When Jordan and I bought our home, I really felt like we had researched everything.
As two type A-ish people (an engineer and accountant), we tend to overthink and over-research most decisions we need to make. When we decided to buy a home we had spreadsheets upon spreadsheets tracking historical prices, neighborhood comps, rental prices, and more. We had created model scenarios for just about every situation we could think of.
But even with that much forethought, there was a lot that we were surprised by. From the search to years after we closed, there were a lot of financial missteps we narrowly avoided.
If you’ve decided that buying a house is right for you (not sure? Check out this article: Is It Better to Rent or Buy a House?), read on for some things I definitely wish someone had told me before we purchased our home.
And continue reading past those 8 for things other Worth Project members wished they knew.
1. Get pre-approved
This is probably obvious and almost everyone will mention this when you tell them you’re ready to buy a home. There’s a good reason for this: it’s true.
Jordan and I will probably be 80 years old talking about the home that got away. We decided that we were ready to buy a house. We woke up one morning and decided to casually visit a few open houses. We walked in and found “it”. The house. It ticked all of our boxes – it was perfect. The only problem? They were only accepting offers for 24 more hours.
We attempted to scramble to get pre-approval, find a real estate agent, and make an offer in the span of 24 hours. Spoiler: it didn’t happen.
Get pre-approved before you start house hunting.
2. Shop lenders before an offer is accepted
After our misstep with not getting pre-approved early enough, we made another mistake: we rushed to get pre-approval without shopping around for a lender first. We didn’t want to be caught in another situation where we lost out on the perfect home. We rushed the pre-approval and carried on looking for a house. We assumed that once we found a home, we could shop around for a lender before closing.
We were wrong.
As soon as we finally had an offer accepted (yay!) the race was on to close. Any thoughts of shopping around for a new lender or making sure we were getting the right deal were replaced with a sprint to the finish line.
3. Understand budget implications
The weirdest thing started happening once we were looking for a house: our conservative budget started to get higher and higher.
If we just went up a little more we could get into that neighborhood with that great school. And if we just added a little extra, we could look at homes with a second bathroom(!!).
Budget creep happens. But here’s what helped us reign it in just a little: we looked at what spending a little bit more would do to our full financial picture. If we needed to stretch our cash to put down a larger down payment, what would that do for our other goals. And if our monthly payment was just a little bit more, how did that change things for us? Would we have to give up anything?
The easiest way I found to do this was to use our Personal Capital account to walk through these scenarios. I’d create a ‘new event’ in the program for buying a house and play with the numbers a little (watch a video tutorial here — I walk you through everything). Once we saw the numbers in front of us, we were able to understand what that second bathroom was really going to cost us.
4. Closing costs
This falls into the “should have shopped around for lenders” idea. When we were buying a home we knew there would be closing costs. But those closing costs felt like nothing compared to the actual purchase price of the home.
Those closing costs are actually a lot. Anywhere from 2-5% of the purchase price, which is a big range.
Jordan and I had tunnel vision on making sure we had 20% in cash ready to put down for our down payment. When we received the final bill of what we owed, with closing costs, we were caught off guard.
A law went into effect in October 2015 where lenders must provide a Loan Estimate form. This standardized form is to help reduce consumer confusion. We wish we had this form as it enables you to make an apples-to-apples comparison when loan shopping.
Pay attention to closing costs estimates and know what you can negotiate. Use this calculator to help you put together a good estimate.
5. Trust your instincts
Near the end of our house hunting, we thought we had found the one. It checked all of our boxes: we loved the neighborhood, the price, the yard.
We put in an offer with a contingency for some additional inspections, specifically the foundation.
The owner countered for just a bit more money and wanted us to drop the additional inspections. Her rationale was that in the hot Bay Area market, she wanted to close as quickly as possible and the additional inspections were unnecessary.
We felt conflicted. We’d been looking on and off for two years. Though we’d put in multiple offers, we’d never even received a counter. We wanted to accept their terms, but there was something that felt off.
We declined their counter, found our house the very next weekend, and that house didn’t end up selling until two years later. For a lower price.
6. Invest in inspections
Jordan and I bought an older home and we knew that there would likely be a lot of issues waiting for us below its beautiful surface. While the seller had paid for a general inspection to be performed, we were wary of what might have been missed.
There were a couple extra inspections that we had performed once our offer was accepted: a foundation inspection and a chimney inspection. We had contingencies placed on our offer so if something crazy came out of them, we could walk away from the deal.
These additional inspections weren’t cheap, but they paid for themselves. We found a few issues that easily added up to thousands of dollars of work that needed to be done.
Had we found these after the purchase closed, we would have spent a lot of money fixing them ourselves. Instead, we were able to negotiate. Which brings me to…
Most of us know that you can negotiate before an offer is accepted. You may go back and forth with the seller over the terms and that’s totally expected.
I didn’t realize, however, that you could negotiate after an offer was accepted. We were buying a home in the San Francisco Bay Area, which is a tough market to be a buyer in. After putting in offers on a lot of homes and losing out, I was nervous to rock the boat on this one.
When the additional inspections came back with a lot of expensive repairs required to make the property safe, we were ready to just accept them and move on. Our real estate agent convinced us otherwise: we should negotiate some of the additional cost of repairs with the seller.
I was terrified of losing the property, but we negotiated anyway. This saved us thousands of dollars in costly repairs.
8. Create your own maintenance fund
Maintaining a home is EXPENSIVE. Even if you buy a new home, there are going to be unexpected repairs that come up.
Jordan and I first leaned on our emergency fund to do the maintenance on our home, but it soon became clear that we weren’t entirely comfortable continuously pulling money out of there for routine maintenance.
We didn’t have issues that came up every month. In fact, we would go long stretches of time without any maintenance required. But when it rained, it poured.
We would get hit with massive expenses all at once (like that month our furnace stopped working, the plumbing in the kitchen and the bathroom went on the fritz, and we needed to update the electrical in our kitchen. That was expensive).
Because these things aren’t really “emergencies”, more like routine maintenance that we can plan for, we decided to stop using our emergency fund for these repairs. We set up separate savings account for home repairs and each month when we paid our mortgage, we put in a little extra money into this maintenance account.
9. Know how a loan is amortized
I know this is definitely not something you want to think about when you’re signing the papers on a mortgage. You know your interest rate, you know your monthly payment, and you should be good, right?
It’s actually really important to spend just a few minutes understanding how your loan amortizes.
Loan amortization is just a fancy way of saying how the principal of the loan – the amount you borrow – is paid down over the life of the loan.
Let’s say you borrow $200k for a house that you’ll pay off over 30 years. $200k is your principle. Since you’re paying interest on that amount you borrowed, only a very small portion of what you’re paying monthly at the beginning of your loan will actually decrease your principle.
This is boring, right? Here’s why it matters:
A year and a half after we purchased our home I was looking at our amortization table (as one does), because I was curious why our principle hadn’t gone down as much as I expected based on what we were paying.
As I looked through the table I saw that we had been issued an escrow refund for thousands of dollars. But the check never made it to us. Because I knew to look at the amortization table I was able to immediately call my bank and have them re-issue the refund check.
So yes, loan amortization is so boring, but so, so important. Use this amortization calculator to understand how it works.
From The Community
In the weekly newsletter I asked to hear what other people wished they knew before buying a home, and their answers were amazing. Here are a few:
- Manage timeline expectations. Get to know typical timelines for the local market you’re in. For example – sale agreed doesn’t mean the same thing everywhere. In America, this is generally legally binding, but in Ireland, going from “Sale Agreed” to signed contracts can take 6+ months (it took us 6 months).
- Prepare your finances as early as possible. Being self-employed and earning in a non-local currency made our mortgage application process really long and difficult (1.5 years). If I had one more year of financial data, this would have been a lot easier and more banks would have considered our application. The market has gone up in value since, so I’m glad we didn’t wait and started when we did. But if there’s anything you can do ahead of time, do it now!
- Apply for a mortgage with multiple banks concurrently. Because of my self-employed status, only 2 banks were able to consider our application. The one that was most promising (with the highest borrowing amount) fell through unexpectedly, so it was important we had kept in contact with the other bank. It’s also better to have multiple offers so that you can choose what is best for you (and also potentially use the first offer as a negotiating point/timeline accelerator for the other). Very similar to the job search/salary negotiation process!
- Find out quickly who can help you. It took us a long time to figure out that the representatives we were dealing with had less power over our mortgage than we even thought. Be nice to everyone, but try to escalate your case quickly if possible to a supervisor or branch manager. In Ireland, due to regulations, you cannot speak to the decision makers directly, so we did our best with the resources we had.
- Don’t be afraid to be a squeaky wheel. In order to finally close the sale, my husband and I went on a “campaign of harassment” (a joke – we just emailed or called everyone involved once a day to keep things moving). Everyone has competing priorities, and no one cares more about your home purchase than you. Don’t sit back and wait to hear back from the people with the power – follow up as frequently as you feel you need (at the peak we were calling/emailing everyone once or twice per day).
It’s an emotional process! We did a lot of research and looked for a long time, so we felt really prepared to buy a house. The biggest surprise for us was how emotional buying a house can be. These emotions can make it really difficult to make a sound financial decision.
We were buying our home in a “hot” bidding market, meaning the homes are priced low in an effort to spark a bidding war. Even though we have no debt, had 20% down, and a strong income, we lost out on a lot of homes because we didn’t want to overbid. While we’re glad that we waited and found the right house at the right price, it was emotionally very difficult to deal with so much initial rejection.
It can take a long time. I’m still in the house hunting process and I have been for over a year. Everyone makes it sound so easy and fun, so I went in with expectations that I’d really enjoy this process. I wish I had known that it could take longer than a year so I would have managed my expectations better. Every month that goes by I get more frustrated but I try to remind myself that finding the right house for me will make this worth it in the end!