Cat’s outta the bag: I’m house hunting. I’ve been renting in LA for 8 years, I love it here, and mortgage rates are so low that I figured I’d just look and see what’s out there. (Also, I became very obsessed with the @cheapoldhouses Instagram, which has fed into my frenzy and my lifelong dream of renovating something to live in. Those people are doing the lord’s work.) But AHHH. Y’all, being a first-time homebuyer is confusing. Even being a person considering buying a home for the first time is confusing. There’s a whole new vocabulary to pick up, ducks to get in a row, and a lot of my googling was fruitless (you know, seeing as we’re living in an unprecedented time and the real estate rules have changed a little bit from when most advice was written).
Basically, I spent the last couple of months totally lost. Can I even afford a house? Is now a good time to buy? Where is the checklist for beginners?! How many questions can I text my mom before she blocks my number?! I needed a one-stop internet post that clarified all the terms and timelines — a step-by-step guide for buying real estate, explained by a normal person who didn’t have a vested interest in selling me a property or mortgage or moving service. I couldn’t find one (or, at least, I couldn’t find a centralized one that didn’t end with me opening an exponential number of tabs and overheating my laptop), so I decided to harangue my loan officer, Andy Green, and my Realtor, Francine Biton, with hours of questions on everything first-time buyers need to know. (If you’re like, “hey, but Caitlin, I don’t have a loan officer or agent to help me,” DON’T WORRY. I will also share how you, too, can find nice and generous people to harangue with your own questions!)
So if you’re also sitting at home wondering “hey, should I do this?” my answer is this: “uhh…maybe! It depends on your situation. But hopefully, I can help clarify!” (Sorry if you’ve come here from Google in the hopes that at least one person can validate your home search.) Before we jump in, I just can’t overstate enough that nobody knows what’s going to happen in the market moving forward and that yes, we are living in unprecedented times…but if you’re curious about exploring ownership right now, here’s a regular person’s guide to how things are currently going down in the time of COVID and how to figure out if now is the right time for you to take the plunge.
Step 1: Check Your Credit Score
Unless you’re planning to stroll in and buy a home in cash, you’re going to need to take out a mortgage. (If you are planning to stroll in and buy a home in cash, dang, please come write a guest post about that because I admire your financial acumen.)
Simply put for my beginners: a mortgage is an IOU between you and a lender (AKA a bank with a lot of money). They’ll come in, buy your house on your behalf, and you’ll have the privilege of spending 15-30 years paying them back (with a little extra added on top every month, because hey, they did loan you a ton of money).
So, how does your lender decide that you’re someone worth trusting? How do they know that you’re not the kind of person who will just borrow a bunch of money and never pay them back? They’ll look at your whole background, like your work history and your bank statements, but they’ll take special note of your credit score. You can check your score with sites like Credit Karma, Nerd Wallet, or Mint, but your bank or credit card provider may also be able to tell you. (I can find my FICO score in my Bank of America app, my Citi App, and my Amex app.)
If your score is high — usually anywhere above a 720 is a great place to be — your lender will say, “oh, heck yeah, that person will definitely pay me back,” and you’ll be eligible for the lowest rates. That means that you’ll have to pay a little less every month (and if you’re buying something as big as a house, “a little less” every month can add up to thousands of dollars over the life of your loan). If your score is above a 620, you should still be able to secure a “conventional” mortgage, just with a higher rate (read: you’ll pay more every month). But if you have a lower credit score, around 580, don’t despair! There’s still hope for you. Now it’s time to…
Step 2: Learn Your Loans
OKAY. I know. I just dropped the term “conventional loan,” and WHAT EVEN IS THAT?! So let’s take a sec to clarify the main types of loans you can take out — get used to these words cause you’re gonna see them a lot on your search.
- Conventional Loan: This just means that the loan is issued by a financial institution and not insured by the government. (The rest of the loans below are insured by the government, which means that a bank or credit union will buy your house, but the government will provide a guarantee to your lender in case you stop paying.) Normally, folks in this category have a fairly strong credit score and they’ll put down around 10-20%, but you can go as low as 3% in some situations. If you’re paying less than 20% for your downpayment, you’ll pay a monthly fee called private mortgage insurance until you hit certain thresholds (this is all super dependent on your market and the house you buy.) In COVID times, these are hands down the most attractive types of loans. WHY? Well, next up is…
- FHA Loan: This type of loan can be easier for first-timers to qualify for, since they only require a credit score of 580 and a minimum downpayment of 3.5%. While this can offer you some financial flexibility and breathing room, some agents may encourage their sellers not to accept offers made with FHA loans. Basically, FHA loans have SUPER stringent safety rules. While you may be okay with redoing weak floors or fixing peeling paint, this loan’s requirements says that the seller has to make all these changes before FHA will sign off on you buying the house. Since this may be annoying for a seller who just wants to get out and move on ASAP, offers from those with conventional loans will often win out over their FHA equivalent. (Not to get too in the weeds, but even 203k renovation loans — like what Bowser got, where FHA will bundle in a loan for repairs with your mortgage — require that the home is safe…so drywall’s gotta be up, no visible wires waiting to shock ya, no peeling paint for your kid to pull off and eat, you get it.)
- VA Loans or USDA Loan: These are two more types of government-insured loans that let you buy a home with zero downpayment. VA loans are for eligible veterans or active-duty military personnel; USDA loans are for low-income rural or suburban buyers. Since I’m not a veteran or a rural buyer, I’m not a true expert on either — just note that these may be options for you, too! Here’s a page with more info on each.
It’s important to know which type of loan makes sense for you early in the process for two reasons: some properties are extremely specific in what they’re willing to accept (“No FHA” is a super common phrase in listings), and having an idea of what sort of loan you’re shooting for will give you a better idea of how much of a downpayment you’ll need to pony up. That’ll come in handy when you start to…
Step 3: Look At Your Budget
It’s time to take a look at your finances. (Bleh, I know, but also…important.) At the beginning of this process, I was under the impression that I just needed to have enough saved for a downpayment (and obviously a cushion for emergencies) but BOY, that was NOT CORRECT. Let’s jump into some of the standard questions, yeah?
“How much house can I afford?”
OK, the basic rule here is that you can — generally, with good credit — afford a home that’s about 3 – 5 times more than you make per year. If you live in a high cost of living area, like LA, you may be approved for more. (In my case, I have been given the green light by my loan officer to look at houses up to 6.25x my annual income. That’s higher than I’m willing to spend because I don’t want to feel overwhelmed by a mortgage that’s significantly more than my rent is now, but it’s nice to have that parameter.)
The other thing you’ll need to consider is your debt-to-income ratio. Basically, you’ve got to think about what recurring payments you have set up. What are your minimum credit card payments? (“Debt,” in this case, isn’t referring to the whole amount you’re paying off, just the required monthly payment.) Are you paying off student loans? Do you have a car payment or lease? Did you buy something with a service like Affirm or Afterpay with a long financing time frame? (Guilty as charged on that last one — I didn’t realize that those small monthly payments would be on my credit report, but THEY WERE.) And in this case, your income isn’t determined by your take-home pay. Lenders only care about your gross income, AKA what you make before taxes.
Plug everything into a calculator like this one. You’re going to want a debt-to-income ratio under 36%. Lenders may approve you if it’s higher — everything is on a case-by-case basis — but this is just a good number to have on hand. You can also play around with the tool to test out potential mortgage payments to see what monthly number makes sense for your budget. For a lot of lenders, 43% is a limit. I’ve heard anecdotal cases of people going up to 50%, and I’m not your financial advisor, but uhhhhhh…maybe try to avoid signing up for more debt if you can avoid it.
“Am I a viable candidate for a loan?”
When there’s not a pandemic, unemployment isn’t a deal-breaker — lenders would issue loans for those who experienced unemployment as a “typical part of their industry.” The go-to example in LA is production crews, who work on set for 8 months and experience stints of unemployment between gigs. But since there is a pandemic, lenders have gotten really nervous and they’ve tightened their belts. It’s still a case-by-case basis (like, if you’re just sitting on a pile of funds or if you’re earning interest on dividends or something, you’ll have a better shot), but it’ll be significantly more challenging to get approved.
“Where are my funds coming from?”
If your potential downpayment funds are in a normal bank account, great! If not, do you have a plan to get these funds into your account? In my case, the money I have saved for a downpayment is in a brokerage account. That’s great for returns, but less great for accessing funds quickly. I’ll have to work with a banker to figure out a plan to withdraw my money so I don’t get slammed with capital gains taxes, which I hadn’t fully considered. If you have something similar in place, it’s worth just thinking about now as your future taxes may cut into the amount you think you have saved.
There are also rules for gifted funds — how long they have to be in your account, verification from your gift-er that you don’t need to repay them, and more — but I did forget to ask my loan officer Andy about the specifics. I’M SORRY. I can report back if any of you have a generous family member who’d like to send me a gift 🙂
“Do I have earnest money ready to go?”
WHAT THE HECK EVEN IS THAT? I had literally NEVER heard of “earnest money” until my first call with Andy! But basically, when you finally submit an offer and it’s accepted, you’ll have to send a small percentage of the total home purchase price over to the seller within three days. It’s usually about 1-5% of the total purchase price, but y’all, THAT CAN BE A LOT. For a $300,000 home, that’s $3,000-$15,000 up front! The funds are held by a separate company while you go through the motions and will be generally be returned if the deal falls through, unless you’ve broken the contract in some way (in which case the seller keeps the earnest money as repayment for making them take the house off the market). This sounds very scary, but as long as you’re working with a good realtor, your funds will be safe and returned if anything does go south.
Anyway, I had been under the impression that all funds were just wired at closing, which is NOT the case. It’s important to note that if you’re buying a house, you’re going to need to start cutting checks a month sooner in the process than the media has traditionally led us newbies to believe.
“Have I budgeted for closing costs?”
So, in a normal market, you may have been able to negotiate for sellers to pay your closing costs. Unfortunately, thanks to this combo of low-interest rates and low inventory (thanks, Ms. Rona), we are in a SUPER HOT seller’s market. They have all the power right now — homes are going fast and are above asking — which means it might be harder for you to ask for these concessions up front.
But oof, this is a big expense — 3% to 5% of the value of your loan. There are a lot of tiny costs rolled in here (appraisals, attorney fees, and interest, in addition to some upfront payments of property taxes, insurance, etc.) and in a best-case scenario, you may be able to have a lender pay for some of them, but are you ready to drop an extra couple thousand dollars ON TOP of your downpayment? Will this deplete your reserves in the event that an unexpected repair pops up immediately after you take possession? Just keep it in mind, okay?
“What about the extra expenses?”
Yeah, yeah, not to be too much of a mom here, but you’re also going to want to make sure you’re looking at the extra area-specific needs. For me in LA, that means pricing out some earthquake insurance. If you live in a place that’s near a big body of water, maybe that means flood insurance. These things aren’t covered by your normal home insurance (ugh), but they’ll factor into your new expenses. OH BOY, BEING AN ADULT IS FUN, RIGHT?!
Step 4: Start Your Research
AHHH BUT IT IS KINDA FUN NOW. If you’ve looked at your credit score, figured out which type of loan you’ll likely be approved for, and taken a look at what your potential monthly expenses would be, you can FINALLY start looking responsibly.
Pop your financial parameters in your listing engine of choice and start peeking at what’s falling in your range. In these early stages, I’d recommend favoriting homes even if they don’t meet all the items on your wishlist. You’re going to start looking for patterns: how fast are homes in your area moving? Are things selling under asking or over asking? In LA, homes are selling VERY FAST and for over asking, so I’ve tried not to focus too much on the homes at the high end of my budget as I don’t want to get swept up in a bidding frenzy that ends with me and a too-big mortgage.
Buuuuuuut…if things aren’t selling, there’s no harm in just looking a biiiit above your budgeted range. If you find something that’s been sitting, you can always ask your real estate agent (we’ll get to how to find one, I swear) if the seller would consider a lower offer. For my searches, I’ve tacked on 100k to the highest number my loan officer suggested and I’ve been eyeballing a few properties that have been on the market for over four months with the hopes of coming in with an offer 20-25% below asking. The danger here, from personal experience: SAY YES TO THE DRESS SYNDROME. Naturally, I fell in love with a home that’s out of my budget and the sellers are firm on price. PROCEED WITH CAUTION. (And maybe send a prayer my way that this particular seller will have a change of heart, get tired of paying a mortgage on their empty house, and consider an offer. It has been nearly 140 days, please let me love your house.)
And a word of caution: algorithms are great, but in the time of COVID, price estimates generated by these sites are kind of a wash. I know that the website says the average square footage in this area is worth 200 dollars less or this home should be 50k cheaper, but the site is not factoring in historic low-interest rates (like, guys, my mom told me about mortgages in the double-digit TEENS, and I’m over here at 2.8%!) and a billion people trying to move after being stuck in their house for five months. KEEP A LEVEL HEAD. We can all find houses! (It may just take a while, and they may cost more than we had anticipated.)
I also don’t want to ignore the very real issue of gentrification. There are so many variables in searching for a home responsibly, depending on your budget and where you’re looking. But at the very least you should be planning on investing in the community you might move into, not just the house you are going to live in.
Step 5: Find a Loan Officer
“Find a loan officer? Before a realtor?” YUP. This flip is just based on our current corona-climate. First off, just some quick terms because I was TOTALLY CONFUSED here for a while.
- Loan Officer: This is whoever you’re working with to get a loan. It can be a person from a bank, a person from the internet…whoever is actually in charge of helping you pay for your future home. If you get a quote from Bank of America, you’ll have a loan officer there. If you get a quote from Quicken Loans, you’ll get a loan officer there. But you can also go the way that I did, which was to get a…
- Mortgage Broker: A mortgage broker doesn’t work directly for a lender — their job is to get a WHOLE BUNCH of different quotes and bring them to you, so you can find the financial institution that works best for you. I prefer this route because I do feel weird about texting someone with someone from a big corporation but I don’t feel weird texting with Andy (or making Andy sit through 40 minutes of questions). If you decide to work with a mortgage broker, they can ALSO be your loan officer. I just feel a lot better knowing that I have a guy who lives in LA and who specializes in California real estate advocating for me.
- Lender: This is the financial institution that provides your mortgage loan. (Just in case you forgot.)
SO. How do you find your loan officer or mortgage broker? REFERRALS. I know, that’s the most annoying answer, but it’s true. I asked my friends who they had used and about their experiences, but Sara’s recommendation that she had written in this post really stuck out in my mind. I needed someone to hold my hand and break everything down (CLEARLY, ha), and so I decided to work with Andy over just getting pre-qualified on a website and being like, “hey, I filled out 4 pieces of information and the internet spit out a number, so I can afford this.”
But if you’re the first in your friend group to buy a home, don’t despair! Just search for mortgage brokers in your area and then DO YOUR RESEARCH. If someone’s review mentions that their loan officer was great at calling, make sure that’s a fit for you and your lifestyle (I see you, phone-scared millennials!!!). If you’re super digital, see if anyone mentions how quickly their broker responded to texts or emails. You can ABSOLUTELY shop around for this person — there is no pressure to work with the first one you meet, and you can still switch to another even if you’ve been advised by someone for a while — so make sure it’s someone YOU feel good about working with and who’s willing to break everything down for you.
Anyway, I say that you need to find your loan officer first because COVID HAS MADE THINGS WILD. For a lot of homes, you’re going to need a pre-approval to enter. (In LA, some homes are even requiring OFFERS before entry. And there are no photos of the inside. IT’S TRULY SOMETHING OUT HERE.)
But pre-approvals are serious. In the olden days (you know…back in FEBRUARY), you’d be good to go with a pre-qualification, which is when your loan officer crunches all your data (income, debt, estimated credit score, savings, etc.) and they pop out an estimate for how much they’d be willing to lend. But pre-approvals, on the other hand, are a SERIOUS indication that you’re looking to buy. You’ll need a whole bunch of documents — 2 years of tax returns, 1 month of pay stubs, 2 months of bank statements, 2 months of statements from your 401k/IRA/stocks/bonds (if you have any of those), and a copy of your license — and your loan officer will pull your credit (yes, they’ll run a hard inquiry) and confirm that yes, a lender is going to approve your mortgage.
It signals to sellers that you’re not just looking for fun — you’re looking to buy. And since the world is ending and people don’t necessarily want a whole bunch of strangers walking through their house, this is the step you may have to take to even SEE the place you’re thinking of buying. Plus, since homes are selling SO QUICKLY, it’s a leg-up on anyone who submits an offer with just a pre-qualification.
Also, for what it’s worth, you don’t pay your loan officer or mortgage broker (or even your real estate agent!). The seller does it all out of proceeds from the house sale. So go out and find the best, most qualified person you can — it can only help you.
Step 6: Find a Real Estate Agent
AHHH. This is where I struggled. Y’all, I cannot even tell you how many agents I chatted with before finding Francine. I bet you can guess how I found her, too, based on the previous section, but first, let’s talk about what to do/not to do.
What not to do: I don’t want to put any listing sites on blast, but don’t expect to hit it off with a random suggestion that’s matched to you after you hit the “I want more information” button a house. (Also, refrain from putting your phone number in ANYWHERE unless you’re giving it directly to an agent. I’m STILL getting phone calls and texts at 6 AM and 11 PM about mortgages and agents and offers and it’s a nightmare.)
Anyway, I tried having conversations with several of these arbitrary matches and they were fruitless. The agents recommended were super kind, but it’s SO IMPORTANT that you find someone who really understands who you are, what you’re looking for, and why. After several conversations trying to explain what I do (believe it or not, “I work for an influencer” is still a pretty confusing job description, even in LA) and what I’m looking for (a fixer, but one that I can manage a la Velinda’s), I just felt like NOBODY GOT IT.
I then tried a new strategy: Reaching out to agents who had listed homes in the areas where I was looking. I couldn’t find a ton of people who specialized where I’d like to buy (it’s in an unincorporated area outside the city), but I figured that maybe these agents would be able to point me in the direction of more homes (or, maybe they’d have coworkers putting homes on the market in the vicinity). This was a little closer and a little better, but it was still no dice.
Finally, success: My realtor, Francine, was a recommendation from Andy. (Y’all. I cannot overstate the importance of referrals.) She called me and from our first chat and I was like, “AHHHH THERE YOU ARE. FINALLY.” Francine’s also a millennial, an LA native, and I feel like she was the first person who just *got* what I was hoping to buy. She was also the first realtor to suggest homes that ~aesthetically~ fit what I was going for — a sign that she listened to my actual wants, just beyond budget — and she’s been AWESOME at guiding me through the whole process. Francine even Zoomed with me for an hour on a Sunday to go over all my questions and then to look at contracts. I didn’t even have an offer in, but she wanted to brief me on everything so I’d be ready when the time comes. WHAT A COOL LADY.
So again, if you’re referral-less and the first in your friend/family group to buy in your area, it’s time to get googlin’. (If you need a referral in LA — and maybe you might, since there are a LOT of you based here — you can also use Andy and Francine. You have my blessing.) But remember: look for the BEST agent for you — you don’t have to trust an arbitrary match. I mean, think of it like being randomly matched with your college roommate. Sometimes your school knocks it out of the park. (Hi, Jess, my freshman year roommate!) But sometimes they don’t, and you pick a new roommate for your next year. (Hi, literally everyone else I know who ended up switching roommates for sophomore year!) If you’re not feeling it, keep looking. Not to be too much like your mom (again), but you’ll know when you’ve met a good match.
Step 7: Let The Serious Shopping Begin
OH BABY. You’ve made it this far. You’ve figured out your mortgage situation, your downpayment plan, your budget for extra costs, and what you want in a home. You’ve also assembled your team and you’re READY TO MAKE OFFERS. This is the big leagues, my pal!
Fun 2020 fact: Before entering a house, you’re probably going to need to sign a bunch of disclosures saying that you don’t have COVID and that you don’t know anyone else who’s sick. Your showings may also be limited (in LA, it’s an agent + 2, and technically it’s supposed to be 2 people who are quarantining together), so if you’re dreaming about bringing a contractor with ya to take a peek at that fixer…it may be off the table.
So when you’re viewing in-person, there are a couple of big things you’re going to want to take note of: are there any cracks? Are the floors tilted? Is there any water damage? (Or, is there any “new” paneling that seems like it may be covering up water damage? Just like, a fun question from my own experience.) Do the windows or doors stick? How’s the water pressure and temperature?
And then, you can also ask the seller’s agent (or you ask your agent to ask the seller’s agent) the following big questions. I’m assuming that you’re tech savvy enough to deduce the normal things (“what school district is this in? How far is it from the city?”) but these are the things you really want to pay attention to before putting in an offer. You can ask in any order, in case you want to shake it up:
- Why is the seller leaving?
- What’s included in the sale? (Lest you be stuck dropping $10,000 on new appliances.)
- How old is the roof?
- Have there been any renovations or additions?
- Is there any un-permitted work? (Gosh. I could write another full post about this. OOF. Basically, this may cost you money to tear out or you’ll have to pay to get it permitted. Not awesome!)
- How old are the major systems? (Water heater, furnace, A/C, plumbing, etc.)
- Are there any health or safety hazards? (Sellers have to disclose, but lead, radon, and mold are costly to fix and may hold up your loan.)
- Do you have a history of past insurance claims? (You’ll learn if there’s been any weather damage, major issues, or vandalism.)
- Can I see a copy of the HOA rules? (I know some people who have broken off contracts after seeing some HOA agreements.)
- Are there any problems with the house? Have there ever been? (This is just the big catchall in case the seller hasn’t disclosed something covered by the billion other questions you’ve asked.)
OH GEEZ. 4,500 words later and we’ve almost made it to the end. Do you know that my original draft for this post was going to be THROUGH CLOSING? LOL. If this has been helpful for anyone else trying to navigate the home-buying process right now, let me know and we can get cracking on the “submitting an offer through keys in hand” phase. (And maybe by the time I finish writing that novel a post, Emily’s book will be out and you’ll be able to jump straight into a renovation.)
I DIGRESS. If you’ve made it this far and you’ve already purchased a house, I’d love to hear from you! Was this your experience, too? Is there anything you’d change or anything you wish you knew when you were thinking about buying? Any glaring errors? How did YOU meet your realtor and loan officer? Any horror stories? I JUST REALLY WANT TO TALK ABOUT HOMEOWNERSHIP, in any capacity, all day. Please chat with me. 🙂
Also here is a little checklist to act as a reminder since you started reading this post a month ago!
Opening Image Credit: Photo by Sara Ligorria-Tramp | Designed by William Hunter Collective | Styled by Emily Henderson Design | From: How We Staged a House (To Sell) With Soul + Some Sneak Peeks