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

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 www.quamut.com Buying a Home

One rule of thumb is that you can probably afford a mort- If You Choose a Fixed-Rate Mortgage . . . lender provides you with an estimate of what type of
gage worth 200 times your current rent. So if your current Just as you would comparison shop for any other product, loan you may qualify for. Prequalification can give you
rent is $800 a month, you can likely afford a mortgage of: you should shop for the best mortgage you can find. When an advantage once you do start bidding for houses.
shopping for a fixed-rate mortgage, look for a mortgage with When a seller is faced with bids from two different
200 × $800 = $160,000 the term you want at the lowest APR you can find. buyers—one prequalified and one not—the prequalified
bidder usually has a definite advantage.
If You Choose an ARM . . . • Mortgage preapproval: During the preapproval
Mortgage Term ARMs are a little more complicated than fixed-rate mort- process—a step beyond prequalification—the
The length of the mortgage’s term affects both the total cost gages. The index and margin of a given ARM determine lender conducts a thorough analysis of your financial
of the mortgage and the size of the monthly payments. how the loan will adjust when the fixed-rate term expires. documents. Preapproval makes you even more
The formula for calculating the adjustable interest rate on attractive to sellers.
• Longer mortgage terms have lower monthly any ARM is: interest = index + margin.
payments: Because they stretch out the mortgage Be aware that though prequalification and preapproval indi-
over more time, longer-term mortgages offer lower • Index: The interest rate for an ARM is based on one of cate that you’re likely to qualify for a mortgage of a particu-
monthly payments than shorter-term mortgages. several reference indexes (such as the interest rate lar type and size, neither guarantees that you’ll be approved
• Shorter mortgage terms result in lower total costs: of U.S. Treasury bills). When the interest rate of the when you apply later on in the process.
Because they generate less total interest over time, reference index upon which a particular ARM is based
shorter-term mortgages offer lower total cost than rises or falls, so does the interest rate of that ARM.
longer-term mortgages. When you’re shopping for an ARM, it’s best to compare How to Research Neighborhoods
rates based on the same index. When you buy a home, you’re also buying the neighbor-
The table below shows monthly payments and total costs for • Margin: The margin is the markup the lender adds to hood surrounding it. The neighborhood is important not
two mortgages with the same principal ($200,000) and the the interest rate of the index. Most lenders add a 2–4% only because you’ll have to live in it but also because the
same interest rate (6%) but with 15- and 30-year terms. margin. So if the index is at 5%, the mortgage you get neighborhood’s quality will have a big impact on the appre-
would likely range from 7–9%. Always look for an ARM ciation value of your home. Before you start hunting for an
Monthly Payment Total Cost with the lowest margin. individual house, you should hunt for a neighborhood that
meets your tastes and needs.
15-year $1,687.71 $303,787.80
In addition, there are two other factors to consider when
30-year $1,199.10 $431,676.00 shopping for ARMs: the slowest adjustment frequency and Characteristics of a Good Neighborhood
the tightest caps. In part, the traits that make a neighborhood good or bad
Which Term Should You Choose? depend on your personal tastes and needs. You may prefer
Whether you should choose a longer- or shorter-term • Adjustment frequency: Once the fixed-rate term neighborhoods based on qualities such as:
mortgage depends on your particular financial situation. If expires, ARMs adjust interest rates at certain intervals:
you can definitely handle the higher monthly payments of one might readjust every six months, another every • Type of people who live there: Are they similar to
a shorter-term mortgage, that’s probably the better way two years. Of two ARMs with the same rate, the one you in terms of age and occupation?
to go. If you can’t (and many people can’t), a longer-term that adjusts less often is the better choice. • Commuting distance to good jobs: Are there offices
mortgage is the better choice. • Caps: These are limits on the highest overall interest nearby? What mass transit options exist?
rate an ARM can have and the maximum amount that • Presence of young families: Do children play freely in
APR rates can adjust between two intervals. The caps limit the neighborhood?
The numerous “percentage rates” on mortgages that lend- a mortgage holder’s risk. Of two ARMs with similar • Shopping, exercise, and leisure needs: What stores
ers quote you can be tricky and confusing. For instance, a interest rates, the one with stricter caps is better. and facilities are nearby?
lender might advertise a 6.9% interest rate that looks great Never take an ARM that doesn’t have a rate cap.
next to a 7.1% rate from another lender but actually has Other factors are common to all “good” neighborhoods no
hidden costs that effectively make the rate much higher. More Mortgage Tips matter what your personal preferences:
To avoid all this confusion, pay attention to the annual per- • Pay more than your monthly payment if possible:
centage rate (APR) when comparing two mortgages. If you can afford to, it’s a good idea to pay more than • Strong, diverse local economy: A town in which most
The APR, by law, includes all costs in a single rate. If you your monthly mortgage payment each month. When jobs are dependent on a single industry or factory does
see one 30-year fixed rate with an APR of 6.9% and another you pay more than your monthly amount, that extra not have a diverse economy.
with an APR of 7.1%, you can feel confident that the one with money goes toward paying off your remaining principal, • Strong housing market: A strong housing market
the lower APR has the lower total rate. which lowers the overall interest you pay throughout should have a vacancy rate below 5% and rental prices
the life of your loan. Note that this approach does not close to the cost of owning a comparable home.
Fixed-Rate vs. Adjustable-Rate Mortgages apply to interest-only mortgages. • Good school system: School-system quality is
The most important factor that should influence whether • Avoid prepayment penalties: Some lenders try to important even if you never plan to have kids because
you choose an ARM or a fixed-rate mortgage is how long stop you from paying off your mortgage early (and thus a good school system raises home values.
you plan to live in the property. cutting into their profits) by including a prepayment • Low crime rates: Crime should be the exception, not
penalty in the mortgage. This penalty is a fee charged the norm.
• If you plan to stay put for a long time (more than if you pay down the principal of your loan early. Never • Services and amenities: The neighborhood should
5–7 years), a fixed-rate mortgage is usually the better accept a mortgage that includes such a penalty. feature multiple amenities, including parks, parking,
choice. • Understand points: Lenders often offer a lower restaurants, and supermarkets. It should also have
• If you plan to move on relatively quickly (within 5–7 mortgage rate in exchange for an up-front payment reliable public services, such as garbage pickup,
years), an ARM can provide very good value due to of some percentage of your total loan, called points sewage, recycling, and emergency response.
its lower initial rate. At any point within the fixed-rate or origination costs. For example, a mortgage with
period, you can sell—giving up the mortgage—to avoid two points means that you have to pay 2% of the total Up-and-Coming Neighborhoods
higher rates when the rate adjusts. mortgage up front to your lender. In most cases, the Good neighborhoods can be expensive. If you can’t afford a
costs of paying more up front outweigh the benefits. “good” neighborhood, keep an eye out for “up-and-coming”
Though the low monthly payments of adjustable-rate mort- You should pay points only if you’re sure you’re going neighborhoods that are affordable but have rising pros-
gages and interest-only loans are enticing, you should to live in the home for a long time (15+ years) without pects. Up-and-coming neighborhoods typically lie on the
approach them with caution. Many people choose ARMs ever refinancing. outskirts of good neighborhoods that have been established
and interest-only loans over fixed-rate mortgages in order for a number of years. Up-and-coming neighborhoods tend
to take advantage of the lower initial fees and “reach” for a Mortgage Prequalification and Preapproval to have specific statistical traits:
house they wouldn’t ordinarily be able to afford. This tactic Once you know the type and size of mortgage you’d like to
is a dangerous financial risk because a shift in rates can get, the next step is to get prequalified or preapproved. • Increasing population
lead to much higher monthly payments and, in the most • Multiple offers on homes being sold
dire cases, foreclosure. Never use an ARM to “reach” for a • Mortgage prequalification: To get prequalified, you • Residents renovating or moving into bigger houses
house you can’t afford. first describe your income, debt, and credit situation • A shift from renters toward homeowners
to a mortgage lender. Based on your description, the • 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 While hunting for a house, it’s crucial to remain realistic,
• Arrange and attend the closing and help resolve any organized, and a bit thick-skinned. If you don’t approach the If You’re Buying Attached Housing . . .
last-minute questions or issues that might arise process with a clear sense of your budget and expectations, In general, apartments, townhouses, condos, co-ops, du-
you can either get carried away and buy a house you can’t plexes, and other attached housing units give more space
Agent/Buyer Conflicts of Interest afford or, out of frustration, settle for less than you deserve. per dollar than freestanding houses and often provide ame-
There are built-in conflicts of interest between real estate Knowing what matters most to you ahead of time will help nities that don’t come with a house (pool, gym, clubhouse,
agent and buyer that you should be aware of as you step the house-hunting process go as smoothly as possible. and so on). Yet buying this type of real estate comes with its
into the world of real estate. own quirks and complications.
Prioritize Your Needs When you buy into a condominium or co-op, you’re join-
• Legal conflicts: In some states, the buyer’s real estate Here’s a list of typical home attributes that you should ing a community, both legally and financially. Membership
agent actually is legally bound to try to get the best consider when prioritizing your needs: in that community can limit your freedom to renovate, have
possible deal for the seller. Before getting a real estate pets, and so on. In a co-op, nearly every decision about the
agent in any state, research your state’s laws to find • Type: House, apartment, duplex, etc. building is subject to the decision of the co-op board. In a
out whose side the buyer’s agent is really on. • Location and views: Waterfront, city skyline, etc. condo, the purchase contract likely contains rules about
• Financial conflicts: Even in states where the real • Price: Including property taxes and insurance costs what you can and cannot do. So if you’re buying a condo or
estate agent is legally bound to represent your best • Size: Square footage co-op, make sure to:
interests, a conflict of interest still exists because • Land: Acreage
real estate agents get paid by commission. When • Schools: Quality of the school district • Read all legal documents and contracts carefully
a home sells, the seller pays both the seller’s agent • Privacy: Proximity to neighbors • Hire a good lawyer to review all contracts you sign
and the buyer’s agent a percentage (usually about • Appreciation potential: Likelihood it will rise in value • Know your rights once you own
 www.quamut.com Buying a Home

House-Visiting Tips
Most home buyers spend at least a few weeks visiting How to Make an Offer on a Home How to Negotiate on a Home
properties before they find a home to buy. The average When you’ve found a home you love that’s priced within It’s rare for a seller to accept a first offer from a buyer. More
home buyer sees 15 properties. Here are some tips to keep your budget, it’s time to make an offer. To make an offer on often, the seller either rejects your offer in favor of another
in mind as you shop: a home, you and your real estate agent draw up and give to or responds to you with a counteroffer. A counteroffer is
the seller a document called a purchase contract. usually a one-page sheet that specifies the precise parts
• Request that the seller or tenants not be present. of your purchase contract that the seller doesn’t accept.
• Try not to be influenced by furniture, which will leave The Purchase Contract Sometimes sellers write directly on the purchase contract,
when the seller does. Your real estate agent will have copies of the type of pur- crossing things out and writing in new terms. There’s no rea-
• Note upgrades you’d have to make to the carpet, paint, chase contract that’s considered standard in your area. son for you to accept the terms of the counteroffer without
appliances, and so on. Purchase contracts typically contain the following: making your own revisions. In fact, the counteroffer should
• Observe and inquire about the neighbors. signal the start of the actual negotiation process.
• Check the views out every window. • Your offer price, including a specification of the down
• Try to visualize the house in all seasons and weather. payment amount Home-Buying Negotiation Tactics
• Inquire about the infrastructure, including plumbing, • Financing information that specifies the amount of the You have two somewhat conflicting goals in home-buying
electrical, gas, heat, air conditioning, cable TV, internet mortgage you hope to get and that identifies the lender negotiations:
service, and so on. • Legal description of the property
• Make sure the floor plan provides enough space for • List of what’s included (appliances, fixtures, carpeting, 1. To get the best deal you can
you, your family, your furniture, and storage. and so on) and not included in the sale 2. To get the house
• Consider how the property might fare in a natural • Move-in date
disaster, such as a flood or earthquake. • Closing date To achieve both, you’ll probably have to make at least a
• Take notes and photos to help you keep track of the • Termination date, so the seller can’t delay few concessions to the seller. Before negotiations begin,
different houses that you visit. think about your priorities: where you’re willing to give and
Contingencies where you aren’t.
Open Houses The purchase contract you give the seller should contain
It’s helpful to attend open houses in neighborhoods that contingencies, or riders, that allow you to back out of the General Negotiating Tactics
interest you. In an open house, the real estate agent listing contract if certain conditions aren’t met. Including these • Give to get: By holding a hard line early, you can make
the house invites anyone interested to come and look at the contingencies is a crucial way to protect yourself financially it seem as if you care about certain terms that don’t
house. Open houses are typically held on Sundays. You can as you work through the transaction: really mean that much to you. Then you can let the
find open house listings in your local newspaper or simply seller have his or her way on those terms in exchange
by driving around neighborhoods that interest you and look- • Mortgage contingency: Allows you to back out of the for other concessions.
ing for “Open House” signs. contract if you’re unable to get the mortgage. • Focus on issues you can solve: If in each round of
Open houses are free opportunities to investigate a • Inspection contingency: Allows you to back out if the negotiation you focus on what you can solve rather
neighborhood and its housing options on your own, before inspection turns up hidden structural problems or other than what you can’t, you can build up momentum and
you hire a real estate agent. Just be wary of the agents who unacceptable physical defects in the house. goodwill and make big issues seem smaller.
attend any open houses you visit—they can be a bit pushy. • Attorney-approval contingency: Allows you to back
out if your lawyer does not approve of the contract. Negotiating Tactics for Specific Situations
Home Buying as an Investment • Negotiations for corrective work: Allows you to Some tactics work best in certain circumstances.
Though one of your goals in buying a house should be to reopen negotiations if inspections turn up expensive
find a home you love, also keep in mind that the home you corrective work needed on the house. In Buyer’s Markets
buy will likely be the biggest investment you ever make. To • Title contingency: Allows you to review the title on • Start low: By starting low, you can move the seller
make a good investment, a house must be priced fairly and the property to evaluate its accuracy and validity and to down significantly. The risk is that the seller might
have a strong shot at appreciating in value. back out of the deal if title problems are uncovered. reject your first offer.
• Final verification of condition: Allows you to • Move bit by bit: By moving slowly, you may be able
Comparable Market Analysis renegotiate or back out if, during the final walkthrough to wear the seller down closer to your target price. The
If you’re interested in a specific house, the best way to get before closing, you spot a significant defect or problem risk is that the seller will get impatient and walk away
a sense of how much it should sell for is to ask your real with the house that is new or that the seller hid. from the negotiations.
estate agent to prepare a comparable market analysis
(CMA) for you. A CMA is an analysis of sale prices of homes Earnest Money or Down Payment In Seller’s Markets or When There Are Multiple Bidders
sold within the last six months that are similar—in terms of Along with the purchase offer, you’ll likely have to include • Avoid bidding wars: Don’t enter a bidding war unless
neighborhood, size, age, condition, amenities, and so on— either earnest money or the entire down payment. (Earnest you can absolutely afford it. Know your upper limit and
to the houses that interest you. If a house that interests money is a deposit that usually ranges from $500 to several stick to it.
you is being sold at a price well above those listed in the thousand dollars.) Specify in the contract that the money • Come in hard: By making your best offer first, you may
CMA, it’s overpriced and is therefore probably not a good must be deposited in an interest-bearing account and that be able to win before a bidding war can start.
investment. the interest on this amount belongs to you. • Make things easy: Though the seller wants a good
price, he or she also wants the sale to go smoothly and
Three Principles of Home Pricing and Appreciation How to Price Your Offer easily. You can make things easy by:
There are three general principles of home pricing and Your goal in bidding on a house is to make the lowest pos- • Increasing your down payment bid, which shows
appreciation (rising value) that can help you spot homes sible offer that will be accepted. That offer could be higher, that you’ll likely get mortgage approval
that might be good investments. lower, or equal to the seller’s asking price. When deciding • Being preapproved for a mortgage
how much to bid, consider two factors: • Offering to pay for repairs, as long as the house
1. Conformity: The more “unique” a house is, the fewer passes inspection
potential buyers there will be for that house. The more • CMA: If the asking price is much higher than the sales
a house “fits” with the houses around it, the better its prices for comparable homes, you should probably bid Late-Stage Negotiations
appreciation prospects. below the asking price. If negotiations hit a snag just as an agreement seemed
2. Progression: Properties of lower value are raised up • Market conditions: If it’s a seller’s market, you’ll within reach:
by proximity to properties of higher value. It’s better to likely have to bid higher than the CMA price—maybe
buy the cheapest house on an expensive block than to considerably higher. If it’s a buyer’s market, you may • Go halfway: If there’s a number or date that you and
buy the most expensive house on a cheap block. safely be able to bid below the asking price. the seller can’t agree on, offer to go exactly halfway.
3. Proximity: Appreciation of a house can be harmed by • Be bold: If the negotiations have started to inch along,
proximity to lower-value houses. So the most expensive you might be able to restore momentum by giving
house on a street is unlikely to appreciate rapidly, even ground on one point and asking the seller to give on
with renovation. another. But if you’re too bold you may give up more
than you need to.
 www.quamut.com Buying a Home

The Inspection Checklist • Pay stub showing most recent year-to-date earnings
Escrow and Closing The written report your inspector provides should cover • Balance and monthly payments of all loans and charge
When you and the seller have signed an agreement on the these interior and exterior areas of your property: accounts for the last three months
terms of the sale, you’ve got a ratified contract. Now you • Balance for the last three months (along with names,
enter the final stage of the home-buying process, which is • Ceilings • Pests addresses, and account numbers) associated with all
called escrow. • Chimney • Plumbing savings, checking, investment, and other accounts
• Cooling systems • Pool • Documents, such as cancelled checks, that show
Escrow • Decks, porches, • Roof income related to child support and alimony, if relevant
Escrow means putting something in the hands of a neutral balconies • Siding
third party. Depending on where the transaction is taking • Doors • Stairs Title and Owner’s Insurance
place, the escrow officer can be a lawyer or a title company. • Drainage systems • Walkways Title is legal ownership of a particular piece of real estate.
Once you have a ratified contract, you should summon an • Fireplaces • Walls When you buy a property from a seller, the title for that
escrow officer—your real estate agent will have a relation- • Floors • Windows property passes to you (or your lender). On rare occasions,
ship with one—and put all the relevant documents and • Foundation • Wiring a real estate sale may transpire in which title doesn’t trans-
funds into escrow. • Gutters • Yard fer from seller to buyer due to error or fraud. Though such
• Heating systems an oversight isn’t usually the buyer’s fault, it’s the buyer who
The Escrow Officer pays if things go wrong.
In return for a fee of about $1,000, the escrow officer “refer- If the Inspection Uncovers Problems
ees” the deal. The escrow officer makes sure that: If the inspector finds problems, the inspection contingency Title Insurance
in the contract allows you to renegotiate. Ask the seller to For a hefty one-time fee of 0.5% –1% of the mortgage value,
• All paperwork is signed and made part of public record pay for the needed work or lower the purchase price. the title company (which often acts as the escrow officer
• Both buyer and seller meet all contractual obligations as well) researches the title of the property and guarantees
• All monies change hands Appraisal that it’s valid. If it turns out that the title company’s research
• A title search is performed ( see below) Lenders typically require prospective home buyers to hire an was wrong—that the title was not valid and someone has
appraiser to assess the fair market value of the property— made a claim against the land—the title company will cover
The Preliminary Title Report what the property is actually worth. Though lenders often your costs.
After escrow has been opened, you’ll receive a document offer to conduct and even pay for this service, it’s a good idea
called the preliminary title report, or “prelim,” from the title to hire an independent appraiser yourself. A comprehensive Owner’s Insurance
company. The report will show: and accurate appraisal should consider all of these aspects The title insurance you buy definitely protects your lender,
of the property: but it won’t necessarily protect you after you’ve paid off the
• The name of the property owner mortgage. When you buy title insurance, make sure you’re
• Taxes or liens against the property • Appearance buying a policy that protects both the lender and you, the
• Third-party restrictions, such as public or private • Condition homeowner. In some states, the two policies come bundled
easements (for example, a grant to an electricity • Build quality together. In other states, you may have to pay an additional
company to plant a pole on your property) • Location fee of $30 or so.
• Unique features
It’s at this stage that the title contingency in your contract • Upgrades Taking Title
comes into play. Look over the report very carefully. If there • Value of comparable properties For a single homeowner, taking title means transferring
are surprises on it—such as a lien you didn’t know about— the title from the seller to the buyer. When this happens,
you have the right to insist either that the seller settle the Homeowner’s Insurance the buyer becomes the sole owner of the property. If you’re
claims or that the purchase price be reduced. As a prerequisite to getting a mortgage, most lenders buying property jointly with another person, you’ll have to
require you to get homeowner’s insurance that protects choose the form you want your co-ownership to take—
Inspection your home (and the lender’s investment) against: that is, how you’d like to take title.
To get a mortgage, you typically have to get the home The most popular way of taking title when two people
inspected. The inspection is intended to protect the lender • Damage (from fire, flood, and so on): Get a policy buy a home is called joint tenancy. In a joint tenancy,
as much as it is to protect you. If your lender does not with guaranteed replacement costs, which ensures the owners hold the title to the property equally, so one
require an inspection, you should still have a professional complete coverage of reconstruction. owner can’t sell or change the property without the other’s
go through the house thoroughly to avoid unacceptable • Loss of personal property: Most policies cover approval. Most couples opt for joint tenancy, in part because
defects or uninsurable conditions. about 70% of losses. More expensive policies cover it provides tax breaks should one member of the couple die
replacement costs as well. and the other inherit full ownership of the home.
• Interior and exterior components inspection: • Liability (for personal injury on your property): Get
Covers every important part of the house: foundation, liability coverage that covers at least two times the Walkthrough
insulation, kitchen and bathroom, plumbing, heating, value of your home. Just before the day of closing escrow (the day you officially
cooling, electric, walls, roof, and gutters. The take ownership of your new home), you’ll have a chance
inspection should last at least three hours and cost The size of your monthly insurance payments, or premiums, to take a final walkthrough of the home. The walkthrough
about $250–500. depends on the comprehensiveness of the coverage and gives you one last chance to inspect the property to make
• Pest control inspection: Checks for signs of pest or the characteristics of the particular region where the house sure no additional damage has occurred since you last saw
fungal infestation; usually costs about $75–150. is located. If you’re buying a home in an area prone to it. The verification of condition contingency allows you to
disasters such as floods or earthquakes, you need to add renegotiate should you discover any significant last-minute
If you’re planning to renovate your new house, you should additional (and costly) riders to your insurance. Don’t skimp problems.
have a general contractor or architect do an inspection and on these riders—they’re essential.
get an estimate on renovation costs. Closing Escrow (The Closing)
Mortgage Application The closing is the final meeting between the buyer, the
How to Choose an Inspector Even if you’re prequalified or preapproved for a loan, you still seller, their respective agents and lawyers, and an escrow
Hire an independent inspector with no ties to your real have to apply to get the mortgage when the time comes. To officer who takes checks and literally closes the deal (in
estate agent. Don’t choose an inspector based on price speed up the loan application process, have these applica- some states, you may have had to hand over the funds
because paying for a quality inspector can save you plenty tion documents ready: before the closing). As the buyer, you receive the following
of money in the long run. A good inspector should: at the closing:
• Final contract signed by both buyer and seller
• Belong to the American Society of Home Inspectors • Social Security number(s) of applicant(s) • Deed of trust on the property
• Have errors-and-omissions insurance that will pay you • Addresses for the past two years (plus landlords’ • Mortgage note
if the inspector makes a mistake names and addresses if you were a renter) • Final sales contract
• Provide you with an extensive written report • Income earned from all employers for the past two • Closing statement (recording all the money involved in
• Let you come along on the inspection years (include employer names and addresses as well) the transaction)
• Provide references and have satisfied clients • W-2 tax forms from previous two years • Keys