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Buying a Home
Buying a Home
Fundamentals for buyers and sellers
What you need to know
when buying a home
1. Don't buy if you plan on moving within a few years!
If you can't commit to remaining in your home for least five years or
more, then owning is probably not for you, at least not yet. If you
live in a area with slow
appreciation and the costs of buying and selling a home, you may end up
losing money if you sell within a few years.
2. Start by checking your credit.
Since you will most likely need to get a mortgage to buy a house, you
must make sure your credit history is as clean as possible. About 6
months before you start house hunting, get copies of your credit
report. Make sure the facts are correct. Fix any problems you discover.
Then get pre-approved for a loan before you start looking for your
dream home!
3. Buy only what you can afford.
The rule of thumb is that you can buy housing that runs about
two-and-one-half times your annual salary. By paying down your credit
cards, student loan, and other bills first, you will be able to qualify
for a much larger loan amount!
4.
When you don’t have 20 percent down.
There are a variety of public and private lenders who, if you qualify,
offer low-interest mortgages that require a down payment as small as
three percent of the purchase price. If you have low or no debt, you
might even be able to qualify for a "no-money down loan!" Which means
the lender is providing you 100% financing! But, you usually will need
a strong income to qualify for this.
5. Seek professional help.
Call a Real Estate company in the area where you plan on buying, and
ask to speak with the broker of the office. Tell the broker you will
only deal with his/her most experienced agent. This way you will not be
wasting time with an agent who is a rookie. Look for an exclusive buyer
agent, if possible, who will have your interests at heart and can help
you with strategies during the bidding process.
6. Paying more points for a lower rate.
When picking a mortgage, you usually have the option of paying
additional points a portion of the interest that you pay at closing in
exchange for a lower interest rate. If you stay in the house for a long
time -- say five to seven years or more it's usually a better deal to
pay more points. The lower interest rate will save you money in the
long run.
7. Bring your camera, when inspecting homes.
Or at least a notebook to jot down reminders, since after you look at a
half-dozen or so houses the details begin to blur in your mind. Best
choice would be a Polaroid so that you can scribble comments in the
margins of the photos. Even better, would be a video camera, if you
have one?
8. Find out why the owner is "selling", before making
your offer.
Could it be they are divorcing, moving out of state, or was this just
an investment property? You need to find out as much as possible up
front. Have your Real Estate agent do some research by coming up with
at least 3 "market analysis reports" showing what has sold during the
last 6 months. And only homes that have the same number of bedrooms,
baths, and extra’s (including square feet). Make sure, that the homes
are not more then 3 miles away from the home you are planning on making
an offer on!
9.
Ask your agent to recommend a home inspector.
You should hire a home inspector, preferably a contractor or someone
with experience with home repairs. This can be contingent in the offer
you make, concerning the price you offered to pay. The inspector will
find out all the faults about the property before you buy. You can
usually get the seller to make the needed repairs before you move in.
Are
you prepared to be a homeowner?
Don't buy just because you can
afford to
Sure,
owning a home is one of the great satisfactions of the American Dream.
Home ownership means you no longer pay monthly rent for the roof over
your head. Now you own it, and most of what's under it too. You can do
what you want with your house. And when you leave, you can sell it to
recoup the purchase price and with any luck earn a profit.
Don't kid yourself. Like most good things in life, home ownership comes
with a slew of disadvantages, responsibilities, and downright
headaches. In fact, it's probably the second biggest financial
commitment most people ever make, the biggest being children.
So
before going any further, consider whether your lifestyle and finances
make home buying a smart move.
Let's start with lifestyle. Except in a roaring real estate market, it
usually doesn't make sense to purchase a home that you'll be departing
in less than four or five years. Reason: the high cost of buying and
selling homes, and their generally slow price appreciation, means
you'll lose money on the deal.
So
ask yourself, can you can really stay put for a long period of time?
Will you need to move because you are transferred by your current
employer or a new one? Are you thinking of going back to school? And
will your income remain steady or grow, or is it likely to decrease?
These are some of the things you will need to keep in mind when buying
a home.
Other
things to think about are:
Do you really want to call the plumber and pay for his services every
time a pipe leaks? Or would you rather leave it to the landlord to fix
the plumbing, paint the walls, patch the roof and buy a new
refrigerator? It all depends on the person of course. If you are
mechanically inclined then you might do the repairs yourself and save
some money?
Coming up with the down payment for your home
Think credit, credit, credit
For
most people, buying a house involves a double financial whammy. First
you have to assemble a huge pile of cash for the down payment and
closing costs. Then you must convince a bank to lend you an even more
staggering amount, generally 80 percent or more of the purchase price.
So your first step, even before you start the actual hunting for homes,
is you should start getting your financial house in order.
Start with your credit. All mortgage lenders do a thorough financial
analysis of applicants, including looking over your credit reports.
These reports are kept by the three major credit agencies, Experian, Equifax and TransUnion. They contain a lot of basic
information, your name, age, address, years at that address, even your
income, if the agency can obtain the data.
They
also list all the open credit lines you are now responsible for,
including credit cards, gasoline cards, revolving charge accounts,
student loans, and the like. A credit report will show whether you are
habitually late with payments and whether you have run into serious
credit problems in the past, such as a bankruptcy within the last seven
years.
Blemishes here can delay or kill your chance for getting financing. So
get a copy of your own report, try ConsumerInfo.com,
which charges about $30 for a combined report from all three agencies,
and make sure it's correct. If there are errors, you must contact the
agencies directly to correct them, which can take a minimum of two or
three months to resolve. And if the report is accurate but shows past
problems, be prepared to explain them to a loan officer.
Next you need to see how much of a loan you can afford. The best way to
do so is to use one of the Web's many calculators, likes the ones on Quicken.com
and Microsoft's HomeAdvisor.
If you're doing the calculation at home using a spreadsheet or
calculator, here's what the results are based on.
Banks
generally insist that: Your monthly housing costs, including
mortgage principal and interest, property taxes, homeowner's insurance
and private mortgage insurance, should equal no more than 28 percent of
your gross monthly income; and 2) that sum plus your minimum monthly
payment on any long term debts should equal no more than 36 percent of
your gross income.
The rule of thumb here is to aim for a home that costs about
two-and-a-half times your gross annual salary. Use this only as a
general guide, though. Many factors can change that equation. If you
have significant credit card debt or other financial obligations like
alimony, then you may need to set your sights lower. Also, if you have
bad credit can play a factor in this.
You must also raise cash for the down payment and closing costs. Most
lenders like to see at least 20 percent of the home's price as a down
payment. Various private and public agencies including Fannie Mae,
Freddie Mac, the Federal Housing Administration and the Department of
Veteran Affairs provide low-down payment mortgages through banks and
mortgage companies. If you qualify, it's possible to pay as little as
three percent up front for a loan. For more, check out their web sites
at Fanniemae.com or Freddiemac.com.
One caveat: With a down payment under 20 percent,
you will probably wind up having to pay for private mortgage insurance,
a safety net protecting the bank in case you fail to make payments. PMI
adds from 0.5 percent to 1.25 percent of the total loan amount at the
closing. This cost can be placed in your monthly mortgage payments,
which would be called an "impound account."
Also make sure you've got enough to cover fees and closing costs. These
may include the appraisal fee, loan fees, inspection fees and the cost
of a title search. They can easily add up to $5,000 to $7,000 and often
run to five percent of the mortgage amount.
If your available cash doesn't cover your needs,
you have several options.
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You can withdraw up to $10,000
without penalty from an Individual Retirement Account, if you have one,
though you must pay taxes on the amount.
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You can receive a cash gift of up
to $10,000 a year from each of your parents without triggering a gift
tax. (In fact, if you and your spouse's parents are both well-heeled,
they can give you a total of $80,000 in one year, $20,000 from each set
of parents to each of you. This is a good type of family to have.)
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Check on whether your employer
can help; some big companies will chip in on the down payment or help
you get a low-interest loan from selected lenders.
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You can also tap a 401(k) or
similar retirement plan for a loan from yourself.
NOTE: The one thing you cannot do, is use borrowed money to meet the
down payment. Banks will recognize that for what it is, a loan, and
treat it as one of your debt obligations, not cash on hand.
Working with the right people
Don't try this without professional help
With
all the tools and advice available today, ranging from the Internet to
books and magazines and online advice, it would theoretically be
possible for you to buy your home almost completely without the aid of
real estate professionals.
We don't recommend this. The housing market, like politics, is
basically local, and each state, city, and even neighborhood has a
thicket of local laws or customs that you need to understand in order
to buy with peace of mind. For that, it helps to have a team of
professionals to guide you through the process.
You might want to start by finding an agent who can represent your
interests in the search. This is not as simple as it sounds. Sure, 85
percent of sellers list their homes through an agent, but those agents
are working for the seller, not you! They're paid based on a proportion
(usually six percent) of the purchase price, so their interest will be
in getting you to pay more. What you need is one of the newer, smaller
group of agents who call themselves "exclusive buyer agents." Sometimes
buyer agents are paid directly by you, on an hourly or contracted fee.
Other times they split the commission that the seller's agent gets upon
sale. A buyer's representative has the same access to homes for sale
that a seller's agent does, but his/her allegiance is to be only to
you.
There are also other agencies called single-agency or dual-agency
brokers. Dual agency is where an agent represents both the buyer and
the seller. Potential conflicts of interest can arise in this
situation. So if you are seeking a buyer agent but no exclusive buyer
agent is available, make sure to ask the agent about conflicts of
interest.
Almost all of the good real estate web sites have resources for finding
an agent.
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Realtor.com is
operated by the largest member association of real estate agents. Also
try the National Association of
Exclusive Buyer Agents. And iOwn.com
offers a list of questions to pose to an agent to help you find one who
best understands your needs.
Your next step should be, looking for a mortgage lender. Take your
time, since you could be paying this loan for 30 years. |
Start on
the Internet at places like iOwn.com, Quickenmortgage.com and E-loan.com. You may also want to
check out the rates at CNNmoney, Bank Rate Monitor or HSH.These sites carry nationwide
listings of mortgage interest rates and other related information.
Don't limit your search to the Net, though. Once you have an idea of
the best rates from national lenders, get on the phone to your
community banks and any other institutions. Including your credit
union, if you have one? Ask if they can beat the national rates. Often,
the local lender can offer a better deal simply because he/she knows
the local market and wants to keep your business.
You might also consider using a mortgage broker, a middleman who keeps
tabs on rates from a multitude of lenders. The mortgage broker isn't
paid directly by you but gets paid by the bank. However, the fee is
usually 1.5 percent to 2 percent of the loan amount. Which you pay for
in the closing costs. Most search engines have extensive listings of
mortgage brokers. There's also a trade group, the National Association of Mortgage Brokers.
There are several different loan types, each suitable for different
homebuyers. First determine whether you want a fixed-rate or an
adjustable rate mortgage. With a fixed rate, you lock in a monthly
payment amount that will remain constant throughout the life of the
loan, even if interest rates rise. If interest rates fall, you can
either continue paying your higher preset rate, or you could refinance
your loan, though that would mean paying additional closing costs.
An adjustable rate mortgage (ARM), on the other hand, has an interest
rate that rises or falls in step with a financial index, such as the
one-year or three-year Treasury rate. Banks typically offer an initial
"teaser" rate on ARMs that is 2 percent lower than that for fixed-rate
loans. For this reason, you might choose an ARM if you plan to sell
your home within four or five years or less?
During
that short period of time, you will almost certainly pay less than you
would with a fixed-rate mortgage. Alternatively, you can look into a
hybrid loan, which offers a fixed rate initially, usually for the first
five to ten years, and then converts to an adjustable rate for the rest
of the term.
You may also want to pay points to lower the interest rate on your
loan. Basically, points or the "loan discount cost," as they're more
formally known, represent a portion of the interest that you pay up
front in exchange for a lower rate thereafter. One point equals one
percent of the loan amount, and most loans carry a charge of one to
three points.
The longer you plan to stay in your home, the more you should consider
paying points. For instance, a lender may offer an eight percent loan
at no points, or a 7.6 percent loan with two points. If you have a
30-year, fixed-rate mortgage of $100,000, your monthly payment for a
no-point loan would be $734; on the two-point loan, it would be $706.
That's a small difference, just $28 a month. But if you pay the points,
you'll recoup the $2,000 you spent in a little under six years of
payments. And over the life of the loan, you'll save $10,000. So in
this case, if you planned to stay put for six years or more, it would
make sense to go with the points.
Once you choose a lender, get yourself "prequalified," which means that
the lender has determined the maximum home price for which he will
approve a loan. If the housing market in your area is very competitive,
with homes selling just days after they go on the market, then you
might also consider getting "pre-approved." That means the lender
agrees to provide a mortgage even before you have selected a house. Not
only will this help you to move quickly to close on a home once you
find one, it can also give you an edge if others are competing to buy
the same property. We recommend getting pre-approved.
Start looking for your new home
Remember
the old saying "location, location, location"!
For
overall demographics and data on metropolitan areas, you can visit a
city site. For more detailed neighborhood information, though, you'll
want to use sites like Yahoo!
Real Estate and Microsoft's
HomeAdvisor that offer comprehensive school and demographic
information on a number of communities. Look for signs of economic
vitality, a mixture of young families and older couples, low
unemployment and good incomes.
Pay special attention to districts with good schools (high
teacher-student ratios and graduation rates are among the hallmarks),
even if you don't have school-age children. When it comes time to sell,
you'll find that a strong school system is a major advantage in helping
your home retain or gain value.
Try also to get an idea about the real estate market in the area. For
example, if homes are selling close to or even above the asking price,
that shows the area is desirable. Try Dataquick.com to check out recent
home sales. Your real estate agent will also be able to show you
listings.
As for the home itself, you probably already know the kinds of things
you want, how big, how many bedrooms, what kind of kitchen, garage,
yard and so forth. But it's a good idea to make a checklist of these
things. Make sure to share them with your agent and also to make
certain that you and your spouse or partner(s) agree on what you're
seeking.
Consider even the smallest details. Do you want a new house, or one
that's more than 50 years old? Should the exterior be brick, stucco,
wood or siding? Should the heat be gas, oil or electric? Also, do you
want to be within walking distance of town, school, work or
transportation? It's unlikely that one home will have all the features
that you want, so indicate which ones matter most. Remember, too, that
many of these features will make a difference not only to the price of
your home, but also to the cost of upkeep.
Then take your search to real estate sites like Realtor.com, iOwn.com, Homeadvisor.msn.com and realestate.yahoo.com. Some of
these sites (e.g., realtor.com) automatically show you homes that only
partially meet your requirements. But for most sites, if you say the
home needs two fireplaces, you will see only homes that meet that
criterion. So be wary of choosing search criteria that are too
restrictive. For example, select a price range 10 percent above and 10
percent below your true range. Add a 10-mile cushion to the location
you specify. If you see a house you are interested in, save it, print
it, add it to your bookmark or favorites list, and take note of the MLS
code; your agent will want that code to arrange to show you the home in
person.
For first-time buyer’s, pay special attention to condominiums and
cooperatives, or co-ops. Condos generally sell for 15 percent to 20
percent less than the cost of comparable detached homes, so you get
much more space for your money.
What's the difference between the two?
1)
In a condo, each owner has absolute ownership of his own unit, which
may be an apartment or townhouse. But owners pay a monthly fee to
maintain shared areas like the lobby, the pool or the laundry room. The
chief financial risk to a condo owner is that the common charges can
rise, or, in the event of a major problem such as a roof repair or
boiler replacement, the condo board can assess fees to cover expensive
repairs. It's a good idea, when considering a condo, to find out how
much the common charge has changed over the last five years, and
whether there have been major assessments during that time. Also ask
what percentage of the residents actually own their units as opposed to
just renting them (many condos include both). A complex with lots of
renters has fewer owners who care about the upkeep, and it may be
harder to get a loan on such a property.
2) A co-op is a rarer animal limited to
major metropolitan areas. Essentially, the complex is run by a
corporation where each owner is a shareholder. The monthly maintenance
fees are generally higher than those of a condo, but prices tend to be
lower. Their chief downside is that the co-op board usually has to
approve new owners and may discourage you from renting your unit if you
move out without selling. As with a condo, check on the group's
financial health, whether shareholders have been hit with special
assessments recently, and whether the unit includes many renters.
When you actually start touring homes, bring a notebook and a digital
or Polaroid camera to help you remember details. Your real estate agent
should supply you with a description of house and the lot it sits on,
the property tax assessment, the asking price and sometimes a diagram
of the rooms. Your camera and notebook are there to record other
details, ranging from the cost of heating to the view out the rear
window.
Spend as much time as possible talking to the homeowners, if they are
present. The more you know about the seller and why he or she is
leaving, the better. For instance, if the seller is being relocated or
the house is part of an estate sale, then the seller may want to sell
as quickly as possible, even at a lower price. If the seller has lived
in the home only a few years, she may be adamant about the asking price
because she wants to recoup her buying cost. Conversely, if she's lived
there for decades, a few thousand dollars off may not matter as much.
Finally, make sure you understand exactly what furnishings are included
with the sale. Even some custom-built furniture, like bookshelves or
entertainment centers, may have to be purchased separately.
One note: Don't automatically reject a home just because it doesn't
measure up to your desires -- either in features or price. You can
always add a deck, for instance, or update a kitchen. And since the
asking price is just a starting point for negotiation, you will be
making offers and counteroffers as both parties seek an acceptable
price.
Getting the best deal on
your new home
Time
to make an offer
Once
you find the home you want, you need to move quickly to make your bid.
If you're working with a buyer's broker, then get advice from him or
her on an initial offer. If you're working with a seller's agent,
devise the strategy yourself.
Try to line up data on at least three homes that have sold recently in
the neighborhood. Calculate the difference between the original list
price and the final price of the homes sold. If the average difference
is, say, five percent below the asking price, then you know you can
make an offer eight percent to 10 percent below, leaving yourself a
little room to negotiate. Don't low ball the bid price. Don’t make an
offer 20 percent or more below list, if you really want the house. The
seller is likely to give up in disgust and not even think about wasting
his time with a counter-offer!
If the market is up, then your are in a seller’s market. If the market
is down, then it’s a buyer’s market. Another factor to consider in
determining your bid is whether the trend in recent home sales is up or
down over the past year. For instance, if homes a year ago were selling
for 10 percent below list, and recent ones are going at three percent
below, then you might want to tighten your opening bid to just five
percent below list.
There's no foolproof system for negotiating a fair price. Occasionally
it's best to deal directly with the seller yourself. More often it's
better to work exclusively through intermediaries. In general, don't
let the other side begin to believe you are negotiating in bad faith or
being deceptive, any deal you eventually reach has to involve trust on
both sides.
Be
creative about finding ways to satisfy the seller's needs. For
instance, ask if the seller would throw in kitchen and washroom
appliances in if you meet his price. Keep in mind, that you will need
to be flexible in your negotiations! You have points that you want and
the seller has one’s he/she wants.
Once you reach a mutually acceptable price, the seller's agent will
draw up an offer to purchase that includes an estimated closing date
(usually 45 to 60 days from acceptance of the offer).
Make sure your offer is
contingent upon:
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Obtaining a mortgage.
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A home inspection that shows no
significant defects.
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A guarantee that you may conduct
a walk-through inspection 24 hours before closing. This last clause
allows you to check the home after the sellers have moved out so that
if the movers cause any damage, or that big living room sofa was hiding
a hole in the floor, you have time to negotiate payment for repairs.
At the time of the offer, you will need to make a good-faith deposit
along with your offer. Usually one percent to 10 percent of the
purchase price, this will be deposited by your agent into an escrow
account. The seller will receive this money after the deal has closed.
If the deal falls through, you will get the money back only if you or
the home failed any of the contingency clauses. Minus any fee’s
incurred while in escrow.
Now call your mortgage broker or lender and move quickly to agree on
terms, if you have not already done so. This is when you decide whether
to go with the fixed rate or adjustable rate mortgage and whether to
pay points.
In addition to the appraisal that the mortgage lender will make of your
home, you should hire your own home inspector. Again, ask for
referrals, or check with the American
Society of Home Inspectors a trade group. An inspection costs about
$200 to $350 and takes up to two hours. Ask to be present, because you
will learn a lot about your home, including its overall condition,
construction materials, wiring and heating. If the inspector turns up
major problems, like a roof that needs to be replaced, then ask your
lawyer to discuss it with the seller. You will either want the seller
to fix the problem before you move in, or deduct the cost of the repair
from the final price.
About two days before the actual closing, you will receive a final HUD
Settlement Statement from your lender that lists all the charges you
can expect to pay at closing. Review it carefully with your lawyer. It
will include things like the cost of title insurance that protects you
and the lender from any claims someone may make regarding ownership of
your property. Title insurance can cost 2 percent of the home's price.
The lender might also require you to establish an escrow account, which
it can tap if you fall behind on your mortgage or property tax
payments. Lenders can require deposits of up to two months' worth of
payments.
The actual closing can be nerve-wracking, though it may be and is often
somewhat anticlimactic. It's a ritual affair, with customs that differ
by region. Your real estate agent can brief you on the particulars. In
essence, once you pay all the settlement charges you then sign a bond
or note that commits you to repaying your loan. Next you sign the
mortgage. The lender then writes you a check for the amount of the
loan. Rather than taking possession of this check, however, you endorse
it to the seller. Once the seller accepts this check, he hands you the
deed and the keys and you own the home!
Buying a Home
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