The First Steps

Do you think you might be interested in buying your first house?  Perhaps you’re not ready to make a purchase now, but sometime in the near future you’d like a house?  As a twenty-something-year-olds, Mr. Wetzel and I always assumed we’d get a house “someday,” perhaps in 5 or 10 years.  Then our friend, Randy, bought a house and shared with us how much his mortgage was. Mr. Wetzel and I looked at each other, baffled, and we knew what each other were thinking: “That’s less than what we pay for rent!”

After Randy gave us the bug, we sat down to talk about it practically, and it was a little overwhelming. I mean, isn’t homeownership something “adults” did? Is it possible that we could actually consider buying a house? Would this be a wise decision for us?  We decided to run searches on some real estate sites and keep a pulse on the market to see what kinds of houses popped up.  If nice homes were selling for cheap enough, it would make it an easy decision for us.

PLAY AROUND WITH A MORTGAGE CALCULATOR

Our goal was to pay less than or about the same amount that we currently did for rent.  To figure out a ballpark of what price of home we would be looking for, we used an online mortgage calculator, like this one from BECU.  Here are a couple tips on how to use the calculator:
(1) If you are getting a 30-year mortgage, your Number of Payments will be 360.  30-year mortgages are common for conventional loans, as well as VA loans (available for military) and FHA loans (many first time homebuyers use FHA loans).
(2) APR will change drastically depending on where you live and when you actually get your mortgage.  To get a general idea of your APR, google “APR rates” and your city, and you’ll see some common APRs that are currently being advertised.  When Mr. Wetzel and I crunching numbers, we decided to overestimate and calculate our finances based on a 7% APR.  In reality, we received an APR of 4.875%. This means that our mortgage payments are about $170 less each month than we planned, which is great because we’ve needed that cushion to be able to buy things for house maintenance. I advise to overestimate the APR in the early planning stages.  You can always decide to expand your budget later, but if you get your heart set on a certain type of house, it’s very discouraging to backpedal and look and cheaper houses. Also, even if APR rates are low right now – and they are at record lows – you never know what your actual APR rate will be, or what rates will look like a 6 months or a year  from now when you finally find the house that you want to buy.  Be conservative now. Be excited about extra financial flexibility later.
(3) You type in the amount you want to pay on your mortgage in the “Monthly Payment” box then click the “Monthly Payment” button, and a figure will be calculated for the “Loan Amount.” Or, you can Type in the “Loan Amount” you’re looking out to figure out your monthly payments.

There are a lot of complexities to figuring out how much you actually pay each month to own a home, many of which are variables that you won’t even know until you are going through the process of buying the home you want.  There is possible mortgage insurance; there are real estate taxes; there are city expenses for sewage, run water and garbage.  When you’re in the planning stage, just ignore these factors, and keep your estimated APR high.  You aren’t signing any papers here. You’re just planning and looking…window shopping, with intent to purchase.

CHECK YOUR CREDIT SCORE

Your credit score is key in determining what loans you qualify for and how good your interest rate and APR will be. When Mr. Wetzel and I started seriously looking at houses, we ran a credit check. It’s a good thing, too, because there was an error on our records: we paid a bill 3 years earlier, and then moved to a new apartment; the billing company had a paperwork error but couldn’t find us, so the bill was sent to collections. Since we found the mistake early in our homebuying process, we were able to correct our credit history and improve our credit score significantly before actually applying for loans.

To check your credit score, go to AnnualCreditReport.com.  From here you can connect directly to the three credit bureaus, Experian, Eqifax and TransUnion, to check on your credit history.  Checking your credit history is free, but the different credit bureaus may charge different amounts to actually see your numeric credit score.  The credit history is what you really need; don’t feel obligated to pay to see your score.

It’s also a good idea to take steps to improve your credit, but that’s a tangent for another post.

FIND OUT WHAT LOANS ARE AVAILABLE

Mr. Wetzel and I were excited.  We figured out what we wanted to pay for a home, and we knew our credit was in-line. We were ready to talk to a lender and take a look at what actual mortgages might be right for us. You might be tempted to start your homebuying process by walking into your bank or credit union, sitting down with someone and asking them to see how much house you are approved to buy. DON’T DO THIS!

Here are list of reasons why you should figure out what you want to pay for a home before finding out how much the lender will allow you to borrow:

(1) This is not about finding your identity in the sticker price of your house.  The loan amount you are approved for is not a reflection of who you are.  At the end of the day, a house is just a thing that you purchase. You can have a home without owning real estate.
(2) If the lender thinks you can afford a half a million dollar home, it never means you should buy a half a million dollar home.  Our society got into its current financial crisis because banks were wrong about how much people should bite off and people were not aware enough of their financial chewing capabilities.
(3) Your goal is not to spend all your money on a house.  Figure out what’s right for your family’s finances, and go from there. A lender makes money off lending, so of course they want to lend you more, rather than less.  For Mr. Wetzel and me, the “right” amount was to try to pay about the same that we were paying for rent. We knew even if one of us lost a job or needed to take time off work, we could still get by on one income and pay our mortgage. Don’t try to fit your life around a house; figure out what kind of house will fit into your life.

Once you talk to the mortgage professional at your bank or credit union, they’ll be able to work with you to figure out what type of loan is right for you, and they can also confirm whether or not the lender would finance a loan for you at this point in your life. The lender can also give you a better idea of how much you need to have in savings in order to pay the down payment and closing costs for a house in the price range that you want.

The lender can also pre-approve you for a loan. You may or may not want to do this, depending on how serious you currently are about buying a house.  One advantage to getting pre-approved is the lender will run a credit check, and they should be able to share this with you.  This credit report will show your numeric credit score as well as your credit history. I liked being able to verify what our credit scores were, since I did not want to pay the three credit unions for that information previously.

Nowadays, many lenders have information online about the loans that they have available.  Mr. Wetzel and I found BECU’s Home Loans website very useful once we were actually ready to apply for a loan.  If you’re curious, google “home loans” and your lender’s name, and see if they have a similar website available.

If you live in Washington State, I recommend BECU all the way.  We do our checking and savings with them, and we used them for our home loan. They were fast, friendly, very helpful and had excellent loans available.  If you don’t live in Washington, ask friends and family for a lender that they recommend.

By ekwetzel
2010-10-11

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Money photo and House photo, courtesy of Stacy Wagoner Photography.

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