We’re set to close on our first home Friday morning at 9 AM.  I can’t believe it’s almost here.  We did a thorough final walk through tonight to make sure things were as they should be.  As we were wrapping up, it hit me how easy everything seemed to be coming together.  To be honest, I’m usually a high strung person who lacks patience when it’s needed most.  But not only has the entire home buying process been extremely pleasant, it’s been a blast!

I give ourselves alot of credit for this.  For example, some would say we’ve “roughed it” for a couple of years.  We’ve been living in a cheap 800 sq. ft. apartment which enabled us to quickly pay our student loan and car debts while saving for a down payment.  Doing this has increased our credit scores and given us a solid financial foundation moving forward.  Because of our willingness to take care of business and delay gratification, we were able to obtain a 15 year fixed rate mortgage at 4.5%, hassle free.

If you are thinking about purchasing a home in the future, I can’t stress enough how important it is to make sure you are financially ready to do so. “Financially ready” means different things to different people.  Not even the experts are going to agree 100%.  But be careful who you listen to and try and understand the motivations behind their advice.

For example, only a few years ago, many people simply asked their mortgage lender what they could afford.  At the time, lending standards were far looser than they are today and thousands of people ended up purchasing a home based on the maximum amount available for them to borrow.  On top of that, real estate agents are paid commission based on the sales price of the home, so it’s only natural that they are interested in selling a more expensive home.  Between the real estate agents, mortgage lenders, and otherwise clueless buyers, foreclosures have become inevitable for thousands of good people.  All the more reason to truly educate yourself about the home buying process instead of relying on only one or two sources of advice.

To me, financially ready means the following:

• Debt Free (or pretty darn close!)
• Stable history of income and positive projected future income
• Understand the pros and cons associated with 15 and 30 year fixed mortgages and the opportunity costs associated with each alternative
• 6 months of prior budgeting to truly get a picture of what you can comfortably afford

I can’t take all the credit for how easy this process has been for us.  Dave Ramsey’s Endorsed Local Provider (Real Estate Agent) gets the rest. She has been a Godsend.  It was obvious from our first conversation that she knew her stuff, but more importantly, she cared about us.  She’s been extremely patient throughout the entire process answering each and every question we asked.  Her wealth of knowledge and experience was evident each and every time we visited via phone or in person.  Because of her extensive knowledge of the local area, her recommendations for home inspectors, repairs, insurance, and mortgage lenders have been spot on.

If I knew 2 years ago what I know now, I’m not sure I would have done anything differently. It really does boil down to making sure you have a solid financial foundation and find an excellent real estate agent willing to help you along your way.

Now, back to packing…

If you are a frequent reader of The Broke M.B.A., you are well aware that we will soon close on our first home. Actually, less than two weeks from today, we’ll be proud homeowners. I’ve posted several articles under the First Time Home Buyer’s Series category if you are interested in more of the details. After the inspection, our home inspector left some information regarding what every new owner should do immediately upon taking ownership:

1. Consider changing the locks on all exterior entrances.

2. Check that all windows and doors are secure. Security rods can be added sliding windows and doors. Consideration could also be give to a security system.

3. Install smoke detectors on each level of the home. Ensure that there is a smoke detector inside and outside all sleeping areas. Replace batteries on any existing smoke detectors and test them.

4. Create a plan of action in the event of a fire in your home. Ensure that there is an operable window or door in every room of the house. Consult with your local fire department regarding fire safety issues and what to do in the event of a fire.

5. Examine driveways and walkways for trip hazards. Undertake repairs where necessary.

6. Examine the interior of your home for trip hazards. Loose or torn carpeting and flooring should be repaired.

7. Undertake improvements to all stairways, decks, porches and landings where there is a risk of falling or stumbling.

8. Review your home inspection report for any items that require immediate improvement or further investigation. Address these areas as required.

9. Install rain caps and vermin screens on all chimney flues, as necessary.

10. Investigate the location of the main shut-offs for the plumbing, heating and electrical systems.

Although we’ve heard it many times, nothing could be truer than the old cliche, “an ounce of prevention is worth a pound of cure.” Preventative maintenance is the best and cheapest way to keep your house in great shape. It also reduces the risk of unexpected repairs and improves the odds of selling your house at fair market value when the time comes.

With this in mind, below are some suggested maintenance items to review on a periodic basis. Most, if not all of these items are things that you can do quickly yourself.  If left unattended for too long, many will result in having to call a professional.

Monthly:

• Check that all fire extinguishers are fully charged.
• Examine heating/cooling air filters and replace or clean as necessary
• Clean gutters and downspouts.
• Ensure that downspouts are secure, and that the discharge of the downspouts is appropriate.
• Carefully inspect the condition of shower enclosures.  Repair or replace deteriorated grout and caulking.  Ensure that water is not escaping the enclosure during showering.
• Repair or replace loose faucets or shower heads.
• Secure loose toilets, or repair flush mechanisms that become troublesome.

Spring and Fall:

• Examine the roof for evidence of damage to the roof coverings, flashings and chimneys.
• Look in the attic (if accessible) to ensure that roof vents are not obstructed.  Check for evidence of leakage, condensation or vermin activity. Level out insulation if needed.
• Trim back tree branches and shrubs to ensure that they are not in contact with the house and roof.  Contact local elctric company if trees rest on power lines.
• Inspect the exterior walls and foundation for evidence of damage, cracking or movement.  Watch for birds nest or other vermin or insect activity.
• Survey the basement and/or crawl space for evidence of moisture seepage.
• Ensure that the grade of the land around the house encourages water flow away from the foundation.
• Inspect all driveways, walkways, decks, porches and landscape components for evidence of deterioration, movement or safety hazards.
• Clean windows and test their operation.  Improve caulking and weather-stripping as necessary.  Watch for evidence of rot in wood window frames and door frames.  Paint and repair window sills and frames as necessary.
• Test all ground fault circuit interrupter (GCFI) devices, as identified in the inspection report.
• Insulate/cover hose bibs in the fall, if below freezing temperatures are anticipated.
• Test the overhead garage door opener to ensure that the auto-revers mechanism is responding appropriately.  Clean and lubricate hinges, rollers and tracks on overhead doors.
• Replace or clean exhaust filters.
• Clean, inspect and/or service all appliance as per the manufacturer’s recommendations.

Annually:

• Replace smoke detector batteries.
• Have the heating, cooling and water heater systems cleaned and serviced.
• Have the chimneys inspected and cleaned.  Ensure that rain caps and vermin screes are secured.
• Examine the electrical panels, wiring and electrical components for evidence of overheating.  Ensure that all components are secure.  Flip the breakers on and off to ensure that they are not sticky.
• If the house utilizes a well, check and service the pump and holding tank.  ave the house water quality tested.  If the property has a septic system, have the tank(s) inspected (and pumped as needed.)
• If your home is in an area prone to wood destroying insects (termites, carpenter ants, etc.), have the home inspected by a licensed specialist.  Preventative treatments may be recommended in some cases.

What else should be added to a home owner’s regular maintenance schedule?

Saving up cash for a home down payment can definitely try your patience, especially as the first time home buyer tax credit deadline rapidly approaches.  There are options other than selling your kidney to come up with some quick cash.  Why not withdraw money or take out a loan from one of your retirement accounts?  My gut advises against this decision, even if it means missing out on the first time home buyer’s credit. The biggest reason has to do with diminishing the power of compound interest.  After all, compound interest is what makes a comfortable retirement a real possibility for the average Joe.  But if you insist, I’ve given you two different options to consider:

Withdraw Contributions and/or Earnings from a Roth IRA

Contributions to a Roth IRA differ from those made to a regular IRA.  Roth contributions are made after tax resulting in tax free withdrawals at retirement. Traditional IRA contributions are made pre-tax resulting in taxed withdrawals at retirement.  The cool thing about a Roth IRA for this discussion’s purpose is that you can withdraw your contributions any time for any reason, tax free.  In addition,  $10,000 in earnings may be withdrawn penalty free if used for a down payment, if your account is 5 years or older.  If you are going to tap a retirement account, I would recommend tapping this before taking out a 401(k) loan.

Take A Loan From Your 401(k)

When borrowing money from your 401(k) to be used for a down payment, you might be able to extend your repayment period for the length of your mortgage.  Not bad. However, keep in mind that there are some major draw backs and significant risks associated with your choice to borrow from your 401(k).  Please keep in mind that even though money in your 401(k) is your money, it’s not the same as money sitting in your savings account waiting to be used.  It is a loan.  If you use these funds, you will have to repay the loan or face the consequences.  For example, if you lose or change jobs, you’ll be forced to pay back the loan almost immediately. If you are unable to repay, you’ll have to pay income tax plus a 10% early withdrawal penalty.  If you must find quick money for a down payment, don’t have a Roth IRA, and are willing to accept the risks, taking out a loan from your 401(k) might be the right choice for you.

Has anyone used one of these two strategies to come up with quick money for a down payment?

1. Find a Reputable Real Estate Agent

A good agent will look out for your best interest and guide you through each step of the buying process.  We found ours through Dave Ramsey’s Endorsed Local Provider program.

2. Get Your Finances in Order

How much can you afford to spend?  We figured out how much house 25% of our take home pay on a 15 year fixed rate mortgage would buy.  You don’t have to adhere to the same mortgage and percentage we did, but you do need to be conscious of how your monthly payment will fit into your budget.  Take a look at the estimated payment button on Zillow for homes in your area.  You should also read Dough Roller’s post, 5 Ways To Calculate How Much House You Can Afford.

3. Get Pre-approved

Your credit score will be pulled and you’ll have to prove your yearly income, but you’ll eventually have to do all of that anyway. Besides, if you find a home you like and your offer is only one of many, your offer will carry more weight than someone who has only been pre-qualified. Check out Get Mortgage Pre-Approval Online at Money Under 30.

4. Determine Your Needs and Wants

Then write them down. This will be different for everyone.  Do you have kids? How important is the neighborhood?  Proximity to work?  How many bedrooms?  It’s easy to get carried away when shopping.  Knowing what you need and want beforehand will keep you focused.

5. Don’t Be Afraid To Make A Low Offer

Common advice says, “you make your money when you buy, not when you sell.”  Unless you are purchasing the home from your best friend, mother, or in-laws, don’t be afraid to ask for well under list price.  You might offend the seller, and they might refuse to work with you. But this is your first home, not your dream home. In other words, move on and make an offer on another “temporary home.” You’ll probably sell it in a few years anyway, and when that time comes, you’ll hope you are are able to sell at a higher price than you bought.

6. Negotiate

If you follow tip #5, the seller will likely make a counter offer.  At this point, do what feels right.  If you like the offer, take it.  If not, you make a counter.  Remember, the sellers are looking out for their best interest, and I suggest you do the same.

7. Shadow The Home Inspector

Once you and the seller agree on the sale price, find a good inspector.  Especially if purchasing an older home.  As a first time home buyer, you will be surprised at how many problems your potential new home will have.  Most will probably be minor, some not so minor.  Ask your agent if they can recommend an inspector who is happy to have you along and explain each detail until you are satisfied with their answer.

8. Negotiate

Yes, tip #8 is the same as tip #6.  But now it’s do or die.  If the home needs a new roof, ask for it. If it has leaky pipes, ask the seller to fix them.  Ask for money to make repairs.  If you don’t push for what you want now, then you may regret it after the excitement of owning your new home wears off.  For tips, check out Important Tips On How To Negotiate After Home Inspection @ jkrinvestments.

9. Find Homeowner’s Insurance

Again, ask your trusted Real Estate Agent who he or she recommends, but don’t necessarily settle for the first company you contact.  Shop around and get quotes from multiple insurance agents to find the best deal for you.   For more tips, read Save Money on Your Homeowner’s Insurance @ Cash Money Life.

10. Prepare To Move!

The easy part is over.  Check out Ten Things I Learned Moving – And Tips from @ Free From Broke. Good Luck!

Quite a bit has happened since the last Home Buyer Series post. Here’s what has happened since we agreed upon the original offer:

Home Inspection Results
Because the house is 45 years old, our Realtor warned that we would receive a long laundry list of problems from the inspector. She suggested we be present during the inspection in order to fully understand each problem and why it had to be reported.

The inspection took 3 hours out of my work day, but it was worth every second. Thankfully, the inspector was very patient and willing to explain each detail and answer every question we had. Out of the multiple page report, there were only 3 big problems that we wanted addressed before moving forward with our purchase:

1. Roof
2. Water Heater
3. Valve for Sprinkler System

More Negotiations
While the sellers’ were happy to have their insurance company pick up the tab on a new roof, they initially balked at replacing the 14 year old water heater and installing the water sprinkler valve now required by law. Their agent said they absolutely would not install the valve, and since they were purchasing a 1 year warranty on our home, that the water heater could be replaced for the $69.00 deductible upon its demise.

Fair enough, but the day after the inspection we sat down to amend the contract stating that the seller would replace the roof, and replace the water heater. We decided we could let the $400 valve go in hopes they would agree to our other two requests…

Any they did. We will be picking out the color of our new roof tomorrow and they are paying $900 in closing costs to cover repairs/water heater!

Waiting Till Closing
All in all we couldn’t be happier. We’ve signed the paperwork associated with our loan and now it’s time to hurry up and wait. We are scheduled to close on November, 6, well before the 1st time home buyer’s tax credit deadline.

Tips and Advice
Here are four tips that I can give to first time home buyers:

1. Find A Good Real Estate Agent (we found ours via Dave Ramsey’s ELP program.)
2. Find an Inspector who will take their time and is happy to explain each and every detail until you are satisfied.
3. Don’t be scared to push for what you want, but be willing to give a little to get a little.
4. Most importantly, Have Fun!

We Are Getting Closer
We signed the seller’s counter offer and are officially under contract.  We have ten days to back out without question. However, if we choose to cancel the deal after next Tuesday, we will have to kiss the $2000 in earnest money goodbye.  It’s time to do our due diligence and make sure we are getting everything we paid for.

Heads From Tails
It’s been an eventful two days trying to not only make the planets align, but figuring out what the alignment is actually supposed to look like.  We are very thankful to have a knowledgeable real estate agent working on our behalf.  She has 30 plus years of experience and it shows.  Not only did she help us decide what our needs and wants are, she’s given great recommendations regarding our mortgage banker, home owner’s insurance provider, and home inspector.  If you’ve never purchased a house before, I can’t stress how important it is to find a reputable Realtor to help you along your way. Really.  I know some of you out there are thinking about how much money you will save by doing this on your own.  Don’t bother.  Spend your time doing the things you already do well.  The seller will pay your real estate agent’s commission anyway.

While we are still trying to cross our “t’s” and dot our “i’s”, here’s a quick list of what has happened since signing the contract:

1. Made contact with recommended home inspector and set up inspection for Friday morning.  It’s our understanding that many inspectors prefer that you are not present as they perform their inspections.  Our Realtor only recommended insepctors that allowed us to be present during the inspection, and both my wife and I fully intend on being there the whole time.
2. Made contact with mortgage banker, American State Bank, who had previously pre-approved us when shopping for a home.  We compared the 15 and 30 year fixed rate mortgages and ultimately decided to lock in a 4.5% interest rate on a 15 year fixed loan.  We will actually be signing an 80/10/10 loan.  10% down, 10% second lien at 6%, and the 80% represents the remaining balance.  This will save us the $40-$50 in Private Mortgage Insurance each month.
3. Made contact with home owner’s insurance provider and received a quote.  We went with a reputable local provider who’s rates were roughly 30% less than some of the national brands.  We were initially concerned about what would happened if we ever had to collect, given their rates were so much cheaper.  But after finding an A+ rating given by the Better Business Bureau, we feel comfortable with our decision.

I think we have done all we can for now.  American State Bank will be sending us additional paperwork soon and we will eventually have to meet with the insurance company to sign even more paperwork.  We are both a little frightened about the leap, but we are well prepared to handle the commitment.  We’ve been saving for a couple of years now, shopping and doing research in our local market, and we have been living on a budget.  Thanks to adhering to a budget for the past several months, we are comfortable with how much money we have allocated to the house payment.  The excitement and anticipation of owning our own home along with the confidence that we are making the right decision far outweighs any other emotions currently present throughout this process!

My wife and I recently viewed several houses with our real estate agent. She took us all over town to see new homes in new neighborhoods, old homes in old neighborhoods, and everything in between. This was tons of fun, and we finally decided on on an older home that needed some updating, but in return, we are able to purchase a larger home in an already established neighborhood with our money.

Of course, this purchase is pending the home inspection. This home was built in 1964 and we are expecting the inspector to find several things that we need to be aware of. After we sign the counter offer made by the sellers this afternoon, we will have 10 days to back out if we so choose. Assuming everything goes well, we have set our tentative closing date for Friday, November 6. This will be in plenty of time to beat the November 30 deadline for the 1st Time Home Buyer’s tax credit.

For those who aren’t familiar with the process of purchasing a home with a real estate agent, I will soon post a brief entry detailing the steps we took during our experience. And for those first time home buyers who haven’t started looking just yet, you still have some time. However, there seems to be a number of “problems” through out this process that could delay your purchase. Our real estate agent suggested that those wishing to close before November 30, should really begin the hunt for their new home in the next week or so. Don’t forget that the Thanksgiving holidays are right before this deadline and many people involved in the transaction, from the real estate agent to the mortgage banker, may or may not be taking a short vacation during the days that you need to close!

My wife and I just recently signed another one-year lease at our current apartment.  We like the apartment, it's quiet and safe.  However, I haven't put the house hunt and my real estate self education on hold.  Here are some of the more recent websites that I have found helpful:

The Wall Street Journal's personal finance section has a "how-to-guide" on a wide variety of personal financial planning topics, including purchasing a home.

The U.S. Department of Housing and Development's (HUD) website contains plenty of useful information.  This link will take you straight to their nine step guide to buying a home.  I have also utilized this website to find HUD homes for sale. According to their website, a HUD home is a 1 to 4 unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim.

Zillow is a great tool to search for homes in your area. You have the opportunity to search for houses based on 11 different criteria, from the number of bedrooms to lot size.  I've used Zillow to figure out the average home prices in most neighborhoods of my hometown.  You can even search comparables on the homes closest to those listed for sale.

There's still plenty of information to cover and I have a great deal of questions that I will be trying to answer over the next year or two, but I feel that these websites are great resources to utilize throughout the process.

I had previously convinced myself that purchasing a home now would be a bad decision.  We have a pile of student loans and a large down-payment to take care of first.  But with the Fed cutting interest rates once again, mortgage rates have fallen to extreme lows. (Check out what Jim @ Blueprint For Financial Prosperity has to say about the recent rate cut.)

In this series' first post, I discovered I could take out a $133,528.50 30-year fixed mortgage or a $95,468.44 15-year fixed mortgage while keeping my monthly payment at an affordable $775.00:

But with lenders now offering interest rates as low as 4.75% on a 30-year fixed and 4.875% on a 15-year fixed, my $775.00 mortgage payment could travel a bit further:

It appears as though my $775.00 could buy me $15,000 more in house today on a 30-year fixed loan than just one week ago.  Will rates still be this low a year or two from now when I previously thought I would be ready to buy?  I doubt it.  But, these low rates are probably assuming a 20% down-payment.  While we could come up with this cash in a couple of months, it would require us to liquidate the emergency fund.  And with the student loan debt, I'm not sure my debt payment ratio would justify this low rate.

Regardless, these low rates are definitely enticing.  I would love to hear your thoughts and advice!

Click here to read the first post in this series, "First Time Home Buyer Series – Where to Begin?"