25 May 2021

Caveats of buying a house

by Robert Paulson

Buying a house for the first time, I ran into obstacles that I feel my agent should’ve voiced. Hindsight is 20/20, so next time I’ll be in better shoes - doesn’t mean these things should remain secret to the world.

I’m obviously not a lawyer so please don’t pretend I’m giving an internet rando legal advice.

Overall process
House searching
Loans
Closing procedures

Overall process

Find an agent (or hire an attorney for filing paperwork and pocket the 3%)
Get pre-qualified by a bank
Find a house
Submit an offer
Get your loan finalized
Bank performs an appraisal
Perform a general inspection
Perform a pest inspection
Finally, close on the house and move in!

House searching

Ideally, the agent does the legwork here, specifically:

Finding compatible houses to look at
Setting up appointments for viewings

The first thing to figure out is actually the loan - because this will determine some requirements for your purchase. Some sellers will only accept specific loans: usually the property listing will show this information. Also, look out for as-is sales, as banks won’t usually give a loan for these properties. So, in general, watch out for:

Types of loans accepted
As-is sales

Agents

There are generally two agents involved: seller’s agent and buyer’s agent. Each earns up to 3% of the sale price, which comes out of the seller’s funds.

Optionally, the buyer can do all the work themselves by hiring an attorney for filing the offer and other paperwork - that way the 3% comes back to the buyer in closing (minus attorney fees, naturally. Word on the street is that this generally costs a few hundred bucks).

Manufactured homes

…are a little more of a pain than stick-built ones:

The interest rate on these is higher than stick-built
These don’t appreciate in value as well as stick-built homes
Finding homeowner’s insurance is more difficult and the payments are higher

So, it’s generally easier to avoid manufactured and mobile homes. Other than these issues, though, it’s fine: you can barely tell modern manufactured homes from stick-built ones. Ours is an ‘84 double-wide model (so, not modern) but I’m still happy with it.

Submitting an offer

An offer is a legal document that includes the following:

Offer amount: can be higher or lower than asking price, depending on the market
Various information about the buyer: name, job, address - why the seller should know this is beyond me (by others’ accounts, this is optional, so who knows)
Earnest money: an amount you’re willing to give to the seller right away, which you lose (all or some of it) if you retract the offer later
Contingencies which you can waive, or not - these include Appraisals, Inspections, the Interest rate. This basically means the offer is contingent on all these things working out as they “should.” If the buyer is dependent on a loan for the purchase, some of these they have no choice on: for example, the Appraisal.

Overall it’s not a good idea to submit offers on every house you see, because if it’s accepted and the buyer retracts it, the earnest money is lost. By others’ accounts, this is exactly the logic in some places: the key then is to rescind the offer before seller’s acceptance of it.

Offers are finicky, there are minimal requirements, but in a seller’s market it may be difficult to get an offer accepted. That’s why often buyers will incentivize sellers to accept their offer by removing contingencies, offering more than asking price, submitting a personal letter, promising a faster closing time, or even paying in cash. One of my offers was refused just because the seller was a veteran and they preferred to accept an offer of another veteran - it can be as simple as that.

Loans

Pre-qualification

This only means that the bank will likely give you the loan. This is a necessary step to submit an offer for a house. This does not include the bank telling you what terms your loan will be on: this you must request specifically, and it takes time.

Ideally by the time you submit an offer for a house, you will have solidified your relationship with a bank. To do that, don’t just get a pre-qualification, but also ensure you know the following metrics:

The interest rate the loan is subject to
The closing costs that your bank controls
Any points applied to your rate

When I submitted an offer, I found out that the rate I was promised included a point, so I went out to frantically look for another bank with better terms. In the end, I did have success here but it was a stressful time because retracting an offer is apparently a dangerous game.

Loan terms

There are a few key terms in a loan:

Principal is the amount of the loan you’re taking out.
The interest rate is the actual rate that your principal is subject to.
Points are a way to increase or decrease your interest rate at the time of closing. Points cost upfront money, so if you will save on interest overall, it might make sense. You can also have negative points, in which case your interest rate is higher, but you get credited cash upfront.
Closing costs are the immediate costs of various services necessary to close the deal: some of these the buyer can pick, while others the seller picks. Most of the closing costs are paid for by the buyer, but some - by the seller.
APR is the adjusted interest rate that includes closing costs. It’s arguably less important than the interest rate, since it’s largely unknown until the deal is closed because closing costs tend to adjust throughout the process.
Loan insurance is generally applied when the buyer has less than 20% stake in the property. One can request to remove it once about 20% of the principal is paid off.

Closing funds sources

Whatever down payment you provide has to be proven to be legal: in my case, I was required to submit three months of statements from bank accounts that will be my sources for the final wiring transactions. Any transfers into the account have to be validated: any gifted money must be proven by a gift letter, signed by the source. Statements of the source bank account are also required. In the end, this is all done to prove that the money isn’t being laundered.

Homeowner’s insurance

This is generally pretty cheap, and the bank does require it for the loan, though you can pick the company and amounts. The total coverage has to be at least for the amount of the loan, aside from that the buyer can change things around.

This is more difficult to find for a manufactured home, and more expensive. I was able to secure a decent policy through AmFam. Beware of home warranties for they’re not the same thing!

Closing procedures

Oh, “closing” is the 7 to 60 day (depending on the bank and how fast they move) process of the buyer actually paying the seller and taking possession of the property.

Appraisal

To avoid another 2008, the banks send out a supposedly independent appraiser to make sure the property is worth the offered price. If the appraisal comes back lower than the offered price, the buyer will need to throw in cash for the delta (or, if it was a contingency in the offer - they can rescind the offer).

General inspection

This is something the buyer pays for upfront - or, the seller may have already performed an inspection and is then required to provide its results (at least in WA) to buyers. The bank doesn’t care about this, but the buyer should. A guy shows up, walks around for a couple hours checking what’s broken or unmaintained - while you rudely drink beer in front of him. Cheap and worth it: during my inspection, a leaky water pipe dripping onto electrical was found. At the risk of the seller dropping your offer outright (because they can), you can ask them to fix stuff you find. Generally, only big issues should be requested though.

If you’re handyman enough, I guess you could do this yourself.

Pest inspection

Depending on property location, different termites are out and about. In CA, there are all different kinds, while in WA there are only subterranean termites. Still, none are fun. Pest inspections are often free, so get it done if possible. In my case, I neglected to for various reasons, and a week after move-in, I got termites coming in through the vents. The balance of speedy closure with a good purchase is fickle!

One year later

A year after your loan starts, expect that your payment may change. In my case, the escrow increased due to property taxes, so my monthly payment shot up by 115$.