I Bought A House

2023-10-20#house

I bought my first house! It was one of the most stressful and frustrating processes I have ever gone through, but to quote Machiavelli, "the end justifies the means".

The lengthy process of home ownership is truthfully overly-complicated and forced me to ask for help so many times from so many people to understand the terminology and prerequisites for home ownership. My primary purpose for writing about my home ownership experience is to maintain a personal record of all that goes into buying a house so that I can reference this in the future. The other purpose is for other prospective home buyers to learn from my experiences and not stumble as much as I did.

Why buy a house? ¶

Why did I want to buy a house? Renting an apartment is fine for temporary housing, but apartments are very restrictive in that they:

Cannot be modified. You can't replace a leaking faucet or insulate a wall yourself.
Depreciate in value over time. Most apartments cannot be renovated while you are a tenant.
Generally have smaller area than houses. For the most part, most apartments have less space to work with.
Generally do not have lawns. You probably won't be able to plant a garden at an apartment.
Do not build equity. I equate paying rent for an apartment to throwing money into the void. You will never get closer to owning an apartment the longer you pay for it.

For the reasons above, I decided immediately after I paid off my student loans that I wanted to start saving for a house. At the time I was just getting into composting and gardening but I had no place to practice my craft. In my apartment I tried composting on my tiny patio, but the shade destroyed my compost and I couldn't get enough oxygen and brown compost (this is a completely separate topic, but the point is that I was restricted by my apartment). I was also frustrated with my apartment's leaking faucets, but my landlords never made the time to replace them. It was time to look for something bigger, so I began researching into how to buy a house.

Determine your budget ¶

The first of buying any house is determining your budget. Houses are extremely expensive and most homeowners spend their entire lives paying off a house. It's very likely you don't have hundreds of thousands of dollars sitting in your bank account and will need to get a mortgage loan (also called a mortgage) from a lender (usually a bank or institution) to pay off the house.

Lenders require you to pay a standard 20% down payment by the house possession date (the date you officially "own" the house), then pay off the loan in monthly installments afterwards. What this means is that you really only pay a fraction of the house price up front, then pay off the rest of the house in monthly installments. Think of it like this: you need money to buy a house so you borrow an amount for the house, purchase the house, then pay back the borrowed amount in monthly rent.

It's possible to pay less than 20% for a house down payment but I wouldn't recommend it. If you pay less, you usually also need to pay additional monthly PMI fees (Private Mortgage Insurance fees) until your payments reach 20% of the home's original value. These fees give lenders security to ensure you're not buying and selling tons of properties at once and you have the financial means to eventually pay off the loan.

This is my made-up formula for understanding your house budget:

max house price = (savings - 20000) / 0.2

Let's break down this formula: the "max house price" is the maximum price of a house you would be able to buy, and "savings" is the total amount of savings you own (including stocks, CDs, IRAs - basically anything you could liquidate to contribute to the house). I'm assuming you will pay the full 20% down payment, and I'm also subtracting $20,000 as a buffer amount. It is in your best interest to set aside a portion of your budget as emergency funds for earnest checks, emergency maintenance, groceries, bills, and other unexpected fees. On the positive side, if you end up not needing this buffer amount, you can put this amount towards renovations after the possession date!

For example, assume you have $50,000 in savings in the bank. This means that you should only try to buy a house that is less than or equal to:

max house price = (50000 - 20000) / 0.2 = 30000 / 0.2 = $150,000

Get quotes from multiple lenders ¶

Once your budget is established, you need to find a lender willing to give you a good rate loan. There are two parts to a loan:

Your interest rate. Lower is better because it means you pay less interest on the loan. Always go for a fixed-rate loan instead of a variable-rate loan because the housing market is never predictable (and with how bad it is in October 2023, you're going to lose a lot of money).
Your term. This is how long you'll be paying off the loan. Mortgage loan terms often come in 5 year increments starting at 15 years, then 20 years, 25 years, 30 years, and so on. Lower is not always better, because this will determine how much you will pay monthly.

To get started talking to lenders, try visiting banks or looking up mortgage loans online. You can get a free quote (a summary of what prices they can provide for you) for what kinds of rate each lender might provide. This is the hardest part, because this ultimately determines how much you're going to pay for the house. Your loan can make a difference of tens of thousands of dollars so it's important to be very blunt and honest with lenders. It is extremely important that you speak to multiple lenders because you will need to haggle - some lenders will purposely charge you higher rates unless you have leverage in the form of other cheaper quotes. When I was looking for a house the standard interest rate was around 5% (I know, it's astronomically high) but most large banks were trying to charge me 7% interest.

One of the key takeaways I learned from this process is that everyone in the process is trying to make money off of you. Don't let them! Lenders and realtors and title companies can all make a percentage of profit off of your purchase, so keep that in mind and remain skeptical when they recommend expensive rates or expensive houses. Ask questions about prices and don't assume that the prices are standard or that all fees are commonplace for loans. Do what is best for you and your family, not what is best for them.

Make sure to also choose a term that best fits your income. If you choose a 30 year term, you will pay off the loan slower but you will have a smaller monthly cost. On the flip side, if you choose a 15 year term, you will pay off the loan faster but may be struggling to pay the monthly dues. I recommend choosing a larger term because you can always overpay your dues and pay off the house faster than the term you chose.

While you are getting quotes from lenders, you can begin looking for a realtor and looking at houses.

Get a realtor ¶

The next step in your journey is to find a reputable realtor. A realtor is just a licensed and certified real estate agent, or someone who works on the behalf of a property broker company to help you buy a property. This can include:

Showing you houses
Helping you negotiate prices
Acting as a communicator between the buyer (you are the buyer) and the seller (the current owner of the house)
Help you find contractors once you purchase a home

Unlike lenders, you usually only work with one realtor. Each area's realtors vary so I recommend researching online to find a good realtor.

Find a house ¶

This is the fun part that everyone loves. Now you actually get to look at houses to find the one you like! Ask your realtor for houses or look at houses on Zillow, Redfin, or Realtor.com, and begin viewing houses. Price is a huge limiting factor in what houses you will be able to afford, but it is equally important to look at location, school district, and how much it would cost to remodel the way you like. You're not paying for the house, you're paying for the location. The house can always be remodeled or extended but the location will never change. Try to live closer to a school because it means that you will live near young families, and the area will likely be safer.

You also need to look at property values. A property value is an arbitrary dollar value assigned to your house based on how much it might be worth, which plays a significant role in the price at which you will be able to sell the house in the future. If the property values of all the surrounding houses have been going down in the past few years, you probably don't want to live there either.

Avoid HOAs. HOAs (or Home Owner's Association fees) are monthly fees from your living community to maintain upkeep of the lawns and surrounding areas. If a house has a cheap selling price but expensive HOAs, you'll end up paying an exorbitant amount of money every month anyways.

You can always remodel. Don't give up on a house because the bathroom "is ugly". Remember, this is what we saved the extra $20,000 for in our budget!

Bidding ¶

Once you have found a house you like, you begin the bidding process. Houses rarely sell for their listed price (the price listed on websites or yard signs) because there are always prospective buyers you are competing against. What ends up happening is that the house essentially becomes an auction item. You bid an offer on the house, and the seller chooses the highest bidder to continue the process. For example, if the house has a listed price of $400,000, you might bid $430,000. Then, if you bid the highest amount, the seller would go to you first, the second highest bidder second, and so on. If you are the highest bidder, the house contract will go for the price you bid. In this example, you would end up paying $430,000.

Don't feel too bad if someone else is the highest bidder. They might back out or withdraw and make you the next likely candidate to buy the house. In fact, this is exactly what happened to me - someone outbid me for my current house but withdrew after an appraisal (I'll talk about appraisals later).

If you are the highest bidder, you're all set! You are now in contract to buy the house.

Negotiate the terms ¶

Now that you are in contract, you can now negotiate the terms. You will need to do a few things:

Get a home inspection, sometimes done by your realtor. A home inspection is needed to ensure that the house quality is actually as the seller says it is, and to make sure that no unmentioned damages exist. For example, the pictures and house viewing may not show anything, but the inspector might notice that a structural wall is buckling and unsafe for living.
Get a home appraisal, usually done by your lender. A home appraisal is when a professional comes to determine the arbitrary monetary value of the house based on its qualities and attributes. For example, although your home might have listed price of $200,000, the house might actually be appraised at a value of $150,000.

In the case that the home inspection finds severe damages that must be fixed, or the home appraisal value is much lower or much higher than the listed price, you are free to negotiate the final price of the house. For example, if a home's listed price is $300,000 and you bid $320,000 but a home inspection reveals severe water damage on the south-facing wall, you might speak with your realtor to tell the seller to fix the water damage and lower the price to $300,000. Or you might tell the seller you are willing to deal with the water damage if they lower the price to $290,000.

You can also negotiate certain appliances, furniture, and other physical objects. You might want to keep the couch at a higher selling price. Or, you might want the entire house cleared of all belongings. You can negotiate until you come to a reasonable agreement with the seller. Be careful, however - if you try to bargain too much, the seller may decide to move to another buyer!

Once you have drawn a fair contract agreed upon by both parties, you are now in the final phase to own the home.

Close on the house ¶

You are almost ready to close on the house, or to sign the contract to own the house. You will likely need to do a few things before the closing date on which you sign the official papers:

Send an earnest check to the seller. An earnest check is a check for a small sum of money (usually $1,000, $2,000, or $3,000) sent to the seller to assure them that you are serious about buying the house and have the financial means to do so. Don't worry, the earnest check amounts will come out of your closing costs (the total down payment you need to officially buy the house).
Set up homeowner's insurance. This is insurance in case your house burns down or is broken into by a burglar.
Set up a wire transfer to your title company. A wire transfer is a special bank non-refundable money transfer you will use to pay the final closing costs to the title company, a neutral third party to sign over the title of the house. You will need to send a wire transfer before the closing date. Make sure you verify the wire transfer amount and the wire transfer account with the title company. This is how a lot of new homeowners get scammed, because they receive falsified wire transfer instructions and transfer all their life savings into a bad person's bank account. It doesn't hurt to call the title company to verify the account number - I called my title company multiple times to make sure I was sending the right amount to the right place. You will get the final closing cost amount from your mortgage lender.

Before the house possession date, you will have a final walk of the house. This means you will be able to view the house one more time before you officially sign the papers to make sure everything is in order. This is the last possible moment for you to back out of the contract or walk away if you change your mind.

Then, finally, you sign the papers on the closing date. Congratulations! You are now the official owner of a new home!

Final Thoughts ¶

Throughout the process I was very fortunate to have so many people help me along the way to get where I wanted. It was difficult to understand all the terminology at first. Credit goes to Yushin's parents for helping guide me with the whole process. I also would like to give credit to my realtor and lender who were both super helpful with explaining terms and prices and being very fair. In the end, I was incredibly lucky with my home's value and my mortgage's interest rate.

Of course, buying a home is only the beginning. Once you have a home, you begin to think about fixing the house and remodeling the way you want. You could even retrofit your house with gigabit ethernet like me - but I'll save that for a future article :)