Before we get into the nuts and bolts of “how to buy a home”, we should first consider “should I settle for a used home?” It’s cliché but often repeated, buying a home will be the largest investment you will make in your life, unless of course you have 4 girls and they all need braces! So, if it’s true that it will be the largest investment, why do so many people make some rather common mistakes about their first home? Often, many feel they can’t afford something that doesn’t come with “problems” or repairs. Does that have to be the case? Not really. Here’s why: when considering the purchase of a home, many think that building a new home is a pipe dream because, either it cost too much, or the stories they have heard about building a home are shocking. Granted, there are some very skilled general custom home building contractors that charge what they are worth. Often the quality of products they use, or the skill level of the subs they use, all might be high-end items and personnel. As a result, you could easily spend $125 per square foot on a new home. Stories of building are also true. Building a new home can be stressful for many reasons. Here are a few in my experience that shed light on why some individuals struggle with building a new home.
- Stretched to the max.
- I have observed couples who qualify for a loan, and take the loan to the max of the limit, and then during construction other costs creep in and the pressure of having to “find” additional funds puts immense pressure on both the client and the builder. Avoid this by putting a contingent amount of money into the loan for surprises during construction. A 5-7% contingent fund (of the entire purchase) in your loan will go a long way to alleviate some of the potential moments of stress related to building.
- Focus on what you want. Quality, functionality, economics of the purchase, or location. Each of these, and perhaps a few others, if meditated upon and agreed upon, if you are a couple, will help you to make wise choices regarding your home. Focusing on one, or no more than two, because budget often predicates your choice, will help keep your project from derailing.
- Unrealistic expectations.
- If you are paying $125+ per square foot for a new home, I would say that you have every right to have high expectations. If though choosing one of the many on-your-lot builders here in the Pacific Northwest and getting what many describe as a “ridiculous” priced home, you may need to temper your expectations. Not to say we don’t strive for excellence, the reality of the build is, you’re paying half the price in some cases, which may mean that having every imperfection addressed is simply not a realistic expectation. If you feel you are the type to demand more than what you pay for, you may want to opt for a smaller home at a $125 per square foot. If though, you see the forest, not just the trees, than you are a perfect candidate for a home at a “ridiculous” price.
So, let’s address “how to buy a home”. I think it well to understand that as many people you ask that question, you will get a plethora of answers and advice. So, please indulge me with what I advise. It’s all about the money. Banks like to use what’s called the “debt to earnings ratios” to determine how much you can afford a month on a new home. Easy to figure, and then the real fun starts with all the paper work. Here is a calculator that you can use to see how much money a lender might allow you to borrow when purchasing a home. Now, just a bit of clarity. You don’t have to put in the amount of gas you use or the amount of your food or entertainment budgets. They want to know credit card payments, car payments, and other long-term debt that you might have. Alimony or child support would be considered such. Subtract what I call “hard” debt from your monthly income, and you can get a picture of what most do when they do that. Where’s all my money going?! Basically, lattes and wine! But seriously, the amount left over is your income minus your debt, and of the left over you can use up to 36% of your total income for a house payment. Granted, I just made that look so simple, but the truth of the matter is, there are several things that go into getting qualified for a loan. To learn more, click here for some different “views” of how to go about getting qualified. NOTE: doing advance research is great, but you want to know what’s even better? A great loan officer or mortgage lender. If you are in the Tacoma area and need one, than I have one that I highly recommend; knows the business like nobody else and is focused on giving you the only advice you need to know either to qualify, or getting you qualified. His name is Justin Glass. You can reach him at 253-208-7879 or email at firstname.lastname@example.org . I have to let you know that he does not do construction lending. This article is not intended to “push” building a new home, but rather to answer the question, “how to buy a home”. If though you are convinced about building, as opposed to buying a used home, then I would recommend our list of approved lenders.
Once the lender has “pre-qualified” you and your significant other (if you have one), then you can start the real process of finding the perfect floor plan, location, amenities, etc. Will you buy used or go through with the very rewarding process of building a new home? Here is an article that may assist you to determine which path you will take. There are two ways to go about buying a home. Whether or not you buy or build the process is similar. You have to find what you want, negotiate a price, agree on the price and go through what many call “the purchase and sale” arrangement. Having a pre-approved letter from your lender goes a long way to assure the person selling what you want that you qualify to purchase the property. If you elect to have a real estate agent involved, (always a good option) then they can help with negotiations, working with appraisers, lenders other agents, the seller and a whole host of paperwork. If you are buying, then the real estate agent in essence is working for free for you. That’s because most who are selling their home or property have made arrangement to pay both real estate agents. Yes, you could argue that you might be paying for the agent because the seller raised their price to accommodate the cost of having to pay the agent, but that is not always the case. Once mutual acceptance of the land or the home has been made then inspections, typically required by your lender, which you have to pay, will need to be made. When the inspection is finished, depending on what is on the report, you and the seller through your agents, negotiate which if, not all have to be addressed, fixed or repaired, and which ones are not required by the lender to be addressed. Cosmetic items like paint, wood work etc., will likely not be an issue with the bank or lender. However, mechanical or structural issues will be. Sometimes with the sale of a used home, the cost to repair is significant and the seller just does not have the money to have the work done. However, they may agree to allow some of the profit from the sale of the home, if any, to cover the repairs. Items like a busted furnace, or poor roof or bad siding, will more than likely stall the process unless either the borrow or seller agree to have them fixed to the bank’s approval to move the process forward. In addition, like that of a newly constructed home, an appraisal of the property and the future home to be built, or the used home that you might be looking at, needs to be performed, again paid by the person buying the home. A typical appraisal is about $400-500. Some lenders my offer this for free, but you need to confirm.
I think if I were to make a plug at any time on whether to build or to buy new, this is the time. The reason being is that often the appraisal of the new home, say if you are purchasing a True Built Home, will often, if not always, be a pleasant surprise due to the amount of value you will have upon completion of your home. This is no joke. We see in many cases the value determined by an appraisal upon completion of one of our homes is often north of $100k above the cost of construction. Click here for just one example. To be fair, a used home may have some equity, but think about this: if you were selling your home and paid to have a professional appraisal and the value was, say $350k, and you owed $250k, why would you sell the house at $250k? You wouldn’t. You would try to get the most profit you could. So, if you were to buy the house at $325k and it’s value is $350k you would have some equity. However, when building a new home, you should realize an improved equity position than you would with a used home. This is a very basic approach to “how to buy a home”. Here are some review points:
- It’s all about the money! Find a lender; get pre-approved; find out what you can afford.
- Start shopping. Either for a used home, or a parcel of land to put a new True Built Home on!
- If you find what you like you could obtain the service of a real estate agent.
- Make an offer.
- Go through negotiations.
- Mutual acceptance.
- Get inspections.
- Negotiate fixes, repairs and cosmetics.
- Get an appraisal.
- If the numbers work and you have enough cash to put down on the home, close the deal.
- Have a double gin martini, or whatever it takes to celebrate or de-stress.