Home Buying Guide

With a turbulent housing market in recent years, the decision to purchase a home can be confusing and filled with anxiety. This guide is designed to arm prospective homebuyers with facts, figures and the potential questions to ask when exploring the home-buying process.

Should I buy or rent?

For many Americans, it is better to purchase than rent. Purchasing at a fixed interest rate locks in a steady monthly payment for 15 to 30 years, at which point you stop paying and own the home. Renting, on the other hand, generally means an increase in monthly payment each year. Furthermore, renters never own the property they are leasing.

It is important to realize that renters are not necessarily "throwing away" money when paying rent. Renting is an attractive option in many cases.

  • Renting is a good option when the renter is planning to move within three years. Generally, a few years worth of home equity and value appreciation is offset by real estate commissions when selling a home. Add maintenance issues, and renting can be advantageous.
  • Renting is a good option in down markets. Virtually every market was hit by the recent housing bubble. If currently renting, it may make sense to continue renting while home values in your area continue to decline.
  • Renting is a good option for people without a stable source of income. We recommend reserving six to twelve months of rent in a savings account. A lost job, demotion, or other salary reduction can impair the ability to pay monthly obligations. Renters are in a better position to move to another home with a lower monthly payment.

Here are some great calculators and articles on renting vs. buying:

I've decided to buy. Now what?

In general, a purchaser can afford a home that is two to three times yearly take-home income. For example: A person making $35,000 per year can afford a $70,000 to $105,000 home. This number changes with varying interest rates, of course. But it is a good start.

Another option for purchasers is to decide how much they can afford to pay per month, and then reduce that number by 30% to account for home maintenance, repairs, utilities, etc... Various mortgage calculators are available, including the calculator on each listing page.

Buyers will need money up front when purchasing a home. Typically, this includes 0-20% of the home's purchase price for a down payment, up to 7% of the purchase price for closing costs, and around $1000 for miscellaneous fees, home appraisal and inspections. In the current home market, many of these fees may be negotiable. In other words, buyers may submit an offer which stipulates that the seller will pay some or all closing costs. recommends that buyers pay for their own un-biased home inspector to avoid conflicts of interest.

The next step is a trip to your local mortgage broker. If possible, buyers will want to be pre-approved for a mortgage before making an offer. Sellers prefer offers in which the buyer is pre-approved for a mortgage.

A mortgage broker will require credit and employment history in order to get buyers approved for a mortgage. Credit history will need to be as clean as possible in today's tightened credit market. Many mortgage brokers can suggest credit counselors and recommend debt-reduction strategies to assist potential buyers.

Tips for improving your credit score:

  • If you have no credit history, we recommend establishing three lines of credit. These can include a car loan, major credit card, department store card, or other small loans. Always keep payments current and try to keep your balances at less than half of the allowed credit line.
  • Avoid applying for several credit cards before you apply for a mortgage loan. Credit applications show up on your credit history and indicate that you are taking on lots of debt.
  • Lenders like to see a picture of stability. Try to live in the same place for two years before applying for a mortgage loan. Similarly, try to keep a job with the same company for two years.
  • If you have terrible credit, seek the assistance of a credit counselor.

The Loan

What will I need to get approved for a loan?

  • Good credit (around 650 or above)
  • Two or more years of steady employment
  • Monthly income two to three times higher than the expected mortgage payment
  • Enough money for an appropriate down payment

Where should I ask for a loan?

Start with the bank where you have your checking and savings accounts. They will have a no-obligation application for you to fill out. Ask them to explain any unfamiliar terms, such as points (up-front charges at loan signing).

Compare their terms with a few local mortgage brokers, and perhaps an online mortgage broker service. Choose the service which best meets your needs and with the best terms.

Bad credit? You'll need to raise it to qualify for a loan. Research and speak with a good local credit counselor. Your mortgage broker may be able to point you in the right direction.

How much should I contribute as a down payment?
The less you put down, the higher the monthly payments and the less the bank will loan to you. Less than 20% down will also require the payment of PMI or Private Mortgage Insurance, which protects the bank's loan. HomesIndex recommends putting a 20% down payment on the purchase whenever possible.

Types of Loans:

  • Conventional: Nothing fancy here. Those with good credit
  • FHA Loan: In this Federal Housing Administration program, the government insures part of the loan if you default. This makes it easier to purchase a home. The home must be in excellent condition in order to qualify. Ask your realtor if an FHA loan is best for you.
  • VA loan: Much like the FHA loans, the Department of Veterans Affairs will back loans to veterans of the armed forces. This makes obtaining a loan easier, and 0% loans are available to many veterans.

Hiring a real estate professional

Even though it is easy to search online listings and call a seller's agent, there are benefits to hiring a broker to represent your interests in a sale. They will:

  • Help you navigate through the large amount of paperwork you'll need to sign
  • Help you get the best price for your preferred home
  • Help you negotiate the contingencies pursuant to your offer
  • Recommend neighborhoods and areas based on your needs and preferences

The seller will pay your realtor commission, so it costs nothing to hire a realtor as a buyer. Family and friends might be able to recommend their favorite realtor. recommends interviewing several realtors. Choose the realtor who best understands your situation, needs and desires.

Realtors are ethically obligated to help you get the best price on a home. However, the realtor's commission is based on the purchase price. Most realtors are honest and ethical but this system does represent a conflict of interest and is something to keep in mind.

If you are unfamiliar with the area, tell the realtor what type of community setting you prefer. Ask about school systems, crime rates, and taxes of various areas. How have property values increased or decreased over the last five years?

The realtor will search the MLS and other sources for properties which match the buyer's criteria. Feel free to search these resources yourself, including Record MLS numbers of properties you'd like to see, so that your realtor can arrange showings.

When you find a great house.

Now we're getting somewhere. recommends driving around the neighborhood, saying hello to the neighbors, and driving from the home to work in order to experience a normal commute before committing to a purchase.

The next step is to ask for disclosure. Sellers must (by law) present a list of known problems with the home.

Next, ask the realtor how much you should offer for the home. Get a list of comparable homes and go over them with the realtor. Agree on an offer price. Agree on offer terms and contingencies with your realtor. Generally, your offer will be dependent on several criteria, including:

  • Appraisal. The home must be worth what you are buying it for.
  • Loan. You must be able to secure a loan.
  • Home Inspection. Any issues found may require further negotiation of sales price or terms.
  • Pest Inspection. Any found pest damage can be grounds for renegotiation.
  • HOA documentation. Get a copy of the Home Owners Association documents, if any. Review the restrictions the HOA places on the property to make sure they fit with your plans.
  • Contingency on selling your current home. Note: If this contingency is part of your offer, a seller may reject your offer because having their home under contract for extended periods of time while the buyer completes a sale isn't preferable.

At this point, have the inspections completed. If there are issues, work with your realtor to have these items addressed either before sale, or offer a reduction in the sales price. If the issues make the home undesirable, the contingencies in your sales contract should allow you to walk away from the deal.

The bank will now appraise the home to make sure it is worth the purchase price. If everything is satisfactory, you'll need to shop for an insurer. The insurance cost will be added to the mortgage, no money will be required at this time.

Finally, it's time to close! You'll go to a title company's or attorney's office to sign documents which make the sale official. You'll need to bring your checkbook and pay immediately for the down payment and your share of the closing costs.

Making an Offer

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Moving In

Be sure to check out our moving guide for tips on moving into your new home. Congratulations homeowner!