As I mentioned last week, my wife and I have been looking to buy our first home. I’ve found the entire process to be incredibly stressful. Not the looking part, that’s kind of fun. But the costs and regulations involved, nobody seems to talk about. So I decided to write a post about everything* you need to know about buying a home but nobody ever tells you.
When I wrote the first draft of this article, it was way too long, so I’ve decided to split it up into two parts.
Part 1 today is about things you need to know about and costs involved with the part of home buying that takes place before closing.
Part 2 will highlight closings costs and costs afterward.
If you don’t don’t have a great credit score, it’s almost impossible to get a conventional mortgage these days. After banks getting burned by thousands of questionable loans written during the housing boom, that isn’t really a surprise. But there is an option left to you. The Federal Housing Authority can insure loans for those with less than stellar credit. It’s kind of like student loans, the federal government pays if you don’t. But even they have some conditions you have to meet. Also, you need to have at least 3.5% of the purchase price as a down payment.
If you have a bankruptcy on your record, you need to wait at least 25 months since the discharge. The discharge is typically about 6 months to a year after you filed for bankruptcy. My wife’s was actually 5 months. The FHA says to wait 2 years, but the mortgage broker will tell you to wait another month after that date to make sure the information has been updated in the FHA’s systems.
During that time, you need to start on restoring your credit. Get a secured credit card. Capital One issued a card to my wife a year after her bankruptcy. Don’t let any non-medical bills go into collection either.
If you lost your house during the bankruptcy, then you have to wait three years instead of two. Otherwise same rules apply.
Never assume that that someone will volunteer all of the information you need. Use this guide as a starting point. Sit down with a mortgage specialist and ask questions. Here is a starting point of questions you should ask any mortgage broker.
Earnest money is like a pre-down payment. This is cash (well a check) that you put up front to show that you are “earnest” in your interest to buy the place. It’s submitted with the offer and held in trust (not spent, just held onto) by the real estate agent that listed the place. This is going to be at least $1000 and typically 1% of the purchase price. Offering more earnest money makes you seem more earnest, i.e. serious about buying. This money is applied towards the down payment at closing.
Getting pre-aproved costs nothing, but then once your offer has been accepted, you have to actually apply for the loan. This needs to be done within a week of the offer’s acceptance. There are no surprises here, you already have a guarantee in writing that the bank will approve you up to a certain amount. But there is a surprise. There is an application fee to apply for the loan. This will pay for the credit report the bank is pulled and an appraisal on the house to make sure you aren’t paying more than the place is worth. This can cost around $300-$400.
A home inspection is done by licensed inspector who goes around and checks the electrical, plumbing, appliances, roof, siding, foundation, etc. In short, they check everything about the house and will tell you everything that is wrong and how serious it is. (A raised piece of sidewalk will show up in the report but should only be listed as a tripping hazard, not a red flag).
Expect the cost to be as little as $150 to over $1000 depending on how detailed you want to go. Testing for things like lead and radon will cost more. It will come out of your own pocket, over and above the down payment and closing costs. A good inspection should take about 3-4 hours and the inspector should walk you through as he is performing it. The final report should be ready in a few days.
If you served in the armed forces, you can get an inspection free through the Veterans Administration. Check with your local VA for more information.
Total costs: $450-$1500
*At least it’s everything I’ve found out so far. Who knows what surprises are still coming in the next couple months before we actually find a place and close on it. Also, this information is based on housing in the US and, in particular, Colorado. Always check with a license professional before taking my word as correct.