Once you are ready to buy a home, you will need to be as informed as possible. This guide discusses how much money to save for a down payment, how to work with a real estate agent, how to negotiate, and what you need to know about closings.

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Because home ownership is a substantial investment and a long-term commitment, it is important to become as knowledgeable as possible about the process of buying a home. Obviously, you want to avoid ending up with a home you are not happy with. You will want to find out all you can about how much you need to save for a down payment, about the process of finding the right home for you, about negotiating the best possible deal, and about various aspects of the closing.

Deciding How Much To Spend

Many new homeowners make the mistake of borrowing too much money. Before deciding on the price range of the home you plan to buy, think about how much you want to pay out each month in mortgage payments. Try to make as large a down payment as possible.

The Mortgage Payment

The mortgage payment will be composed of the mortgage payment, the property taxes (in most cases), and the mortgage insurance.

Caution Caution: The lender will set a maximum on how much you can borrow. However, this maximum is often too much for the average homeowner to pay out comfortably each month. Therefore, use the maximum only as a starting point to deciding how much you will borrow.

Tip Tip: Ask a real estate agent to help you get "pre-qualified" by a lender (to get an estimate of the maximum mortgage amount).

When deciding how much to borrow, be sure to take into account saving for your retirement, meeting your financial goals, and maintaining your current lifestyle. If your monthly payments do not allow you to meet these needs, buying the home does not make financial sense. Home buyers often end up unable to save enough money, to travel, to pursue their interests, or even to eat out and the purchase turns into a burden. Worse, many people buy a home that is too expensive and end up overwhelmed by debt, since home ownership requires more spending than renting: the home must be furnished and repairs and improvements have to be made.

Caution Caution: To avoid having your dream home turn your life into a nightmare, calculate how much you realistically can spend on the monthly mortgage payment. Do not forget to add in the real estate taxes and mortgage insurance.

Lenders will be happy to pre-qualify you by giving you a preliminary limit on the amount they would be willing to lend you. This pre-qualification is not a commitment on the lenderís part; lenders will not commit to a mortgage until they have the property appraisal and all of your documentation. But the maximum they are willing to offer can be helpful for planning purposes.

The maximum debt is based on your income and debt level. It depends on current interest rates, the term of the mortgage, and the property taxes. To get a rough idea, the maximum debt amount is usually about three times your annual gross income.

The Price

Having decided how much of a monthly mortgage payment you can realistically afford, you are now ready to set a price range for your new home. You will give this range to the real estate agent during your first visit or use it to rule out homes you do not want to look at.

Planning Aid Planning Aid: See the Financial Calculator: How much house can I qualify for?

Tip Tip: Donít be afraid to look at homes that are 15% to 20% over your price range. In many cases, you will be able to negotiate the price down.

The Down Payment

You will probably want to make as large a down payment as possible. There are two reasons for this: (1) lenders will generally not require you to pay for private mortgage insurance if you can come up with a 20% down payment and (2) the sooner you pay off your mortgage, the better off you will be financially.

To save the 20% down payment, you may need to go on an "austerity plan" for a year or two. Many home buyers also use cash gifts or loans from family members to meet the 20% figure. If you cannot save 20% of the purchase price, you will still be able to get financing. However, it is best to try to save the 20% to avoid paying for private mortgage insurance.

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Working With Your Real Estate Agent

You can save yourself much time and trouble by knowing what to look for in a real estate agent.

If you find that your real estate agent is not doing his or her best to find you the home you want or is otherwise not meeting your expectations, donít hesitate to make a change. Avoid the mistake of staying in the relationship because you have invested time in it. Rather, get out as soon as you can. The real estate agent will cost you money, so make sure you are getting your moneyís worth.

You can shop for and buy a home without an agent, but you will need to put in much extra time to do an agentís work: search for properties, schedule appointments to see them, coordinate inspections, and negotiate. Home buyers who already have a property in mind that they want to buy are the best candidates to do the deal without an agent.

Positive Traits To Look For

Of course, you want a competent and experienced agent whose work habits are compatible with your own. To find such an agent, interview several candidates at different agencies. Look for the following traits:

  • Is the Agent Full-Time? Make sure the agent works in the field full-time. Otherwise he or she may not be up-to-date on the fast-changing information and skills required for the job.

  • Is the Agent Experienced? Be sure the agent has been doing the type of work you will need him or her to do for at least a few years. For example, if you are looking for a modest single family home in the suburbs, make sure the agent has not spent the last five years handling mostly rentalsóor mansions.

  • Does the Agent Listen and Communicate Clearly? The agent must be able to understand your priorities in purchasing a home and to tell you what you need to know about a home. For instance, if you tell the agent repeatedly that you must have wood floors and a tree-lined neighborhood, and he or she persists in showing you linoleum floors on crowded streets, you need to get a new agent.

  • Is the Agent Willing to Negotiate For You? To get the best home for your dollar you will have to negotiate with the seller on the price. The agent plays a crucial role in the process. If he or she is not willing to show you houses that are 20% over your price range or to vigorously negotiate with the seller, you need to find a new agent.

  • Is the Agent Careful In His or Her Work? You need an agent who will cover all the details that go into buying a home. Someone who takes shortcuts in order to "produce"ógenerate as many home sales as possibleówill not do you any good.

Tip Tip: Ask the candidates for references from clients with whom they have recently worked in the area in which you are house-hunting. That will help you determine whether the agent has the traits you want.

Negative Traits To Watch Out For

Here are some traits a good buyerís real estate agent should not have. Most of them have to do with the conflicts of interest that arise with any commissioned salespeople. Basically, a commission salespersonís goal is to see that as many deals close as possible while putting in the minimum of hours. However, many agents still provide good service.

  • Haste Makes Waste. The agent who tries to push you into making a decision before you are comfortable doing so is to be avoided.

  • Spendthrifts. Avoid agents who urge you to go over your price range.

  • Favoritism. Avoid agents who push you to buy their agencyís listings over other properties, or who push you to use the attorneys or inspectors they recommend.

  • Cover-ups. Dishonest agents have been known to help the seller hide a defect, or to look the other way. The only way to protect yourself from such deceit is to use an objective inspector.

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Finding The Right Home

Throughout the search for a home, you must remain focused on what you want (and donít want) in a home and to investigate for yourself. You may want to keep a list of items that are important to you, such as the location of the neighborhood, the type of materials used in building the home and the schools.

If a particular aspect of the house is important to you, do not take anyoneís word for it. Investigate for yourself. Visit schools, walk around the neighborhood, look under carpets to see what the floors are made of, stay in the basement for awhile to see how damp it is. You may also want to drive through the neighborhood after dark to see if the it is a safe place to live.

Tip Tip: In order to have a benchmark for comparing home prices, find out what the price per square foot is for homes you are looking at. To find the price per square foot, divide the asking price by its square footage. Sources of a homeís square footage include the local tax assessment agency, the real estate agent, and the home builder. You should verify any statement that might be self-serving.

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Negotiating The Selling Price

Buying a home calls into play your negotiating ability. Successful negotiation can often save you tens of thousands of dollars. Here are some tips to keep in mind when negotiating for your hoped-for home:

  • Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.

  • Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.

  • Know what comparable homes are selling for.

  • If the seller refuses to budge on price, try to negotiate for something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.

  • Donít forget the real estate agentís commission. It may also be negotiable.

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Arranging For The Mortgage

If you and the seller finally agree upon a price, and sign a contract, the next step, in virtually all cases, is to get a mortgage. In fact, the sale is usually conditioned upon the buyer obtaining a mortgage. Getting the right mortgage is very important, and can result in savings of tens of thousands of dollars over the term of the mortgage.

Because the discussion of mortgages is quite extensive, it is beyond the scope of this Financial Guide. Rather it is covered in detail in other related Guides.

Related Guide Related Guide: Please see the Financial Guide: MORTGAGES ALTERNATIVES: How To Choose The Right One.

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Inspecting The Home

The home inspection is an objective visual examination of the physical structure and systems of the house, from the roof to the foundation. The standard home inspectorís report will include an evaluation of the condition of the home's heating system; central air conditioning system (temperature permitting); interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation and basement; and the visible structure.

Having a home inspected is like giving it a physical check-up. If problems or symptoms are found, the inspector will refer you to the appropriate specialist or tradesperson for further evaluation.

Why is the inspection necessary? The purchase of a home is probably the largest single investment you will ever make. You should learn as much as you can about the condition of the property and the need for any major repairs before you buy, so that you can minimize unpleasant surprises and difficulties afterwards.

Of course, a home inspection will also point out the positive aspects of a home as well as the maintenance that will be necessary to keep it in good shape. After the inspection, you will have a much clearer understanding of the property you are about to purchase and will be able to make a confident buying decision.

Cost

The inspection fee for a typical one-family house varies geographically, as does the cost of housing. Similarly, within a given area, the inspection fee may vary depending upon the size of the house, particular features of the house, its age, and possible additional services, such as septic, well, or radon testing.

Tip Tip: Check local prices on your own.

Tip Tip: Do not let cost be a factor in deciding whether or not to have a home inspection or in the selection of your home inspector. The knowledge gained from an inspection is well worth the cost, and the lowest-priced inspector is not necessarily a bargain. The inspector's qualifications, including his experience, training, and professional affiliations, should be the most important consideration.

Why You Canít Just "Do It Yourself"

Even the most experienced homeowner lacks the knowledge and expertise of a professional home inspector who has inspected hundreds, perhaps thousands, of homes. An inspector is familiar with all the elements of home construction, proper installation, and maintenance. The inspector understands how the home's systems and components are intended to function together, as well as how and why they fail.

Further, most buyers find it very difficult to remain completely objective and unemotional about the house they really want, and this may affect their judgment. For the most accurate picture, it is best to obtain an impartial third-party opinion by an expert in the field of home inspection.

How To Find A Home Inspector

The best source of recommendations is a friend or business acquaintance who has been satisfied with a home inspector they have used. Real estate agents are also generally familiar with home inspectors and should be able to provide you with a list of names from which to choose. In addition, the names of local inspectors can be found in the Yellow Pages where many advertise under "Building Inspection Service" or "Home Inspection Service." (However, it's generally risky to rely on an inspector obtained through the Yellow Pages.)

Whatever your referral source, be sure to ascertain the home inspector's professional qualifications, experience, and business ethics before you make your selection. You can do this by checking with the local Consumer Affairs office or Better Business Bureau, as well as by verifying the inspector's membership in a reputable professional association.

Tip Tip: Since there are currently no licensing requirements for home inspectors (with the exception of Texas) make certain that such an association has a set of nationally recognized practice standards and a code of ethics. This provides members with professional inspection guidelines, and prohibits them from engaging in any conflict of interest activities which might compromise their objectivity, such as using the inspection as a means to obtain home repair contracts. The association should also have rigorous membership and continuing education requirements to assure consumers of an inspector's experience and technical qualifications.

When Do You Call In The Home Inspector?

A home inspector is typically called right after the contract or purchase agreement has been signed, and is often available within a few days.

It is not necessary for you to be present for the inspection, but it is recommended. By following the home inspector around the house, by observing and asking questions, you will learn a great deal about the condition of the home, how its systems work, and how to maintain it. You will also find the written report easier to understand if you've seen the property first-hand through the inspector's eyes.

Tip Tip: Before you sign, be sure that there is an inspection clause in the contract, making your purchase obligation contingent upon the findings of a professional home inspection. This clause should specify the terms to which both the buyer and seller are obligated.

What If The Report Reveals Problems?

No house is perfect. If the inspector finds problems, it does not necessarily mean you should not buy the house, only that you will know in advance what to expect. A seller may be flexible with the purchase price or contract terms if major problems are found. If your budget is very tight, or if you do not wish to become involved in future repair work, this information will be extremely important to you.

What if you find problems after you move in? A home inspection is not a guarantee that problems will not develop after you move in. However, if you believe that a problem was already visible at the time of the inspection and should have been mentioned in the report, your first step should be to call and meet with the inspector to clarify the situation. Misunderstandings are often resolved in this manner. If necessary, you might wish to consult with a local mediation service to help you settle your disagreement.

Tip Tip: Though many home inspectors today carry Errors & Omissions liability insurance, litigation should be considered a last resort. It is difficult, expensive, and by no means a sure method of recovery.

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Checklist of Home Needs

For each home you are considering, bring a copy of the following list and fill it in. This form will enable you to have a record of all the homes you visit and to compare their features. You may be able to fill in much of the information from the multiple listing service sheets your real estate agent provides. Write down the size, materials, and any other comments you have about each item.

General: ________________
Address: ________________
Date of visit: ________________
Asking price: ________________
Square footage ________________
Price per square foot ________________
Financing available (FHA, VA, other) ________________
  ________________
Interior: ________________
Number of bedrooms: ________________
Number of baths: ________________
Location of sunrise: ________________
Size of master BR: ________________
Size of 2nd BR: ________________
Size of 3rd BR: ________________
Size of 4th BR: ________________
Size of 5th BR: ________________
Size of master closet: ________________
Size of 2nd closet, location: ________________
Size of 3nd closet, location ________________
Size of master bath: ________________
Size of 2nd bath, location: ________________
Size of 3rd bath, location: ________________
Size of kitchen, location: ________________
Size of DR, location: ________________
Size of living room, attributes: ________________
Other rooms, size and attributes: ________________
Appliances (number, condition): ________________
Attic, attic vents: ________________
Basement: ________________
Ceiling fans: ________________
Ventilation: ________________
Garage, adequacy: ________________
Garage, door opening convenience: ________________
Fireplace(s): ________________
Cost of utility bills (ask homeowner): ________________
Floors (material, condition): ________________
Heating/AC: ________________
Insulation: ________________
Humidity, mildew: ________________
Lead-based paints: ________________
Plumbing: ________________
Radon: ________________
Security: ________________
Stairs: ________________
Wallpaper/wallcoverings: ________________
Windows: ________________
Wiring: ________________
  ________________
Exterior: ________________
Year of construction: ________________
Comments about exterior, siding: ________________
Deck/porch: ________________
Doors (ext.): ________________
Windows: ________________
Foundation: ________________
Grading, drainage: ________________
Lot size: ________________
Landscaping, yard: ________________
Roof: ________________
Driveway: ________________
Septic system: ________________
Swimming pool: ________________
Trees: ________________
  ________________
Neighborhood: ________________
Overall comment: ________________
Accessibility during bad weather: ________________
Nearby properties (use of property and comments on neighbors): ________________
  ________________
Driving time to: ________________
Work: ________________
Bus/train: ________________
Airport: ________________
School: ________________
Place of worship: ________________
Highways: ________________
Day care: ________________
Noise levels: ________________
Proximity of police, firefighters: ________________
Privacy: ________________
School district: ________________
Restrictions (e.g., on landscaping): ________________
Security: ________________
Flood, earthquake, other disaster likely: ________________
Garbage removal: ________________

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Renting Vs. Buying

Here are some factors, other than whether you can afford a new home, that you should consider when deciding whether to rent or buy a home:

  • When home prices are down, home ownership is a less valuable investment. (Of course, owning a principal residence is not just an investment.)
  • When comparing the costs of renting against the costs of owning, factor in the valuable income tax deductions available for mortgage interest payments.
  • You may not have to pay tax on the capital gain when you sell your principal residence.
  • In a period of high interest rates, owning a home is more costly.
  • Those who move frequently, for example every four years or less, are often better off renting than buying.

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Agents' Titles and What They Mean

When looking for a real estate agent, you may come across the following commonly used titles. Here is a basic definition of each:

  • Principal broker: This is a person who is licensed to operate a real estate office. He or she may either work alone or employ other agents. Several years of experience are required to obtain this licensure. Anyone selling realty must work under the supervision of a principal broker.

  • Realtor: A realtor is a member of the National Association of Realtors, along with a state realtorsí association and a local board of realtors. Realtors are bound by a code of ethics. They are able to access a local computerized database of homes for sale known as the multiple listing service.

  • Agent: This is the general term for any licensed professional in the real estate sales business.

  • Listing agent: A type of agent who signs up the home seller and lists the home with the multiple listing service.

  • Selling agent: An agent who finds a home for sale (through the multiple listing service) and finds a buyer for it.

Note Note: On a home sale, the listing agent and the selling agent split the commission with each other and with their principal brokers.

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The Selling of Mortgages

When you apply for a home mortgage, you may think that the lender, or loan originator, will service the loan until it is paid off or your house is sold. This assumption is not always true. In today's market, mortgage servicing rights often are bought and sold.

If you are notified that your home mortgage servicing has been sold to another company, you may wonder how it will affect your loan terms and monthly payments. Some consumers have complained that they were not given enough notice of loan servicing transfers and were unfairly charged late fees and penalties.

In 1990, the National Affordable Housing Act was passed to address some of these concerns. This section explains what a mortgage service does and what your rights are under the Housing Act. It also tells what you can do if you have a complaint about the transfer of your loan servicing.

What Are The Responsibilities Of A Mortgage Service?

The mortgage service collects your monthly payments and handles your escrow account. It also is required to give you an annual statement that details the activity of your escrow account. This statement shows your account balance and reflects payments for property taxes and homeowners insurance.

What does the Housing Act Require?

To protect borrowers, the National Affordable Housing Act requires lenders or services to do the following:

Provide a disclosure statement. The disclosure statement says whether the lender intends to sell the mortgage servicing immediately; whether the mortgage servicing can be sold at any time during the life of the loan; and the percentage of loans the lender has sold previously. The lender also must provide information about servicing procedures, transfer practices, and complaint resolution. If you have a face-to-face interview with a lender, you must receive the disclosure statement at the time of the loan application. If you apply for a loan by mail, the lender has three business days to send you the disclosure statement after receiving your application. Without a signed disclosure statement, the lender cannot fund a mortgage for you.

Give proper notification when the loan servicing is going to be sold. If your current service plans to sell your loan servicing, you must be notified at least 15 days before the effective date of the transfer unless you received a written transfer notice at settlement. The effective date is when the first mortgage payment is due at the new service's address. Under certain circumstances, the current service has up to 30 days after the effective date of the transfer to send you notification.

Include certain information in the notice. If your loan servicing is going to be sold, you should receive two notices: one from the current service and one from the new mortgage service. The new service must notify you not more than 15 days after the transfer has occurred. The notices must include the following information:

  • The name and address of the new service
  • The date the current service will stop accepting mortgage payments and the date the new service will begin accepting them
  • Free or collect call telephone numbers for both the current service and the new service that you can call for information about the transfer of service
  • Information that tells whether you can continue any option insurance, such as mortgage life or disability insurance, and what action, if any, you must take to maintain coverage. You also must be told whether the insurance terms will change
  • A statement that the transfer will not affect any terms or conditions of the contract you signed with the original mortgage company, other than terms directly related to the servicing of such loan. For example, if your old lender did not require an escrow account, but allowed you to pay property taxes and insurance premiums on your own, the new service cannot demand that you establish such an account

Grant a grace period during the transfer of the loan serving. After the transfer, there is a 60-day grace period. During this time you cannot be charged a late fee if you mistakenly send your mortgage payment to the old mortgage service instead of the new one. In addition, the fact that your new service may have received your payment late cannot be reported to a credit bureau.

Respond promptly to written inquiries. If you believe you have been improperly charged a penalty or late fee, or there are other problems with the servicing of your loan, contact your service in writing. Be sure to include your account number and explain why you believe your account is incorrect. Within 20 business days of receiving your inquiry, the service must send you a written response acknowledging your inquiry. Within 60 business days, the service must either correct your account or determine it is accurate. The service must send you a written notice of what action it took and why.

Tip Tip: Do not subtract any disputed amount from your mortgage payment. Many mortgage services will refuse to accept what they consider to be partial payments. They may return the check and charge a late fee, or declare the mortgage is in default and start foreclosure proceedings.

What Can You Do If You Have a Complaint?

If you believe the service has not responded appropriately to your written inquiry, contact your local or state consumer protection office. If your lender is certified by the Department of Housing and Urban Development (HUD), you may want to file a complaint with HUD. Write: Office of Single Family Housing, HUD, Room 9282, Washington, DC 20410.

You also can send your complaint to the FTC. Write to: Correspondence Branch, Federal Trade Commission, Washington, DC 20580. Although the FTC generally does not intervene in individual cases, the information you provide may indicate a pattern of possible law violations requiring action by the Commission.

You also may want to contact an attorney to advise you of your legal rights. Under the National Affordable Housing Act, consumers can initiate class action suits and obtain actual damages, plus additional damages, for a pattern or practice of noncompliance. In successful actions, consumers also may obtain court costs and attorneyís fees.

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Recommended Books

Recommended Books

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Government and Non-Profit Agencies

Consumer Information Center
P.O. Box 100
Pueblo, CO 81009

Request the consumer information catalog. Handbooks cover subjects such as adjustable rate mortgages, mortgage lock-ins, and mortgage refinancing. Other titles cover home safety issues, such as asbestos and the use of wood-burning stoves.

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