How to Buy a House in Houston: The Ultimate Guide is designed to describe all major aspects of buying a house including getting pre-qualified, deciding on the best mortgage, what happens when your offer is accepted, and the things you should expect at closing.
Buying a house isn’t hard and you don’t have to the perfect buyer. If you educate yourself on the minimum requirements to getting pre-approved for a mortgage and are familiar about the home buying process, you will be light years ahead of the average buyer.
The Ultimate Guide covers every step of the way from beginning to end such as earnest money deposits, inspections, and underwriting.
You’ll be able to plan ahead and won’t be left in the dark wondering what the next move is. If an issue pops up, you’ll quickly be able to pivot because you will already know about the possibility of a problem.
The process of buying a house is complex and ever-changing, but you can easily understand the basics. Even a small amount of real estate knowledge can make a big difference. Free real estate education is also widely available on my website.
Combine this information with a rock star real estate agent and you are well on your way to becoming a home owner.
Step 1: Make sure you're ready to buy a house in Houston
Almost everyone loves the thought of buying their own home. You can’t deny the benefits, but borrowing thousands of dollars and taking on this big responsibility might not be for you.
There’s real adult like responsibilities that come with ownership. Make you really want it. Buying a house isn't like buying a car; you can't bring it back after 3 days.
Maintenance and Repairs
There’s no landlord. Yes, that means when things break you’ll have to fix it yourself.
I tell buyers either have money saved or have credit cards you can use. $3,000 should be the minimum amount of money. Why $3,000? One of the biggest house emergencies in Houston is a broken AC. It’ll cost around $3,000 to get a 4ton Goodman condenser installed. Bigger ticket items like roofs or more expensive ACs can be financed.
Another option is to get a home warranty. It protects owners from costly repairs. After you pay the deductible or service fee, the company will repair or replace an appliance or HVAC.
The cost of a home warranty will depend on what you want to insure with plans starting at $400. I’ve heard good and bad things about home warranties; mostly bad. People complain it’s hard to get anything fixed.
Think about this: how is it sustainable for a business to get $600 from an owner, but have to pay $3,000 for a repair. That is why there are many complaints.
To confuse you even more, there are people that swear by home warranties. The owner paid their premium and didn’t have any problems when something broke.
Moving
Not everybody wants to stay in one location and plant roots. Some people like moving.
Leaving at the drop of a dime gets a tad bit more complicated with a mortgage. It’s not necessarily a huge deal if you had to move, but there are things you’ll have to consider like finding a tenant or possibly paying for rent and a mortgage at the same time.
Step 2: Save For a Down Payment and Closing Costs
Down payment
There are upfront costs you might not know about that you'll have to pay. The earnest money deposit, option fee, and home inspection will need to be paid within 3 days of an accepted offer. Make sure you already have the money BEFORE you put in an offer because you probably won't have time to get it.
- deposit- 1% of the purchase price
- option fee- $200 to 1,000
- home inspection- $350 to 600
- appraisal- $600 to 800
The deposit, option fee, and appraisal will be applied towards your closing costs when you close. Home inspections are only for your peace of mind to make sure you you know the condition of the house.
Closing Costs
You will need around 3% of the price to cover closing costs. All disable veterans using their VA home loan will pay 2% because they're exempt from property taxes. This doesn't apply to all states, but it does in Texas.
Ways to pay for closing costs
- lender credits- your interest rate will be increased in exchange for the cash
- seller- it'll be given instead of doing repairs or to help the house sell faster
- down payment assistant programs- grants, repayable 0% loans, and interest loans are available
- price- increase your offer and ask the seller to pay the difference
- roll- add the cost to the loan
- gift- someone who's not on the loan can give you the money. It has to be a 100% gift; it can't be a loan
- realtor- real estate agent will give a portion of their commission
Step 3: Pick the Type of Mortgage You Want to Use
Ok, Step 3's title is a little misleading because the type of mortgage you get is not up to you. It's what you can qualify for. However, some buyers can get pre-approved for multiple types of mortgages.
Types of Loans
VA (Veterans Affairs) loans are only for active duty soldiers, veterans, and spouses. There's no down payment, minimum credit score, or maximum debt to income ratio. However, mortgage companies will set their own requirements.
There's no maximum purchase price or private mortgage insurance.
FHA (Federal Housing Administration) loans are to help low to moderate income people buy a home. The minimum down payment with a 580 or higher interest rate is 3.5%. Anything under 580, requires 10%.
The maximum price in Texas is $420,680. The standard maximum dti ratio is 43%. It can go up to 56.9% with compensating factors.
You can avoid private mortgage insurance if you put down 20%.
Conventional loans are the most common type of mortgage and can be harder to qualify for. The down payment can be as low as 3%. The lowest credit score allowed is usually about 620 with a maximum dti ratio of 45%. You can go as high as 50% with compensating factors.
The maximum price in Texas is $647,200. There's no PMI if your down payment is 20%.
USDA (U.S. Department of Agriculture) loans are to help low to moderate income people buy a house only in rural areas. There's no down payment and no minimum credit score. Lenders will set their own required credit score. Maximum dti is 41%. You can go higher with compensating factors.
To qualify, your income can't be more than 115% of the adjusted gross income in the Houston/the Woodlands/Sugar Land metro area. The maximum price in Houston is $336,500.
Step 4: Get Pre-approved
Pre-qualification is the first step of the home buying journey. Every potential buyer must get pre-qualified because it lets you know if you can buy right now and how much you can afford. The pre-qualification letter tells the seller you’re serious and are capable of buying their house.
The only exception to getting pre-approved is if you're paying with cash.
Whether you speak to a real estate agent or lender first, it really doesn't matter. It's like asking the question, "did the chicken or the egg come first?"
Many buyers automatically reach out a real estate agent at the beginning. There’s nothing wrong with that because we have worked with many lenders and can give references if you need them.
Get lender recommendations from other your realtor and from other home owners. You always want to get multiple quotes so you can compare the fees, pre-approval amount, and interest rates.
I think 3 is the minimum you should do. All credit pulls within a 45 day period will count as 1 inquiry. Whether it's 1 or 100, it'll still be 1 hard pull.
Try to find mortgage companies that are well versed in the typed of mortgage you will get. VA, USDA, and down payment assistance programs all have particular nuances that could delay you from buying if the lender is not familiar with that particular mortgage.
Before pre-approving your mortgage, the lender will check your credit score, income, employment verification, debt, and assets you already have etc.
They will request several documents including:
- Government-issued photo ID
- Social Security number
- Bank statements from the last 60 days
- Pay stubs from the last 30 days
- Credit reports and scores from all three bureaus
- Two years of W-2s or 1099 tax forms
Step 5: Hire a Realtor
Get recommendations. Don't put too much faith into reviews real estate agents will show you from past buyers or from lenders. No real estate agent is going to show you a bad review. You're going to see all 5 stars and glowing complements.
Banks have a list of their preferred realtors. According to them, their realtors are the best of the best. What they don't tell you is that the real estate agents pay them either a monthly fee or a percentage of their commission to be on that list.
Their real estate knowledge or work ethic has nothing to do anything. It's basically a "pay to play" type arrangement.
How to pick a good real estate agent
Do you vibe and connect with the Realtor? You'll spend hours with your real estate agent. It would be a long process if y'all personalities didn't mesh.
Can the real estate agent relate to you? You don't have to be from the same background, but it does help when trying to understand how another person feels and thinks.
How is the Realtor's character? Check out their personal (not business) social media profiles. You'll want to see if they're posting things that are in direct conflict with your beliefs.
Is the Realtor knowledgeable in the type of mortgage you're getting? Ask questions that are specific to your loan. You'll know real quick who's stretching the truth. Knowledgeable realtors can save deals and make buying a house easy.
Does the Realtor have time? Realtors juggle multiple clients at one time. Make sure your real estate has the availability to show you houses and to answer any questions in a timely manner.
Is the Realtor on a team? You might have the buyer's consultation with the Realtor you picked, but you might be passed to another Realtor. This can cause a problem because you don't get a choice as to what other real estate agent you will be assigned to.
Step 6: Go House Hunting
Once you are pre-approved for a mortgage and know your budget, we'll go home shopping. I'll send you list of homes that we can visit and you can let me know which ones you want to see.
If you find a house that you like, let me know and I will arrange a showing.
Once you let me know your preferred layout, styles, and features, I can help you figure out what you can get for your price range.
Make a list of your must-haves and like-to-haves. The must-haves are absolute deal breakers. You won't buy the house if it's missing those.
The next one is like-to-haves. These are bonuses if the house has it; but if not, you'll still buy it .
It's important to have realistic expectations for what your money can buy. After you've looked at a lot of houses and still don't like anything, you should modify your list by eliminating 1 or more of your must-haves.
While viewing a house, pay close attention to the layout and look of the neighborhood; look for needed repairs; make note of the AC's age; write down what you like and take pictures.
Step 7: Make an Offer
Once you have picked a house, we'll decide what a good offer is.
In this market, always submit your best offer. 99% of the time the seller will not reply back. Sellers are collecting offers for 3-4 then choosing the best one.
The good news is that it's starting to slow down. Sellers are more willing to negotiate and pay closing costs. This depends on how long the house has been listed and how many offers it house.
I'll write the contract and send it to the seller's agent. Sellers like offers that will net them the most money with the lowest possibility of the buyer defaulting.
The seller will respond in one of three ways:
- Accept the offer: As soon as both sides sign, you're under contract.
- Counter-offer: You can either accept this counteroffer, another offer, or walk away
- Decline: You could try to make a more appealing offer (if your budget allows) or move on to find another house
* I recommend submitting offers to every house you like.*
How to get your offer accepted
- Waive inspection, financing (the ability to get a mortgage), and appraisal contingencies (only conventional buyers can do this)
- Pay your own closing costs
- Don' t ask for a home warranty
- Close in 30 days or less
- Pay more earnest money and option fee
- Pay some of the seller' s closing costs
Step 8: Schedule Your Home Inspection
When the seller accepts your offer and has sent back the signed contract, you're officially under contract.
You'll have 3 days to pay the deposit and option fee.
In the event you get multiple accepted offers from other houses, you would pick the house you want the most and cancel the other offers.
Once you're under contract, you'll schedule a home inspection. The inspection has to be completed within 7-10 days.
The only mandatory inspection is the pest inspection that's required for VA mortgages, but it's recommended to get a general home inspection. There are different inspections you can do, but the costs will increase for each one.
Additional inspections you can get are stucco, plumbing, foundation, chimney, pool, mold spore, HVAC, roof, lead based paint, and septic. It's best to get the general inspection first then pay for additional ones if the report shows a defect.
It is a good idea to attend the inspection. This allows you to see the problems first hand and to ask questions. I t will take 2-4 hours to finish.
Arrive 1.5 hours after the inspection has started to give the inspector time to work and find problems.
C.L.U.E. Report
During the option period, you should also get a Comprehensive Loss Underwriting Exchange (CLUE) report from your insurance company. A CLUE report shows the claims filed for the past 7 years even if you weren't the owner at the time.
Step 9: Negotiate Repairs
Speak now or forever hold your peace
The option period is when we'll negotiate with the seller. Ask for everything you want now. Don' t wait until after the option period is over to ask for additional things; you won't have any leverage and the seller will say no.
After the inspection report is emailed, we'll pick out things that need to be repaired. If you' re buying a pre-existing house, don' t expect the seller to f ix normal wear and tear items like wall defects or old working water heaters. You can still ask though.
I'll request for the seller to fix all big ticket items like water leaks in the ceiling, electrical problems, foundation issues, and bad roofs. Any VA, USDA, or FHA property condition defects will also need to be repaired by the seller.
Based on the inspector’s report, I'll negotiate with the seller’s agent regarding the major points and whether the seller will fix the repairs, give money towards your closing costs, or reduce the price.
If you and the seller can't come to an agreement, you can buy the house anyway or cancel the contract and get your deposit back.
Step 10: Get Insurance Quotes
Homeowners Insurance
A homeowners insurance policy will protect you against certain losses and damages to your new home. You should get multiple quotes and at least 1 should be from an insurance broker.
Lenders will collect the money you owe for homeowners insurance as part of your monthly mortgage payment and place it in an escrow account. Your lender will pay the insurer on your behalf when the bill is due.
Flood Insurance
Flood insurance is a different policy separate from your homeowners insurance. Houses in a flood zone are required to have flood insurance. If the flood policy is expensive, it could put you out of your pre-approval amount.
Even if you aren't in a flood zone, it's a good idea to get it. Rates are set by FEMA so you don't need multiple quotes. The monthly payments will be added to your escrow account.
Step 11: Go Through Underwriting
When you first go under contract, your lender will send you an initial closing disclosure (CD). The numbers will be more accurate since you have a price and know the property taxes.
Underwriting can last 2-4 weeks and can be very stressful time for some buyers. The underwriter will review all of your documents and determine whether or not you' re clear to close.
You might receive what’s known as a conditional approval. This means there are still some items that need to be resolved or explained. For example: verification of your current employment or a letter of explanation for things they found like withdrawals or deposits.
The underwriter will stay in touch with your loan officer throughout this process to make sure he has what they need to move toward closing.
The lender will provide you with a final closing disclosure 3 days before your closing. This is a formal statement of your final loan terms and closing costs. Your closing costs most likely will be different from your initial CD. It shouldn't be more than a $1,000 difference.
During underwriting, do not
- change jobs, become self employed, or quit job buy a vehicle
- use credit cards excessively or let current accounts fall behind make large deposits without checking with your lender
- co-sign a loan for anyone
- get new inquires on your credit report change bank accounts
- buy furniture on credit
If your financial situation changes significantly, it could raise a red flag or get your loan denied.
Step 12: Order Appraisal
The appraisal happens during underwriting after an offer has been accepted and the home has been inspected.
Once it's ordered, it'll take 2-3 weeks for the appraiser to go to the house. The report will be sent directly to the lender 1-3 days after the appraiser is finished.
Sometimes the appraised value of a house will be less than the purchase price. Depending on your mortgage, you have options. USDA nor FHA loans allow you to appeal an appraisal unless it's under extinguishing circumstances.
VA loans allow you to challenge the appraisal by initiating Tide Water and ultimately a reconsideration of value. With a conventional loan, you can switch lenders and get a new appraisal.
If the new appraisal or appeal still comes low, you can ask the seller to reduce the purchase, price pay the difference, or cancel the contract and get your deposit back.
Minimum Property Requirements
The appraiser not only determines the value of the house, he will also decide if the house meets VA, USDA, or FHA's condition standards. The house should be safe, structurally sound, and sanitary.
Anything the appraiser flags will need to be fixed before you close on the house. You'll have to pay a reinspection fee after the repairs are made. Conventional loans are way more lenient and don't require re-inspections.
Things that will cause problems are missing flooring, exposed wires, chipped exterior paint broken windows, or rotted wood.
Step 13: Close On Your New Home
Your closing date is the day you become the legal owner of your new home.
You’ll need to bring a few things to your closing appointment.
- photo ID
- outstanding documents or paperwork
- certified or cashier' s check made payable to the title company for closing costs if you didn't wire the funds
What Happens on Closing Day?
We'll have a final walk-through of the house to make sure it's in the same condition as when you first saw it . If anything is wrong with the house, you can delay closing so the seller can fix the problem or close anyway.
You’ll pay any remaining closing costs as listed in your CD.
You'll sign a settlement statement that lists all costs mortgage note stating your promise to repay the loan mortgage or deed of trust securing the mortgage note.
You won't get the keys until the loan has funded. Closing early in the day will ensure you get the keys that same day. You can wait at the title company or leave.
*Wait until after your loan funds to finance anything. The mortgage company can still deny you.*
After Closing
A few days after you close, you'll be hit with a bunch of solicitations. Some will call, send mail or knock on your door. Buying a house is public knowledge and companies pay for the information online. Other times, they'll get your phone number from the title company or Realtor (I don't do that).
Common solicitations are mortgage protection insurance, alarm systems, and water softeners. If you're worried about your house after you pass away, get enough life insurance to pay it off. Life insurance is way better than mortgage protection insurance.