What should I ask my mortgage lender?

As a borrower, you have the right to ask questions of any lender with whom you might do business. Before handing over your financials, ask the loan officer, mortgage broker, or online lender the following six questions:

1. Does the application fee include the credit report, or do I pay for that separately?

2. Approximately how much should I factor in for closing fees? (Your lender is required by law to give you a good-faith estimate when you apply for your loan, but your loan officer should also be able to provide an estimate of closing costs before you apply.)

3. How long have you been in the mortgage business? (Look for a lender with experience, who can walk you through the application process and help you work through any obstacles that might crop up.)

4. Can I get a preapproval letter to take with me on my house hunt?

5. Will I be able to lock in the interest rate at any time? (Interest rates change daily, and many lenders will give you the option of locking in a rate at any time.)

6. Will this loan have prepayment penalties? (Make sure that you can prepay your loan without incurring a penalty. There may come a time in the future when you will want to make additional payments to save money on interest.)

What are lenders looking for?

Let’s just say that if there are any financial skeletons in your closet, they’ll come out during the homebuying process. When reviewing your application, lenders typically look at the ‘‘four Cs’’ of credit—capacity, credit history, capital, and collateral—so come prepared to discuss and/or show proof of everything from past bankruptcies to alimony payments to credit blemishes, and everything in between. The individual lender has its own requirements, but the process generally starts at the credit rating and works backward from there. The better your credit, the less ‘‘other’’ documentation you’ll have to show.
At a minimum, you’ll need to produce the same information you did for the preapproval, then sit back and wait while the lender sifts through it. Be prepared to come up with additional documentation, such as proof of additional income, statements that show certain accounts were ‘‘paid off’’ even though it doesn’t reflect that on your credit report, and tax returns for the last two years if you’re self-employed.

What is a loan application?

The loan application is a detailed form that lenders use to evaluate whether or not they can give you a loan, and if so, the amount of money they can lend you. Lender applications vary by company, but on the application you may be asked to provide all or some of the following:
❑ Bank account balances and account numbers, as well as bank branch address
❑ Information about where you work or what sources of income you have
❑ Outstanding debts (including loans and credit cards with names and addresses of creditors)
Once this information is provided, the lender will pore over your financial situation, based on that information, and suggest programs that most closely meet your needs. If your financial situation doesn’t measure up, the lender may also suggest steps you can take (cleaning up your credit, paying down some of your monthly debt, for example) to get it into mortgageworthy shape. If this happens, bear in mind that not all lenders are alike, and that some may be more willing to extend flexible programs to first-time home buyers while others may be more stringent with their criteria. If you run into issues working directly with a bank, for example, find a good mortgage broker (unlike banks, these folks have a knack for matching lenders with borrowers who need help getting their finances in order) and have that person work on the preapproval for you.
It’s not a final loan commitment, but a preapproval letter does show that you’ve taken steps to get the ball rolling on the financing before spending time on your house hunt. It shows your financial strength and proves that you’re not just out there ‘‘kicking tires’’ but that you have the wherewithal to follow through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained. It also helps you, as the home buyer, to know exactly where you stand when it comes to how much you can pay for a home when you enter into a purchasing agreement.

What is a preapproval letter?

A preapproval letter tells home sellers that you have the ability to qualify for a certain mortgage amount, as judged by your lender. The process helps the lender determine the size of mortgage that you qualify for and helps you decide the price ranges to spend your time looking at. Unlike a prequalification, the preapproval process is very thorough, with the lender doing most of the review work required for a full approval, with the exception of the appraisal and title search (which can’t be completed until you’ve identified a home to buy).
Preapproval helps you to:
❑ Know how much you can borrow.
❑ Confirm your ability to qualify for a mortgage based on your credit, financial, and employment information.
❑ Strengthen your position to make an offer on a house. (A seller will
be more willing to accept an offer if the buyer is preapproved.) To become preapproved, you’ll need to work with a mortgage lender who will review your credit history, earnings information, employment history and assets. You can get this done in person, or via telephone and/or fax and the Internet. Here are the basic items that the lender will want to see:
❑ A loan application
❑ Verification of your employment (pay stubs, W-2s, and/or tax returns if you are self-employed)
❑ Information concerning any other sources of income (such as alimony)
❑ Source of cash for your down payment and closing costs
❑ Authorization to have your credit checked

What is a prequalification letter?

A lender’s prequalification process will give you a ballpark estimate of how large a mortgage you can afford. It doesn’t matter which lender you obtain this from since nearly all of them use the same criteria when determining what size monthly mortgage payments, property tax bill, and homeowners insurance you can handle. This will give you a good idea of the maximum mortgage amount you can afford and will help you focus your house search on properties within your price range.
Lenders, real estate agents, online financial Web sites, and other resources all use pretty much the same formula to figure out what priced home you can afford. You’ll want to figure this out before you start house hunting, since your budget can have a significant impact on your new home’s size, style, and age. The more amenities and square footage a home has and the newer it is, the more expensive it will be. By obtaining a mortgage prequalification letter prior to embarking on your house hunt, you’ll have a much better idea of exactly what you can afford.

Should I get a fixed-rate or an adjustable-rate mortgage?

Here’s the difference between the two:

❑ Fixed-Rate Mortgage: Just what it sounds like, this option features
an interest rate that is fixed at a certain percentage throughout the life of the loan. Typically, the longer the term of the loan, the lower the monthly payments will be. With a shorter term, you will have higher monthly payments; however, you will realize a savings in the amount of interest you will pay over the life of the loan. Fixed-rate mortgages are recommended to borrowers who:

• Look for predictable payments, because the payment is the same each month over the entire life of the loan
• Are willing to pay a higher interest rate in return for protection against the possibility of rising interest rates
• Are interested in building equity in their property through monthly principal and interest payments

❑ Adjustable-Rate Mortgages (ARM): This type of mortgage provides
an interest rate and payment that periodically adjusts based on the current interest rate environment. With an ARM, you can tap the benefits of lower interest rates and payments in a falling interest rate environment, and the initial interest rate on this type of loan is typically lower than the interest rate on a fixed-rate mortgage.
ARMs are recommended for borrowers who:

• Seek extra borrowing power, based on a lower initial payment, than is typically available with a fixed-rate mortgage
• Want to take advantage of a lower monthly payment to save money
• Plan to refinance or sell their property in a few years

Your mortgage broker or lender can help you decide which option is best for your situation. Talk to one or more mortgage professionals, and check out the current mortgage interest rates (they’re usually published in your local newspaper, or you can check an online source like HSH Associates at www.hsh.com/today.html) to use as a comparison.

How do I determine how long the term of my mortgage should be?

You can basically break down mortgages into two sections: fifteen years or thirty years. Use an online mortgage loan calculator from a Web site like QuickenLoans.com (go to mortgage calculators, then to homebuyer tools and monthly payment estimator) to figure out which will work best with your budget, based on the home price range that you’re looking at.
Here are two comparisons:
Total loan price (home price plus closing costs, less down payment):
$150,000
Length of loan: 30 years
Interest rate: 6.5 percent
Monthly payment: $949
Total loan price (home price less down payment): $150,000 Length of loan: 15 years Interest rate: 6.0 percent (shorter-term loans generally have lower interest rates)
Monthly payment: $1,266
As you can see, the fifteen-year loan increases your monthly payment by $317, but the amount of interest saved over the life of the loan is a whopping $130,800, nearly the price of another home! Low interest rates have pushed some home owners to the fifteen-year option (a choice previously unattainable due to double-digit interest rates), although many still opt for the thirty-year loans to avoid higher monthly payments. It’s a decision you’ll have to weigh once you select a home and loan option.

What is a mortgage?

A mortgage is a long-term loan that you obtain from a bank, mortgage broker, online lender, thrift, or other source (sometimes even the property seller) to cover the purchase price (excluding your down payment) of your home. In exchange, the lender holds the home and land as collateral. You sign documents at the closing table that give the lender a ‘‘lien’’ against your property. If you fail to make payments as promised, the lender has the right to take the home through a process known as foreclosure. Large in size, mortgage loans are paid off over long periods, typically either fifteen or thirty years. Monthly payments chip away at the principal balance, but don’t expect to see that principal balance number go down much during your first few years as a home owner, particularly if you’re using a thirty-year mortgage. That’s because for the first few years you will be paying down your interest and not much of your principal balance. Where would we be without mortgages? For starters, there certainly wouldn’t be very many home owners. The typical individual or family isn’t able to cough up enough to cover the six-digit price tags of homes, which makes mortgages a basic necessity for home buyers. Today’s lenders offer a very wide variety of mortgage options or ‘‘products’’ (as they call them) to meet the needs of the nation’s wide and varied base of home buyers.

How much do homes cost?

Existing homes run the gamut from $40,000 (or less) condominiums to $1 million-plus single-family homes. New homes are more expensive, generally running anywhere from $125,000 and up, depending on location, size and amenities. We can narrow the ranges down to a more digestible number by looking at the National Association of REALTORS’ (NAR’s) latest statistics, which reported a national median existing home price (half of the homes sold for less, half sold for more) of $169,900 in 2003, an 8 percent increase over the 2002 median home price of $158,100. The national median new-home (newly constructed) sales price was $194,500 in 2003, up about 3.7 percent over 2002. NAR forecasted the median existing-home price to grow by 4.6 percent in 2004, while new homes were expected to increase by 5.1 percent.
Using NAR’s statistics as a guide, it’s clear that home buyers have been paying more and more for the same homes over the last few years, but the group predicted that the high level of appreciation would level off in 2004. The 8 percent increase across the board in 2003 was the strongest showing since 1980, but NAR expected the percentage to decrease to 4.6 percent for existing homes and 5.1 percent for new homes in 2004, which is good news for you.
Besides consulting with your local paper or online multiple listing service, you can compare home prices across the nation via indexes created by companies like Coldwell Banker, which publishes an annual Home Price Comparison Index (HPCI). You can access more detailed information at the firm’s Web site at www.coldwellbanker.com/homepage.html—click on Home Price Comparison Index.
The cumulative national average sales price of all markets surveyed in the Coldwell Banker_ HPCI was $318,172, a 9 percent increase over 2002. The study’s most expensive market was La Jolla, California ($1,362,375), and the most affordable market was Binghamton, New York ($121,400), indicating a price difference of $1,240,975 for a similar 2,200-square-foot home. Six of the country’s ten most expensive markets were in California, two were in Connecticut, and one each was in Hawaii and Massachusetts. Geography aside, how much you pay for a home depends on the following factors:

• The specific community or neighborhood you’ve selected
• Size of the home
• Age (in years) of the home
• Amenities the home offers
• How eager the home owner is to move out (sometimes urgency can create a ‘‘fast sale’’ environment, which is good for you as the buyer)
• The price of ‘‘comparable’’ homes that have sold in the community/ area recently
• Any other positive (or negative) features of the home or surrounding area (such as sinkholes, proximity to a large highway, or other factors)

What if I can’t find the home of my dreams?

If this is your first home, don’t expect your efforts to produce the home you’ve dreamed of all your life. Even your second or third home may not meet those expectations, but that’s really just part of the process. Once acclimated to how it works, the homebuying routine does get easier, since many of the fundamentals haven’t changed in the last few decades. The first time out, for example, you may not realize just how important a good credit rating is to your getting the right loan at the right interest rate, but after owning a home for several years and making timely payments, that score will improve and the next time out you’ll be that much closer to reaching your goals.
Unless money is no object and your choice of locations is completely flexible, the odds that you’ll find the perfect home at the right price and in the right place are pretty slim. Add in that the home search can be a timeintensive process, and the idea of perfection slips a little further away. A big part of buying such a large investment—particularly one that’s already standing and that’s been lived in by someone else—is the need for concessions that result in a good purchase decision, and that don’t necessarily address your every single want and need.
According to NAR, most buyers face budget limitations when shopping for a home. Oftentimes buyers must spend more money or be forced to compromise on their vision of a ‘‘dream home.’’ In 2003, 65 percent of buyers reported compromising on at least one characteristic of their home purchase. Buyers were most likely to compromise on the size of the home they purchased (21 percent) or the lot size (18 percent). Buyers were less inclined to compromise on neighborhood quality (12 percent) and their budget for a home purchase (14 percent).
You might, for example, give up that spare bedroom in exchange for a larger backyard for your family to play in. Or, you could cross that inground pool off of your wish list and instead purchase a town home that offers a community pool for all owners (a great way to meet and mingle with new neighbors!). Instead of that lake-view condo, opt for a unit with a garden view and save a few hundred dollars a month on your mortgage payment. Avoid ‘‘keeping up with the Joneses’’ and instead balance your and/or your family’s unique wants and needs.
As you make compromises, be sure to address all of the ‘‘hot buttons’’ that you listed earlier in this chapter. Keep the list handy and maintain a record of what you’re giving up in exchange for what to determine if the concession is worth it. Who knows, you may ultimately find your own dream home in the most unlikely of places.

How much home can I afford?

Just how much home you can afford relies on two factors: how much money you can borrow, and how much down payment you have available to put down on the home. Thanks to the Internet, you no longer have to sit down with a lender to get an idea of what you can afford, as there are several online resources where buyers can key in a few numbers and get an estimate of how much home they can afford.
Ginnie Mae (a corporation within HUD) has a homeownership mortgage calculator on its Web site at www.ginniemae.gov/index.asp. You key in your gross income and liabilities and the site will spit out a rough estimate of what you can afford. If you want a more detailed estimate, click on ‘‘detailed estimate’’ and key in more parameters to obtain a more precise calculation for your specific region. Bankrate Inc., an Internet consumer finance marketplace that owns and operates a portfolio of Internet-based personal finance channels, also has a good ‘‘How much house can you afford?’’ calculator online at www.bankrate.com/brm/calc/newhouse/cal culator.as.

Using the following parameters, the calculator will produce two estimates for you: affordable mortgage payment and affordable home amount.
❑ Gross Monthly Income: Wages, investments/dividends, alimony received, other income
❑ New Home Info: Down payment, loan term (use thirty years if you aren’t sure), interest rate (use 6.5 percent if you aren’t sure), homeowners insurance (estimate $800 to $2,000, depending on size of the home, location, and your own insurance record), and real estate taxes (check your local tax collector or property appraiser’s Web site for last year’s taxes assessed on a property that you might be interested in)
❑ Monthly Expenses: Car payment, alimony paid, credit card payment, other debts

A word of caution: While this process will give you an idea of what size home you can afford (provided you’re forthcoming with the numbers), don’t confuse it with a ‘‘preapproval’’. A prequalification estimate basically states that you’re qualified for a loan based on a few preliminary questions, but it doesn’t commit a mortgage lender to approve the mortgage. The mortgage lender will still have to conduct a complete review of your financial situation, including your credit report, income, and employment history. The preapproval process is very thorough, with the lender doing much of the work needed for a full-fledged approval, but without your having to identify an exact property for purchase. A lender’s prequalification process will give you a ballpark estimate of how large a mortgage you can afford. It doesn’t matter which lender you obtain this from, since nearly all of them use the same criteria when determining what size monthly mortgage payments, property tax bill, and homeowners insurance you can handle. This will give you a good idea of the maximum mortgage amount you can afford and will help you focus your house search on properties within your price range.

How do I determine whether a neighborhood is right for me?

One great way to experience a neighborhood before buying is by driving through it at different times of the day. If you’re looking for evidence of other young families, for instance, drive around either after school or on weekends, when children are most likely to be out playing. If you’re concerned about noise from a nearby intersection or other neighbors, cruise through late at night, watching and listening for any signs of disturbance that might end up being a nuisance.
You can use a similar drill for condos, town homes, co-ops, and other types of detached housing, with one advantage: Because the units are usually close together—and sometimes joined by a common area—you can more easily talk to a few current owners. When doing so, don’t be afraid to ask how satisfied they are with their own home choice. Tell them that you’re thinking about buying a home in the development and ask them some or all of the following questions to get a feel for the development. If any of the answers or comments send up red flags, dig a little deeper (perhaps with another owner) to find out if the complaints are valid and worth noting:

❑ How do you like living here?
❑ Have you run into any major problems or issues in the development or surrounding community?
❑ Do the residents tend to be loud, quiet, or in between?
❑ Are there children living in the development?
❑ Does the area have any major issues with crime?
❑ Is the condo management firm or homeowners association receptive to its residents who have problems or issues?
❑ Would you recommend this development to one of your friends or family?

When shopping for a home you’ll also want to look at the positioning of the home. If you have small children, for example, then a cul-de-sac would be a perfect choice, even if the homes on that particular part of the street don’t fit your perfect home profile. Think about it: Would you rather have a fireplace or peace of mind knowing that your child is riding a bike on a street where few cars drive through? Also, if you have a large extended family that owns more than two cars, you might want to avoid a corner lot with a small driveway, since parking those cars on the grass is probably not an option.
Last but not least, talk to someone or do a bit of research on the neighborhood and surrounding community. Find out if it’s a part of the city or an unincorporated area of the county (the latter usually means lower property taxes and fewer regulations, but also fewer city services). Ask about future infrastructure projects (you don’t want to find out a month after closing that a fifty-foot-high cell phone tower is being constructed ten feet from your property line), and any such projects that your condo or homeowners association might be ready to hand out hefty assessments for, like a $5,000 per-unit assessment for new roofs. All of these issues should be factored into your choice of location and used to help make the best decision.
When choosing a location, also remember that not everyone can afford the perfect home in the perfect neighborhood, but that compromising on both ends just might find you living in a nice home in a good neighborhood. In the long run, most buyers find it better to live in a less-than-ideal home in the right location, rather than the other way around.

How important is location in the homebuying process?

There’s a saying in the real estate profession: location, location, location. As a new home buyer, you’ll want to integrate those words into your search process because location will play an integral role in your selection. Going beyond the home itself, factors like area schools, neighborhoods, quality of life, surrounding businesses and developments, and roadways will also play an important part in your ultimate decision. Don’t make the mistake of falling in love with a home that’s built twenty feet away from a proposed power line, or a beautifully kept home in a neighborhood where the rest of the properties are run-down. Do your research, check out the specifics on location before making any buying decisions, and you won’t be sorry.
Where your new home is located is probably more important than the home itself, since structures can be changed but the location—and its surroundings— cannot. Start from the top down during your selection process, looking first at the city or town, then at the communities, the neighbor hoods and subdivisions, and ultimately the specific locations of the homes within those neighborhoods or subdivisions. Where your home is located can be just as important as its appearance and size. If you ignore location issues like proximity to a particular school district, a job, or a bus line, even the nicest home will lose its luster when you become dissatisfied with the surrounding neighborhood.
Once you’ve determined which city, town, or suburb you’d like to live in, you’ll want to identify one or more neighborhoods that suit your tastes. Look at factors like crime rates, school quality, commuting time to and from work, and amenities offered by the neighborhood. Do you have a family with young children? Then you’ll also want to make sure there are other children in the neighborhood. Just as you created your home ‘‘hot button’’ list, you can list all of the criteria that are important to you and focus only on neighborhoods that meet those criteria.

What should I consider when looking at starter homes?

If you’re in the market for a starter home, ask yourself the following questions during your review process:

• Am I generally pleased with the condition of the home?
• If I had to move into the home as-is, would it be livable?
• If not, can I make some repairs and upgrades (such as painting, removing or replacing wallpaper and carpeting) myself?
• Do I need to hire someone to help bring the house up to speed, and if so, can I afford the extra expense?
• Is the neighborhood safe?
• Is my family going to fit in with the neighborhood?
• Does the area offer the quality of schools that I’m looking for?
• Could I live in this home comfortably for three to five years, or will I grow out of it sooner?
• If a starter home isn’t the right fit, can I afford the down payments, mortgage payments, repairs, maintenance, and taxes on a larger, more suitable dwelling?

Starter homes can be a perfect ‘‘starting’’ point for first-time home owners who are willing to put some elbow grease into repairs and customizations that will make the home ready to live in, or who don’t mind sacrificing some square footage (or that two-car garage) in order to live within their means and ultimately save for a larger home sometime down the road.

What is a starter home?

A starter home is a small, inexpensive home suitable for first-time home buyers. The home may be in move-in condition, or it may need some tender loving care to make it livable. Either way, these are generally single-family homes that are considered good starting points for families or individuals purchasing their first home. Find out what price points the starter homes in your region are demanding by looking through your local Sunday paper (look for adds that say things like ‘‘needs TLC’’ and ‘‘good starter home’’), searching the Internet, or consulting with a local real estate professional. The concept of the starter home is simple: You buy a small, inexpensive home (typically when you’re single or recently married) with the intent of selling it within a few years. By that time, your income will have grown (allowing you to purchase a larger home), or you’ll need more space for a growing family. The idea works well for some, who improve the home and within a few years end up making money on the sale and ‘‘moving up,’’ and not so well for others, who outgrow the starter home too soon and end up losing money if the property hasn’t appreciated.
According to 2003 NAR Profile of Home Buyers and Sellers, first-time buyers were less likely to buy a detached single-family home than were repeat buyers. Instead, they more frequently purchased lower-cost, ‘‘starter homes’’ such as townhouses, row houses, or condos. A greater proportion of new-home buyers (82 percent) than buyers of previously owned homes (78 percent) bought detached single-family homes. Starter homes run the gamut from well-kept, cozy dwellings to fixeruppers and everything in between. From modern to antiquated, some homes may need a lot of work and effort to make them livable, while others may be small, yet livable. Don’t expect a lot of bells and whistles with these homes, which are often a good match for someone who is either handy with repairs and upgrades or willing to shell out a few bucks to have someone else do the work.
Starter homes are generally priced anywhere from $40,000 to $120,000 and up, depending on where you’re located in the country. It might be hard to find a starter home under $120,000 in a city like Miami, for example, but easy to find a $65,900 three-bedroom, two-bath home in Fargo, North Dakota. Prices on most of these homes have spiked in recent years, thanks to a new demand spurred on by the low mortgage interest rates of the 2000s, but there is still a category of homes that are thought of as perfect choices for first-time home buyers.

Understanding House Equity

How long you plan to stay matters because real estate investments aren’t liquid, and because they could be either easy or difficult to sell (depending on market conditions and other variables). It’s best to choose a home in a location where you’re going to stay a while. If something comes up (a family change, a job relocation, etc.), you can always put your home up for sale, but it’s best not to count on a quick sale before you even get into your new house.
The longer you own a home, the more equity you establish in your property. Studies show that most people stay in their homes for five to seven years. For the first few years, however, nearly 100 percent of your mortgage payment will go toward interest. Mortgages are ‘‘front-loaded’’ on the interest side, which means lenders use your payments primarily to pay down interest before applying it to the principal amount. This is good if you’re itemizing tax deductions, but bad if you’re counting on a quick accumulation of equity during those early years. Also remember that unexpected personal or family crises (medical emergency or a death in the family) or change in lifestyle (a new job in a new city) could force you to sell your home long before you had anticipated.

How long should I plan to live in my new home to make the investment worthwhile?

The market will dictate the purchase price and length of time to sell, and if you haven’t been in the home very long, you could end up losing money on the deal in your urgency to sell. It’s something to think about before you start your house hunt, since the mobility that renting provides can be an advantage when it comes to dealing with such issues. The length of time you expect to own your home also affects your down-payment and closing strategies, as well as the type of mortgage you choose. For example, a fifteen-year mortgage will require larger monthly payments than a thirty-year loan, but you’ll see your principal loan amount reduced sooner if you take the shorter-term loan. If you plan to stay in the house five years or less, you may want to consider an adjustable-rate mortgage (ARM)—which offers lower interest rates and helps the owner start paying off the loan principal balance sooner—but if you plan to live in your home for the next ten to twenty years, you may want to lock into a fixedrate mortgage.
There are also prepayment penalties to watch out for (charged by the lender if the loan is paid off before maturity), and if you sell your home before the loan matures, you must also pay the remaining balance of the loan.

How do I start my Internet home search?

A good starting place for your Internet search is a national Web site like Realtor.com, which essentially ‘‘aggregates’’ listing information from agents across the country and makes a limited amount of that information available to potential buyers. Once you’ve narrowed down a few homes, you can contact directly the agents who have listed the home, or you can put your own agent on the case by handing over the MLS numbers or listing information on the specific properties.
If you’re looking for an FSBO, try a Web site like BuyOwner.com, For SaleByOwner.com or Foxtons.com, where you can key in geographic preferences and home qualities to see what type of properties are being offered directly by owners in your region.
Realizing that home buyers are more sophisticated and accustomed to having information at their fingertips, most agents and sellers these days create Web sites that include basic information about the home (general location, asking price, square footage, number of bedrooms/baths, etc.), one or more still photos, and a virtual tour that will give you a 360-degree view of one or more rooms. Combined, these various tidbits of information can help you decide whether the home is worth seeing in person.

Can I find my home on the Internet?

The Internet has become a terrific starting point for folks like you who are looking for a home. In fact, in its 2003 Profile of Home Buyers and Sellers, the NAR found that 65 percent of home buyers used the Internet to start their home search, up from 2 percent in 1995. With the advent of virtual tours (where you can view an entire home, room by room, online), digital photography (still photos of the home), and search tools like the online MLS services that many brokerages offer on their Web sites, the Internet has become a consumer-friendly tool useful for culling out undesirable homes and pinpointing those that would make good candidates. The truth is, while technology has put information and resources into the hands of more consumers, it hasn’t really made the homebuying process itself that much easier. So while you might be able to narrow your choices down to six homes by previewing them on the Internet (instead of driving around the neighborhood on a Sunday with your real estate agent), you will still need to touch, smell, and feel a home before making the ultimate buying decision. Whether that means you’ll have an agent, an attorney, or just your spouse by your side when you go into a house is your choice.

How do I choose a buyer’s agent?

Choose a buyer’s agent with the ABR or EBA (Exclusive Buyer Agent) designation after his or her name; ‘‘EBA’’ means the agent doesn’t ever represent sellers. The ABR designation is awarded to real estate practitioners by the Real Estate Buyer’s Agent Council (REBAC) of the National Association of REALTORS who meet the specified educational and practical experience criteria. The National Association of Exclusive Buyer’s Agents (www.exclusivebuyersagents.com) has a ‘‘find an agent’’ section. The group says its agents provide full fiduciary services to their clients and advocate the right of consumers to be fully represented when purchasing real estate.
The National Association of Exclusive Buyer’s Agents suggests that all future home owners ask their agents the following questions before making their selection:
❑ How long have you been representing buyers as a buyer’s agent?
❑ Do you, or the company you are with, take listings? Do you practice dual agency?
❑ What percentage of your personal business and what percentage of
your company’s business is representing buyers? Is the balance of that representing sellers?
❑ Will you try to sell me one of your listed properties before you show me listings from other real estate companies?
❑ Do you have information about FSBO properties?
❑ How many buyers have you successfully represented in the last six months? Can I have the names and phone numbers of three to six of your most recent buyer clients?
❑ What training have you taken that specifically relates to being a buyer’s
agent and representing buyers? Do you have any specific buyer’s agent professional designations?
❑ Do you know the six fiduciary, client-level duties you would owe to me if I chose to hire you as my buyer’s agent? (These duties are confidentiality, accountability, reasonable skill and care, undivided loyalty, obedience to lawful instructions, and full disclosure.)
❑ What is your commission? Or do you have hourly rates or a set fee?
❑ Will there be a written contract?
❑ Do you have a list of home inspectors, insurance agents, and reputable lenders for me to consider?
❑ What clauses will you incorporate in our offer to protect me as a buyer?
❑ How will you help me save money?
❑ Specifically, how will you protect my interests, and why should I hire you rather than another agent?

How are Realtors paid?

Today’s Realtors operate in a number of different ways, although most ‘‘traditional’’ agents (from companies like Coldwell Banker, Century 21, RE/MAX and ERA) work on a certain percentage (usually 6 percent or 7 percent) of the home’s sales price, paid by the seller at closing. Buyer’s agents work in the same manner (the buy-side and sell-side agents split the commission 50/50) and operate as fiduciaries or ‘‘trusted advisers’’ in the transaction.
The good news for you, the buyer, is that most Realtors turn to the seller for payment at the closing table. The transaction coordinator (see Question 56) usually does too, unless it’s the buyer who enlisted her services and therefore is the person responsible for payment

What is the difference between a buyer’s agent and a seller’s agent?

Traditionally, Realtors only represented sellers in the transaction, but in the last few years a significant number of agents have become what are known as ‘‘buyer’s agents.’’ These individuals often have the initials ‘‘ABR’’ after their names (Accredited Buyer Representative) and specialize with helping buyers find the homes of their dreams.
Buyer’s agents are probably one of the best things to happen for home buyers in a long time. Many will ask you to sign a buyer’s agency agreement before they take off with your hot button list in hand to look for suitable properties. The agreement is not exclusive and typically states that the agent will work to find and secure the perfect home for you. The beauty in all of this is that the agent’s commission comes out of the seller’s pocket, so you don’t have to pay for the valuable services that they offer. If, however, you decide to purchase a ‘‘for sale by owner’’ (FSBO) property and wish to have representation on the sale, most buyer’s agents will negotiate a fee with either the seller (most commonly) or buyer. Because they don’t typically list properties for sale, most are eager to work with qualified buyers who are ready to buy now, rather than later.
Here are a few advantages of working with a buyer’s agent:

• Someone in Your Corner: A buyer’s agent works on your behalf, unlike seller’s agents, who are accountable by law to the seller. Buyer’s agents can not only help you pick out a home, but can also negotiate your best interest and spot potential hurdles before they become real problems.
• Benefit of Experience: An experienced agent will look objectively and carefully at a property, spot potential problems, and point out material defects as well as the positives of a property.
• Negotiating Prowess: A good buyer’s agent will help you draw up an offer based on recent sales in the neighborhood or community, thus allowing you to make better-educated decisions during the negotiating phase.

How can emotions affect the homebuying process?

While it’s true that you’re about to make one of the biggest financial decisions you’ll ever make in your life, it’s important not to allow emotions to get the better of you during this process. When you walk into that absolutely perfect home, for example, bottle your enthusiasm a bit and instead look at the structure as an investment instead of a place where you’ll spend the next ten or twenty years of your life.
When you see the sign go up on that home around the corner that you’ve always dreamed of living in, try to approach every home with a critical eye and examine every inch, without shame. The seller who knows that a home has you by the heartstrings could use that knowledge to ask more than a fair price and/or avoid making necessary repairs prior to closing. Once you’ve given the home a critical review, have a home inspector do the same (should you decide to make an offer and sign a purchase agreement on it). Doing so will save you both money and grief in the long run.

How do I determine my housing needs?

Start by not letting yourself get overwhelmed by the choices and by not getting too emotional about the process. Look at it as an investment, and treat it as if you were making an investment in your family’s future. With that in mind, use the information gathered during your market research or from a real estate agent to see what types of homes are available in your market, then whittle down the choices based on your own preferences. For example, do you need a single-family home with a large yard? Would you prefer a lower-maintenance condominium? Do you need an extra bedroom for a home office? Do you have a preference on the number of bathrooms? Having all of these details nailed down before you start house hunting will result in a much more focused, efficient search.
Tell me more
There are many variables that will come up during the homebuying process. Existing homes can be the biggest challenge, since they were built for someone else—someone who might not share your tastes. To avoid getting overwhelmed when you see the home that looks perfect on the outside but that has rooms painted purple with carpeting to match, ask yourself the following questions first:

1. How many bedrooms do I want?
2. How many bathrooms do I want?
3. What size kitchen would I prefer?
4. Do I want a new home or an existing home?
5. What type of home do I want? Single family? Town home? Condominium? Co-op?
6. How important are outdoor amenities like decks, lanais, pools, and patios? And, am I willing to add any of these if they don’t come with the existing home?
7. How important are indoor amenities like fireplaces, vaulted ceilings, and crown moldings?
8. Am I willing to do fix-up work (either myself, or by hiring someone) in the home such as painting walls, to make it right for me? (If not, then a home in ‘‘move-in condition’’ is your goal.)
9. How important is the home’s proximity to the following: other houses, the street or major intersections (for the noise and safety factor), my place of work, my children’s school, and our favorite activities (community pools, movie theaters, workout centers, etc.)?

Answering these nine straightforward questions should help you create a rough sketch of your desired home, and it should give you some indication of your ‘‘home hot buttons’’ (those issues of utmost importance to you, typically those that could ultimately make or break the deal). That’s not to say you can’t change your mind about wanting a pool if you find the right house with a large backyard with no pool, but it will give you some solid parameters to use when either viewing homes on your own or

How can I determine my local market conditions?

Timing counts when it comes to buying a home. The last thing you want to do is get stuck in the middle of a hot seller’s market, but the good side is that real estate—like all economic forces—is cyclical. A way to find out what your market is like on your own is by flipping through the Sunday real estate section of the newspaper for a few weeks, running your finger down the list of single-family homes and attached housing options (condos, town homes, etc.) available in your targeted area. You can also log on to a local real estate brokerage’s Web site to gain access to certain parts of the MLS (multiple listing service, where all of the properties for sale in an area are compiled) system via a system known as ‘‘broker reciprocity.’’ Use the service by first finding a local real estate site, then clicking on a link that will be labeled something like, ‘‘view all local MLS listings.’’ After putting in some parameters (house size, number of bathrooms, etc.), you’ll get a listing of homes available in the area. Individual real estate offices, agents, and companies like BuyOwner.com (www. buyowner.com) also list homes for sale, searchable by geographic region.

Understanding Buyer’s and Seller’s Market

A seller’s market exists because the quantity demanded by the buyers at a given market price exceeds the quantity supplied by the sellers at that price. In real estate, that means buyers are seeking out more of the goods than sellers are willing to sell, so sellers can pick and choose whom they sell to among prospective buyers. Buyers are lucky to find a desirable home at the right price in such a market.
A buyer’s market is just the opposite, and one you should be hoping for as you go out in search of a home. It exists because the quantity supplied by the sellers at a given market price exceeds the quantity demanded by the buyers at that price. In this situation, sellers are seeking to sell more of the goods than buyers are willing to buy, so buyers like you can pick and choose the goods purchased from the sellers, who are typically eager to unload their homes at a fair price.

What’s the market like for first-time home buyers?

The answer to that question depends on a few different factors, like your geographic location, whether your region is experiencing a ‘‘seller’s’’ or ‘‘buyer’s’’ market right now, and what the average home sales prices are. Working in your favor are low mortgage interest rates, flexible loan programs, and a variety of homes to select from as ‘‘move up’’ buyers (those moving from starter homes to larger dwellings) also take advantage of low interest rates to upgrade their own living situations. Also in your corner is the fact that the supply of housing—including single-family, multifamily, and manufactured housing—is expected to increase by nearly 2 million units (or 1.6 percent) in 2004 alone, according to a Merrill Lynch & Co. housing report. That means more available properties to purchase, and a better selection of housing options for first-time and experienced home buyers.
Working against the first-time buyer are property appreciation rates that range from zero to a staggering 25 percent nationwide, depending on where you’re located. In some areas, that kind of appreciation has bumped up the prices of starter homes to $75,000 to $150,000 (in some metro areas that number can be much higher) while stoking a great demand for such properties. In metro areas like Houston and Miami, and throughout much of the State of California, such properties are either hard to come by or hard to purchase, since they sell within a day or two of hitting the market.

Challenges of Buying a House

Any number of challenges can crop up as you move through these various stages of the homebuying process. The title company might uncover liens on the home that need to be cleared up, you and the owner may not come to terms on which repairs she will rectify prior to closing, or the home inspector may uncover an expensive structural defect like toxic mold. The key is to surround yourself with competent professionals (real estate agents, title companies, appraisal firms, lenders, and even attorneys—which are required in some states) and books like this to help you navigate the process.

Steps of Buying a House

As for the homebuying process itself, it generally goes something like this:
❑ Consult with a lender or real estate professional about how much home you can afford (obtain a ‘‘prequalification’’ estimate).
❑ Select a region and/or community where you’d like to live.
❑ Decide what type of home you’d like to purchase (single family? town home? condominium? co-op?).
❑ Either work on your own (using the newspaper, Internet, and ‘‘for sale’’ yard signs) or enlist the help of a buyer’s real estate agent to see what on the market fits your criteria.
❑ Find your home and make an offer.
❑ Negotiate the price and fine points, such as repairs that need to be made by the current owner.
❑ Determine a closing date and set the wheels in motion (start packing!).
❑ Finalize your financing while home inspectors, appraisers, and other required inspections or reports are completed.
❑ On closing day, take possession of your new home and start moving your stuff in!

How difficult are the financial aspects of purchasing a home?

The factors that mortgage lenders look at when doling out money are far different from the criteria landlords use to rent out a property. Let’s compare: When you rent an apartment, a decent credit rating and steady income source usually result in a lease signing and the forking over of first and last month’s rent. Within a few days, you’re in your new apartment. Home buying is not as simple. The process itself is time-consuming because there’s more at stake and because mortgages simply aren’t as easy to obtain as leases.
Still, the overall consensus is that the homebuying process is easier than it was, say, ten years ago. The fundamentals are the same: You need some cash reserve for a down payment and/or closing costs; you need the cleanest credit history you can provide (a variable that factors heavily into the interest rate that a lender will offer you); and you need a source of steady income that proves your ability to pay your monthly mortgage payment.
Everyone from mortgage lenders to real estate agents has created programs for first-time buyers like yourself, who need a bit more hand-holding during the purchase process. Still, the biggest challenge that most first-time home buyers face is the same as it was ten years ago: scraping up the money for the down payment. Most lenders offer an array of lending options. Wells Fargo of San Francisco, for example, is the nation’s top originator of residential mortgages and offers programs that include closing cost saver, down-payment assistance services, as well as 3 percent and 5 percent downpayment programs. Visit the lender online at www.wellsfargo.com/mort gage, to read more about the homebuying process, mortgage options, and getting preapproved for a mortgage. That’s the financing aspect of the purchase.

When You Should Buy a Home?

Overall, home ownership can give you a feeling of accomplishment in reaching a goal while also helping you establish deep roots in your community. Unlike renters, who tend to be more transient in nature and less conscientious about their physical surroundings (they don’t own them, after all), home owners have plunked down one of the biggest investments of their lives in their communities.
The Department of Housing and Urban Development (HUD) advises first-time home buyers to ask themselves these questions before making their decision. If you can answer ‘‘yes’’ to the following questions, HUD says you’re probably ready to buy your own home:

• Do I have a steady source of income (usually a job)?
• Have I been employed on a regular basis for the last two to three
• years?
• Is my current income reliable?
• Do I have a good record of paying my bills?
• Do I have few outstanding long-term debts, like car payments?
• Do I have money saved for a down payment?
• Do I have the ability to pay a mortgage every month, plus additional costs?

On the downside, home ownership does bring with it significant responsibilities that renters generally don’t have to deal with. Once you’ve walked away from the closing table with those keys in your hand, you can no longer dial up the landlord when a pipe breaks or when the furnace stops producing heat. You are your own ‘‘go to’’ person on the chain, which means outside chores like cutting grass and cleaning roof gutters are suddenly in your lap. Owning a home also means not being as mobile as you once were, since selling a home and giving thirty days’ notice to a landlord are two completely different things.
Here’s a rule of thumb for renters wondering if ownership is right for them: In general, the longer you are likely to remain in a residence, the more advantageous it is to own rather than rent. If your career, family status, and other variables are likely to be stable for the next three to five years, then your housing needs should be equally stable. That’s not to say that a mobile professional shouldn’t buy a home (in fact, many relocating professionals never rent and simply buy and sell as they make their way around the country to different positions), but it does give you something to think about before making your decision.
For some folks, renting is going to be the right choice. For others, the positives of owning their own ‘‘home sweet home’’ will far outweigh the negatives.

Why should I buy a home?

Home ownership is one of the key components of the American Dream and a universal symbol of financial stability. You may be shelling out more money per month for a great apartment, but it’s still not the same as owning a home, which is associated with stability, security, and even wealth. The National Association of Realtors_ (NAR) says first-time home buyers generally buy homes because they are (in order of importance):

1. Tired of paying rent to landlords
2. Ready to tap the tax advantages associated with home ownership
3. In need of more living space, be it indoor, outdoor, or both Of course, home ownership brings with it both positives and negatives that must be considered, particularly if this is your first time out.

Despite the challenges it presents, home ownership is undeniably one of the most sought-after dreams that Americans pursue on a daily basis.
If you’re not sure whether home ownership is the right choice for you, take out a piece of paper, draw a line vertically down the middle of it, and write the words ‘‘pros’’ and ‘‘cons’’ as headers on each column. Then, take your time comparing the good and the bad aspects of your current living situation against the pros and cons of home ownership. If things are too heavily weighted in either column, it could be time to buy a home. For starters, right now you’re probably putting money in your landlord’s pocket—and helping him pay down his own mortgage—without reaping any of the benefits of that money. You’re not building equity in a home, and you probably have little or no say in the permanent decor, landscaping, and repairs on your home, even though you live there. If the home were yours, you’d bemakingmodifications (some of which can add value to the property), enjoying your own wall paint colors, and tapping one of the best tax advantages that Uncle Sam affords Americans: deducting points paid on a home purchase, mortgage interest paid (which can be a pretty hefty sum, particularly during your first few years as an owner), and property taxes. And because properties nearly always appreciate in value, you would also be building a nest egg for yourself that can be tapped when needed (in the form of, say, a home equity line of credit) or saved for future use.
As NAR discovered in its survey, people also buy homes because their lifestyles change and families grow, which means the need for larger yards, more bathrooms, or extra bedrooms. Those who do go in search of homes often find a much better selection than their renting counterparts, since single-family homes, town homes, condominiums, and co-ops come in all shapes and sizes. Other reasons for purchasing a home include the ability to build or improve a credit history, an investment in your future, and more control of your surroundings.

Mistake _15. Not Checking Out the Homeowners Association First

In most states, homeowner associations (HOAs) have broad powers to enforce the rules and collect fees and assessments. If you don’t follow the rules or pay your monthly fees, they can put a lien on your property and ultimately foreclose.
Having a strong HOA is a double-edged sword. Strict rules can keep the project looking uniform and inviting, thus maintaining its value. The opposite edge is that you may not like the rules, and changing them is not always easy.
To change HOA rules usually entails getting like-minded people together and electing a new board. If you can get a majority of the homeowners to go along with your proposals, great. If not, you can try again next election.
So you don’t end up in a project with rules you don’t like, get a copy from the association secretary and read them over carefully. Also find out what other rules have been proposed but not yet voted on. This will give you a feel for what direction the homeowners in the project are headed.