2torial #0935:
Learn2 Buy a Home

A home of one's own

Nearly everyone dreams of owning a home. Ownership brings responsibility, but also a sense of security that virtually no other material possession can provide. And it's one of the best investments you can make, thanks to hefty tax breaks and long-term appreciation in real estate values.

However, the process can be intimidating, especially for the first-timer. You have to deal with a gaggle of professionals--including realtors, bankers, and inspectors--all looking to get their piece of the purchase price. And since it's probably one of the biggest financial decisions you'll ever make, you don't want to get it wrong. That's why we've prepared this preview of the process.

Before looking seriously for a new home, it's important to take stock. Ask yourself how you expect your life to look in 5, 10, or 30 years. You'll have a better sense of the kind of home you need for the long term--and whether or not now is a good time for you to buy.

If it's likely you'll have to relocate in the next several years (for example, because of a job or relationship), you may want to wait until things settle down. Buying a home costs a lot of money over and above the price of the home itself. You'll be shelling out extra money for things like property taxes, inspections, and insurance, and the benefits of short-term ownership may not be worth the expense or hassle.

Find a lender or mortgage broker

In the past, home buyers could go to their friendly local banker and negotiate their own mortgage. It's still possible, and if you have a good lead (whether it's a friend's recommendation or a deal you've found on the Internet or at your local credit union), by all means pursue it. However, with today's ever-more-complex financial market, your best bet may be to engage the services of a mortgage broker, whose job it is to estimate what you can afford, explain the myriad financing options, shop around for the best deal, and handle all the paperwork.

But don't settle on the first broker you find in the phone book. Ask friends and colleagues for references, or try typing "mortgage broker" into an Internet search engine to find qualified brokers in your area. You must trust your broker to find you the best deal possible, so look for someone who takes the time to explain things thoroughly and who understands the particulars of your situation.

Note: Mortgage brokers are paid by lending agencies, not by home buyers. Beware of brokers who keep steering you toward a particular mortgage company--they may not be giving you the best deal.

Decide what you can afford

When you've settled on a broker, it's time to crunch the numbers and figure out the size and type of mortgage you can afford. Here's how it works:

Assess your finances. Your lender or mortgage broker will perform a financial analysis, taking into account your income, profession, debts, savings and investments, and credit history. Then he or she will tell you exactly what you can get. Lenders may offer you more than you can comfortably repay, so be sure your monthly payments won't break the rest of your budget.

Investigate financing options. In the past, virtually all home buyers took out fixed-rate mortgages, with payments that remained the same for the life of the loan (typically 30 years). Today, there are literally hundreds of mortgage products, ranging from floating-rate mortgages with payments that move up and down with overall interest rates, to balloon mortgages with low initial payments that increase substantially over time. If you're considering one of these newfangled mortgages, be sure you understand all the terms so you don't get blindsided. Some of them may work in your favor, and some may have you bankrupt before you know it.

Note: Make sure any monthly payment quote includes related costs such as private mortgage insurance (if required), home owner's insurance, property taxes, and home owner's association fees that may apply. If it doesn't, make sure you can afford these items in addition to the mortgage.

Get pre-approved. Pre-approval means a mortgage lender has gone over your finances and is committed to lending you a certain amount of money to purchase a home. Sellers are much more likely to accept your bid if they know you can back it up with quick cash. Pre-approval is especially important in tight markets, where available housing gets snatched up fast.

Select a realtor

A trustworthy realtor is a must. They serve as guide and advisor throughout the buying process, and their wisdom can save you thousands of dollars down the road, so shop around.

Ask for leads from friends and family who've recently purchased property in your area. Interview various agents before settling on one, and ask for references. Agents won't be insulted. It's a normal part of the process. As with a mortgage broker, make sure they're willing to keep answering your questions until you understand issues fully, from current housing prices to the details of closing a deal.

Though you don't pay realtors (they get their fee from the seller), they serve a number of vital functions, including:

Selecting homes. It's virtually impossible to visit all the homes on the market at a given time. Good realtors will listen carefully to your wants and needs and select the homes that are the best fit for you. This can save you a great deal of time and effort, and ensure a hidden gem doesn't slip through your fingers.

Making a bid. Once you've found a home you want, your realtor will help you negotiate a price. This is when trust in their judgment becomes essential. They base their recommendations on knowledge of the current market, but the more you yourself know about both asking and selling prices for similar houses, the better off you'll be.

Handling paperwork. The process of buying and selling a house involves a huge tangle of paperwork, but a good realtor will make the process go as quickly and smoothly as possible. He or she should also understand and explain all contracts before you sign them. However, you may also want to engage a lawyer to read over the small print to ensure that you're getting what you think you are.

Start shopping

Before you visit a single home, you should have a very clear idea of what you want and, even more important, what you need. Make a list of all the elements you'd like--high ceilings, a certain number of bedrooms and baths, a garage or parking, proximity to your work or public transportation, specific school districts, and so forth--and prioritize it.

Your eventual home isn't likely to fulfill all your desires, though, so consider what trade-offs you'd be willing to make: a big yard for a garage? An extra bathroom for a formal dining room? Then there are the extras: old-world charm or all the modern conveniences, peace and quiet or access to a lively street scene. Actually, so-called extras may be requirements as far as you're concerned. Don't compromise on these points without careful consideration.

Give a copy of your list to your realtor, and carry one with you when you visit potential homes. Compare what you see to what you want, and be sure to take notes--especially on places you like. Don't forget to consider the neighborhood as well as the home itself. Here's what to look for:

Neighborhood:

• Find out from municipal authorities about any upcoming projects that could affect the neighborhood, for example new roads, homes, or shopping districts. Remember, you're going to be there for a while, so you want to know how things are going to look in the future.

• If you have kids, ask your realtor where you can get a report on local schools.

• Once you get serious about a home, visit it at various times of the day. Does it seem safe at night? Is traffic heavy at rush hour?

• Find out exactly how long it takes to get to your job, especially during the heaviest commuting times.

Note: In some areas, sellers are required to hire an independent survey agency to determine if there are more serious problems with the home's location (is it in a flood zone or on a fault line, for example). Inspection results must be disclosed to buyers. Insurance companies also make similar inspections before writing a home owner's policy.

Home:

• Don't get stuck on superficial details. A relatively inexpensive paint job could make a dark, dingy house seem like a sunny marvel.

• Will your furniture look good in the house, or will you have to do some redecorating? Will there be extra rooms to furnish?

• Will it be comfortable? Too hot in the summer or too cold in the winter? Consider living there in all four seasons.

• What are the realistic upkeep costs, especially if it's an older or larger house?

• Is it a fixer-upper? If so, is the lower buying price really worth the time, money, and effort it would take to make it the home you want? If you're considering a fixer-upper, be sure to get a thorough, independent estimate from a contractor for the cost of all necessary improvements. Refer to 2torial #0506: Hire a Contractor for advice on how to find and hire one.

Make a bid

At some point you'll see a place, and though you may not think it's perfect, you'll know it's a good fit. Now it's time to make an offer.

Bidding on a home is the trickiest part of the buying process. Bid too low, and you may lose your chance. Bid too high, and you could be paying for your mistake for the next 30 years.

During the bidding process, you'll really test the mettle of your realtor. A good realtor will survey the market and offer you two different potential bids: what the house is worth given the current market, and what the house is likely to sell for.

These may be two widely different figures. For example, if a seller is in a big hurry, the price may be lower than average. If lots of other buyers are interested, the price is likely to rise above overall market levels. Discuss the current market with your realtor to determine your offer.

Settle on a price

Some people hate to haggle. If that's you, get over it. Sellers rarely accept your first bid. And if they do, you'll always wonder if you've paid too much.

Once bids are made, the seller has three options: accept your bid, reject it, or come back with a counter offer. If you receive a counter offer, negotiations have begun. At this point, pre-approval for a mortgage can really pay off. Another buyer could make a higher offer, but the seller may prefer to do business with you instead, knowing you can follow through.

The bargaining process can go several rounds. Don't get so caught up in the process that you raise your bid to a point where you won't be able to comfortably afford your mortgage payments. Likewise, be sure you don't sign away your right to require the seller to perform important services--for example, any needed structural repairs due to pest damage--without serious consideration.

Close the deal

Once you and the seller have agreed on a price, there's still work to be done. Again, a good realtor will help you navigate the waters, but you must be involved in the process, too.

Escrow. When buyer and seller settle on a price, the house goes into escrow. Essentially, this means you're making a down payment (1 to 3 percent of the sale price), though in fact the money goes into an independent account that neither buyer nor seller controls.

Escrow guarantees you the chance to buy, but before you make a final commitment, you and your lender must ensure the home actually belongs to the seller, that there are no outstanding liens, and that it's in good condition. This process, which requires a lot of time and paperwork, is commonly known as "contingencies," meaning the final sale is contingent on your findings.

During this time, have the home inspected for any structural problems--including termite or other pest damage, roof and foundation solidity, and soundness of the electrical, plumbing, and ventilation systems--to ensure you don't get stuck with huge repair bills after you move in. Your realtor should provide a list of independent inpectors to choose from, or read 2torial #0506: Hire a Contractor to find your own. It's your responsibility to pay for these inspections; you can do so at the time of inspection, or charges can be added to the fees you pay to finalize the home's sale.

At this point, you can still pull out of the deal or renegotiate if you find problems. But if the home receives a clean bill of health (or if you and the seller can agree to an adjusted price to allow for any problems detected), contingencies are lifted, and the sale moves forward.

Note: Pulling out of a home purchase after contingencies have been removed will result in forfeiture of all deposits made. You'll be responsible for repaying your lending agency any amount they've advanced on your behalf.

Closing. If there's nothing terribly wrong with the house and you're sure you still want it, one-time closing costs will be assessed at this point (for convenience, they can be added to your loan amount if you want). Closing costs include:

• Your first month's mortgage payment

• Pro-rated property taxes for the upcoming year

• Your first year's home owner's insurance premium

• Fees owed for all property and personal inspections (including your credit report and the home's title investigation)

Again, realtors and your lending institution should take care of the lion's share of the work, but you still have plenty of decisions to make, and you'll need to provide your signature several times as you finalize your mortgage, transfer the funds to the seller, receive the deed, and so on. Finally, the place is yours. Just arrange a time to pick up the keys!

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