Expert: liznarr - 5/27/2009

Question
  First time buyer looking for a cheap starter house. Probably not my ideal house, but something I can at least put my money towards instead of continuing to rent. Something cheap that may require maintenance (~$50k range or lower perhaps). But something I could at least resell or use as an investment property down the road.  I'm looking for a starting point and what’s required, and or helpfull to know... any input you have to offer is appreciated, and however indepth you consider going or feel is relevant at this point is up to you. I will be looking into everything suggested ASAP, so I can hopefully move into a budget home instead of renewing my current lease.

What I already know is very general and sketchy in the details.  I know...
-   i should go through the pre-approval process for a mortgage loan beforehand.
-   i know a lot of people are recommended to use an agent, but I don’t know the specifics..
I don’t know...
-   Should I just go threw pre-approval for a loan right now with any lender and then shop around later? Because I would need to give all my info and go through the approval process for each bank or institution just to find out what kind of rates they would offer me? I’m aware my credit and income affects my rates, but each bank's offers wouldn't have a universal standard and would vary, No? Would it be a good idea just to start the process at a bank I already have active accounts (checking/savings) with?
-   Are agents services free for finding properties for buyers, or is that just case dependent?
-   Because I’m not looking for a great house, mainly concerned with location, and that it doesn’t have a terminal issue such as: located in a contaminated environment or crumbling foundation. And budget is of importance right now to me. Would it perhaps suit my situation to go through the closing process on my own, instead of using an agent/lawyer /and whoever else u normally need? If possible I would like to explore that option. I do not mind taking the time to learn what I need inorder to do that.

PS. I realize this is a very broad topic and would not mind at all if there are previous questions or info you know of that have the info or part of the info I’m looking for, but I also realize my goal is little different then the average buyer, since my standards may be lower. As I’m not currently an investor, but looking for a beneficial situation especially with the current market. Apposed to leasing. So also feel free to simply link me to the appropriate info you feel is relevant. And or info of what Not to do, sometimes I've also found it quit helpfull learning of mistakes others have ran into down the same path, which consequently gives me an even clearer picture on what Should be done.

Thank you very much for your time, and any info you have to offer. Appreciated

Answer
Joe,

I would suggest first getting pre-approved (vs. pre-qualified) if you are serious about purchasing.  Starting the process at your bank where you already have accounts and do business would be an excellent place to begin.  Do not go to multiple banks, lenders, and get each one to pull credit and pre-approve you.  Each time a lender checks your credit, an “inquiry” is created on your credit file.  Too many “inquiries” can be bad.  (Ask your lender to explain this process to you.)

Make sure that you understand the TERMS of any loan you apply for.  Ask what your closing costs will be; what your note RATE will be; how much down payment you will have to make; how much will you be charged for an origination fee (usually no more than 1% of the LOAN amount, not the purchase price); make sure you get a FIXED rate versus a rate that might adjust.  Rates are low now, and there is no reason to apply for an adjustable rate and have your rate and monthly payment go UP in years to come.  

You mentioned “something cheap that may require MAINTENANCE.”  You need to keep in mind that the type of loan you qualify for may or may not allow certain repairs to be made AFTER the sale.  Be sure and ask lenders about repairs/maintenance you can do after the sale.  For example, an FHA loan would require that a leaking roof at the end of its useful life be replaced prior to closing.  FHA lenders are not allowed to insure homes with that type issue, their thinking being that if a buyer were to default on the loan; they would be stuck with a house with a leaking roof at the end of its useful life.

You say you are mainly concerned with location – a good one – and that a house does not have a contaminated environment or a crumbling foundation.  To this end, you need to educate yourself on what to look for to determine if such factors exist.

You can always check with your local police and/or sheriff’s department for crime statistics.  Keep in mind, that even so-called “good” neighborhoods can have “some” crime.  There is ALWAYS a busy-body in every neighborhood who loves to tell all.  You just need to find that busy-body and ask some pointed questions.    

Agents generally do not charge, per se, for their services if you purchase a home listed in a MLS database.  These type listings generally offer a commission to a selling agent which is paid at closing by the Seller of the property.

You do need to find a GOOD, reputable agent who will represent YOU, not a Seller.  Let any agent you work with know up front what YOU expect of him/her:  To keep you up to date on new listings in YOUR price range as they become available, and to show you inside homes you request to see.  You’ll just have to ask tons of questions of any agent you might consider.  You can also ask family and friends what agent they have used in the past and whether or not the agent did a good job and if they would recommend him/her and whether or not they would use that agent again.  

Most agents will ask you to sign a Buyer Agency agreement, stating that you will BUY from him/her.  This is best for you, as an agent knows you will be loyal to him/her, and you should expect the same from the agent.  Initially, you can just sign, say, a 90-day agreement with an agent so you won’t be tied in long term if an agent does not perform for you.

In addition to MLS properties, you can contact For Sale By Owner properties (FSBOs) and check out HUD properties available online (which are many times also listed in a MLS database); and you also can research foreclosed properties in your area online, again, many of which may also be in a MLS database.  

When it comes time to writing your offer, make sure you have the right to have a home inspection performed by a qualified, licensed home inspector – and have the inspection performed.  Again, you’ll just have to ask around as to who the good inspectors are.  When you start hearing the same name more than twice or so, that’s probably a good starting point.  Also, make sure that if the home inspection is unacceptable to you, or if a Seller refuses to make all the repairs you ask for as a result of a home inspection, that you have the right to terminate the Contract.

In addition to a home inspection, you need to have a HVAC inspection performed by a company of YOUR choice, with a Seller agreeing to make any required repairs in order to get a “clear” letter.  Ditto for a termite and water damage inspection (including dampness and/or any standing/ponding water in a crawl space); again, by a company of YOUR choice.  This is referred to as a CL100 report in my area, but could be known by another name in your area.  Make NO compromises, period, in obtaining a clear CL100 HVAC reports.

You need a good home inspector once you make an offer, but initially you should LEARN TO DO SOME INSPECTING ON YOUR OWN TO SPOT POTENTIAL PROBLEM AREAS.

For foundation problems, you can look for cracks in the brick foundation and exterior walls of a brick home.  On brick homes, check for separation around exterior window areas, also – especially in corner areas.  If you see mortar having fallen out of bricks which have opened up or signs of mortar-filling of any opened cracked bricks, or displaced bricks (some bricks sticking out beyond the vertical line of others on either the foundation wall and/or the exterior brick of a house), you can bet you have some settling/foundation issues.  

Other tell-tale signs of foundation problems can be windows and doors that do not close properly (binding doors); miter joints of interior windows and doors opening up; uneven floors, and cracks running from one end of a room all the way to the other end.  Open and close all windows, doors, cabinets, and drawers to make sure they open and close properly.

For environmental problems, you can check with your local DHEC office and also ask neighbors.  There is ALWAYS a busy-body in every neighborhood who loves to tell all.  Again, find the neighborhood busy-body and ask questions.

As you start looking at houses, go in the crawl space yourself.  After a good, hard rain is always an excellent time to inspect underneath a house.  If the soil is wet, or if there is any standing or ponding water after a rain that does not drain out on its own after, say, 48 hours max; then you probably have a problem that needs addressing.  Look for signs of trenching in the sand/dirt in the crawl space, a tell-tale sign that water has been entering the crawl space and running underneath the house.  Also, look for water-lines on the foundation walls and brick piers underneath a house.  If you see water lines, you know there has been standing water underneath the house; and this is a MUST to address.

Look in the attic of homes, and take a bright flashlight with you.  Do you see any water stains anywhere in the rafters that would indicate leaks?

Check the plumbing under sinks and lavatories for leaks.  Turn the water on and fill up the sink/tub or whatever.  Then pull the plug to see if it leaks, and also drains properly.  If it is draining slowly, there could be a blockage in the line somewhere.  If any commodes in a bath room are loose and can be “rocked” back and forth, the wax seal could be loose and you could have water damage underneath this area.  

If a tub/shower has cracks in the tiles where water could enter and go “underneath,” you could have water damage underneath the house.  Don’t forget to check shower heads and valves for leaks.  If a shower head is pulled away from the wall, it could be leaking BEHIND the wall, doing damage to an area you cannot see.  Same for water leaking at valves, or loose valves:  Water can be running or leaking BEHIND the wall.

Check electrical outlets as best you are capable, making sure that all lights operate properly and do not “flicker.”

You also should ask for a new survey or a copy of any recent survey done on property you intend to buy.  Make sure what you THINK you are purchasing is actually what you WILL BE purchasing.  Ask the Seller to walk the property with you and show you all the corner markers so you will know exactly where your property lines are – and whether any fencing is yours or that of a neighbor’s.  Make sure there are no encroachments onto your property, and that any buildings on property you intend to purchase do not PROJECT onto a neighbor’s property.  (Only a survey will accurately reveal encroachments and projections.)

I do NOT recommend trying to close on a house yourself.  You need a qualified closing attorney or Title Company to check title of any property you intend to purchase and make sure it is closed properly.  And DO purchase an OWNER’S title policy at closing.

Last, but not least, if your State requires a Seller to fill out a property disclosure form, make sure all questions have been answered.  If you see ANY reason to suspect they have not been answered fully, ask questions up front.  After closing, you will have to pursue issues through the legal system, and that can be time-consuming and COSTLY.

I hope the above is helpful.  Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth