Buying a Home: Frequently Asked Questions

How much should I spend on my next home?

The first step is to think about how much you can afford to pay out each month for a mortgage payment. Keep in mind that a mortgage payment typically includes property taxes and mortgage insurance as well as the mortgage payment itself. The general rule of thumb is that no more than 30 percent of your gross monthly income should be spent on housing expenses.

If you plan to borrow money from a lender then you might want to consider getting pre-qualified. Pre-qualification is helpful to the buyer for planning purposes because it gives you an estimate of the maximum mortgage amount you can afford based on your current financial situation. Unlike a pre-approval, pre-qualification is not a commitment on the part of the lender, but it does give you an idea of the mortgage amount you probably qualify for. Knowing this information in advance can help you figure out a price range for your new home.

When you're figuring out a price range, don't forget to take into account any amount you apply as part of a down payment. You will want to save as possible for a down payment. The reasons for this are two-fold: first, lenders will not require you to pay for private mortgage insurance if you can come up with a 20 percent down payment; second, the sooner you pay off your mortgage, the better off you are financially.

Once you've figured out a price range let your real estate agent know what it is, but don't be afraid to look at homes that are 15 percent to 20 percent over your price range. In many cases, you will be able to negotiate the price down.

How can I find a good real estate agent when buying a home?

As a home buyer you pay a commission to the agent, so you want to make sure you are getting your money's worth. What you need is an agent who is competent and experienced, and whose way of working is compatible with your own. If you're working with a real estate agent that you feel is not doing his or her best to find you the home you want, then don't hesitate to find a new one.

When looking for a real estate agent ask yourself the following:

Is the Agent Full-Time? Is the Agent Experienced?

Look for an agent with at least a few years of full-time experience. As with many professions, real estate agents acquire most of their skills on the job.

Does the Agent Listen, and Communicate Clearly?

The agent must understand what's important to you in your home purchase and be able to tell you what you need to know about a home.

Is the Agent Willing to Negotiate For You?

To get the best home for the best price you'll have to negotiate with the seller. If the agent is not willing to show you houses that are 20 percent over your price range or to go to bat for you when negotiating with the seller, you should find a new agent.

Is the Agent Careful In His or Her Work?

You need an agent who will cover all the details that go into buying a home.

Can I save money by buying a home without a real estate agent?

You can shop for and buy a home without a real estate agent, but keep in mind that it will be more time-consuming. Homebuyers who already have a property in mind that they want to buy are the best candidates to forgo an agent, but if you're willing to do the extra legwork such as searching for properties, scheduling appointments to see them, coordinating inspections, and negotiating, then it's probably worth a try.

How can I negotiate the lowest price when buying a home?

Here are some negotiating tips:

• Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
• Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
• Know what comparable homes are selling for.
• When the seller won't budge on price try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
• Don't forget the real estate agent's commission. This is negotiable, too.

Should I have the home I want to buy inspected?

The purchase of a home is probably the largest single investment you will ever make. You should learn as much as you can about the condition of the property and the need for any major repairs before you buy.

The standard home inspector's report will include an evaluation of the condition of the home's heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.

The inspection fee for a typical one-family house varies by region and may also vary depending upon the size of the house, particular features of the house, its age, and whether additional services are required such as septic, well, or radon testing. The knowledge gained from an inspection is well worth the cost, however.

Not all states require home inspectors to be licensed or certified. When hiring a house inspector, qualifications, including experience, training, and professional affiliations, should be the most important considerations. One organization that can help you find a qualified home inspector is the American Society of Home Inspectors (ASHI). You can contact them through their website: www.ashi.org

What should I watch out for when dealing with home contractors?

Once you find a home you may want to do some remodeling or updating. Before you get started, however, make sure that the remodeling you're doing is something that the average home buyer wants such as a modern kitchen, larger closets, and modernized or additional bathrooms. Improvements in electrical wiring are also a plus, and when redecorating, keep future buyers in mind and use neutral colors.

Do not pay the contractor too much money upfront.

Before you sign a contract, work out a detailed plan that includes a target date for finishing various portions of the job, and a payment schedule as well. The contract should detail the costs of materials and labor so that you know what the contractor's profit will be. The final payment should be due on completion and should be the largest payment.

Don't contract with someone who's not bonded, licensed, and insured.

To find out whether a contractor is licensed, you can contact either a state licensing agency or check with a consumer protection agency to find out whether complaints have been filed against that contractor. Always ask to see copies of insurance policies.

Ask for as much detail as possible from the contractor about what the job will entail.

You never know what you'll find when you rip open that 30-year-old wall or start replacing that electrical wiring. On a big project, hire an independent engineer to inspect the work. If you don't, you could regret it later if the work has to be redone at your expense because it's not up to code.

How much should I expect to pay in closing costs?

Closing costs vary by state and by lender so it pays to shop around if possible. In addition, many of the fees associated with closing costs are negotiable such as credit checks, application fees, title searches, broker fees, appraisals, and other processing fees.

Property taxes, homeowners' insurance (usually paid one year in advance), and private mortgage insurance (PMI) are not negotiable. One of the largest closing costs is likely to be the origination fee, which is typically 1 percent of the mortgage. You may also pay from 1 to 3 points or 1 percent to 3 percent in up-front interest. If you put less than 20 percent down, you will also need private mortgage insurance, which includes a one-time fee of up to 1 point plus a specific dollar amount that is included in your monthly mortgage payment.

Your lender must send you an estimate of your closing costs, referred to as a GFE or Good Faith Estimate (required by law), within three days of receiving your application and your realtor, lawyer, or escrow agent will give you the exact amount of your closing costs before closing. If you have only enough cash for a down payment, you can fold closing costs into your mortgage, but you will have to pay a higher interest rate. You can also ask the seller to pay some of the closing costs when you are negotiating your price.

Should I buy or rent?

Depending on your particular situation, owning a home might make more economic sense than renting one. With home prices dropping and mortgage rates at historically low rates, people who are planning to stay in their homes long-term can build equity over time and reap the benefits of writing off mortgage interest on their taxes. A modest increase in value represents an even greater gain for people who make a typical down payment of 20 percent or less. The higher your income tax bracket, the better your return.

You may want to rent however if you can find cheap housing, such as a rent-controlled apartment or the cost of renting is substantially less than owning. If you are young and single, newly divorced, move often with your job, or just don't want the responsibility of home ownership, then renting probably makes more sense. It's tough to recover the costs of buying a home within the first five to seven years, so if you're planning on moving before then renting is a better option. Retirees also may want to sell the family homestead and invest the proceeds. If you live in an area where housing prices are falling, then wait until the market bottoms out before you buy.