We closed on our house this morning. Weirdly, it does not feel that different, probably because we still have to pay per month for occupation, kind of like renting another house, just from the bank? Well, at least there is a thing called equity…
While Slav is moving 40 boxes of books ( my weakness) and jars of Asian sauces (my second weakness) out of our rental and into our ranch, I would like to tell you a story of how we bought this house. I know people can always find the basic steps of house purchasing online, which all look so straightforward. But the devils are in the details. We were confused most of the time during the process, and I hope our story can get some other first-time buyers a bit more prepared.
Sound good? OK, let us start!
Week one – Got pre-qualified by a broker, aka “know what we could afford”
We started looking for housing on April 24. I remember it vividly because it was a Monday, and we had been debating on renting vs buying for the whole weekend prior. We visited a local realtor, who is very nice and helpful when Slav had questions about land, just to explore our options.
At that time, we did not know how much of a loan we could get. The amount of the loan one can get is depending on the debt/income ratio, which means that your monthly TOTAL debt can not be more than 40% of your monthly income, including credit card debt (roughly $25 per card you actively use), your car payment, student loan, or other mortgage(s). I was recently unemployed, and Slav is self-employed – which is pretty much unemployed in the eyes of the banks.
The realtor suggested us to first talk to a broker, who could help us to figure out how much we can borrow, and eventually to help us to get a loan. He recommended his own broker, and told us a couple more names that he knows of. He did not recommend any online services. We are not sure if it is because he has been in the business for 40 years and developed stable partnership with some brokers.
When we got home, Slav started to research loans online. He got on LendingTree and put in our basic information, including zip code, estimated annual income, and his contact number. IMMEDIATELY, he started getting phone calls. As soon as he hit the “give me a quote” button, his phone was ringing non-stop. By the way, I highly recommend using a spare phone/SIM over your daily cell number. We have already bought a house and Slav is still getting these phone calls!
Before you choose a broker, be careful not to give out your SSN, because then brokers can check your credit score with your SSN, and they will. We gave out our SSN to one broker, just to see her rates. Even though she promised that she would not check our credit scores, she did it anyway. Too many passes of credit check will lower your credit, which is not good for you at this stage.
Before noon on Tuesday, Slav already got a few quotes. Not surprisingly, all the quotes offered ridiculously low interests and closing fees. Just know that it would not be the case when you actually hire them – these low rates are calculated based on national data, and never tailored to a particular region.
At the meantime, I was researching the type of loans and closing cost. There are lots of different types of loans, so be sure to ask your broker what is possible/the best for you. For example, what is important to us is 1) the length of the loan and 2) the possibility of overpay. We really want a loan that is shorter than 30 years, and we would like to overpay our mortgage without penalty. Not every lender allows it, because the lenders (banks, etc. whoever carries your mortgage) earn their share by charging you the interest. Therefore, sooner you pay off the principle part of your mortgage, less interest they earn. We made a note on asking our broker to find a 15- or 20-year loan that allows it.
On Thursday, we visited the broker recommended by our realtor. We immediately knew that she could take good care of us – she is so organized and so precise, from her communication , he speech, to her movement. She took a look on all the online offers we got, and said she would not be able to beat these, but could get really close. Again, the reason she could not beat these low interest offers is because these are not tailored for Colorado specifically. And since these are already so low to feel true, we would much rather go with a broker that can get us close but more accountable.
She asked our SSN and two minutes later, our DETAILED credit reports were out! We had never officially checked our credit before – all we saw are the numbers in our credit card account – so it was pretty exciting to see the details in our credit reports. Every single debt you have had and all the bank transactions are in it.
After getting our credit scores and bank statements, our broker quickly compiled a bunch of rates for different types of loans, and by the time we walked out of her office an hour later, we were certain that we could comfortably afford a $350K house with a 30-year loan, and $300K house with a 15-year loan.
One thing worth mentioning is that our broker did not provide a pre-qualification letter for us at this moment. Her explanation is that if you hold a generic letter stating the maximum amount you can borrow (for example, $350K) while house shopping, the sellers will know this number prior to negotiation. If this number is much higher than the market price of the house (let us say, $300K), they might elevate the bidding war because you could pay more. And if you are buying a house that is very close to what you can afford (let us say, $345K), your offer may not be chosen because you may fall through due to lack of closing cost or the interest rate just increased a bit. So her recommendation is to know this number ourselves, and once we put down an offer, she will get us the pre-qualification within a day, which will be in time.
I do not know if a pre-qualification letter is necessary in a more competitive market. But in Denver it is not. Our realtor agreed too. Knowing our borrowing power, we decided to search for houses that is close to $300K, to give us some room for potential bidding war and a chance to take a shorter loan.
(To be continued…)
This is the first post in our “how we bought our ranch house” series. You can find the rest of the story here:
Week two – Finding a Realtor and Learning What We Want
Week two – Our First Offer and the Bidding War
Week three – Putting Offer on Our Ranch
Week four – Inspection and Negotiation
Week five and six- Convincing the Bank to Buy Our House