After deciding that it’s time to purchase a house you basically need to do two things:
1. Get pre-approved for home loan so that you know which houses are within your reach
2. Start browsing popular sites like Redfin, Zillow and Trulia and building up your list of properties you want to look in person
Most people start with #2 because it’s easier. Also, first time home buyers obviously have no idea how the whole home loan preapproval process goes, so in most cases they are thinking “let me first find a house I like, then I’ll figure out financials”. This thinking can actually work in your favor in case you are not 100% sure you’ll be buying house. We’ll explore that, along with other scenarios in section that follows.
Home loan pre approval process
The benefits of home loan pre-qualification boil down to two things: real estate agents taking you more seriously and getting insight into financials of house purchase.
Before you are pre-approved, your or seller’s agent don’t have any firm guarantee that you’ll be able to purchase house they are showing you. So, if you are already pre qualify they’ll be bound to take you more seriously.
Also, pre-approval helps you kickstart longest part of home purchase – closing loan. Instead of finding your dream house and then figuring out financials, you’ll be bound to figure out financials right away. When you truly understand how the process goes, financials are not that hard. We can break them down into:
1. Credit score – this influences loan APR you’ll be offered. Say ranges are 760-850+ for 4%, 700-759 for 5%, 670-699 for 6%, etc… If you credit score is 710 you’ll obviously get base APR of 5%. Take a look at How credit scores affect mortgage rates article that gives more detailed example.
2. Ratios tied to your income – the simplest check I can offer is: your mortgage payment (including taxes and HOA) should not exceed 25% of your monthly paycheck. Keep in mind that you should subtract all fixed credit payments you currently carry… like car loan payment for example. Zillow has great Affordability calculator. Simplest version just requires that you provide your annual income, monthly debs and down payment in order to get maximum house price that you can afford. Even better, calculator has advanced mode in which you can add property taxes, HOA dues, etc… so definitely check the given link to home loan calculator.
Finding loan issuer that can pre approve you is not hard in today’s market. Both Zillow and Trulia offer great mortgage marketplaces in which you can see all the lenders available, plus customer reviews for each of them:
http://www.zillow.com/mortgage-rates/
http://www.trulia.com/loan/
Zillow even offers step-by-step home loan preapproval wizard that can guide you through the whole process. I found it too cumbersome – during my search for pre-approval, I just emailed agents that had best combination of offered APR and customer reviews on Zillow Mortgage Marketplace.
Before closing this section, a word of warning on something we talked about. In case you haven’t firmly decided that you will be buying a house, it’s actually better NOT to get pre-approved. First off, process is not exactly trivial. You’ll need to fill detailed application that includes giving away your Social Security Number (SSN). On top of that, each pre-approval process includes credit score check, which brings down your score by at least 5 points (each time).
In my case, I reached out to 3 lenders, and after talking with them I’ve filled full application only with 1. In ideal scenario, I advise you to do the same.
Besides, now that you know that basic ratio (mortgage payment not exceeding 25% of your monthly paycheck), have link to affordability calculator and know where to get preapproved, you already better positioned then I was. Since I didn’t knew that basic ratio, I needed to get pre-approval just to get solid idea on home loan I can afford. You already enjoy knowledge of what comes next and what is it that you can afford. So inverting steps – visiting a few houses and getting pre approved only before you want to give formal offer – is something you can easily do.
Tips and tricks of house hunting over Internet
Nowadays, there are numerous sites that can help you find houses worth visiting in person. I would recommend using following three, in order in which I’m giving them:
1. Redfin – the best site in my book because of two things: they have most accurate data and they allow you to easily schedule tours with their agents. Other positives of Redfin that I would emphasize include advanced search, nice integration with school reviews and finally recently launched 3D Walkthough that allows you virtually walk through some of the houses.
2. Trulia – out of three Trulia is probably the sexiest looking, true HTML5 website. The biggest selling point of Trulia are easy to use map overlays – so when searching you can easily see the crime rate of an area, schools, amenities nearby, whether or not property is in a flood zone, and so on.
3. Zillow – third place doesn’t mean that Zillow is a bad site. On the contrary, as you saw in pre-approval section, Zillow offers lots of great tools for prospective home owner. Just, everything search-wise, Redfin and Trulia do slightly better. Finally, data on Zillow is noticeably worse, especially when compared to Redfin.
Chances are that you’ll be finding all available houses for purchase by just sticking with these three websites. But of course, your options don’t end there – just Googling for “find house to purchase” gives you tons of real estate websites – like Realtor and HomeFinder . Use whatever is easiest for you.
Somewhat different are sites like ForSaleByOwner and Owners.com. Remember how in previous article I’ve talked about hefty real estate agent commissions? Well, these sites may contain listings not found on Redfin/Trulia/Zillow since owner decided to list property on their own and not give in to extra real estate agent fees.
Other than strictly real estate, there are some other useful websites. First that comes to mind is Walkscore which shows you how walk-able certain neighborhoods are. For most people, driving is not a problem… but some of us want to have a grocery store, park or coffee shop nearby – one that we can walk to in under 5 minutes. For example, area in which I live now has a sports bar with 1/2 off burgers and $2 draft beer during every Monday or Thursday Night Football… it’s truly nice perk in winter when you just want to get out of house, but don’t want to deal with traffic.
Also, review sites like Yelp can be quite helpful. They can show you whether or not property is in popular area. I mean, if houses cost approximately the same and one is in area with 10 great food joints, while the other is 5 minute drive away from closest store, you’ll obviously go with the first one.
One thing that I couldn’t find is definite forum on which you can get answers to questions you have and interact with other buyers/sellers. Don’t get me wrong, it’s not like there are not options. Redfin has pretty good forums. Zillow has nice Q&A website. Just I can’t truly recommend either – so if you are stuck with questions, the best thing I can recommend is leaving comment here.
Wrap up
Now that you are armed with knowledge on home loan pre approval process and websites for home search, start building your list. Again, do not start home loan preapproval process until you are 100% sure you’ll be buying a house. Ideally, you should be aiming to give formal Home Offer within 30 days of getting pre-approved. Once they start house searching process most people overwhelm themselves. To repeat myself, for now just FOCUS on two things:
1. Building a list of at least 5 houses you want to see in person
2. Making sure that monthly payment for each house (mortgage+taxes+hoa) on the list is below 25% of your monthly income (paycheck – existing credits you carry, like monthly payment for car loan for example). If in doubt, use Zillow Affordability calculator.
That’s it. Do not worry too much about anything else. To give you a peek of what follows, and how easy it is overwhelm yourself, here are the steps that stand between having a list and moving into house that you’ve just purchased:
1. Getting home loan pre approval
2. Finding an agent to take you on a house tour
3. Signing contract with agent to represent you during house purchase
4. Hiring building inspector and giving formal Home Offer for property you want to buy
5. Hiring attorney to guide you through closing process and help you with contingencies on the purchase contract
6. Closing loan with issuer that pre-approved you
7. Final inspection
8. Closing date, scheduling date when you and seller will be signing 100+ papers and exchanging money and house keys
Keep in mind that steps I gave are for conventional house purchase. Meaning, if you are looking to purchase foreclosure or a short sale – there may be extra steps – like both you and seller waiting few extra months on whoever is holding the deed (loan issuer / bank) to approve the purchase.
Also, ordering of steps is not set in stone. You can hire an attorney before giving formal offer – so that he goes through offer you are signing and make sure that it doesn’t bind you to purchase house in case inspector discovers something quite problematic. Also, you can reject signing contract with an agent or getting home loan pre approval all the way until you give formal offer. There are lots of intrinsic details that I’ll be covering and that can save you quite some time / money… for now just follow what I’ve said in this and previous article, revisit your reasons for becoming a home owner and make sure that properties you are looking at align with those reasons.