How to buy a home

Quickstart guide to home shopping

Get a mortgage lender

Find a good lender and get pre-qualified, or even pre-approved. Being ‘pre-approved’ means that lender will lend you the money under the terms specified.

Goals with a loan pre-approval

The key things you want to do is get the lowest possible APR (ignore the interest rate, as that has confusing things like points to factor in, which I don’t recommend buying, as well a lot of fees excluded. APR is the most apples-to-apples number.) You’re also checking to see how much of a loan you’ll qualify for, what the payments will be, and how much down you’ll need put. Feel free to have the lender run a few different scenarios for different home purchase prices and different down payments. You’ll have to supply financial documents like quarterly bank or investment account statements, etc, so create a folder on your computer or cloud storage where you save the info in case you need to use it again for another lender later.

Get your down payment together and have it in cash

Saving a lot of cash in a high-yield account, like your Altruist Cash account.

Start touring homes

Find a buyer’s agent and start scheduling home tours, or visit open houses on your own. Look at as many homes as you can! It doesn’t cost anything except your time, and seeing a range of homes is very useful for getting a feel for the market vs your budget & tastes. Take someone that is knowledgable about what to look for (things that likely would need to be replaced/updated/could break, etc.)

Redfin seems fine

I used and was happy with Redfin (I did ZERO research on other agents), as they made the process easy to schedule home tours. The professionals they used for us for home inspections & title insurance etc after we made an offer seemed reasonable, but you can also shop for your own. I honestly didn’t care too much about my buyer’s agent– other than making sure they weren’t pushy, which Redfin wasn’t since their agents weren’t paid on commissions!– since the seller customarily pays both agents’ fees. Remember, though, that all real estate people just want you to buy & sell real estate, since the business runs on transactions, so do your own due dilligence on what price to offer, what terms to enforce or waive in your offer, etc.

Making an offer

Your buyer’s agent will advise on offers, but make your own independent decision first and don’t be swayed unduly. The agents ALWAYS want you to buy no matter what; they don’t care if you’re getting a good deal, if the home is right for you, etc.

If it’s a hot ‘seller’s market’, keep a cool head, and remember that you can always wait until next year to buy a home. My wife & I looked off and on for 3 years before finally buying, and that was just fine.

Waiving contingencies in your offer

While I was confident in our financial position and ability to get financing, I don’t recommend that most people waive the financing contingency, but we did in attempt to make our offer more competitive. I definitely do NOT recommend waiving the inspection contingency– we certainly didn’t– unless you’re a home-flipping expert and can do your own inspection while you tour. Think about costly items like big appliances needed to be replaced (furnace, fridge) or other maintenance (new roof, new fence/deck) or updating (new electrical wiring or plumbing), and get a feel for what it would cost to do some of those repairs and add it mentally to the ‘true’ purchase price of the home, or use it to negotiate the price downward with the seller.

Evaluating a home purchase financially

Try to only buy if you can stay 7-10 years minimum in your home to amortize the large ~7% hit you’ll pay when selling.

You can look up home price indexes using data like this: https://fred.stlouisfed.org/series/CSUSHPINSA and can slice by your area (ex:’NW MLS King County’ for Seattle-area buyers)

Compute the ‘price-to-rent’ ratio by taking the purchase price and dividing it by the equivalent annual rent for a similar place. For example, if a 3-bedroom 2 bath home is $600,000 and would rent for $2,500/month = $30 K/year, that’s a price ratio of 600/30 = 20x rents. This is similar to the PE ratio for stocks. Cheaper ownership markets have ratios around 10, more expensive or inflating markets around 20+. In theory, a low own-to-rent ratio means it’s relatively more advantageous to own instead of rent. Hotter markets with high ratio might be better off renting in, unless of course prices keep going up!

Make sure that you can cover the total costs of housing, including mortgage, homeowner’s insurance, property taxes, and expected maintenance for ~1/3 or 1/2 of your salary, and make sure that the remainder of your salary will cover everything else with a little room to spare! 1/3 is the usual advice, but I can see stretching it IF your other expenses are much less than the other 1/2 of your income.

Lastly, remember that small percentage differences can add up to big dollar differences in home-buying. If you’re looking at a $500,000 home, taking 10 minutes to ask your buyer’s agent to negotiate $1,000 off to pay for a small repair that turned up in the inspection might seem small, but it’s 10 minutes for a possible extra grand in your pocket. That’s a pay rate of $6,000/hour!