It’s no secret that real estate is one of the best ways to build lasting wealth. The amount of land stays the same (unless we colonize other planets) while the number of people increase exponentially. In other words, the supply of land stays the same while the demand always increases.
Last year in 2018, I decided I was tired of paying rent and wanted to ensure my monthly housing expense did not go down the drain. Since I live in the beautiful sunny state of California, I thought I wouldn’t be able to call myself a homeowner until quite a bit later.
Little did I know, even in California, becoming a homeowner is not as difficult as one may think.
Busting the Myth About Homeownership
Whenever I talk to people, they always assume that homeownership is beyond their reach. More often than not, they believe the following reasons are stopping them:
The Down Payment
A common misconception is that you need to put 20% of the property price as a down payment in order to purchase a home. That is simply not true. For a conventional loan, you can put down as low as 10, 5, or even as low as 3 percent down.
Does that mean that 3% down is a good idea? Not necessarily. If your down payment is below 20%, mortgage lenders will require you to purchase PMI (Private Mortgage Insurance). This is a monthly insurance fee to protect the lender in the case that you default on the entire loan. The lower your down payment, the higher the PMI. However, once you have 20% equity in your home, then you can ask the lender to cancel PMI.
If you’re thinking about putting less than 20% down, you need to ask yourself whether you’d like to own the home now for a higher monthly payment or if you’d like to wait for a lower monthly payment. There are strong arguments for both sides.
Mortgage lenders need to assess their risk, so they need to know that you are making enough money to be able to pay mortgage every month. They use a metric call the Debt To Income, or DTI Ratio. The complexities of DTI are beyond the scope of this article so if you’re interested, reference the following articles on Front-End DTI and Back-End DTI.
A good general guideline is to spend no more than 1/3 of your income (or your joint income if you’re married) on housing.
The monthly housing cost will typically include:
- Private Mortgage Insurance (if paying down less than 20%)
- Home Owner’s Association Fees (if applicable)
- Home Insurance
You can plug in your numbers in a mortgage calculator. Google “mortgage calculator” to check your monthly payment.
Credit scores are nothing but a way for lenders to determine whether you are responsible with borrowing money. The purpose of borrowing money is to invest in the future. Without lenders, the economy would slow to a crawl, and nobody would take risks. No risk, no reward.
Of course that doesn’t give you permission to be stupid with money. Society punishes you for making dumb money decisions.
I recommend having a credit score of at least 700. While it is technically possible to buy a home with low credit, I would still focus on building a better credit score. It’s all about building better financial habits and knowing your borrowing limits.
For those with lower credit scores, I encourage you to look into an FHA (Federal Housing Administration) loan. While more flexible, FHA loans come with additional provisions, such as a permanent mortgage insurance throughout the life of the loan.
My Journey To Buying A Home
Before I begin, I want to mention that there are several ways to buying a home. This is just the path that I took.
1. Save for a Down Payment
When I first started working, I started to aggressively save right away. Income could not be afforded to be wasted on trivialities. My goal was to save for a down payment as soon as possible. The longer I waited, the more money I would waste on rent.
I did this by living in a less trendy city so that I could pay cheaper rent while I saved up. I lived very frugally. My main expenses were rent, food, gas, and car insurance. I dumped nearly everything else into savings.
Every dollar I saved was a dollar closer to homeownership. That was my motivation.
2. Building Up the Credit Score
I began building up my credit score ever since I was 18. I got a credit card right away and treated it like a debit card, never spending more money than I actually have. Every month, I paid off my bills on time without exception.
The most important factor in building up credit score is time. By the time I needed to apply for a mortgage, my credit score was in good shape.
3. Get Pre-Approved by a Lender
Before even looking at homes, I needed to know the range of what I could afford. Or, more accurately, what the bank was willing to let me borrow.
I applied for a conventional loan, and after getting quotes from a number of lenders, I found a decent rate with my credit union, so I opted with them.
4. Find a Great Real Estate Agent
I didn’t personally know any real estate agents in the area I wanted to buy a home, so I interviewed a few and did some reference checking. I picked the one I had the most confidence in.
This step is pretty important—you want to find someone that you trust will have your best interest in heart. If possible, I recommend going with someone that you know personally. But be sure to interview whoever you are considering. Ask them about their track record, and ask for references.
5. Visit Homes on the Market
This was the fun part—home shopping! Of course, I had to stick with the price range of what my lender pre-approved. I started browsing Zillow, Trulia, and Redfin, and filtered for the criteria of what I wanted.
I mostly looked at condos and townhomes since single family homes were out of my range in the area. Plus, condos/townhomes are significantly easier to maintain as a first-time homeowner and work well as investment properties even after you move out. I also knew that I wanted a 2-car garage, at least 2 bedrooms, a spacious kitchen, and a comfortable living room area.
I knew that pictures don’t give the full picture (pun intended), so I asked my real estate agent to schedule viewings of the properties on my list. Some properties had open houses where anybody could come and view the home. Most of the properties gave my agent the code to the lockbox so that I could get a private viewing of the home.
In total, I visited about 11 properties.
6. Make Offers
At this point in the process, I found 3 homes that I could see myself living in. It was time to make offers to the seller.
An offer is a written proposal that specifies the terms in the purchase of the property. The two most important numbers are the full purchase price and the earnest deposit amount. The earnest deposit is the amount of money you will need to deposit in a third party account (called an escrow) for holding while the closing process is underway. Like the name suggests, it indicates how serious or earnest you are in this property.
The offer is not binding until both the seller and buyer agree to begin the closing process. The priority at this stage is to win over the seller from all other buyers. Let the bidding war begin!
My Considerations When Making an Offer:
- Demand—how many other buyers were looking at this property? The less buyers, the lower I can bid. However, if there are other buyers, be prepared for the seller to counteroffer.
- Home Condition—are there broken floor tiles or problems with faucets? The more problems, the lower I can bid. But the more work I would need to do afterwards also.
- Aesthetics—is the home’s look outdated? If remodeling work needs to be done, I can also bid lower. But that’s also more work for me later.
- Solidarity—can I relate to the seller? The more I can get the seller to like me, the more the seller would be willing to accept a better price from me.
I made a total of 3 offers.
Home 1 was worn down and needed a number of simple aesthetic touches, handyman fixes, and basic remodeling. I made a lowball offer by deducting the labor costs from what I estimated to be the market value of the home. The seller refused to go below a certain price, so I had to move on.
Home 2 was in better shape, requiring only some paint work. I made a conservative offer, and after 1 counteroffer, I asked the seller to meet in the middle and agreed to begin the closing process. Not far into the closing process, I received the seller disclosures and found out that somebody had died on the property within the last 3 years. I was not comfortable with this, so I used one of my contingencies to back out of the agreement. (more on that later)
I discovered Home 3 after I backed out of Home 2. This home was great—it was a townhome and did not require any additional work. However, there were 2 other buyers interested in this home too, so I had to be strategic with my offer. I bid slightly higher than the listing price and ended up barely beating one other buyer. The seller and I agreed to begin the closing process.
7. Deposit Earnest Money Into Escrow
With the closing process officially under way, I deposited my earnest money into the escrow account. Depositing this amount of money is my indication that I am serious about buying the home.
Certain contingencies need to pass before the earnest money is non-refundable. Which leads to the next point.
8. Hire an Inspector to Inspect the Home
The home looks good on the surface, but is there anything I should be wary of? That’s what the home inspector is for—to check for anything wrong under the hood.
A good home inspector will check for leaking water pipes, functional heating cooling and ventilation, indication of termites, roofing, building foundation, etc.
I used a home inspector recommended by my agent, and he did a good job of laying out all the problems. Overall, there were not any big problems, but there was some indication of termites on the building and a few broken tiles on the roof. Since I was buying a townhome, the HOA would be responsible for those fixes rather than me.
9. Wait For Other Parties
Now, I wait.
I needed to wait for my bank to finish the paperwork on distributing me the loan. The seller was buying another home, so he had to wait for that home’s process to close. The county needed to wait for the transfer of titles. My bank needed to wait for title insurance to check out.
Escrow will work with your agent to handle most of these things I described above.
After everything was wrapped up by all the other parties, I met with a notary and signed a lot of forms.
10. Get the Keys!
And now I’m officially a homeowner!
The entire process took around 2 months, from visiting homes to closing on the home purchase. Even though my agent told me that closing can finish in 30 days, we were delayed due to the seller’s seller (yes, the seller was trying to buy a home too and we needed that to finish first) being slow.
After getting the keys, I didn’t move in immediately. The seller used the proceeds of this sale to purchase his next home, and his next home was not ready for him to move in yet. So we worked out a deal where he could stay for a few more days and he would chip in to pay for “rent”.
Soon after, I moved in and began the exciting journey of homeownership!
Are you a homeowner or considering homeownership? Did you go through these steps as well? Comment below!
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