Buying a house during a recession can be a scary prospect, but in some places in the United States, buying a house in good times or bad is a scary prospect either way.
Whether you’re in a part of the country that has a relatively stable economy or you’re in a part that is being hard hit and has low property values, there is one constant: Buy as low as you can. By buying low, you’re not only getting a house for the cheaper end of the local market, but you increase the chances of being able to sell the house high later if or when the economy rebounds and you’re looking to get out for whatever reason. This doesn’t always happen, but by all means try to avoid a situation where you buy high and sell low.
Regardless, it seems property values are dropping nationwide and for those with the means, this is as good of a time as any to get in on the market.
Here are a few tips to get you started in the right direction:
1.) No matter what, know exactly what you can afford and do not under any circumstances go beyond your budget.
This means factor in all your monthly bills, fuel costs and food expenditures. Don’t necessarily count on “cutting back” once you get your mortgage underway because that doesn’t always work. Humans are creatures of habit, and it can be difficult to cut back on things such as eating out and movies.
Use this monthly budget to determine how much money you have left over for a mortgage payment. And even with the difference dedicated to the mortgage, always have a remainder of at least a few hundred dollars in case something comes up that’s unexpected, such as car repairs or household maintenance.
2.) Go to a mortgage lender first and speak to them about the process of buying a home, and how much you can afford for the monthly payment. This will allow the lender to be frank and open about what they can lend to you based upon any assets you already own and your credit history and employment.
Be prepared for them to get personal. This is their job. In the past many banks gave out mortgages to those who were well above and beyond their means simply because they swore they could make the payments. Now, banks such as Wells Fargo do extensive credit checks and even contact past landlords to make sure you are the type of person who pays their bills on time. Believe it, as this happened to my wife and I when we bought our home last fall.
3.) When speaking with the lender, get their itemized estimate of the monthly fee and the max amount you could buy a home for. Understand that interest rates change daily — sometimes hourly — and this can effect the cost of the home you can close on.
Keep in mind you will have to have enough money to cover closing costs, which are due up front prior or at the time of closing on the home. Sometimes you can add money to the closing cost to consider it a down payment on the house. Lenders love to see this as it indicates you really know how the game is played and having the means to at least save up some money over time.
4.) Don’t just shop at one lender and stick with them. It is to your advantage to see what other lenders will offer in terms of interest rates, down payments and closing fees, as well as the monthly fees that help make up the mortgage payment. Also understand you will need title insurance or mortgage insurance. This is a formality the lender adds on in the event there is a default on the property or someone pops up later claiming they have a lien on the property.
This is what escrow is for, which the title company goes through the do a background check for tax and lien purposes to make sure the home is “free and clear.” Still, the lender likes having things nice and cozy for them, so keep this in mind.
5.) When going out to look at houses, don’t be afraid to ask for a utilities record to see how much it costs to heat or basically run the home on a monthly basis. And as confrontational as it may seem, don’t shy away from For Sale by Owner properties. This means you’ll get a more personal approach to the property and the owner will be the one doing the tour. This is an opportunity to get informed information on the structure and over-all history of the house. Try to avoid them talking about Little Bobby’s first steps because it may make them get cold feet and back out on you. Humans are not only creatures of habit, but they’re extremely nostalgic.
Often realtors don’t know everything on a property and it’s their job to make a sale by avoiding the negatives — however many or few they may be.
6.) A plus to doing For Sale by Owner is there’s not extra commission tacked onto the sale price for the realtor’s fee, saving you money and yielding the owner more profit.
7.) When you’ve settled on a house and have secured a lender, you may now use the secured loan as a means to let home owners and realtors know you mean business. They’ll be more willing to jump through hoops for you, especially if it means a sale in these uncertain times.
8.) Prior to closing, most lenders want a foundation inspection, and it may be to your advantage to also have a building inspection done. While the foundation inspection is often done by a licensed engineer, the home inspection (which doesn’t necessarily include the foundation) focuses on electrical work, plumbing and over-all construction. The roof is also key to deciding how much you want to settle on. If there will be thousands of dollars of repairs to be made, lower the amount you’re willing to offer accordingly.
Be sure to mention this to the home owner. In some cases, as with roofs especially, a home owner may be willing to fix the roof if you’ll go half on it and come up a bit on your offer. This is another way to secure the sale and make everyone happy. However, don’t do this unless you’re extremely close to closing or you will have it written on a contract.
9.) When dealing with an owner and not a realtor, everything will have to be documented. Many title companies have FSBO forms to fill out that protect both parties. Things such as the roof condition listed in the previous note can fall into this area.
10.) If something seems too good to be true, it probably is. If the owner keeps making promises and shows no signs of backing them up, you can always back out unless you’ve invested money. Working with a mortgage lender is a little more difficult to back out from since there is often a commitment fee of several hundred dollars at stake. This money is mostly to secure the lending agent’s time in the matter. It also gives one peace of mind knowing they’ll get their due attention from the lender since you have given them substantial money and are essentially “paying” the lending agent to follow up with his or her superiors and guarantors to keep things moving.
11.) Count on there being a ton of papers to fill out at the title company and the lender. Bring a new pen or several older ones if that’s what you have. And hopefully the banks now have all their ducks in a row after the Fannie and Freddie fall-out from last fall.
My wife and I had to come back in multiple times over a one month period to sign documents the guy “just found out we now have to sign.” It’s not his fault; it’s the company’s for making things up as they go along. The majority of these documents are now intended for the IRS to be able to yank a mortgage agreement on demand and do an extensive background check on the lenders and the recipients.
12.) It never hurts to look your best when dealing with home owners, realtors, the title company and the lender. This helps give them greater confidence that you’re a respectable person who is honorable by their word.
13.) Even if you see “your dream house” never lose sight of the money in your bank account. If it’s too expensive for you then it’s too expensive. Rarely does a home owner want to go more than $10,000 below their initial asking price. And as a result don’t feel compelled to give in and “hope everything works out in the end.” It won’t and you’ll end up losing your dream house.
14.) Don’t be afraid of ashamed to look up repossessed homes. This is incredibly important, especially for those one tight budgets. These houses are often cheaper than other homes of the same age because the bank is trying to recover some of the lost funds. Often the price asked is barely over market value and these houses can be, literally, a real steal.
15.) Always look to see the type of neighborhood you might be moving too. Keep any eye on the newspaper or TV news to see where many of the city or town’s crimes are being committed. If they’re anywhere near your prospect, it should be avoided. Also be sure to look at proximity of schools and churches if these things are of importance to you.
16.) Once the sale is complete, you’ve deflated and you’re done moving into your new home, do everything you can to maintain the integrity of your home.
If you have to sell at some point in the future, it will help maintain its value. Keep in mind adding decks or covered porches can add value, as can erecting proper storage sheds or garages. Just remember to ask your city office about any necessary permits to do so.
Important Note: Count on the process once you’ve gone into escrow to last at least one month before you go to closing. At least one month means it could be longer, especially now.