# How to buy a home A house is the largest existing consumer product. - Buying a home is a privilege, not a right. - If you want to buy a big house like your parents', remember *their* first house. - Buying a good home takes wisdom and patience, so carefully consider the decision. Buying a house can be rewarding, but must be for the right reasons and isn't intrinsically superior to renting: - The risks of owning a house can be severe if you get the wrong one, and you're stuck with its problems until you can sell it. - Compared to a higher down payment, the tax advantages of a home are *rarely* worth the costs of a mortgage, but they *do* add stress. - A house can be a great [investment](money-investing.md), but you won't receive returns until you either sell it or rent out rooms. Make sure to budget other associated expenses instead of simply "rent": - Mortgage principal (which you're essentially [saving away](money-3_budget.md) until later). - Mortgage interest - PMI (an [insurance](money-insurance.md) for the lender if you can't put 20% down on the property) - [Property tax](money-accounting.md) - HOA fees, if applicable - Pool maintenance, if applicable - Home maintenance - Necessary [repairs and improvements](home-decorations.md) (~2%/year of house's value in good condition, and ~4%/year if it's old) - Any [local taxes](money-accounting.md) (e.g., school levies, mandatory inspections) - Utilities (e.g., gas, sewer, water, electric, trash) - [Homeowners insurance](money-insurance.md) - Protection/security fees (in a dangerous area) Depending on your lifestyle, renting may be a better idea: - You may not live geographically in the same area for long. - You have poor knowledge of the area. - Your work arrangement is volatile or uncertain. Renting, however, should be temporary if you expect to live in a region for more than 5 years: - "Home" is an emotional word and more than a financial transaction. - A house is a forced savings plan. - Houses hedge against inflation. - House equity grows tax-free. ## Timing Only buy a house when the market and family timing are right. The housing market should *not* be high. - Inflation can mean getting back the money you invested in a high-market buy can take 15 years. - To accommodate the size of the investment, timing the market should always be a little slower than [most other markets](money-investing.md). A two-bedroom apartment is fully sufficient for two children, sometimes three, so do *not* buy a house as a "starter" for a new baby. [Have 3-6](money-3_budget.md) months of emergency expenses ready beforehand, and [get out of other debt obligations](money-2_debt.md). Save a down payment beforehand: - A home equity loan is the same as any other debt, but larger, so [compounding interest](money-2_debt.md) works the same. - e.g., a 6% 30-year loan on a $225,000 house after 10 years of minimum payments: 1. A 15-year mortgage ($1,899/month) will have $98,210 remaining, or 43.6% of the principal. 2. A 30-year mortgage ($1,349/month) will have $188,292 remaining, or 83.7% of the principal. - The best house purchase is a 100%-down payment, though most people can't typically afford one starting off. - Do a break-even analysis to find out how long until you've paid off 20% of the home (when you can drop PMI) and how long to pay off the rest at (preferably) the same payments. ## The real estate industry A realtor is a salesperson collecting a commission on the world's most expensive consumer product. You usually must have a licensed realtor to buy a house, so look for a reputable one with a service like [Angie's List](https://www.angieslist.com/companylist/real-estate-agents.htm). - There is a listing agent who uploads the information to the MLS (Multiple Listing Service), and a selling agent who arranges the contract to purchase the property. - The buying and selling agents collect ~6% commission, split between both of them. - Their commission is the *only* way they make a living, but it is a [negotiable](people-conflicts-negotiation.md) rate. - An agent can be a listing or selling agent, but can also act as a "dual agent". Realtors have access to the MLS, which lists most homes for sale: - 90% of buyers start on the internet through online services, so homes don't need to run through the MLS anymore. - Each MLS has a specific region, so make sure your realtor knows the rules for that specific MLS before engaging with them. - Further, the MLS itself is now available online for public viewing, so listing agents' roles are dramatically smaller than they used to be. ### Home loan financing Get pre-approved for a mortgage *before* you start shopping, not just pre-qualified: - A 1% increase in a home loan will likely be about an extra $100/month and ~$50,000 more across the loan's life. - It's tempting to buy as high as you're qualified, but focus on your [budget and long-term goals](money-3_budget.md). Federal Housing Authority (FHA) loans are through Freddie Mac & Fannie Mae: - HUD (Housing & Urban Development), a government organization, issues them. - They are usually privately insured against default. - They were a large part of the 2008 global market crash. - FHA loans are often for lower-priced homes with first-time buyers. - Down payments can be as low as 3% or lower, but fluctuate all the time. - Avoid FHA loans if possible, since they are usually pricier than conventional financing. VA loans are like FHA loans, but insured through the US Department of Veterans Affairs instead: - VA loans have different details and conditions, so read carefully. - They are similar to FHA loans with government oversight, and a large down payment on a conventional loan is less expensive in the long term. Conventional loans are arranged with a bank: - A bank will check your [credit score](money-2_debt.md) to see your reputation in paying off obligations. - Most banks want to see a 10% down payment to demonstrate your willingness to pay off the loan. Owner financing lets you pay the owner directly, which lets you be more [creative](mind-creativity.md) when structuring the loan: - You'll have to prove your credit-worthiness to the seller more than a bank. - Be careful that [you're not exploited](legal-safety.md): - Make sure everything you discussed is [signed in writing](people-6_contracts.md). - If you're unsure about the agreement, have a real estate accountant, attorney, or realtor look it over. - Avoid any balloon payments at the end even if the payments are less, since *not* having the balance available allows the lender to repossess the home with most of your house already paid-for. - Watch for buydowns because their terms may be worse in the long term. You'll need a manual underwriter if you've had little to no debt to influence your credit score: - Use your bank's, or shop around if they don't have one. You can sometimes get a house for a *fraction* of what you'd normally pay: - If you can identify a poorly staged house, you can usually find a house most other people would overlook. - Depending on the state, you can buy a house for a few dollars or for *free* if you live in it for a certain number of years. - Your family or friends may want to quickly sell and leave a house. - Banks will sell foreclosed homes for a reasonable price. - You can take an assumable loan (someone gives you the remainder of the loan along with the deed to the house) from anyone, even when they're not on the market. Typically, to secure financing, you'll also have to get Private Mortgage [Insurance](money-insurance.md) (PMI) for the lender to trust their investment towards you. ### Home loan features An "ideal" home loan has a few qualities: 1. Fixed rate 2. 15-year term 3. A monthly rate that's up to 25% of your take-home pay 4. At least a 10% down payment Lenders give a better interest rate if you use an escrow account for paying [insurance](money-insurance.md) and [property taxes](money-accounting.md), so always set one up. Fixed Rate vs. Adjustable Rate (ARMs): - In an ARM, the borrower risks higher interest rates later for the lender to give a lower interest rate now. - Never get involved with ARMs, since the bank considers *their* best interests over yours. - If you have an ARM, immediately refinance! Private Mortgage Insurance (PMI) is designed for the lender, not you. A piggyback loan, (also called an 80/10/10 or combination mortgage) is available for when you can't afford a standard loan: - Arrange for 2 mortgages at the same time, with one being 80% of the property's value and a second ARM "on the back" at 10%, with a 10% down payment. - Sometimes this can be an 80/15/5, with the down payment being only 5%. - One advantage of a piggyback loan is that it can help avoid PMI, and only if you can pay off that ARM rapidly. - Another advantage is that it can sidestep "jumbo loan" requirements by splitting up the mortgages, which can be difficult to otherwise navigate. Interest-only/negative amortization loans: - The minimum monthly payment is only covering interest, and *only* over-payment can affect the principal. - Even with low rates, you'll never own a house with an interest-only loan unless you frequently make *extremely* high over-payments. - Negative amortization loans are worse, with monthly payments less than the compounding interest. - The only reason *anyone* would want an interest-only loan is to quickly flip it. - To avoid the risks from a loan of that scope, just rent somewhere instead. Reverse mortgages: - Reverse mortgages convert paid equity into cash, but their fees make the arrangement unwise. - Find other ways to finance your retirement: - Make lifestyle changes. - Sell the home. - Look for government assistance. - Rent out a room. Accelerated/bi-weekly payoff programs: - Accelerated payment programs require you to pay the mortgage off faster. - Instead of signing an agreement that forces you to make more payments, simply make an over-payment every month. ## Hunting People very frequently fall in love with a house they can't afford. - The 3 C's of home buying: Cautious, Careful, Coherent - Before you even start looking, clarify your needs and wants. Buy in the bottom price range of your preferred region and neighborhood. - If you feel [up to the challenge](home-decorations.md), hunt for abandoned or run-down houses. - For more selection, consider moving somewhere with a lower cost of living. - Consider a smaller house or one you can build onto. Thoroughly research, and walk away if things look bad. - Home-buying is very emotional, so walking away can be difficult. - *Always* get a land survey if you're not buying a standard subdivision lot. - An appraisal is only a professional opinion of value, but still worth getting before moving forward. Have a certified home inspector mechanically and structurally inspect the house. - A home inspection includes a report with everything related to the house's function: - Electrical, plumbing and HVAC systems - Walls, ceilings, floors, windows, and doors - Roof, attic, and visible insulation - Foundation, basement and structural components - Home inspections are *always* worth the price. The house should be (or can be made) attractive from the street. - Observe the surrounding neighborhood and how old the houses are. - Look for urban decay or bars on the windows. - Watch to see if children are playing outside. - Look for nearby construction, since new shopping areas and expanding neighborhoods are a sign of a healthy community. Note the house's floor plan. - Look at the county assessor's information on the property to find tons of small potentially relevant details. - The kitchen is the "hub" of a house, so it should be accessible and well-connected with the other rooms: - Has a convenient eating area to accommodate people. - Has an island for easier [food prep](cooking.md). - Bedrooms: - Walk-in closets and en-suite bathrooms are extremely convenient. - Outside: - Ideally, has wraparound porches with open space to relax and play. - If you're willing to do the required maintenance for it, a swimming pool. The three rules of real estate: Location, Location, Location. - Buy near water if possible. - You should enjoy the view from the property. - Mind noise pollution from loud nearby locations (e.g., freeways, industrial areas). - Check your phone's signal in the house to ensure you have convenient service. - If you're afraid of the flooding, get a house at the top of a hill. - If you're concerned about thieves, get a house close to a police station. - If you want more reliable electricity with less downtime in a brownout or blackout, get a house near a hospital. - If you want the snow plowed by your house first, find one near a school. - If you want rapid pizza delivery or convenient fast food, get a house near a strip mall. If you like the house and can make an acceptable offer, the house will go into escrow. - Escrow is a middle holding place for the buyer and the seller to ensure everything is clear for the exchange. - House escrows take about a month, though they can sometimes take longer. - At any time during escrow, you or the seller can back out with few adverse consequences. - If you're offering a low down payment, sellers very frequently will drop you at any time for someone else with at least 10% down. If the appraisal is *not* the same as the selling price during escrow: - Ask the seller to lower their asking price, which is least likely to work. - If it provides incorrect information, challenge the appraisal or request a new one. - Cancel the contract. - With your expenses in mind, meet in the middle of that difference with out-of-pocket cash. - Ask a realtor what to do. Always buy title [insurance](money-insurance.md) that covers when anyone questions your property ownership. If you're looking at a more rural property or intend to build one yourself, there are [more things to consider](home-homestead.md). ## After escrow has closed You now own your house, and will have to [move into it](home-moving.md). Before moving into the basement, test it for radon and radon-proof it. Make [improvements](home-decorations.md) after you've moved in to maximize enjoyment of your new home. - Have a relative order for your projects: 1. Make sure the roofing material sufficiently seals the top of the house. 2. Most household electrical wiring and plumbing is easier to install if you do it *before* you paint (since you can patch it up without having to match colors). 3. While it won't add much to the *financial* value of the house, winterizing it can make it more enjoyable. 4. Add any additions to the house (e.g., extra living space, conversions to other types of rooms, fixture upgrades). 5. Keep the house sufficiently painted to weatherproof, protect, and insulate the house. 6. Install or update the flooring last, *after* finishing all the other repairs and improvements. - Most of the work is relatively easy to learn, especially if you search how to do it on the internet. - Making additions before selling it later can make a *lot* of money back for the effort. - At the same time, making it early after you've bought it allows you to *enjoy* the things you worked on for at least a few years. - Any updates you make while moving in might require touching up or re-updating when you choose to sell. If you hire a contractor, use a service like [Angie's List](http://www.angieslist.com/) to find high-quality workers. - Hire them for their service *after* you've bought the supplies and parts already. - Sometimes an HVAC or electrical service provider will offer an extended maintenance agreement, which is often *not* worth the expense unless your items are likely to break down. Compared to the rest of the neighborhood, never over-build your home with additions and improvements. Whenever you can, overpay the mortgage to trim down the loan's principal.