With the down payment savings in place, I made an appointment with my banker to help me complete a pre-approval mortgage application. Now, I will start to sound like a banker whom you dislike but this is an important point: “You need to know with certainty how much you can afford and get your home financing commitment from your lender of choice before you start looking for your dream home”. When I was a lender, I came across a lot of customers who had offers on houses before securing their financing. Needless to say, that was not an “ideal” approach in home buying. Some people ended up losing on their initial down payment (usually $10,000 or more) because they waived the financing condition on the purchase and their financing didn’t come through. You don’t want to be in that position. Be prepared and plan ahead of time.
Your lender will do an assessment of your assets, liabilities and income and let you know your affordability. But don’t just depend on your lender to tell you your affordability; you need to know it yourself. I did a thorough analysis of my financial standing and knew that I must give up a few things to afford a $200,000 home (15 years ago). I decided that my sister and mom must live with me. By pulling all our resources together, we could afford the mortgage and made the ends meet. Again, you may not like this solution but by just sharing your accommodation with your family or friend can increase your affordability significantly. Don’t discount this option just because you have to give up some freedom and personal space. When your salary is low, you also have little to no savings for fallback or your budget is tight, this approach will ease a lot of financial stress for you. Based on this development, I had three “MUST have” for my house:
- 2 bedrooms with ability or already had 1 more bedroom in the basement
- Must be detached or semi-detached. With $200,000, I couldn’t buy 3 bedrooms house in a decent neighborhood, so the additional bedroom in basement solved my dilemma. Also, with the tight budget, there was no money left for condo/maintenance fee, house was the right option
- No suburb because the transportation cost was high. On average, someone living in suburb spent an additional $2,000 to $5,000 annual and 1 hours more per day to travel into work place.. Yes, the house costed more, but I saved in transportation cost and time. Again, it is a trade-off
With my mortgage approved, I searched on MLS listings every day to find the home. I didn’t use a real estate agent because I wanted to reduce the purchasing cost. Although the buyer doesn’t have to pay the real estate agents, the seller will have to pay both agents. Thus, seller will factor in agent’s commissions in the house’s sale price. So, if you can do it on your own and negotiate with the seller, you can save yourself some cash. I will write another post to share with your some tips on this. I brought all 3 houses without using a real estate agent and knock on wood, all three houses turned out to be sound investments. Alas, I found and brought my dream home. Though it looked a bit like a nightmare at the first glance. A sad and old looking bungalow and a family of eleven people (yes, I couldn’t believe my eyes either) lived in the house. So that’s give you an idea how the house looked. And here is the visual!
Yep! Reality was so cruel! But I looked at it from a practical angle and this house met all my 3 “must” requirements, large lot of land and good structure. It needed some works, but hard work never stopped me. That’s another advice that I like to give the first home buyer: “Don’t just look at the surface (cosmetic) of the house. Look for potential and stick to your list of MUST”. You can repaint, change the countertop even remodeling the house over time, but you can’t increase the size of the lot or change the location of the house, so look for potential, size and location of the house.
In today market, I can confidently say that this bungalow will fetch around $800,000 a 300% return on investment in 15 years. Not too bad for my first try at this real estate venture. In summary, there are couples of things that I want to reaffirm:
- Know yourself and have a realistic budget about your affordability. Don’t go over your budget at all cost! You will get into financial troubles if you stretch your budget too much.
- Share your house with someone. If you can’t buy the house with a family member as I did, how about a friend? I have seen friends purchase home together and they worked out great. There are a few tips on this topic too… I will share soon.
- Don’t look at the surface of the house. Look at the house with objective eyes and assess it true potential as a long term investment. Find the house that meets your “MUST” list, decent location, has good potential and lot size.
- Stay within your means, don’t overspend.
Hope you had a few good laughs and get some useful information. I will post more postings on my home purchasing experience along with posting on purchase your home without using a real estate agent and share accommodation. Stay tune!