Lesson 15: Buying a House
Buying a house
By the end of this lesson, you should be able to:
- Discuss different options for finding a place to live
- Outline steps in the home-buying process
Can I afford a house?
Instead of renting, you may want to consider buying a house. It's a good investment in the long term. Instead of paying a landlord, you are building up equity in your own property.
Before you jump into buying a house, ask yourself:
- Can I manage a budget?
- Do I have a good credit history?
- Do I have few debts?
If you answered "no" to any of these questions, you may need to get your finances in order before you begin your house search.
- Pay off debts.
- Don't incur any new debt. Mortgages are based on debt-to-income ratios—what you spend monthly vs. what you bring in. Taking on hefty new debt would throw the ratios off.
- If you are not already on one, get on a budget and follow it. Start putting money aside for a home purchase.
- When you are ready, consult a financial institution for a possible home loan.
Where to look
Once you have a good idea of the type of place you want, here are some places to help you start your search.
- Real estate agency. Real estate agents can help you look for a house. You'll learn more about real estate agents later in this lesson.
- Newspaper classifieds. You can find listings of apartments or houses on classified websites such as craigslist, or in local newspapers and their websites.
- Housing or real estate guides. These listings can usually be found at your local grocery store.
- Ask friends or family. They may know of a great house that is available or know of some people who are moving.
- Websites. Some real estate agencies may have websites of their listings. Housing or real estate guides may also have websites.
- Community bulletin boards. Homeowners wishing to sell a house may post a notice in a community center or library.
- For-sale signs. Many real estate agencies and owners post signs in front of available property.
Finding a house
To find and buy a house, many people work with a real estate agent. He or she has access to data that shows which houses are for sale and at what price, as well as details such as house and lot size and number of rooms. The more detailed you are about what you want, the easier the househunting process will be.
Consider the following:
- How much square footage is the house?
- How many bedrooms and bathrooms does it have?
- How much storage space exists?
- Does it have a large or small yard?
As you look for a house, consider neighborhood factors such as public schools, parks and community centers, economic centers, shopping areas, and crime rates.
Making an offer
Once you find a house you like, your real estate agent can help you make an offer for the house, listen to the seller's counteroffer, and negotiate a price. An agent also helps with the necessary paperwork and can help you find a title company, which will check that the title on the home you are considering is clear—meaning there are no liens or other problems.
Your agent can also help you find a reputable home inspector to conduct an inspection before you sign a contract. This will typically cost you $200 to $500. Make sure the seller either fixes or compensates for any problems, which doesn't include cosmetic defects, before the final sale.
In most states, it is illegal for the seller to lie or cover up defects in the home. Ask the seller for a Seller's Disclosure report, which details all physical problems and defects of which the seller is aware. However, it is not a crime if the seller doesn't report a problem because he or she wasn't aware of it.
Visit your local library or bookstore and go online for additional research on homebuying before beginning your search.
How much does that house cost?
There are different costs and factors associated with buying a house, including earnest money, a down payment, mortgage, and closing costs. Be aware of the following:
- In some states, when you sign a contract to buy a house, you will need to pay a deposit, called earnest money (usually between 1 and 3 percent of the purchase price). Putting down earnest money shows that you are serious about buying the house. The title company—the business that will handle the paperwork for the sale—usually holds the money until closing, when the papers are signed to buy the house. Other states wait until the closing before the transfer of funds occurs.
- When you are ready to buy a house, you will need a down payment (3 to 20 percent of the sale price). On a $130,000 house, that's $3,900 to $26,000. If you've planned for buying a house, you may already have a good idea of how much you can put down. If not, take time to figure out how much of a down payment you can afford.
- For the rest of the cost of a house, you will probably need a special type of loan called a mortgage. The higher the down payment, the higher the loan you can get from a bank. For a given house price, the more you put down, the easier it is to qualify for the loan as well. If you put 20 percent or more down on a house, you also won't have to purchase private mortgage insurance. This protects your lender against the possibility of you defaulting on your mortgage.
- You will also have to pay closing costs—miscellaneous fees charged by various people involved with the home sale, such as your lender for processing the loan, the title company for handling the paperwork, a surveyor, and local government offices for recording the deed. Because the amount varies, your lender can give you an estimate of closing costs on a particular house. (If the costs are not rolled into the mortgage, you will have to pay them in cash at the time of closing.)
- Another factor is the amount of points you are willing to pay. A point is 1 percent of your mortgage loan amount. Points are usually paid for upfront. If you can—and are willing to—pay points, it will bring down your interest rate and potentially your closing costs.
- Check the current mortgage rates for your area. They are usually listed in the real estate section of your local newspaper.
The home loan
Now that you know more about the homebuying process, consider what you'll need to do to secure a home loan or mortgage. Shop around and compare. Check your local bank or credit union, mortgage brokers, and websites.
Remember that a bank or other lending institution will check your credit history before deciding whether to offer you a loan, as well as the amount of the loan. This loan or mortgage is paid back to the bank on a monthly basis over 20 to 30 years.
A monthly mortgage payment consists of:
- Principal: Repayment of the original amount borrowed
- Interest: The cost of borrowing the principal amount
- Taxes: Real estate taxes
- Insurance: Homeowners insurance
Before approving a mortgage, your lender will also look at the comparative value for similar homes in the area where you are buying in to make sure the loan is a good investment.
Housing prices can vary significantly from location to location. Some loan programs such as Fannie Mae and HUD have strict guidelines as to the condition the house must be in before you buy it. Most loan companies also require things such as termite inspections and roof repairs if needed before approving a home loan.
There are two basic types of mortgages:
- Fixed mortgage: A fixed term—for example, 30 years—and a fixed interest rate at the start of the mortgage; the monthly amount for the payment of principal and interest will not change during the term of the mortgage
- Adjustable mortgage: Also known as an adjustable-rate mortgage (ARM); interest rates are adjusted up or down based on current interest rates set by the federal government; principal and interest payment goes up and down with these rate changes
Living in a house usually involves dealing with more living expenses than living in an apartment. Make sure you are aware of and can afford such expenses before you take on the responsibility of homeownership. Some may be one-time costs, while others will be ongoing.
You will likely have to deal with most of the following:
- Moving expenses
- Miscellaneous expenses, such as a lawnmower, rakes, paint, ladders, and tools
- Repairs and maintenance
- Property taxes
- The 106 Common Mistakes Homebuyers Make (and How to Avoid Them), 3rd Edition - Gary W. Eldred
- Home Buying for Dummies - Eric Tyson, Ray Brown