Money & Business

Buying a Home
published by Barnes & Noble

Build a foundation for your future.

More than just a place to hang your hat, a home is a financial commitment that
shouldn’t be taken lightly. Before you take the plunge and become a homeowner,
make sure you know:

• How large a mortgage you can afford and which type is best for you

• How to evaluate neighborhoods and specific homes

• How to use an agent, make an offer, and avoid overpaying

Buyers who pay less than 20% must usually pay credit. FICO scores range from 300 (lowest) to 900 or more
Should You Buy a Home? additional private mortgage insurance (PMI). (highest). Generally, a score of 700 or above is considered
Buying and owning a home is almost always a better finan- • Closing costs: The various fees that lenders charge for good, while a score below 700 may hurt your chances of
cial decision than renting. Yet buying a home isn’t always processing your loan. These charges are usually 1–5% qualifying for the lowest possible interest rates.
the right decision for everyone. So before you jump into of the overall purchase price. To order a credit report, contact one of the three
the home-buying process, it’s a good idea first to figure out • Property taxes: State and/or local taxes levied on major credit bureaus—Experian, TransUnion, or Equifax.
whether you should be buying a home at this time. your home. Property taxes vary widely by jurisdiction, A new law entitles all Americans to one free credit report
but expect to pay at least 1% of the purchase price of per year, available at www.annualcreditreport.com. It’s a
Renting vs. Buying your home per year. good idea to take advantage of this opportunity every year
Renting and buying each have their own advantages. • Insurance: The cost of homeowner’s insurance and to monitor your credit and check the reports for errors.
title insurance. Homeowner’s insurance covers your
Advantages of Renting Advantages of Buying new house and its contents. Title insurance covers How to Improve Your Credit
you if the sale of the home was somehow fraudulent. If you have a low credit score, don’t despair: you can
• Time: It usually takes • Investment: Homes
Insurance costs vary substantially depending on the improve your credit over time. Credit reports and scores
less effort to find a can grow in value.
value of your home and its contents. generally cover only the previous two years, though major
place to rent than one Rent, once paid, is lost
to buy. forever. • Repairs: Costs for any necessary or desired repairs, credit issues such as bankruptcy remain on your report for
• Less responsibility: • Taxes: Mortgage which vary widely depending on the condition of the 10 years. Improving your credit is largely a function of dis-
You’re not responsible interest is tax home. If you’re interested in a property that needs playing good credit behavior:
for damage that results deductible, lowering substantial repairs, make sure to budget for the work.
from everyday wear payments. • Moving costs: The more stuff you have and the farther • Pay monthly bills: Pay all loans and other monthly bills
and tear. • Stability: Fixed-rate you have to move, the more it will cost. Interstate promptly and in full every month.
• Personal flexibility: mortgage payments moves typically cost $3,000 and up. • Pay off credit cards: Pay off your credit card bills
It’s usually easier and never rise in cost, on time and in full every month. Never make just the
less expensive to break whereas rent can rise In addition to the savings needed to cover the up-front minimum monthly payments on credit cards.
a lease than to get out every year. costs of buying a home, you also need a steady income • Never max out credit cards: Maxed-out cards—even
of a mortgage. • Design flexibility: to cover ongoing expenses, such as repairs and upkeep. If if you pay them off—will make creditors question your
• Financial flexibility: You’re completely you don’t have that savings and guaranteed income stream, spending habits.
Since you typically pay free to renovate, it’s probably better to keep renting and build up some funds • Don’t get more credit cards than you need: Holding
just a deposit (and not remodel, or landscape by cutting costs and saving money each month. Eventually many credit cards can suggest that you have cash flow
a substantial down your home however you’ll be in the position to buy a home with confidence. problems, even if no problem actually exists.
payment, as you would you like.
for a mortgage), your If you get turned down for a mortgage even though you think
assets remain more Credit History and Credit Score your credit is great, request that the lender provide you with
liquid and accessible.
A lender considering whether to approve you for a home a written explanation. They’re obligated to supply one if
mortgage will examine your credit history—your record of you ask. The explanation will identify the problems with your
In short, if you need personal or financial flexibility, don’t have paying back loans, including credit card bills. If you have a credit so that you know what needs improvement.
much time to find a place, or don’t want to be responsible for “good” credit history of repaying loans on time and in full,
the upkeep of your home, renting is the better bet for you. you can usually get approved for loans with lower interest How to Get Credit Help
Otherwise, buying a home is probably the better option— rates. If you have a “bad” credit history of missing payments If you’re in severe credit card or other debt and aren’t sure
as long as you can truly afford to buy. or paying only minimum balances, you’ll typically get higher- what to do, help is available. Most localities have nonprofit
interest loans and sometimes can’t get approved for a loan credit counseling services that, for little or no cost, will
Can You Afford to Buy? at all. If you’re thinking about buying a house—even years help you develop a plan and budget to help you pay off your
Over the long term, buying a home is usually more cost- from now—make sure you maintain good credit. creditors and improve your credit over time. Local credit
effective than renting one. But in the short term, buying a counseling services are generally listed in the phone book
home is always more expensive because there are a num- Credit Reports and in online listings.
ber of significant up-front costs: To find out where your credit stands, get a credit report, Go only to nonprofit credit counseling services. Never
which details your debt and payment history. Credit reports trust a company that claims it can “fix” bad credit histories
• Down payment: A one-time cash payment that is typically include a credit score (also called a FICO score) for a fee because these offers are often scams. Only good
typically 5–20% of the purchase price of the home. that gives lenders a quick summary of the quality of your credit behavior over time can improve your credit.
 www.quamut.com Buying a Home

Types of Mortgages much lower than those of standard fixed-rate mortgages or

Mortgage Basics
Few home buyers are wealthy enough to pay the entire
purchase price of a home up front. Instead, most pay a
down payment, a percentage of the total purchase price of
the home, and get a mortgage loan to cover the rest of the
expense of buying the home. Mortgages work as follows:
• Loan: A lender, such as a bank, agrees to lend the
home buyer an amount equal to the difference
between the down payment and the full purchase
price of the home. The amount of the loan is called
the principal. If a home costs $200,000 and the buyer
pays a 20% down payment of $40,000, the principal is
$160,000.
• Repayment: The buyer must repay the lender over
time through monthly mortgage payments. These
payments typically pay down the principal plus
interest. If the buyer fails to pay the mortgage, the
lender can foreclose on the house, taking it back from
the buyer.
In general, it’s best if the down payment covers at least 20%
of the total purchase price. If you don’t have the funds to
put down 20% of the purchase price, you can usually still
get a mortgage, but you’ll likely have to cover some addi-
tional costs each month. Some first-time buyers may qualify
for FHA (Federal Housing Administration) programs that
require down payments of just 1–3%. Talk with a lender
about whether you might qualify for FHA programs.
Taxes and Insurance
The total monthly mortgage payment is often referred to
as the PITI, which stands for principal, interest, taxes, and
insurance.
• Property taxes: Each monthly mortgage payment may
include a prorated portion of the annual property taxes
you owe. If your annual property taxes are $2,400, for
example, each of your monthly payments may include
$200 of property tax in addition to the principal and
interest. But sometimes property tax payments are
made directly by the homeowner and therefore are not
associated with the monthly mortgage payment.
• Insurance: Lenders typically require homeowners to
purchase homeowner’s insurance, which covers both
the home and its contents in the event of a flood, fire,
or other damage. Though some lenders sell insurance
themselves, homeowners most often purchase
insurance from a separate insurance firm. In addition,
buyers who can’t afford a down payment of at least
20% of the purchase price usually have to purchase
private mortgage insurance (PMI), which protects the
lender if the home buyer defaults on the mortgage. PMI
can add $50–100 or more to the monthly mortgage bill.
To calculate the monthly payments for a given mortgage,
use Quamut’s online mortgage calculator (www.quamut.
com/tools/mortgagecalc). To get a more thorough predic-
tion of monthly mortgage payments, consult your lender.
The two types of mortgages most commonly offered are even other ARMs. However, when the interest-only period
fixed-rate and adjustable-rate mortgages. expires, you must either:
Fixed-Rate Mortgages • Pay off the entire balance in a lump sum: This
Interest rates rise and fall over time. In the early 1980s, for option typically requires tens or hundreds of thousands
instance, interest rates rose to almost 19%, whereas in 2006 of dollars.
they were at about 5%. A fixed-rate mortgage protects you • Start paying off the principal within each monthly
from such fluctuations by locking you into a permanent rate payment: This option causes monthly payments to rise
when you take on the mortgage. dramatically, even if interest rates don’t rise. If interest
rates do rise, your monthly payments could skyrocket.
Advantages of Disadvantages of
Fixed-Rate Mortgages Fixed-Rate Mortgages Mortgages and Tax Deductions
Stability: The interest rate Higher initial costs: The U.S. government encourages its citizens to buy homes
on a fixed-rate mortgage Interest rates on fixed- by allowing people with mortgages to deduct from their
never changes, even if rate mortgages are taxable income the mortgage interest they pay each month.
economic shifts cause usually higher than This deduction lowers the monthly mortgage payment by an
interest rates to spike. the initial rates on riskier amount based on your income tax bracket. For example, say
That means your monthly adjustable-rate mort- you’re in the 28% tax bracket and have a monthly mortgage
mortgage payments will gages. As a result, your payment of which $1,000 is interest. After deductions you
never change: if you’re monthly payments (at pay only 72% of that $1,000, or $720.
paying $1,500 a month least during the first 3–10 These tax deductions are especially beneficial in the ear-
today, you’ll pay $1,500 a years) will be higher with ly years of a mortgage because most mortgage payments
month a decade from now. a fixed-rate mortgage. are structured so that in the first few years you pay far more
interest than principal. As a result of this arrangement, in
Fixed-rate mortgages can cover terms of 15, 20, 30, or 40 the first months and years of a mortgage, nearly the entire
years. The most common are the 15- and 30-year varieties. monthly payment is tax deductible.
Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage (ARM) has an interest rate How to Choose a Mortgage
that can change at certain points throughout the term of Before you start house hunting, you should have a good
the loan. Most ARMs offer a fixed rate for a certain period idea what size and type of mortgage you want and can
of time (3, 5, 7, or 10 years), after which the rate adjusts to afford. Thinking about mortgages early on in the process, and
match the interest rates that the financial markets are of- getting either prequalified or preapproved for a mortgage,
fering at the time. will improve your house-hunting efficiency and your ability
to close the deal once you’ve found the house you want.
Advantages of ARMs Disadvantages of ARMs
Mortgage Size
Lower initial costs: Risk: ARMs expose you
There’s a big difference between the mortgage you could
During the initial fixed to risk. Though your initial
get and the mortgage you should get.
term of an ARM, interest rates on an ARM will be
rates are usually lower lower than those for a
than the permanent rates fixed-rate mortgage, if • What size mortgage can you get? Unless you
on fixed-rate mortgages. rates rise when the fixed have a history of bankruptcy or bad credit, lenders
This results in lower term ends, you’ll pay generally will approve you for a mortgage with monthly
monthly payments during more. payments that amount to no more than 33% of your
the fixed-term phase of monthly pre-tax income. So if your pre-tax income is
an ARM. $6,000, you could get approved for a mortgage with a
monthly payment of $2,000.
Different ARMs adjust their interest rates in different ways. • What size mortgage can you afford? Just because
Some adjust only once, at the end of the fixed term, and you can get approved for a mortgage doesn’t
then act like a fixed-rate mortgage at the new, adjusted guarantee you can actually afford it. To decide whether
rate. Other ARMs continue to adjust their rates every 6–12 you can afford a particular mortgage, you need to
months to match current rates. Like fixed-rate mortgages, evaluate your current financial situation and your
ARMs usually come with 15- or 30-year terms. worst-case future scenario. Consider your savings
goals, your job prospects, your plans for children and
Interest-Only Mortgages aging parents, and so on. These factors determine just
Certain ARMs allow you to pay interest only—as opposed how much risk you can take on and help you decide,
to interest plus principal—on the loan for a fixed period for example, whether you should even consider an
of time (usually 5–7 years). Since you don’t have to pay adjustable-rate mortgage.
down the principal, monthly payments on these loans are

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 www.quamut.com
One rule of thumb is that you can probably afford a mort-
gage worth 200 times your current rent. So if your current
rent is $800 a month, you can likely afford a mortgage of:
200 × $800 = $160,000
Mortgage Term
The length of the mortgage’s term affects both the total cost
of the mortgage and the size of the monthly payments.
• Longer mortgage terms have lower monthly
payments: Because they stretch out the mortgage
over more time, longer-term mortgages offer lower
monthly payments than shorter-term mortgages.
• Shorter mortgage terms result in lower total costs:
Because they generate less total interest over time,
shorter-term mortgages offer lower total cost than
longer-term mortgages.
The table below shows monthly payments and total costs for
two mortgages with the same principal ($200,000) and the
same interest rate (6%) but with 15- and 30-year terms.
Monthly Payment Total Cost
15-year $1,687.71 $303,787.80
30-year $1,199.10 $431,676.00
Which Term Should You Choose?
Whether you should choose a longer- or shorter-term
mortgage depends on your particular financial situation. If
you can definitely handle the higher monthly payments of
a shorter-term mortgage, that’s probably the better way
to go. If you can’t (and many people can’t), a longer-term
mortgage is the better choice.
APR
The numerous “percentage rates” on mortgages that lend-
ers quote you can be tricky and confusing. For instance, a
lender might advertise a 6.9% interest rate that looks great
next to a 7.1% rate from another lender but actually has
hidden costs that effectively make the rate much higher.
To avoid all this confusion, pay attention to the annual per-
centage rate (APR) when comparing two mortgages.
The APR, by law, includes all costs in a single rate. If you
see one 30-year fixed rate with an APR of 6.9% and another
with an APR of 7.1%, you can feel confident that the one with
the lower APR has the lower total rate.
Fixed-Rate vs. Adjustable-Rate Mortgages
The most important factor that should influence whether
you choose an ARM or a fixed-rate mortgage is how long
you plan to live in the property.
• If you plan to stay put for a long time (more than
5–7 years), a fixed-rate mortgage is usually the better
choice.
• If you plan to move on relatively quickly (within 5–7
years), an ARM can provide very good value due to
its lower initial rate. At any point within the fixed-rate
period, you can sell—giving up the mortgage—to avoid
higher rates when the rate adjusts.
Though the low monthly payments of adjustable-rate mort-
gages and interest-only loans are enticing, you should
approach them with caution. Many people choose ARMs
and interest-only loans over fixed-rate mortgages in order
to take advantage of the lower initial fees and “reach” for a
house they wouldn’t ordinarily be able to afford. This tactic
is a dangerous financial risk because a shift in rates can
lead to much higher monthly payments and, in the most
dire cases, foreclosure. Never use an ARM to “reach” for a
house you can’t afford.
If You Choose a Fixed-Rate Mortgage . . .
Just as you would comparison shop for any other product,
you should shop for the best mortgage you can find. When
shopping for a fixed-rate mortgage, look for a mortgage with
the term you want at the lowest APR you can find.
If You Choose an ARM . . .
ARMs are a little more complicated than fixed-rate mort-
gages. The index and margin of a given ARM determine
how the loan will adjust when the fixed-rate term expires.
The formula for calculating the adjustable interest rate on
any ARM is: interest = index + margin.
• Index: The interest rate for an ARM is based on one of
several reference indexes (such as the interest rate
of U.S. Treasury bills). When the interest rate of the
reference index upon which a particular ARM is based
rises or falls, so does the interest rate of that ARM.
When you’re shopping for an ARM, it’s best to compare
rates based on the same index.
• Margin: The margin is the markup the lender adds to
the interest rate of the index. Most lenders add a 2–4%
margin. So if the index is at 5%, the mortgage you get
would likely range from 7–9%. Always look for an ARM
with the lowest margin.
In addition, there are two other factors to consider when
shopping for ARMs: the slowest adjustment frequency and
the tightest caps.
• Adjustment frequency: Once the fixed-rate term
expires, ARMs adjust interest rates at certain intervals:
one might readjust every six months, another every
two years. Of two ARMs with the same rate, the one
that adjusts less often is the better choice.
• Caps: These are limits on the highest overall interest
rate an ARM can have and the maximum amount that
rates can adjust between two intervals. The caps limit
a mortgage holder’s risk. Of two ARMs with similar
interest rates, the one with stricter caps is better.
Never take an ARM that doesn’t have a rate cap.
More Mortgage Tips
• Pay more than your monthly payment if possible:
If you can afford to, it’s a good idea to pay more than
your monthly mortgage payment each month. When
you pay more than your monthly amount, that extra
money goes toward paying off your remaining principal,
which lowers the overall interest you pay throughout
the life of your loan. Note that this approach does not
apply to interest-only mortgages.
• Avoid prepayment penalties: Some lenders try to
stop you from paying off your mortgage early (and thus
cutting into their profits) by including a prepayment
penalty in the mortgage. This penalty is a fee charged
if you pay down the principal of your loan early. Never
accept a mortgage that includes such a penalty.
• Understand points: Lenders often offer a lower
mortgage rate in exchange for an up-front payment
of some percentage of your total loan, called points
or origination costs. For example, a mortgage with
two points means that you have to pay 2% of the total
mortgage up front to your lender. In most cases, the
costs of paying more up front outweigh the benefits.
You should pay points only if you’re sure you’re going
to live in the home for a long time (15+ years) without
ever refinancing.
Mortgage Prequalification and Preapproval
Once you know the type and size of mortgage you’d like to
get, the next step is to get prequalified or preapproved.
• Mortgage prequalification: To get prequalified, you
first describe your income, debt, and credit situation
to a mortgage lender. Based on your description, the
Buying a Home
lender provides you with an estimate of what type of
loan you may qualify for. Prequalification can give you
an advantage once you do start bidding for houses.
When a seller is faced with bids from two different
buyers—one prequalified and one not—the prequalified
bidder usually has a definite advantage.
• Mortgage preapproval: During the preapproval
process—a step beyond prequalification—the
lender conducts a thorough analysis of your financial
documents. Preapproval makes you even more
attractive to sellers.
Be aware that though prequalification and preapproval indi-
cate that you’re likely to qualify for a mortgage of a particu-
lar type and size, neither guarantees that you’ll be approved
when you apply later on in the process.
How to Research Neighborhoods
When you buy a home, you’re also buying the neighbor-
hood surrounding it. The neighborhood is important not
only because you’ll have to live in it but also because the
neighborhood’s quality will have a big impact on the appre-
ciation value of your home. Before you start hunting for an
individual house, you should hunt for a neighborhood that
meets your tastes and needs.
Characteristics of a Good Neighborhood
In part, the traits that make a neighborhood good or bad
depend on your personal tastes and needs. You may prefer
neighborhoods based on qualities such as:
• Type of people who live there: Are they similar to
you in terms of age and occupation?
• Commuting distance to good jobs: Are there offices
nearby? What mass transit options exist?
• Presence of young families: Do children play freely in
the neighborhood?
• Shopping, exercise, and leisure needs: What stores
and facilities are nearby?
Other factors are common to all “good” neighborhoods no
matter what your personal preferences:
• Strong, diverse local economy: A town in which most
jobs are dependent on a single industry or factory does
not have a diverse economy.
• Strong housing market: A strong housing market
should have a vacancy rate below 5% and rental prices
close to the cost of owning a comparable home.
• Good school system: School-system quality is
important even if you never plan to have kids because
a good school system raises home values.
• Low crime rates: Crime should be the exception, not
the norm.
• Services and amenities: The neighborhood should
feature multiple amenities, including parks, parking,
restaurants, and supermarkets. It should also have
reliable public services, such as garbage pickup,
sewage, recycling, and emergency response.
Up-and-Coming Neighborhoods
Good neighborhoods can be expensive. If you can’t afford a
“good” neighborhood, keep an eye out for “up-and-coming”
neighborhoods that are affordable but have rising pros-
pects. Up-and-coming neighborhoods typically lie on the
outskirts of good neighborhoods that have been established
for a number of years. Up-and-coming neighborhoods tend
to have specific statistical traits:
• Increasing population
• Multiple offers on homes being sold
• Residents renovating or moving into bigger houses
• A shift from renters toward homeowners
• New businesses opening
 www.quamut.com Buying a Home

How to Research Neighborhoods 4–6% combined) of the purchase price. Though this Tell your real estate agent your priorities, indicating which
Many resources are available to help you evaluate neigh- arrangement allows the real estate agent to provide items you consider fixed (a maximum price, for example)
borhoods. services to you free of charge, it also creates a and which you consider flexible.
situation in which it’s in the agent’s financial interest to
• Internet: Many websites, such as Yahoo! and MSN get you to spend as much as possible. If You’re Buying a Single-Family Home . . .
allow you to find and compare crime statistics, school If you want to live in a freestanding single-family home,
scores, and demographic data for virtually any city, To address these types of conflict of interest, you can agree consider whether you’d rather buy a new home or a home
town, or suburb in the United States. to pay your agent a flat fee yourself, as long as the laws in that’s been previously occupied. This table lists the advan-
• Local resources: The local library and chamber of your state allow this. If you’re not willing to make that sort tages and disadvantages of each.
commerce should have a lot of pertinent data about of extra payment—most people aren’t—you can reduce
the area. Local periodicals should give you a good the influence of conflicts of interest by never wavering from Factor Older Homes Newer Homes
sense of both the news and cultural events in the area your initial price range and by finding an agent with a reputa-
Price and More space per Less space per
and local issues and politics. tion for integrity, including references to back it up.
space dollar dollar
• Local professionals: For a few hundred dollars
you can hire an appraiser to assess the likelihood of How to Find and Hire a Real Estate Agent Location Close to town Outskirts of
home-value appreciation in a specific home, street, The best way to find an agent is through a reference from center town, often in
or neighborhood. Also, you can usually get housing a friend or associate you trust. Rather than focus on one developments
statistics on sales prices from local real estate agents. agent at first, come up with a list of a few who sound prom- Appliances May need New
• Residents: No one knows a place like the people ising. Once you’ve got that list, approach each agent and remodeling or
who live there. Talk to them. Ask about the schools, request an interview, making it clear to the agent that he or maintenance
amenities, local government, crime—everything. she is not the only one you’ll be interviewing.
Charm Age often gives Can feel
• Visits: Visit the prospective neighborhood a number
character cookie-cutter
of times: in different weather, at different times of the The Agent Interview
year, and at different times of day. Drive the commute Each agent interview should last at least a half hour. You Costs Less energy More energy
from the neighborhood to your work. Act as if you live can interview over the phone or in person, though in-person efficient; may efficient; built to
there. Try the place on. interviews are generally more informative. During the inter- need repair code
view, make sure the agent is state-licensed, works full-time work
in real estate, has at least five years’ experience, and is a
How to Find a Real Estate Agent member of a realtors’ trade association—preferably the
Customization
potential
Less
customizable
More
customizable
Though you’re not required to use a real estate agent when National Association of Realtors (NAR). Always ask for
buying a home, a good agent will make the process much references from previous clients and follow up on them. Amenities Closer to town Often near
easier for you. Besides, a real estate agent’s services usu- Finally, ask the agent to bring to the interview a list of all the shops, parks, development’s
ally are free for the home buyer. It’s the seller who pays all deals he or she has handled in the last year, including the restaurants private
amenities
broker fees. following information:
(pools, etc.)
What Real Estate Agents Do Information What to Look For Landscape Often occupy Sometimes
A real estate agent’s job is to make your life easier. You Property location Many sales in the area where wooded or occupy treeless
should expect your agent to: you want to buy otherwise fields
mature lots
Property type Experience with the type of
• Develop a profile of your property needs, covering
home you’re interested in Community Older, more Younger, less
specifics such as number of bathrooms, square
Purchase price Experience with houses in your diverse diverse, usually
footage, location, and so on more children
price range
• Provide a list of available properties, with photos and
descriptive details Date of sale Regular sales all year round Build quality Easy to assess Difficult to
• Contact the listing agent (the seller’s real estate agent) since home has assess since
to set up showings for properties you like Exclusivity Agreement proved itself home doesn’t
• Escort you through each property, explaining its pluses Your agent will likely ask you to sign an exclusivity agree- over time have a proven
history
and minuses ment stating that you will work only with him or her.
• Provide you with a list of comparables (“comps”) Though this is standard practice, you may want to negoti- Safety Built to Built to
showing the prices of similar, recently sold properties ate the length of the exclusivity. Many agents will ask for older safety modern safety
in the area six months, but you’re better off insisting on no more than standards, standards
• Advise you during negotiations with the seller three, just in case the agent fails to meet your expectations which are often
• Draw up, gather together, and explain the contracts and you wish to switch. less stringent
and paperwork that pile up once you make an offer
Energy Tend to be less Tend to be more
that the seller accepts
• Guide you through the pre-closing process, including How to Hunt for a House efficiency energy efficient energy efficient

setting up inspections and walkthroughs
• Arrange and attend the closing and help resolve any
last-minute questions or issues that might arise
Agent/Buyer Conflicts of Interest
There are built-in conflicts of interest between real estate
agent and buyer that you should be aware of as you step
into the world of real estate.
• Legal conflicts: In some states, the buyer’s real estate
agent actually is legally bound to try to get the best
possible deal for the seller. Before getting a real estate
agent in any state, research your state’s laws to find
out whose side the buyer’s agent is really on.
• Financial conflicts: Even in states where the real
estate agent is legally bound to represent your best
interests, a conflict of interest still exists because
real estate agents get paid by commission. When
a home sells, the seller pays both the seller’s agent
and the buyer’s agent a percentage (usually about
While hunting for a house, it’s crucial to remain realistic,
organized, and a bit thick-skinned. If you don’t approach the
process with a clear sense of your budget and expectations,
you can either get carried away and buy a house you can’t
afford or, out of frustration, settle for less than you deserve.
Knowing what matters most to you ahead of time will help
the house-hunting process go as smoothly as possible.
Prioritize Your Needs
Here’s a list of typical home attributes that you should
consider when prioritizing your needs:
• Type: House, apartment, duplex, etc.
• Location and views: Waterfront, city skyline, etc.
• Price: Including property taxes and insurance costs
• Size: Square footage
• Land: Acreage
• Schools: Quality of the school district
• Privacy: Proximity to neighbors
• Appreciation potential: Likelihood it will rise in value
If You’re Buying Attached Housing . . .
In general, apartments, townhouses, condos, co-ops, du-
plexes, and other attached housing units give more space
per dollar than freestanding houses and often provide ame-
nities that don’t come with a house (pool, gym, clubhouse,
and so on). Yet buying this type of real estate comes with its
own quirks and complications.
When you buy into a condominium or co-op, you’re join-
ing a community, both legally and financially. Membership
in that community can limit your freedom to renovate, have
pets, and so on. In a co-op, nearly every decision about the
building is subject to the decision of the co-op board. In a
condo, the purchase contract likely contains rules about
what you can and cannot do. So if you’re buying a condo or
co-op, make sure to:
• Read all legal documents and contracts carefully
• Hire a good lawyer to review all contracts you sign
• Know your rights once you own
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House-Visiting Tips
Most home buyers spend at least a few weeks visiting
properties before they find a home to buy. The average
home buyer sees 15 properties. Here are some tips to keep
in mind as you shop:
• Request that the seller or tenants not be present.
• Try not to be influenced by furniture, which will leave
when the seller does.
• Note upgrades you’d have to make to the carpet, paint,
appliances, and so on.
• Observe and inquire about the neighbors.
• Check the views out every window.
• Try to visualize the house in all seasons and weather.
• Inquire about the infrastructure, including plumbing,
electrical, gas, heat, air conditioning, cable TV, internet
service, and so on.
• Make sure the floor plan provides enough space for
you, your family, your furniture, and storage.
• Consider how the property might fare in a natural
disaster, such as a flood or earthquake.
• Take notes and photos to help you keep track of the
different houses that you visit.
Open Houses
It’s helpful to attend open houses in neighborhoods that
interest you. In an open house, the real estate agent listing
the house invites anyone interested to come and look at the
house. Open houses are typically held on Sundays. You can
find open house listings in your local newspaper or simply
by driving around neighborhoods that interest you and look-
ing for “Open House” signs.
Open houses are free opportunities to investigate a
neighborhood and its housing options on your own, before
you hire a real estate agent. Just be wary of the agents who
attend any open houses you visit—they can be a bit pushy.
Home Buying as an Investment
Though one of your goals in buying a house should be to
find a home you love, also keep in mind that the home you
buy will likely be the biggest investment you ever make. To
make a good investment, a house must be priced fairly and
have a strong shot at appreciating in value.
Comparable Market Analysis
If you’re interested in a specific house, the best way to get
a sense of how much it should sell for is to ask your real
estate agent to prepare a comparable market analysis
(CMA) for you. A CMA is an analysis of sale prices of homes
sold within the last six months that are similar—in terms of
neighborhood, size, age, condition, amenities, and so on—
to the houses that interest you. If a house that interests
you is being sold at a price well above those listed in the
CMA, it’s overpriced and is therefore probably not a good
investment.
Three Principles of Home Pricing and Appreciation
There are three general principles of home pricing and
appreciation (rising value) that can help you spot homes
that might be good investments.
1. Conformity: The more “unique” a house is, the fewer
potential buyers there will be for that house. The more
a house “fits” with the houses around it, the better its
appreciation prospects.
2. Progression: Properties of lower value are raised up
by proximity to properties of higher value. It’s better to
buy the cheapest house on an expensive block than to
buy the most expensive house on a cheap block.
3. Proximity: Appreciation of a house can be harmed by
proximity to lower-value houses. So the most expensive
house on a street is unlikely to appreciate rapidly, even
with renovation.
How to Make an Offer on a Home
When you’ve found a home you love that’s priced within
your budget, it’s time to make an offer. To make an offer on
a home, you and your real estate agent draw up and give to
the seller a document called a purchase contract.
The Purchase Contract
Your real estate agent will have copies of the type of pur-
chase contract that’s considered standard in your area.
Purchase contracts typically contain the following:
• Your offer price, including a specification of the down
payment amount
• Financing information that specifies the amount of the
mortgage you hope to get and that identifies the lender
• Legal description of the property
• List of what’s included (appliances, fixtures, carpeting,
and so on) and not included in the sale
• Move-in date
• Closing date
• Termination date, so the seller can’t delay
Contingencies
The purchase contract you give the seller should contain
contingencies, or riders, that allow you to back out of the
contract if certain conditions aren’t met. Including these
contingencies is a crucial way to protect yourself financially
as you work through the transaction:
• Mortgage contingency: Allows you to back out of the
contract if you’re unable to get the mortgage.
• Inspection contingency: Allows you to back out if the
inspection turns up hidden structural problems or other
unacceptable physical defects in the house.
• Attorney-approval contingency: Allows you to back
out if your lawyer does not approve of the contract.
• Negotiations for corrective work: Allows you to
reopen negotiations if inspections turn up expensive
corrective work needed on the house.
• Title contingency: Allows you to review the title on
the property to evaluate its accuracy and validity and to
back out of the deal if title problems are uncovered.
• Final verification of condition: Allows you to
renegotiate or back out if, during the final walkthrough
before closing, you spot a significant defect or problem
with the house that is new or that the seller hid.
Earnest Money or Down Payment
Along with the purchase offer, you’ll likely have to include
either earnest money or the entire down payment. (Earnest
money is a deposit that usually ranges from $500 to several
thousand dollars.) Specify in the contract that the money
must be deposited in an interest-bearing account and that
the interest on this amount belongs to you.
How to Price Your Offer
Your goal in bidding on a house is to make the lowest pos-
sible offer that will be accepted. That offer could be higher,
lower, or equal to the seller’s asking price. When deciding
how much to bid, consider two factors:
• CMA: If the asking price is much higher than the sales
prices for comparable homes, you should probably bid
below the asking price.
• Market conditions: If it’s a seller’s market, you’ll
likely have to bid higher than the CMA price—maybe
considerably higher. If it’s a buyer’s market, you may
safely be able to bid below the asking price.
Buying a Home
How to Negotiate on a Home
It’s rare for a seller to accept a first offer from a buyer. More
often, the seller either rejects your offer in favor of another
or responds to you with a counteroffer. A counteroffer is
usually a one-page sheet that specifies the precise parts
of your purchase contract that the seller doesn’t accept.
Sometimes sellers write directly on the purchase contract,
crossing things out and writing in new terms. There’s no rea-
son for you to accept the terms of the counteroffer without
making your own revisions. In fact, the counteroffer should
signal the start of the actual negotiation process.
Home-Buying Negotiation Tactics
You have two somewhat conflicting goals in home-buying
negotiations:
1. To get the best deal you can
2. To get the house
To achieve both, you’ll probably have to make at least a
few concessions to the seller. Before negotiations begin,
think about your priorities: where you’re willing to give and
where you aren’t.
General Negotiating Tactics
• Give to get: By holding a hard line early, you can make
it seem as if you care about certain terms that don’t
really mean that much to you. Then you can let the
seller have his or her way on those terms in exchange
for other concessions.
• Focus on issues you can solve: If in each round of
negotiation you focus on what you can solve rather
than what you can’t, you can build up momentum and
goodwill and make big issues seem smaller.
Negotiating Tactics for Specific Situations
Some tactics work best in certain circumstances.
In Buyer’s Markets
• Start low: By starting low, you can move the seller
down significantly. The risk is that the seller might
reject your first offer.
• Move bit by bit: By moving slowly, you may be able
to wear the seller down closer to your target price. The
risk is that the seller will get impatient and walk away
from the negotiations.
In Seller’s Markets or When There Are Multiple Bidders
• Avoid bidding wars: Don’t enter a bidding war unless
you can absolutely afford it. Know your upper limit and
stick to it.
• Come in hard: By making your best offer first, you may
be able to win before a bidding war can start.
• Make things easy: Though the seller wants a good
price, he or she also wants the sale to go smoothly and
easily. You can make things easy by:
• Increasing your down payment bid, which shows
that you’ll likely get mortgage approval
• Being preapproved for a mortgage
• Offering to pay for repairs, as long as the house
passes inspection
Late-Stage Negotiations
If negotiations hit a snag just as an agreement seemed
within reach:
• Go halfway: If there’s a number or date that you and
the seller can’t agree on, offer to go exactly halfway.
• Be bold: If the negotiations have started to inch along,
you might be able to restore momentum by giving
ground on one point and asking the seller to give on
another. But if you’re too bold you may give up more
than you need to.
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Escrow and Closing
When you and the seller have signed an agreement on the
terms of the sale, you’ve got a ratified contract. Now you
enter the final stage of the home-buying process, which is
called escrow.
Escrow
Escrow means putting something in the hands of a neutral
third party. Depending on where the transaction is taking
place, the escrow officer can be a lawyer or a title company.
Once you have a ratified contract, you should summon an
escrow officer—your real estate agent will have a relation-
ship with one—and put all the relevant documents and
funds into escrow.
The Escrow Officer
In return for a fee of about $1,000, the escrow officer “refer-
ees” the deal. The escrow officer makes sure that:
• All paperwork is signed and made part of public record
• Both buyer and seller meet all contractual obligations
• All monies change hands
• A title search is performed ( see below)
The Preliminary Title Report
After escrow has been opened, you’ll receive a document
called the preliminary title report, or “prelim,” from the title
company. The report will show:
• The name of the property owner
• Taxes or liens against the property
• Third-party restrictions, such as public or private
easements (for example, a grant to an electricity
company to plant a pole on your property)
It’s at this stage that the title contingency in your contract
comes into play. Look over the report very carefully. If there
are surprises on it—such as a lien you didn’t know about—
you have the right to insist either that the seller settle the
claims or that the purchase price be reduced.
Inspection
To get a mortgage, you typically have to get the home
inspected. The inspection is intended to protect the lender
as much as it is to protect you. If your lender does not
require an inspection, you should still have a professional
go through the house thoroughly to avoid unacceptable
defects or uninsurable conditions.
• Interior and exterior components inspection:
Covers every important part of the house: foundation,
insulation, kitchen and bathroom, plumbing, heating,
cooling, electric, walls, roof, and gutters. The
inspection should last at least three hours and cost
about $250–500.
• Pest control inspection: Checks for signs of pest or
fungal infestation; usually costs about $75–150.
If you’re planning to renovate your new house, you should
have a general contractor or architect do an inspection and
get an estimate on renovation costs.
How to Choose an Inspector
Hire an independent inspector with no ties to your real
estate agent. Don’t choose an inspector based on price
because paying for a quality inspector can save you plenty
of money in the long run. A good inspector should:
• Belong to the American Society of Home Inspectors
• Have errors-and-omissions insurance that will pay you
if the inspector makes a mistake
• Provide you with an extensive written report
• Let you come along on the inspection
• Provide references and have satisfied clients
The Inspection Checklist
The written report your inspector provides should cover
these interior and exterior areas of your property:
• Ceilings • Pests
• Chimney • Plumbing
• Cooling systems • Pool
• Decks, porches, • Roof
balconies • Siding
• Doors • Stairs
• Drainage systems • Walkways
• Fireplaces • Walls
• Floors • Windows
• Foundation • Wiring
• Gutters • Yard
• Heating systems
If the Inspection Uncovers Problems
If the inspector finds problems, the inspection contingency
in the contract allows you to renegotiate. Ask the seller to
pay for the needed work or lower the purchase price.
Appraisal
Lenders typically require prospective home buyers to hire an
appraiser to assess the fair market value of the property—
what the property is actually worth. Though lenders often
offer to conduct and even pay for this service, it’s a good idea
to hire an independent appraiser yourself. A comprehensive
and accurate appraisal should consider all of these aspects
of the property:
• Appearance
• Condition
• Build quality
• Location
• Unique features
• Upgrades
• Value of comparable properties
Homeowner’s Insurance
As a prerequisite to getting a mortgage, most lenders
require you to get homeowner’s insurance that protects
your home (and the lender’s investment) against:
• Damage (from fire, flood, and so on): Get a policy
with guaranteed replacement costs, which ensures
complete coverage of reconstruction.
• Loss of personal property: Most policies cover
about 70% of losses. More expensive policies cover
replacement costs as well.
• Liability (for personal injury on your property): Get
liability coverage that covers at least two times the
value of your home.
The size of your monthly insurance payments, or premiums,
depends on the comprehensiveness of the coverage and
the characteristics of the particular region where the house
is located. If you’re buying a home in an area prone to
disasters such as floods or earthquakes, you need to add
additional (and costly) riders to your insurance. Don’t skimp
on these riders—they’re essential.
Mortgage Application
Even if you’re prequalified or preapproved for a loan, you still
have to apply to get the mortgage when the time comes. To
speed up the loan application process, have these applica-
tion documents ready:
• Final contract signed by both buyer and seller
• Social Security number(s) of applicant(s)
• Addresses for the past two years (plus landlords’
names and addresses if you were a renter)
• Income earned from all employers for the past two
years (include employer names and addresses as well)
• W-2 tax forms from previous two years
Buying a Home
• Pay stub showing most recent year-to-date earnings
• Balance and monthly payments of all loans and charge
accounts for the last three months
• Balance for the last three months (along with names,
addresses, and account numbers) associated with all
savings, checking, investment, and other accounts
• Documents, such as cancelled checks, that show
income related to child support and alimony, if relevant
Title and Owner’s Insurance
Title is legal ownership of a particular piece of real estate.
When you buy a property from a seller, the title for that
property passes to you (or your lender). On rare occasions,
a real estate sale may transpire in which title doesn’t trans-
fer from seller to buyer due to error or fraud. Though such
an oversight isn’t usually the buyer’s fault, it’s the buyer who
pays if things go wrong.
Title Insurance
For a hefty one-time fee of 0.5% –1% of the mortgage value,
the title company (which often acts as the escrow officer
as well) researches the title of the property and guarantees
that it’s valid. If it turns out that the title company’s research
was wrong—that the title was not valid and someone has
made a claim against the land—the title company will cover
your costs.
Owner’s Insurance
The title insurance you buy definitely protects your lender,
but it won’t necessarily protect you after you’ve paid off the
mortgage. When you buy title insurance, make sure you’re
buying a policy that protects both the lender and you, the
homeowner. In some states, the two policies come bundled
together. In other states, you may have to pay an additional
fee of $30 or so.
Taking Title
For a single homeowner, taking title means transferring
the title from the seller to the buyer. When this happens,
the buyer becomes the sole owner of the property. If you’re
buying property jointly with another person, you’ll have to
choose the form you want your co-ownership to take—
that is, how you’d like to take title.
The most popular way of taking title when two people
buy a home is called joint tenancy. In a joint tenancy,
the owners hold the title to the property equally, so one
owner can’t sell or change the property without the other’s
approval. Most couples opt for joint tenancy, in part because
it provides tax breaks should one member of the couple die
and the other inherit full ownership of the home.
Walkthrough
Just before the day of closing escrow (the day you officially
take ownership of your new home), you’ll have a chance
to take a final walkthrough of the home. The walkthrough
gives you one last chance to inspect the property to make
sure no additional damage has occurred since you last saw
it. The verification of condition contingency allows you to
renegotiate should you discover any significant last-minute
problems.
Closing Escrow (The Closing)
The closing is the final meeting between the buyer, the
seller, their respective agents and lawyers, and an escrow
officer who takes checks and literally closes the deal (in
some states, you may have had to hand over the funds
before the closing). As the buyer, you receive the following
at the closing:
• Deed of trust on the property
• Mortgage note
• Final sales contract
• Closing statement (recording all the money involved in
the transaction)
• Keys