How to Buy a House

Guide Note: Buying a home was always intimidating, and the current subprime mortgage debacle makes it even more worrisome. Don't despair! Read this page to learn How to Buy a House.

Table of Contents:

Introduction

  • Buying a home: it's the American dream. But with the subprime mortgage crisis, credit is getting tighter, and many people are afraid to buy. Now more than ever, if you're going to buy a house, you need to go into the process prepared. Read on to learn the ins and outs of how to buy a house.

Disclaimer

  • Buying a house is a huge endeavor. While this page can give you advice, you should not proceed without consulting a lawyer and a financial adviser. (Keep that lawyer on hand - you'll need him when contract time comes around.)

Step 1: Find out how much you can afford

  • Several years ago, it seemed like anyone could buy a McMansion. Most of those people, however, were buying well beyond their means. Before you look, you should have a realistic idea of what you can buy. Online mortgage calculators will give you a general idea of how much you can spend.
Maybe a little out of reach? (Photo by Kap Jak)
Maybe a little out of reach? (Photo by Kap Jak)
  1. Go to Ginnie Mae's How Much Home Can You Afford? page.
  2. Provide the information they request, including your annual income and your current monthly payments.
  3. Click "Get Estimate".
  4. Ginnie Mae will provide you with a basic estimate of how much you will probably be able to borrow, based on the assumption that you are married with two children.
  5. If you would like to get a more detailed estimate, click on the "Detailed Estimate" link.
  6. Provide Ginnie Mae with the state and county you work in, as well as your marital status and the number of dependents you have.
  7. Click on the "Get Estimate" link to get a detailed estimate.
  8. Most lenders now require at least 5 percent of the total cost of the home as a deposit. If you don't have 5 percent of the estimate Ginnie Mae gave you in the bank, it's time to start saving.
  9. Check to see if your area has any programs to financially assist homebuyers.
  10. Don't forget that you will need to pay home-associated costs like insurance and taxes. Property taxes are different by state, county, and sometimes town; by choosing a home one town over, you can save yourself a bundle in the long run.

Step 2: Get preapproved for a mortgage

  • If you've made a mint off an Internet startup, inherited a large sum, or otherwise saved enough money to pay for your house in cash, you can skip ahead.
    If you're preapproved, you'll know if you can afford this house. (Photo by Christa Richert)
    If you're preapproved, you'll know if you can afford this house. (Photo by Christa Richert)
  • If you find your dream house, you don't want to make an offer only to learn that no bank will back you up. Get preapproved for a mortgage, and you won't have to suffer that heartbreak.
  1. Find multiple lenders you're comfortable with. You'll want to have more than one offer to choose from, so you can pick the best deal.
    • A mortgage broker has access to many different types of lenders. Some of them are even on the Web - you can look at what they offer with a click of the mouse! They can often find you the best deal on a loan - but once they find the loan for you, they're out, and you'll have to deal with the lending company.
    • Your bank, or another local bank, generally also handles mortgages. Just walk in and ask to speak to the loan officer at your branch.
    • This worksheet from Motley Fool gives you a great list of questions to ask.
  2. Fill out the loan application.
    • You'll need to provide multiple documents, including your social security number, addresses for the past two years, two most recent W-2 forms (or tax returns if you are self-employed), most recent pay stub, info and account numbers for all your current loans and credit cards, info and account numbers for all your bank accounts and other assets, and any information on child support and alimony - basically, every piece of financial information you can think of.
    • You'll also need to provide a fee of anywhere from $20 to $50 to pay for the credit check.
  3. Wait. They'll have to research your information before they can make you an offer.
  4. Compare the offers and choose the best one. Remember, it's not just the amount you should look at - it's also factors like the percentage interest charged.

Step 3: Check out a few open houses

  1. Open Houses are traditionally held on Sundays, although now many are being held on Saturday as well.
  2. You can find open house listings in your local newspaper, or on Craigslist.
  3. Be cautious about sign-in sheets. These are often used by real estate agents to garner new clients.
  4. Take notes on the things you like and dislike about the house and neighborhood. This will help focus your hunt when you begin seriously shopping.

Step 4: Make a list of what you want in a house

  1. Review your list of likes and dislikes.
  2. Include information about the neighborhood. Do you want it to be near a park? Great schools? Walking distance from shops? Far from civilization?
  3. Make sure to emphasize areas that are non-negotiable.

Step 5: Find an agent you're comfortable with, and a lawyer

  • If you don't work with some sort of agent, you're likely to miss a number of the houses going on the market. Unless you're buying something that's for sale by the owner, you also won't avoid paying a commission; the agent in charge of selling the house will get a commission, no matter what. It's important to look for an agent that is right for you.
  • There's more than one type of agent to choose from.
  • A real estate agent or seller's agent is always working for the seller.
  1. Real estate agents get a commission based on how much the house sells for.
  2. They are also obligated to tell the seller anything that affects the deal — for example, how high you're willing to go on the price.
  • A buyer's agent is on the side of the buyer. They often can be hired for a flat or hourly fee instead of a commission based on the house price.
  1. To start your hunt, ask for recommendations among people you trust who have recently bought homes.
  2. Try to interview at least two agents, so you can compare and contrast.
  3. Ask to see the agent's credentials.
  4. Ask how many homes they've found for people in the past year.
  5. Ask for references from prior clients.
  6. Ask how, and how often, they plan to communicate. Email? Phone calls? Smoke signals? On a daily basis, or weekly, or more infrequently? If you aren't comfortable with their communication plan, they are probably not a good fit.
  7. Ask if they will be representing the seller. If they will, they have a conflict of interest. If you really trust the agent, ask if they have a trusted colleague they'd recommend.
  8. For even more questions, check out this list from Nolo and this one from MSN Real Estate.
  9. You'll need to have a lawyer go over all the contracts and paperwork. Now is the time to find one.

Step 6: Look exhaustively

  • It's possible you'll find your dream house on your first try — but not likely. Much like finding a good romantic partner, finding a good house takes a lot of hard work and a little luck.
    After looking at several homes, you may decide brick is crucial. (Photo by Martin Boose)
    After looking at several homes, you may decide brick is crucial. (Photo by Martin Boose)
  1. Don't give up if you don't find the right house the moment you start searching. New houses go on sale every week.
  2. There are several websites that will allow you to look at homes online.
  3. If it looks good online, take a look in person. Realtors often airbrush home photos online, eliminating things like utility lines.
  4. Turn on faucets, light switches, and so forth to make sure everything works.
  5. Use your list of wants and needs as a checklist.
    • Make multiple copies of your list of wants and needs.
    • Write the address of a home you're interested in at the top.
    • Circle an item on the list if the house has it.
    • Cross out the item if the house doesn't meet your needs in that area.
    • If it has extra features you like (or loathe) that will affect your decision, note them at the bottom of the page.
  6. Take digital photos of the homes you visit so you will have them to refer to later. (Make sure to ask the owner for permission first, if he's there!) Once you've looked at 10 houses, you may forget which house had which details you liked.
  7. If you want to know how walkable the neighborhood is, look up the address on Walk Score.

Step 7: Research the house you've found

  • You've found the house you think you want to buy. Great! Now, it's time to do some research to make sure there are no hidden surprises.
    Make sure no one is about to build a factory on that lake! (Photo by Atif Gulzar)
    Make sure no one is about to build a factory on that lake! (Photo by Atif Gulzar)
  1. Get the Seller's Disclosure report. In this, the seller must list the problems, issues and quirks of the house that he knows about.
  2. Do a Google search on the address. If anything newsworthy (a fire, a murder) has happened on the property in the past several years, it will probably come up.
  3. Ask at the police station about crime rates. Not every realtor will tell you information about crime rates, and you don't want to get a home that's a steal, then find out it's because the neighbors have been stealing everything.
  4. Visit the house you want to buy on different days and at different times — or else you might learn the hard way that the new neighborhood called DoWiSeTrePla got its name because it's DOwnWInd of the SEwage TREatment PLAnt.
  5. Check to see who owns the property on each side of you, and whether any large building projects are in the offing. You may not have long to love your view of the mountains if a developer is about to replace the little cottage next door with a four-story condo building.
  6. Find a home inspector.
    • Although you probably won't have the inspection done until you sign the contract, you will have a very short time to do it once the contract is signed. It is best to do the work of finding an inspector before you make an offer.
    • Don't use an inspector recommended by the seller or the seller's agent. It is better to get an inspector with an objective view of the home.
    • Ask friends who have recently bought homes who they recommend (or recommend against) using.
    • Check the American Society of Home Inspectors or National Association of Home Inspectors listings. ASHI and NAHI members must pass a test before they are certified as inspectors.
    • Engineers can also inspect homes, and are usually not registered with ASHI or NAHI.

Step 8: Make an offer and sign the contract

  • You know how much you can pay, and you probably know how much the seller is asking for. If you want the house, it's time to make an offer.

Money

  • You'll need to have the money you are putting down on the property available at this time to be put into escrow until the sale is completed.

Contingencies

  1. Your offer should state that it is contingent on inspection.
  2. You can also make your offer contingent on your ability to get insurance coverage for the home.
  3. Other potential contingencies include:
    • your ability to sell your current home
    • the seller's ability to buy a new home

Making the Right Offer

  1. Find out what nearby houses have recently sold for by researching the neighborhood on Yahoo! Real Estate.
  2. If you think the seller's price is dead on, and you don't want to haggle, you can offer exactly what the seller is asking.
  3. If you're willing to negotiate, you can offer the seller a bit less than what they're asking.
    • If you are close enough to what they are looking for, they will probably make a counteroffer that involves either a higher price or fewer repairs to be done before they sell the house to you.
    • You can sometimes ask the seller to include items of furniture or decor with the purchase of the house. If you like their curtains, or their washer/dryer, ask if they'll throw them in. The worst they can say is no.

The Contract

  1. All contingencies must be written into the contract. This will protect you if something goes awry before you finalize your purchase.
  2. Run the contract past a lawyer. This will help you find any loopholes that could cause trouble later.

Step 9: Get an inspection

  • While even you may be able to spot home issues like these, a trained professional will see many things you might not catch. This is not the same as an appraisal; the inspector can only tell you if there are structural or mechanical issues with the home.
    The decorations above the cabinets could be hiding something (Photo by Carol Garbiano)
    The decorations above the cabinets could be hiding something (Photo by Carol Garbiano)
  1. Schedule a visit to the house with the home inspector. That way, the home inspector can explain issues as he goes along.
  2. Make sure the inspector checks behind paintings, under throw rugs and so forth. A strategically placed couch can conceal several issues.
  3. Only some inspectors are certified to inspect items like swimming pools, underground oil storage tanks, or septic tanks. If yours is not, you will need to find a specialist.
  4. You will need to have a separate inspection done by a pest inspector to see if the house is infested by termites, roaches, rodents or other unpleasant non-paying residents.
  5. If the inspection reveals unforseen problems with the house, you have the following choices:
    • You can choose to rescind your offer.
    • You can tell the seller that he must make repairs before you buy the house at the agreed-upon price.
    • You can tell the seller he must lower the purchase price, based on the cost of the repairs necessary.

Step 10: Get an appraisal and insurance

  • It's not over yet! To finally settle your mortgage, you will need to get an appraisal, to find out what the home is worth. You'll also need to secure homeowner's insurance.
  1. Call or sit down with your loan officer and give them the information on the home you plan to buy.
  2. The lender will have an appraiser check out the house and give his expert opinion of what the true value is. If the value is much lower than what you're paying, it may be time to back out.
  3. You must get homeowner's insurance before you buy, or you will not be able to get a mortgage. Shop around. You may be able to get it from your current auto insurer.
  4. Consider title insurance. If it turns out your home is built on top of a Native American burial ground, or that it was illegally sold 15 years ago, your home could be taken away. Normal homeowner's insurance doesn't cover this, but title insurance does.

Step 11: The closing

  • You're now at the last nail biting moments - the closing. While everything should go smoothly, there are some last items you'll want to keep in mind.
  1. Don't schedule your move for the closing date. There is always the possibility something will go awry at the last second.
  2. Have a final walkthrough of the property, or a clause about a post-close walkthrough in the contract, in case the seller knocked a hole in the wall while moving the grand piano out.
  3. Be prepared to write a lot of checks. You will have to give money to the lawyer, the bank, and the seller for assorted fees. These may be more than you expect.
  4. Keep every paper you receive at the closing in a safe place, where you'll be able to find it when you decide to sell your house.

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