Which Part of 100% Financing Do You Not Understand?

I purchased my first home in April this year, and now I understand why some people choose to rent all their lives. Buying a house is like stepping out in the street and screaming "My name is [insert name here], and I want you to lie to me and take my money."

Each step of the way, there are tons of pitfalls. Obviously, though, people wouldn’t go through with it if there weren’t a big pay-off in the end. Here are some of the things that I learned, which will make the next time easier.

STEP 1: Financing

Ahhhh... Banks. Can you believe we let them hang on to our money? You’ll need to get pre-approved for a loan before most realtors will even talk to you.

I was lucky. I found a good lender right away (Quicken Loans). My definition of good is that they gave me lots of good information right away and didn’t make me sign anything until I was completely comfortable. They weren’t the cheapest lender I researched (the closing costs were much higher than others), but they made me the most comfortable. I worked my closing costs into the offer, so this was no skin off my nose.

Quicken gave me tips to improve my credit score and cut my interest rate. These are good tips:

1) Pay off credit cards to less than 70% of their limit, or request a higher limit. 75% is a trigger for the "high balances" alarm on your credit report.
2) Call your creditors and request lower interest rates. This lowers your monthly liability.
3) Talk to all potential lenders within a two-week period. Credit checks hurt your credit (WHY???). But, all checks within this two-week window are counted together, to allow you to do your homework.
4) Check your credit report for errors. If you need to be told, you’re in REAL trouble.
5) Don't ask creditors to lower your credit limits. This shows that you are not comfortable with your credit line.

Some lenders tried to get me to commit to a loan on my first visit, and I walked away. There are a lot of numbers flying around in a very short amount of time, and you need to absorb them. One number that you will NEVER get without working for it is your total monthly payment. By total, I mean everything: principal, interest, escrow, and random ‘cause-we-feel-like-it fees. There’s actually a reason why you don’t get all these numbers right away: your lender might not know them. Taxes can only be calculated after you pick a property.

Here are some things that get added into your monthly payment. Whenever a lender quotes you, ask them which of the following they are including:

1) Principal and Interest (P & I). This is the part that your lender cares about. It might be the only number that they quote you. If you have an 80/20 loan, be sure they’re quoting P & I for BOTH loans!
2) Primary Mortgage Insurance (PMI). First of all, if you have good credit, a life insurance property, and all your ducks in a row DO NOT accept a loan with PMI. PMI is an insurance payment to cover you if you can’t make a loan payment. Note, that PMI and P&I sound a lot alike, some lenders may use this to their advantage. Get everything in writing!
3) Taxes and Escrow. I thought escrow was a dirty word, but it’s really not. An escrow account is essentially a bank account with a lot of strings attached. Your money goes in, to be released conditionally at a future date. Your property taxes for your first year go into escrow so that the money is there when the bill arrives. I had an escrow account for basement repairs that needed to be finished after I moved in.

STEP 2: The realtor

There are different types of realtors: buyer’s agent, seller’s agent, and dual agent. A seller’s agent is the most common; they try to move as many properties as they can and work to negotiate the best price for the seller. A buyer’s agent, theoretically, is more interested in working with you to meet your needs. In the end, though, they all get paid on commission and there probably isn’t a huge difference.

I had a seller’s agent. But not just any seller’s agent: a top seller. And, this is what I learned: you want an agent who treats you like you’re their only client. If you feel at all unsure about your realtor, switch! I can’t overstate how much better the experience can be if you have a realtor that is compatible with you. This is the only person throughout the entire process that you can keep on a short leash.

Your realtor should be calling you to check in. Yes, it can be annoying if you’re still not sure about buying, but it shows that your realtor wants your business. They should be researching properties that meet your criteria and inviting you out to see them. My realtor put me on an email list, that blasted me every day with 10 properties or more. That’s nice, but she never called to tell me what she thought of them! I felt like I was doing all the work, and she was just a set of keys to get me in the door. In the end, I found the houses that I liked best by searching Shorewest and other real estate web sites. Then, I needed to convince her that I really wanted to see these properties.

STEP 3: Lower your standards

I was shocked at just how little I could afford. I looked at houses that seemed smaller than my two-bedroom apartment! Other houses need lots of work, like they hadn’t been remodeled since the 1970’s. I must’ve been through at least thirty houses, and I was starting to say things like "well, this isn’t so bad." I’d also seen some pretty wild stuff: like a sack of potatoes actually sprouting shoots in someone’s basement.

The only advice I can give is don’t give up! I found that I was just looking in the wrong place, when I expanded my search I found much better houses. In the end, I only had give up my hope for a dog-sized lawn and accept the fact that I was going to have to buy a "project house."

Step 4: The offer

Be very careful during this process. Your offer to buy is a commitment to purchase the house. If there is anything about the house that needs to be changed before you’ll buy it, write it into the offer. This is your chance to make the owner work for you. Most importantly, give yourself an out. Although your realtor probably has a standard form for offers, it is very important to check the verbiage and know what you’re getting into. There are three contingency clauses that will protect you if anything goes wrong. I recommend getting the trifecta, even if you think you don’t need it.

1) Inspection contingency. An inspector will look over the property and give you a report (you pay for this). You can give the owner an opportunity to fix the problems (right to cure), or you can choose to walk away.
2) Financing contingency. If it takes you as long to buy your house as it did me, you’ll want to make sure your bank is still behind you. The financing contingency protects you if your lender decides to raise your rates before you lock in the loan.
3) Appraisal contingency. This is important on older homes. Your bank might not want to finance you for the full purchase price of the house, if their appraiser says it isn’t worth that much. You’re on the hook for the difference! The appraisal contingency says that the house must appraise for the price offered.

This is also the part where you get to work in your closing costs, if you want to. The tough part is, you may not know how much to include. If you don’t want to have to bring your checkbook to the closing, get an estimate from your lender. Everyone wants a check at closing, including the title company. If you’re really unlucky, they’ll invite people in off the street an fifty bucks a head. So, be sure to pad this amount enough to cover the fees you haven’t been told about yet. Note: 100% financing does not cover closing costs!

Once the offer is made, the process of counter offers begins. Sooner or later, you or the owner will have to accept reality and settle on something.

Step 5: The inspection

Realtors don’t actually do or know much. With a few hundred dollars and a week of training, you could be realtor. They’re trained to take you through houses, and they may help you spot obvious flaws. But, they’re not inspectors and they know more about curb appeal than they do about proper grounding and dry rot.

The inspector doesn’t get to see much either, actually. He’s not allowed to poke around too deeply. But, he will give you a user’s manual for your new home. He’ll report to you on the condition of the property and give you an idea of what you’ll need to replace when. My inspector is also a landlord, so he also gave me advice on repair costs and remodeling tips.

You’ll want a good inspector. Call your friends for recommendations or take the time to meet with a few inspectors (prior to writing the offer).

Step 6: The closing

This is the real party. Bring a wrist brace, because you’ll be signing a lot of papers. Many people bring a lawyer to closing, but at this point you’re already fairly committed to the purchase. Unless there are some obvious issues that come up, you’re just going to be signing papers for the next few hours. Be sure to read everything and ask questions. Don’t feel pressured by the title company or your realtor. This is your house now, after all.

The strangest feeling is walking out of the closing with a set of keys to someone else’s... Oops. I mean, your house.

Step 7: The house warming

I don’t know much about this step yet. I can't afford it. :)
I’ll have to report back when I find out how it goes.