite yet.  Below, we'll talk about some dollars and cents and hopefully help you get an idea of how much you can afford.  After that, the fun starts - house hunting.  You might find that once you know your limits, there isn't anything appealing in your price range.  If you can only afford homes you doubt you'd be happy with, then remain a content renter and start saving with a purpose.  We definitely found that you can save a lot more money every month when you have a serious goal.

So on to some numbers...
You'll find some easy generalizations with a few simple searches, including: 6x your annual salary or 33% of monthly income after all debts is how much you can afford to pay on a mortgage.  You should hopefully have a good sense as to how much you are able to save on a monthly basis while renting, so you could also add that to your current rent to see how much you could afford to pay monthly.  Banks will look at your income and what you spend every month to service your debts.  They'll also look at your credit history to see if you've missed payments or perhaps have too many lines of credit open.

I would suggest visiting www.bankrate.com and playing around with their mortgage calculators to see how much of a mortgage you can afford based on your rough estimates of how much you can afford to spend on a home every month.  Keep in mind, there are going to be other charges in owning a home including taxes, home insurance, higher utility bills (compared to an apartment), and other regular maintenance items.  I've added an entire separate post on Financial Budgeting Tips.  It's a topic I could discuss all day and night, but let's not get too sidetracked.

The other big issue when it comes to affordability is how much you have to put towards your down payment.  0% down mortgages aren't likely to come back.  You can put down as little as 3.5% with an FHA mortgage and this is often a good option for first time home buyers (we purchased our home using an FHA mortgage an a lot less than 20% down).  Keep in mind that if you put less than 20% down, you'll have to pay for Private Mortgage Insurance (PMI), which helps assure the lender that they won't lose a lot of money if you quickly find you can't afford your home.  PMI is a monthly expense you'll have to pay until you reach 20% equity in your home, so you'll want to consider that in your budget.

From a seller's point of view, a bigger down payment shows a real commitment to the deal.  Imagine if you were selling a $500,000 home and you accept an offer from someone who is putting 1% down ($5,000) and financing the rest ($495,000).  You would be then risking the possibility that the buyer may not get approval for such a large loan, and with less money down, that buyer is more able to walk away if they find another house they are interested in.  A seller would often prefer to accept a lower offer from someone if they are more confident the deal will get done - don't forget, sellers are often moving themselves and the absolute last thing they want is to buy their new home and then find the sale of their old home has collapsed.

So, the bigger the down payment, the smaller the mortgage and the lower your monthly payments will be.  You'll also avoid PMI and your offer on a house will be viewed as more credible with a bigger down payment.  On the other hand, a small down payment may be all that you can afford, and sellers will likely understand that. 

I won't get into all the different types of mortgage options here - that's something you can do with your mortgage broker as you get going in your process - and we'll talk about mortgage brokers later.

With the next post, you are ready to move onto the fun part and get searching.

Buyer's Guide - Step #1 - Time to Buy a Home or Continue Renting

This is clearly a personal question with many different intricacies for different individuals / couples.  I can though, tell you about our experience and what I found that helped us come to a decision.

Before moving to the suburbs we were renters in NYC.  New York City likely has the most vibrant rental market in the US but it is also characterized by exorbitant prices, renter beware situations, and sometimes real estate agents who can do more harm than good.

When we moved to Westchester we continued to rent.  I think the first impetus to really think about buying a home came when we received our lease renewal statement from our landlord.  Our rent was set to jump significantly, in part because we had signed our first lease (18 months) not long after the bottom of the housing crisis.  While we had expected a jump in our rent, this increase was more than we had anticipated.  Thankfully, we could easily afford the new rent and still be able to put money away every month, but the key question really hit us: could we be doing better owning rather than "throwing away" rent every month?

If you do a quick search for Rent vs. Buy, you'll quickly find that most calculators out there are too complex, asking you to make assumptions about long term rental rate increases versus the appreciation of you first home's value, minus some annual depreciation, minus the cost of capital for your mortgage, don't forget the tx benefits of paying mortgage interest which varies depending on your marginal tax bracket and marital status, minus the money your savings could have been earning if they weren't applied to a down payment,... and don't forget your 15 year outlook on mortgage rates, whether you think a flood might occur EVER, and so on.

As we began to think about this, it really boiled down to a few things: #1 could we make a commitment to stay in one place for at least 5 years, and #2 do we really want a house.

#1 - committing to a town - do you really love it where you live or where you are looking to buy?  Do you want to become involved with your neighborhood?  Does the area provide good schools, whether you have kids or not, or will you need to relocate if your family grows?  These are difficult questions, but I used the word "love" for a reason - I think it is something you just know.  And even if you do feel like you love where you are looking to live, it's probably a good idea to go on "dates" with other towns for a day.  Pamela and I took the train or the car to a few other nearby towns that had been recommended to us to really test our feelings.  If you start looking at houses in your area but can't get that feeling out of the back of your mind that maybe this area isn't right for us, then you probably should consider renting for longer until you are sure.

#2 - do you really want a house - my boss, who was unaware that I was looking for a house, had told me that homes are "money pits" - things break, things need fixing, and if you aren't fixing, you'll probably decide to upgrade or renovate something.  Once you do that, you'll forever be in cycle of renovation projects.  I bring this up to hopefully get rid of that notion that rent = money thrown away, while monthly mortgage payment = building equity.  If you are looking solely for the best choice financially, you can make a case that owning is better than buying, but renting gives you the optionality to move every 12 months if you like and that really is quite valuable.

Outside of wanting to make the best financial decision, do you want / need more space?  Do you want a yard?  Do you want to have to take care of a yard (mow, rake leaves, etc)?


Back to those calculators - they were clearly developed during a time which is not similar to current times.  They all use this concept of "how much do you expect your home's value will appreciate each year" and "how many years until you sell, realize your profits, and plow them into your newer/bigger/better home".  I don't think that's going to be the case again for a while.

Deducting mortgage interest from your annual taxes really is a great benefit for homeowners, but I viewed that as an annual true-up - it wasn't part of thought process for the month to month expenses of owning a home or renting.

In summary, the rent vs. buy decision is largely based on intangibles, in my opinion.  We'll discuss some of the more detailed aspects of budgeting and comparing costs in a later post, but the simplest way for me to get past spending lots of time crunching numbers at this point was to recognize that the renting and buying markets are priced, by definition, to be about equal.  What I mean by this, is that if I own a house or apartment that I am looking to rent out to someone, I know that over time as the landlord, I will need to make some repairs and that each month I need to recoup more than the amount I put towards my mortgage payment.  The universe of renters out there are people that need a bit more flexibility to be able to move in 12 months if need be, or perhaps they want to buy, but need to save up more money for their dream home.  They have to be willing to pay monthly rent that is greater than the cost of paying a mortgage on that same home, plus a bit more for the optionality to leave in a year.

At this point, you need to decide, if the cost of renting a house was equal to owning it, would I be happier owning?  If you see yourself living in a home of your own and that gets you excited, then you should continue to the next step - figuring out how much you can afford.