Buying a house in Austin
July 22, 2002

By: Tomer Pintel , Austin, TX.

Well, you decided to buy a house in Austin. Good for you. We’ll try to give you some information about the process.

First, how much house can you afford? Here is a little calculator to help you with that: http://www.calculator.com/pantaserv/finance/howmuch.cgi Property Tax is between 2%-3% in Austin, depending on the neighborhood. Home Insurance rate is about 0.3%. Enter all the rest of the data as you see fit. This is of course only a rough estimate, but it can give you an idea of how much you can spend on a house and still live nicely.

Now you need to choose what kind of a house you want. There are several options for that; each has its advantages and disadvantages for you.

• A new house from the contractor: There is something special about buying a brand new house and if you buy it before it’s finished you might be able to change a few things like colors, tiles and light fixtures. You can also get a good deal on a house that is already finished and not yet sold, you won’t have upgrades but the contractor will lower the price until he finds a buyer. The bad things about buying a new house are extra expanses for blinds, the back yard and a sprinkler system. These can easily cost around $6,000-$10,000.
• A preowned house: In a preowned house what you see is what you get (at least if you look for it). Preowned houses are usually cheaper and they usually come with the yard already done and blinds. Some have a sprinkler system and some don’t. The older the house the bigger the chances for something (or a lot of things) wrong in it. In Austin, the city was built in circles from the center, so in the center you have the oldest houses, while all the new neighborhoods are either in the south near Circle C or in the north near Round Rock. I think that a good compromise is a house not older then 5-7 years and too far from where you work.

After you decide which kind of a house you want, think about it’s layout. Do you want a one story house with a smaller back yard, or a two stories one with a big back yard? If you have (or plan to have) small children, make sure the master bedroom is near the children room or you’ll be running the stairs all day (and night) long. A large yard is fun, but someone has to take care of it. Don’t say you weren’t warned.

How many rooms do you need? Some people like to have a separate living room and a family room, while others like only one. A safe number is a room for each child, a master bedroom and a guest/study/game room. This will give you lots of space and if the family extends, you don’t have to rush and switch houses under pressure.

The next thing to decide is where do you want your house. The things to consider are the commuting time to work, the neighborhood and the schools. Nobody lives east of I-35. Far West is very expensive. Round Rock and Cedar Park have a lot of traffic problems during the rush hours. You need to consider the age of the house when you start searching for the right neighborhood, because most of the neighborhoods will have houses in the same age (give or take a few years). The schools are very important for two reasons: If you have school age children you will want them to go to a good school and for resale value – if the schools are crappy, people with children will not buy the house from you.

After you know what you want it’s time to start searching. There are a few options here as well, and it really depends on how fast and how cheap you want to find your house.

• A Realtor – The realtors in Austin don’t get paid from the buyer, only the seller. The usual amount is 3% from the sale price (if the seller has a realtor too, he pays another 3% to him as well). You might say you don’t care as you don’t pay, but if the sale is without a realtor the price could be 6% lower. For a first time buyer I highly recommend using a realtor, as the realtor sends the proposal, checks all the paper work and knows what to look for. In a new country that is very important and the sale process is very different from Israel’s. A good realtor will tell you all that is wrong with the house (the good things you can see for yourself). He will give you information about the schools near the house and his estimate of how much the house is worth. My realtor done a very nice job, his name is Steve Gardner and his mobile is 748-8820. There is a web site called http://www.erealty.com/ where the seller pays only 1.5% commission and the buyer gets 1% rebate when the sale is done.
• Sale by owner – Some of the time the seller may decide he doesn’t want a realtor in order to save the commission. They usually advertise in the papers and you can recognize the houses by the sign “for sale by owner” if you drive by them.

Getting a Mortgage

You can get pre-approved for a mortgage as soon as you decide how much money you need, give or take a few thousands. It’s better to be pre-approved when you make an offer on a house because the buyers know you are serious and you won’t have last minute problems getting the money.
The process goes like this: First you need to know if you have at least 20% down payment to put on the house. Don’t waste your last dollar on the down payment because you’ll need more for the closing costs (more on that later). I you have the 20%, good for you. It will be much easier getting the money and the rates are lower. If you don’t have the 20%, the APR will be higher and will include some kind of extra insurance on the part below the 20%.
Now, you need to decide what kind of mortgage you want. There are several dozens options but they come down to a few variants:

• 30-year mortgage – you pay the mortgage in monthly payments for 30 years with a fixed annual percentage rate (APR).
• 15-year mortgage – you pay the mortgage in monthly payments for 15 years with a fixed APR. This will make your monthly payments about 50% higher, but you finish in half the time. The APR is usually a little lower for it as well.
• X-1 ARM – The X stands for the number of years the APR is fixed and after that it can change with in a certain limit. The ARM stands for (I think) Adjustable Rate Mortgage. The X is usually 3, 5 or 7. This is a good option if you don’t intend to stay in the house for more then the X years of the ARM, as the APR is about 0.5% lower then the 30-year one.
• Labor ARM – This kind of mortgage is very similar to the ARM and gave us the lower APR we could find at the time.

Always ask for the rates for all 4 variants before you decide.

After you decide how much money you need for the house, call your bank or a mortgage company. I used North American Mortgage Company http://www.namc.com/ to get my mortgage. Tell them you want to be pre-approved for a mortgage, and give them all the details. Ask them for a Letter of Understanding – this will include all the closing costs for the mortgage. After you get pre-approved go to at least two other companies, tell them you are pre-approved with what APR and ask them for the letter of understanding too, so you can compare the different companies. What this will give you, is that only one company will do a credit check on you, not all three (or more). If you decide to go with another company, they will of course do a credit check as well, but for the closing costs and the APR they don’t need it.
There is a weird law in the U.S., which makes buying houses with cash very difficult. What the law says is that you need to have money in a bank account for three months before you can use it to buy a house. This is in order to prevent money laundering by criminals. What it means is that you either have to have the money in a U.S. bank for three months or give the mortgage company some proof that the money is in a bank in Israel, which is not as easy as it sounds because you need the proof in English. What I did was, I came to the mortgage company and showed them over the Internet my account in Israel with the money there. It then took about three months to buy the house so they let me slip by without having to bring anything from my bank in Israel.
If you get money as a present from your parents to buy the house, there is a limit to how much they can give you (I think about $9,000 a parent), and you need them to sign a Gift form and bring it to your mortgage company (they will give you the form).

Closings costs vary widely from company to company, you can easily save about $500 just shopping around. One of elements in the closing costs is the Escrow Account – this is a special account for making your life easier, if a bit expensive. Let me explain: When you pay your monthly payment, some of the money goes to an escrow account. This account will be used by your mortgage company to pay the yearly taxes and insurance on your house. The monthly payments will be as follows: mortgage payment + estimated property tax/12 + property insurance/12. Sound nice but there are a few problems. First, you need to give at closing about two months worth of taxes and insurance which can be a problem if you are tight on cash at closing. Second, each year you need to send the mortgage company the papers with the taxes for them to pay, so it’s not something you can forget about anyway. Third, while the money is sitting in the escrow account, you don’t get any interest on it. If you want to cancel the escrow account, some mortgage companies will ask you for a “fine” in order to do it. Some companies don’t – find a one which doesn’t. If you canceled the escrow account, remember to put aside some money to pay the taxes with on January and you will have to pay a whole year of insurance at closing.

Another thing that is very important is to get a mortgage without penalties for pre-payment. This means that if you get some money and want to put it into the mortgage, you won’t have to pay any fines on it. When you get the papers from the mortgage company a few days before closing, make sure there is no fine for pre-payment or you’ll be screwed.

Well, I hope I didn’t forget anything.
Good Luck,
Tomer Pintel