Tell me about buying a home for the first time

[DeeBye]

After way too many years of renting, my wife and I are seriously considering buying a home of our own. We've always intended on owning our own place, but it always seemed like we had an excuse not to make the risky jump. We finally both have decent job security, and our outstanding debt is less significant now that our student loans are both pretty much paid off. I think we're ready to go ahead and do it, but applying for a mortage is a scary process when you are looking being six figures in debt for the next few decades.

I should mention that I live in Canada, so please don't confuse me with advice only applicable to *insert country that is not Canada here*:huh:General advice would be great.

The actual price of the home doesn't scare me as much as the other costs that can pop up. I'm thinking about things like lawyer's fees, property taxes, property surveys, home inspection fees, and so on. My mom was a life-long real estate agent and she used to talk about stuff that goes along with every real estate purchase which always went way over my head. I have never fully understood the world of finance, which is why I married a banker and let her handle all of the bills.

Speaking of which, since my wife works for a bank, she tells me that if we apply for a mortage through her bank we get a 1.5% discount on the mortage rate. I was playing around with some online mortgage calculators, and THIS IS HUGE!

We're not looking for anything flashy or big. We've been renting a pretty nice 2 bedroom apartment for quite a few years now, but we would dearly love to move to something with some more space and a reason for me to buy and operate a lawn mower.

[--Pete]

Hi,

I should mention that I live in Canada, so please don't confuse me with advice only applicable to *insert country that is not Canada here*:huh:General advice would be great.

I don't know about Canada, but here in the states there are requirements and expenses that vary from state to state, between different counties within the same state, and often between cities (and rural areas) within the same county. So, any information you get from someone not buying in the vicinity that you are looking at is probably no more than a rough guide.

My advice, work with a lender before you even consider where to look. They can give you most of the info you need and they can tell you just how much you have to work with. And as soon as you find an area you are interested in, hook up with an agent that is knowledgeable about the area, the legal and financial requirements for that area, etc. Paying a commission might seem like a bad deal for something you might be able to do by yourself, but if something goes wrong, the costs can make that commission look like chump change.

Now, in this area, it costs about $2000 up front for all the niggle details (inspection, title search, closing fees, etc., etc.). Figure about 6% commission split between the realators (and if yours says he'll work both sides of the deal, tell him to take a long walk on a short pier -- can you say 'conflict of interest'?). You might also haver to pay the remainder of the year's taxes. And, of course, there's the down payment.

On the loan itself, you'll have the principle and interest payment, which you can figure out with a ten buck financial calculator, or look for one on the net (Countrywide has a few, and most of the numbers should work as well for Canada as for the USA -- besides, I've had a number of loans with them, and if they operate in Canada, you might want to at least check them out). In addition, you'll usually have to pay into an escrow account with your lender for the annual taxes and insurance (most lenders will not give you a loan without home-owner's insurance -- after all, till you pay them off, it is their property).

The devil, as they say, is in the details. So get that lender and agent on board and go with what they say (or fire them and get others if you're not comfortable with the first you find).

And good luck. May you stumble into a great deal:)

--Pete

[DeeBye]

Thanks Pete! That's the kind of stuff I'm looking for.

edit: we have an appointment with a lender for a mortgage pre-approval

[ShadowHM]

Hi DeeBye

Two things worthy of mention are the home inspection and zoning.

A detailed home inspection will uncover any surprises that you might find to your sorrow later. It could be a leaky basement, aged and/or faulty wiring, etc. There might even be problems that the city will require you to fix at their scheduling, not yours. You should hire the inspector, not the current home owners. And don't let the pressure of a competition for a house you like a lot cause you to waive that one.

As you review homes for sale, ask your real estate agent/tour guide about what the area has as its current zoning as well as any proposals before city council for changing it. You will be interested to know if there might be a new high-rise nearby soon, that will take away the sunshine that fills that back yard. Or if that open space nearby will soon be filled with cheek-by-jowl townhouses.

Ask about the city rules on fence cost sharing. It is no fun to find that your neighbour wants to build a fence of a style you loathe and then find that you are required to pay for half of it.

The bank / mortgager will fill you in on all the legal expenditures that you will face.

[Maitre]

-- snip --
Now, in this area, it costs about $2000 up front for all the niggle details (inspection, title search, closing fees, etc., etc.). Figure about 6% commission split between the realators (and if yours says he'll work both sides of the deal, tell him to take a long walk on a short pier -- can you say 'conflict of interest'?). You might also haver to pay the remainder of the year's taxes. And, of course, there's the down payment.
--snip --

When my wife and I bought our house last year, we payed nearly 8K at closing in addition to the down payment (which included some substantial tax reimbusement, escrow payments, and insurrance, so I'm not sure how much actually counts as "closing" fees). The other thing that we ended up paying was "accumulated interest:" the interest that had accrued on the loan between the day that the money was declared as ours, and the day we went to closing. This ended up being about 15 days, which means it was half of our monthly interest, and we payed the first full months payment, and the partial payment for the month that we moved in. Oh, and there was a line item for $50 in courier fees (they couldn't just throw that one in?).

Another thing to keep in mind is what other changes you expect in your life over the next few years. Four days after we finished reviewing our HOA documents, we found out that we were going to become parents. This significantly changed our outlook on the house, as well as the rest of our life but it was too late to call off the bid, or we would loose the bid deposit to the seller.

As ShadowHM says, know the area you're looking at moving into. How is traffic durring the time you commute from your new home to your job? How is parking space for when you entertain? How are the neighbors: Are they all about the same age and place in life as you? Are their kids in the neighborhood that are around the age of your child(ren)? Is HOA membership required? How much is that payment a month, and what do you get out of it?

The last thing to keep in mind is something that my wife and I forgot: what will happen to the electric bill? Our's doubled for the first winter months in our new place. Oh, and whatever you do, don't keep the same phone number as the people who used to live there before. Who knows who has that number.

[Concillian]

On top of the fees that the lender will have a good handle on (requirements and costs vary widely by location,) the lender will likely want you to have another 3-6 months worth of mortgage payments in reserve.

Fixed costs at purchase are not such a big deal. You have to factor them in, but if you're looking at what it takes to afford what house, I'd pay more attention to recurring costs:

1) Property taxes are also one of those things that vary dramatically by location, here in California we pay a bill that's a little bigger than a monthly mortgage payment on a 30 year fixed with 20% down every 6 months, so you figure on paying ~14 mortgage payments a year when doing calcualtions of what you can afford. Other places have much lower or much higher property taxes. Lender will probably have this information, but that's something to consider when putting values into an online calculator.

2) Some of your other monthly bills might be higher as well, or you will be paying bills you didn't pay when renting (water and garbage are often not payed by renters, at least in the US). Energy bills will likely be a little higher to go along with the larger living space. So you might want to factor in that your monthly bills will be seeing a jump on top of your mortgage payment and property taxes.

[ZatarRufus]

Mortgages in the U.S. typically run for 30 years and I’ll assume that it is the same in Canada.

With that in mind, you might want to consider a 15-year mortgage. The interest rate will be slightly lower and because you are paying down the principle quicker, this will result in a dramatic reduction in the total amount of interest you pay. For instance, a $175,000 mortgage at 7% interest will have a monthly payment of $400 more per month; yet will save roughly $60,000 over the course of the loan. Also, you will build up equity in your home at faster rate, which is good if you decide to sell the house in a few years. (Play around with the mortgage calculators to see the difference.)

Also consider buying a home that is in below average condition. Around here, one can find homes needing only paint and floor coverings selling from 10 to 30 percent below market value. This is a way to gain “instant” equity in the home.

As was mentioned, get a home inspection.

See if a home warranty is available.

Check whether or not the home is in a flood hazard area.

Have a realtor run CMAs (Comparative Market Analysis) of the area for the past three or four years and see if property values are increasing. Stay away from areas that show declining values and be wary of stable values as well.

ZR

[Chesspiece_face]

1) Property taxes are also one of those things that vary dramatically by location, here in California we pay a bill that's a little bigger than a monthly mortgage payment on a 30 year fixed with 20% down every 6 months, so you figure on paying ~14 mortgage payments a year when doing calcualtions of what you can afford. Other places have much lower or much higher property taxes. Lender will probably have this information, but that's something to consider when putting values into an online calculator.

Another thing to mention regarding property taxes is that if you are planning on having a house built as opposed to purchasing a pre-existing house the property tax for the lot will initially be the price of a vacant lot. it will probably remain that price for awhile and then will jump up after the lot gets registered as a house. A lot of people when building their first house don't know that the property tax jumps up so high after the first year which can cause problems with improper planning.

[ShadowHM]

Mortgages in the U.S. typically run for 30 years and I’ll assume that it is the same in Canada.

With that in mind, you might want to consider a 15-year mortgage. The interest rate will be slightly lower and because you are paying down the principle quicker, this will result in a dramatic reduction in the total amount of interest you pay. For instance, a $175,000 mortgage at 7% interest will have a monthly payment of $400 more per month; yet will save roughly $60,000 over the course of the loan. Also, you will build up equity in your home at faster rate, which is good if you decide to sell the house in a few years. (Play around with the mortgage calculators to see the difference.)

Mortgages are not quite the same here in Canada. You get your mortgage for an amortization period of your choosing, but you lock the interest rate (or not) for a different time frame, and that is what dictates your rate. There are a number of other differences. DeeBye will be getting a detailed list of all that through his banker.

[kandrathe]

We're not looking for anything flashy or big. We've been renting a pretty nice 2 bedroom apartment for quite a few years now, but we would dearly love to move to something with some more space and a reason for me to buy and operate a lawn mower.

My only advice is to make sure you consider the costs of the additional stuff you will want to put into the house due to the increased space. You will also need to have emergency money in case the air conditioner, fridge, dishwasher, or garbage disposal breaks. No more calling the land lord for repairs.

[DeeBye]

My only advice is to make sure you consider the costs of the additional stuff you will want to put into the house due to the increased space. You will also need to have emergency money in case the air conditioner, fridge, dishwasher, or garbage disposal breaks. No more calling the land lord for repairs.

That's indeed a big advantage of renting versus buying, but I think we can manage.

Anyhow, the pre-approval went swimmingly. We ended up qualifying for a lot more than I expected, and a lot more than we'll need. Time to start looking now.

My dad said he'd buy us a lawnmower as a house-warming gift :blush:

[ShadowHM]

My dad said he'd buy us a lawnmower as a house-warming gift :blush:

So where will the snowblower come from? After all, you do live in the snow belt too. :P

[Doc]

Lots of good advice here, like the emergency funds for appliances and what not.

Look out for being nickled and dimed to death. A house has a way of doing this, especially moving in.

Curtain rods... New curtains. Oh, and something to match the kitchen tile. Contact paper for the shelves in the cupboards. Faucet drips a bit, needs a new faucet. Toilet runs a bit to often, need new internals. A new rug for the hall. Lightbulbs of all shapes and sizes. A can of oil for the squeaks. The cost of gas running around to buy all of these things. That cute little antique table that your wife finds and things it will be just perfect next to the front door. Shelves of all shapes and sizes to put on the walls so you can put stuff away. The obligatory stud finder, so you can find a stud to screw those shelves to. (Just use an electric razor.) Paint and wall paper. It has been my experience that in every house you live in, there is always just one room that does not agree with you. It's that room with the paint peeling just below the window sill that drives you crazy and seems to be the only thing you can see when you walk in to that room. That room painted in Harvest Gold with Avocado trim. (along with deep pile shag carpet) The bathroom with the funky wallpaper which has little toilets on it doing crazy things toilets would never do, like drive cars, read newspapers, and dress in funky 70s discotech clothing, with sideburns and Chester the Molester mustaches on lids that look like smiling lips. The buttery yellow glow of a kitchen that used to be white, but has seen to many cigarettes smoked by lonesome housewives.

Adding lipstick and rouge to a house is all fine and good, but you would be amazed at just how fast those nickles and dimes add up.

[--Pete]

Hi,

We ended up qualifying for a lot more than I expected, and a lot more than we'll need.

That's good, it gives you a few nice options. For instance, if you find a house that's perfect except that it needs a new roof, you can make the replacement of the roof part of the deal, increase the purchase price by the cost of replacing the roof, and get that roof job financed as part of the mortgage at the mortgage rate which is usually much cheaper than the price of other loans, even home improvement loans. Heating, A/C, major repairs or improvements are all candidates for this technique. However, avoid doing this on minor items that have a relatively short lifespan. You don't want to pay for thirty years for something that you'll probably replace in seven.

The idea is to roll as many of the initial expenses into the home loan as you can get by with, keeping as much of your ready cash in reserve for the unexpected. Of course, this is based on having a loan with no pre-payment limitations or penalties. Then, after the dust settles, you've had a chance to adjust to your new budget, and when you think most of the surprises are behind you decide how much of that reserve to pay as a lump sum toward your principle. You'll effectively have gotten a very cheap short term loan for your immediate needs without the additional hassle of applying for it.

And, although it is a little early to talk about it now, be sure to consider adding a bit to your monthly payments. This additional prepay really brings a loan down fast since it is 100% applied to the principal. If you look at an amortization table, you'll see that the first few years of a loan most of basic payment is interest.

Probably more advice than you need or want:)

--Pete

[Alram]

When you take out a home loan you are getting today's money for tomorrow's dollars. If you buy in an area where the houses appreciate, it will turn out to be the best investment you ever make. It was for me.

[Falomin]

And, although it is a little early to talk about it now, be sure to consider adding a bit to your monthly payments. This additional prepay really brings a loan down fast since it is 100% applied to the principal. If you look at an amortization table, you'll see that the first few years of a loan most of basic payment is interest.
--Pete

This is probably the best advice someone can get when getting a loan for a large amount of money. As I am a number's geek I once figured out that on a 10 year, 6%, $20,000 dollar loan, paying $5 extra per month saves $1200+ in interest over the life of the loan. When you get into even larger numbers the $5 a month saves you even more. It really is all exciting stuff to an accountant like me :D

Regarding the house: Check the age of the furnace, find out if the water heater is a self venting water heater or it has a chimney (Self vent goes to the side and are more expensive to have fixed or replaced). A home inspection is a very good idea. My wife and I had one done on a house and he found several things very wrong with the house so he ended up saving us from purchasing a lemon house.

Make sure you examine the ceiling under any bathrooms for water leaks, especially leaks behind walls.

Most of this stuff I learned because I didn't look for these things and had to pay for my lesson, so maybe my mistakes will help you.

[DeeBye]

Regarding the house: Check the age of the furnace, find out if the water heater is a self venting water heater or it has a chimney (Self vent goes to the side and are more expensive to have fixed or replaced). A home inspection is a very good idea. My wife and I had one done on a house and he found several things very wrong with the house so he ended up saving us from purchasing a lemon house.

I won't even think about buying a home without a thorough home inspection.

[Alram]

Go around and talk to the neighbors as well.

[DeeBye]

Go around and talk to the neighbors as well.

They certainly can't be any worse than the neighbours I have now :angry:

[kandrathe]

Hi Pete. That was really good advice. I just thought I would comment on that and compliment you on some things we agree on, like sound fiscal sense.