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(Excerpted from Stop Getting Ripped Off) Buying a house is probably the most perilous transaction in any consumer’s lifetime. The potential to get screwed is orders of magnitude larger than any other transaction you’ll ever undertake. And as we saw during the great housing meltdown, screwing up a housing purchase can cast a shadow over family finances for years or even decades. That’s the lesson I want you to take away from the housing collapse; your primary goal when buying a home should be this: Don’t ruin your future. With that in mind, let me introduce my blasphemous rule for the home buyer:
The loan is more important than the home People go about home shopping in a bass-ackwards way. They might spend months looking at dozens, even hundreds of properties. They read up on schools. They hunt for grocery stores. They look up crime data. One thing they often never do: They never buy the first house their realtor shows them. And they don’t move right into a condo that their friend Larry at work said he heard about from his friend Jennifer. Yet when it comes to pledging the largest amount of money they’ll ever spend – when it comes to pledging one quarter to one third of their monthly earnings for 30 years (let me say that again, 30 years!) -- people often take the first piece of advice they get. People often spend 500 hours or more shopping for a home and 30 minutes shopping for the loan. That’s nuts. Here’s the lesson I hope we learned during the housing market meltdown: it’s much easier to move out of a house you don’t like than a mortgage you don’t like. In fact, getting out of a bad mortgage is such a nightmare that the Harvard law professor and bankruptcy expert, Elizabeth Warren author of The Two-Income Trap, gives this counterintuitive advice: You’re better off taking a bunch of expensive vacations and blowing money on nice clothes than buying a house with a bad mortgage. You can always stop making the frivolous purchases when times get tough. But going deep into debt that can’t be erased – even by a bankruptcy proceeding – can be an impossible problem to solve. It’s important to buy a house you love. If you love the home, and you can afford the monthly payments, than you should ignore all the talk about housing values. It is just noise. Even if you are “under water” on paper, you needn’t worry – if you have a nice place to live and there’s no immediate concern that you’ll lose your job or be relocated. Primary homes are not an investment and should never be chosen as one. The benefit of a mortgage is the fact that you’ve locked in your housing costs for 30 years; and with only the rarest of exceptions, your housing payment will be a bargain if you stay in the home for more than 10 years. But it won’t be a bargain if you get a bad loan. Even if you get a bad house, you can fix it up or redecorate. But a fresh coat of paint does nothing to improve you debt situation. This is why the loan is more important that the home, and I want you to spend your time accordingly. Why home buying is so hard You buy things every day. You make judgments, you bargain, you look for sales, you ward off aggressive sales tactics. All those experiences should prepare you for buying a home. But they don’t. Why? Limited selection. A buyer who sets out to buy flat-screen TV, like a shopper who sets out to buy a home, has thousands of possibilities. TV buyers will usually find multiple copies of the item they seek, sold by competing retailers. Home buyers, however, are at a serious disadvantage. When a shopper finds the perfect condo, there’s only one. It truly is a once-in-lifetime opportunity. The supply represents the ultimate scarcity. You don’t need to know all about supply and demand to understand that when there is only one of something, the seller has a lot of leverage. There is often no time for buyers to think, as another buyer can swoop in and take the home away. That means the pressure on the transaction is immense. This single fact makes home buying fundamentally different from almost any other transaction consumers undertake. Even new car purchases, hardly an easy-going affair, don’t contain this kind of once-in-lifetime pressure. You can always go to another dealer and find the same car. The intensity and unfamiliarity of these once-in-lifetime transactions make home selling ripe for abuse. I am generally a big proponent of the do-it-yourself approach. But when buying a home you’ll need to be represented by someone you can trust. There’s nothing more important you can do when home shopping than picking good people to surround yourself with. Real estate law is local. In some states, an honorable agent is sufficient; in others, a real estate lawyer will be required. Picking an honest advocate is the most important bridge to a fair transaction. Because people buy homes only once about every 10 years, they are generally forced into questionable trust relationships with strangers, relationships that are very similar to doctor-patient relationships. And they often misunderstand the true nature of these new “friends,” who all stand to benefit economically from their bad choices. The truth is, very few people can make sense out of the 1700-line form that is the HUD-1 closing document, and that’s only one of the pieces of paper you will have to sign when you buy a home. When the pile of papers show up on closing day, most consumers have no idea that all the terms of their loan can change, even if those terms were presented in writing, in a Good Faith Estimate. There are numerous examples of consumers being hit with random extra charges (I’ve heard of brokers who add something they call a “dumb-ass fee” on closing documents). But that’s not as bad as bait-and-switch stories, like this one sent in by a reader to the Red Tape Chronicles, about a sale gone bad in Los Angeles. The lender will tell you that you are getting a 30 year fixed rate loan at 6% with no points, no pre-pay penalty, and no fees. You're just so excited about the interest rate and terms that you don't ask for it in writing and thus essentially you don't receive, a "good faith estimate." So, when the time comes and your agent has removed all contingencies on the purchase of your new home, including the loan, you sit down to sign the loan docs that have been essentially prepared by your lender. This is where you become a victim of the "don't ask -- don't tell, bait 'n switch game." You come to find out that your loan is now 6.5% and you're paying 1 point, along with some other "administrative" costs. This makes your monthly payment increase by $500, no longer allowing you to afford the home at a comfortable monthly payment. Nor did you know that you were going to have to pay five thousand or more just to get the loan. Additionally, since there is a pre-payment penalty, you cannot re-finance until the pre-determined time, without paying a hefty penalty. This could cost you thousand and thousands of dollars. The above scenario happened to my client I want you to spend serious time picking an honest real estate agent and mortgage broker. Because in the end, no matter how clever you are, if you are dealing with the devil, you are going to end up in housing hell. You should still understand, however, that the someone you trust – even if he or she is pure as the driven snow -- is helplessly subject to economic bias that you need to understand. That wonderful neighbor who’s helping you buy your first home may say he wants to get you the best price during a negotiation – but he gets nothing until you sign on the dotted line. Then, he makes thousands of dollars. Same for the seller’s agent. Both really have only one incentive that’s operating: they want to close the sale at any price. That means, in the end, you really are on your own. Knowing how perilous the journey from idea to new home is, I want to lay out a 10-step process to help you safely swim the rapids of the home-buying process. The 10 steps to buying a house and not getting screwed 1. Estimate your monthly payments and down payment 2. Get a pre-approval letter 3. Pick an agent 4. Pick a home 5. Get several GFEs 6. Fill out Bob's GFE 7. Consider backing out and renting 8. Read and understand a HUD-1 9. Stay involved during the interregnum 10. Get your HUD-1 early
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