Part of being a grown-up means facing this question at some point: Should you rent or buy? It's a confusing thing for sure. On the one hand, there is no better feeling than owning a home. On the other, there is no better feeling than knowing someone else has to make expensive repairs.
We'll say this: You do you. Don't let anyone pressure you into a huge decision you aren't yet ready for.
If your're mulling it over, a calculator can help you get your mind and money right. According to the values I entered for Los Angeles, it will never be cheaper to buy than rent. Go figure! When I enter the numbers for Pittsburgh, it tells me that if I planned on living in the house for five years, it's a good idea to buy. Obviously, every situation is different and sometimes things happen that you could never imagine. But still, this calculator is a great tool if you're on the fence.
Okay. So you've decided you want to buy a house. Now what? Here's what:
If you have your credit history in good shape, then you're ready to start the whole process. Without a doubt, pre-approval from a lender is necessary. The bank will look at your finances and give you a letter acknowledging the risk they're willing to take on you. However, just because the bank says they'll lend you $4 million doesn't mean that you can buy a $4 million house. Of course they're going to shoot for the moon — they're the ones collecting the interest! Because you have a budget, you know exactly how much you can afford each month.
With the pre-approval amount from the bank, you can start looking for homes in your price range. Traditionally, no more than 1/3 of your take-home pay should go towards housing. The cost of the home isn't the whole picture. You'll need to factor in taxes and homeowners insurance, too. The amount you can afford monthly and your down payment will determine what price you should hone in on.
Clear up your financial past. Get your current credit report and dispute any errors. Make an effort to pay off any credit debt. Make sure you are never late and never miss a payment. Your consistency will play a large part in your credit score. If you aren't where you need to be, that's fine. This isn't a race. Get yourself set for success. There's no rule that you have to buy a house by a certain age. You'll get there.
Once you have a feel for the type of home you're interested in, a price range, and a desired neighborhood, get in touch with a realtor. Friends and family are of course a great resource. You need someone who works in your market, in your price range, and who has been in business long enough to be unflappable. You need someone who you get along with, and who you can get in touch with when you need to. Ask around! Go down the Yelp rabbit hole.
Your offer is accepted (woo-hoo!). If the offer has been accepted, you'll typically give the sellers "hand money" to show that you are serious about making good on the purchase. This amount varies on the purchase price, but shouldn't be more than $5,000. They won't cash this check now, it just shows good faith.
Once you pick a house you like (exciting!), your realtor will help you make an offer. They'll guide you on how much to offer and generally walk you through the beginning steps of the buying process. Sometimes you'll be outbid or turned down. It sucks. But there are more houses. Remember, this is a financial decision and not an emotional one.
If you don't have a 20% down payment saved, no worries!There are a ton of great programs available for first-time home buyers through the Department of Housing and Urban Development. Seeking out assistance on the federal, state, and local level are smart moves — an FHA loan down payment can be as low as 3% and they have options to roll your energy-efficient improvements right into the mortgage.
Once the inspection is done, negotiate. Either the sellers to fix things or lower the price. Your realtor should be able to aid you in the fine points here, but essentially once an inspection report is made, you are fully able (and expected) to ask for some price concessions. After a few go-rounds with the sellers, you'll agree on a (new, hopefully lower) price and your realtor will work out a closing date.
Go into closing. Your lender and your realtor will work together to get all of the paperwork in order and you'll sign off on it all at the closing. Then you just write the biggest check of your life, sign your name 100 times, and get the keys! Hooray!
Most people who have been through this process will tell you that it's hands-down the worst and most frustrating thing ever. And it is. But then at the end you get a new home! Totally worth it.
Decide on a mortgage lender. Here's where knowing which lender you'll work with comes in handy. With all of that decided, you can basically begin the super fun task of packing up all of your stuff and booking movers. If you haven't decided on a mortgage lender, then this is the time. Your bank will have the home appraised and take it from there. Very infrequently the bank will appraise a home at less than you've agreed to pay — if this happens, you'll have to negotiate the price again or walk away. (At this point, if you do walk away for any reason you'll most likely lose your hand money.)
Next, you'll need to have the home inspected. Absolutely do this, no exceptions. It's not that expensive and could potentially save you much money and heartache down the road. If it turns out that nothing is wrong, then great! Good for you. Now you know. But if something is wrong with the house (and there probably will be) then great! Now you have a bargaining point.
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