The complete idiots guide to buying and selling a home, 3rd edition

The Complete Idiot’s Guide to Buying and Selling a Home, Third Edition, strives to make understanding the homebuying process easy.. Special Thanks to the Technical Reviewer The Complete

by Shelley O’Hara and Nancy D Warner

Third Edition

201 West 103rd StreetIndianapolis, IN 46290

A Pearson Education CompanyBuying and

Selling a Home

All rights reserved No part of this book shall be reproduced, stored in a retrieval tem, or transmitted by any means, electronic, mechanical, photocopying, recording,

sys-or otherwise, without written permission from the publisher No patent liability is sumed with respect to the use of the information contained herein Although everyprecaution has been taken in the preparation of this book, the publisher and authorsassume no responsibility for errors or omissions Neither is any liability assumed fordamages resulting from the use of information contained herein For information, ad-dress Alpha Books, 201 West 103rd Street, Indianapolis, IN 46290

as-THE COMPLETE IDIOT’S GUIDE TO and Design are registered trademarks of

International Standard Book Number: 0-02-863960-X

Library of Congress Catalog Card Number: Available upon request

Interpretation of the printing code: The rightmost number of the first series of bers is the year of the book’s printing; the rightmost number of the second series ofnumbers is the number of the book’s printing For example, a printing code of 00-1shows that the first printing occurred in 2000

num-Printed in the United States of America

Note: This publication contains the opinions and ideas of its authors It is intended to

provide helpful and informative material on the subject matter covered It is sold withthe understanding that the authors and publisher are not engaged in rendering profes-sional services in the book If the reader requires personal assistance or advice, a com-petent professional should be consulted

The authors and publisher specifically disclaim any responsibility for any liability,loss, or risk, personal or otherwise, which is incurred as a consequence, directly or in-directly, of the use and application of any of the contents of this book

Pearson Education

Part 1: Getting Started 1

Discover the advantages and disadvantages of home ownership.

Find out how much home you qualify for and understand the role your credit plays.

3 Understanding the Up-Front Costs of Buying a Home 29

Yes, you have to make a down payment.

Discover who’s who and which kind of agent is for you.

You’re the customer Find a lender who will treat you like one.

Examine your lifestyle to determine your ideal home and neighborhood.

Before you start shopping, think about what you need and what you want in your home.

Buyer’s market versus seller’s market, a sample MLS listing, and more!

From bedrooms to kitchens to shower nozzles—try thing on for size.

Condos, co-ops, townhouses, patio homes, and zero lot line homes can have their advantages.

Don’t like used homes? Find out how to get the most out

of a new homebuilder.

13 Fixed-Rate Mortgages 143

If the interest rates are low or you will be in the home for

a while, perhaps go fixed.

If your credit’s not so good, rates are high, or you won’t be

in the home long, perhaps go adjustable.

If your circumstances warrant a different type of

financ-ing, there are many others to choose from.

They don’t make you fill out all those forms for the fun of

it, learn what they are for.

Like buying a used car, this process can be an elaborate

game.

Counteroffers are lobbed back and forth until you buy

your home or someone cries “Uncle!”

Protect yourself from the 11 common perils and more.

Make sure you don’t get trapped in a money pit.

It’s like a big party Invite all your friends Bring all your

money.

It’s more complicated than sticking a “For Sale” sign in

your front yard.

Strategy, pricing, marketing, negotiating—you’ll work hard

for that 6 percent savings.

An agent can help you in innumerable ways, but be sure

to get a good one.

Clean and repair, but don’t go overboard on the

remodeling.

27 Dealing with Purchase Offers 289

Know your bottom line.

28 Handling the Closing: Seller’s Perspective 299

It’s that party again, but this time you get to keep the

Contents

1 The Dream of Owning a Home 3

The Advantages of Owning a Home .3

The Drawbacks of Owning a Home .5

Facts About Buying a Home 7

Who Is Who? .9

What Happens When You Buy? .10

What Happens When You Sell? .10

2 How Much Can You and Your Credit Afford? 13 How Much You Make and How Much You Spend .13

What If You’re Self-Employed? .14

Keeping Track of Income .15

Keeping Track of Expenses .15

How Much Can You Borrow? .16

Understanding Lender Ratios 16

What’s Your Ratio? .17

Example Ratios 18

Prequalifying for a Loan 20

What Do You Need? 20

Advantages and Drawbacks .21

Getting Preapproved for a Loan 21

Checking Your Credit 22

Getting a Credit Report .22

What’s on Your Credit Report? .23

What’s a FICO Credit Score? .24

Are You a Risky Creditor? .25

Correcting a Mistake or Responding to Problems .25

Strengthening Your Credit .26

Dealing with a Bad Credit Report .26

Before All the Numbers Make You Dizzy 27

3 Understanding the Up-Front Costs of Buying a Home 29 Down Payments .29

How Much of a Down Payment Do You Need? .30

Where to Get the Down Payment .30

What If You Don’t Have Money for the Down Payment? 30

When Do You Fork over the Down Payment? .31

Closing Costs .31

Lender Fees 32

Advance and Reserve Payments 33

Private Mortgage Insurance (PMI) .34

Other Fees .34

Adding Up All the Costs .35

4 Buying a Home with an Agent 37 Who Does What? .38

Agents 38

Brokers 38

Realtors 38

New-Home Agents .39

Who’s Working for Whom? .39

Using a Buyer’s Agent .39

Using a Selling Agent .40

Using a Discount Broker .43

How Agents Can Help .43

Offering Financial Help .43

Finding the Right House .44

Negotiating and Closing the Deal .45

Selecting a Good Agent .45

Finding an Agent .46

Putting an Agent to the Test .47

Getting Rid of an Agent .48

Working with “For Sale by Owner” Homes 48

5 Selecting a Mortgage Lender 51 Types of Lenders 51

Understanding the Secondary Market .53

Uncle Sam Helps Out .53

Portfolio and Jumbo Loans .53

Where to Find a Lender .54

Getting Help from Your Agent .55

Reviewing a Mortgage Advertisement 55

Looking for a Lender Online .56

Questions to Ask Lenders 58

Part 2: Choosing the Home for You 63 6 Where You Want to Live 65 Decision Time 65

Finding the Right Community 66

Finding the Right Feel 67

Contents

Finding the Right Neighborhood .68

Choosing Planned Communities .68

Location, Location, Location .70

Home to Stay, or Home to Resell? .70

Family Matters .70

What Is Your Job Situation? .70

What Are the Taxes? .71

What Are the Schools Like? .71

What About Emergencies? .72

What About Fun? .72

7 Defining Your Dream Home 73 Keep an Open Mind .73

Type and Style of Home 74

How Many Stories? 74

What Is It Made Of? .75

Age of the Home .75

The Home Itself .76

The Kitchen .76

Bedrooms 76

Bathrooms 77

The Family/Living/Great Rooms .77

Attics and Basements .77

Closets 78

Garages 78

The Exterior .79

Facing 79

Heating, Cooling, and More .80

Landscaping 80

Repairs 81

Know Your Must-Haves .81

8 How to Find Your New Home 85 What to Expect When Looking for a Home .85

Buyer’s Market vs Seller’s Market .86

Seasonal Sales .86

Finding a Home .87

Drive-Bys 87

Local Papers .87

MLS Listings .88

Word of Mouth 90

Auctions and Foreclosures .90

Online Listings .91

9 Buying a Resale Home 95

What to Expect 95

Do You Like the House? .96

Does the House Have Everything You Need? .97

Can You Live in the House? 98

If You Don’t Like Something, Can You Change It? 99

Is the House Well-Maintained? .99

Your House and the Neighborhood .100

Checking the Area .101

Checklist 101

10 Buying Other Types of Homes 105 What’s the Difference? .105

Buying a Condominium .106

The Board Rules! .107

Selecting a Community .108

Making an Offer .109

Buying a Co-Op .109

Selecting a Co-Op .110

Financing Your Co-Op .110

11 Building a New Home 113 Something New .113

Finding a New Home .114

Using an Agent 115

Custom, Tract, or Semi-Custom .115

Selecting a Subdivision .116

Selecting a Good Builder .118

Selecting a Plan .120

Selecting a Good Lot .121

Understanding the Sales Contract .121

Contract Terms 122

Upgrades, Upgrades .122

Getting a Deal .125

Mortgage Extras .125

Home Warranties .126

Avoiding Problems .127

Part 3: Understanding Your Finance Options 129 12 Financing 101 131 How Lending Works 131

What’s the Charge? .132

Contents

Types of Financing .134

Conventional Loans .135

Government-Backed Loans .135

Fixed-Rate Mortgage Loans .136

Adjustable-Rate Mortgage Loans .136

Other Loan Types .137

Conforming vs Nonconforming Loans .137

Getting Mortgage Insurance .137

Paying Mortgage Insurance .137

Canceling Mortgage Insurance .138

How to Decide on the Type of Financing .138

How Much Can You Afford for a Down Payment? 139

How Much Can You Afford for a Monthly Payment? .139

How Long Will You Live in the Home? .140

What’s Your Risk Level? .140

13 Fixed-Rate Mortgages 143 Adding the Pluses .143

Subtracting the Minuses 144

Checking Interest and Points 145

How Long to Pay? .145

Thirty-Year vs Fifteen-Year vs Biweekly .146

Is the Shorter Term Better? .146

Prepaying Your Mortgage .147

14 Adjustable-Rate Mortgages 149 The Good, the Bad, and the Ugly .149

Understanding How an Adjustable-Rate Mortgage Works .150

The Initial or Teaser Rate .151

The Index 151

The Margin .151

The Adjustment Interval .152

The Rate Caps .152

Understanding Negative Amortization .153

Selecting an ARM—What to Look For .153

Looking at the Worst-Case Scenario .155

15 Other Types of Financing 157 VA Loans 157

Assumptions 158

Balloon Mortgages .159

80-10-10 or 80-15-5 .159

Buydowns 160

Carrybacks 160

Land Contracts or Layaway Payments 160

Two-Step Mortgages .161

How to Do the Two-Step .161

Is the Two-Step for You? .162

Lease Options .162

Other Options .163

Refinancing 163

Subprime Lending .164

16 Applying for a Mortgage 167 The Players .167

How the Lender Decides Whether to Lend You Money .168

Taking the Application .168

Verifying Information .168

Looking at the Credit Report .169

Getting an Appraisal .169

Knowing What Lenders Look For .170

Approving or Denying the Loan 171

Applying for the Loan .171

Spilling Your Financial Guts .171

Locking in an Interest Rate .176

Estimating Closing Costs .176

Estimating Interest Rates .178

Ensuring a Smooth Process .178

What to Do If You Can’t Get a Loan .180

Income Problems .180

Credit Problems .181

Appraisal Problems 181

Discrimination 182

Part 4: Getting the Best Deal 183 17 Making an Offer 185 Understanding the Sales or Purchase Contract .185

What’s Included in the Offer 185

Tips on Making an Offer 186

How Much Do You Offer? .189

Comparing Other Sales Prices .189

How Motivated Is the Seller? 190

Can You Afford the Home? .190

What Terms? 191

What Else from the Seller? .191

Contingencies 192

Financing 192

The Deed and Title 192

Contents

The Inspection .193

The Appraisal 193

Other Contingencies .193

Setting Time Limits .193

Personal Property .194

Condition of Home at Settlement .194

Prorating 195

Making a Deposit .195

18 Working the Deal 197 Understanding the Offer Process .197

Offer Strategies .198

Handling Counteroffers .199

Receiving a Counteroffer .200

Responding to a Counteroffer .200

When to Quit .202

Having an Offer Accepted .202

Withdrawing an Offer .203

Do I Need a Real Estate Attorney? .204

19 Choosing Insurance 205 Understanding the Types of Insurance .205

Getting Home Insurance .206

What Insurance Covers .206

Types of Insurance .206

How Much Do You Need? .207

Tips on Insurance .208

Search the Web for Insurance Information 209

How Payments Are Made .209

Comparing Insurance .210

Getting Title Insurance .210

The Title Search .210

What Title Insurance Protects .211

20 Having the Home Inspected 213 It’s the Law .213

Why Get an Inspection? .214

Scheduling an Inspection 214

What the Inspector Checks .215

What the Inspector Should Check .215

What the Inspector Doesn’t Check .216

What the Inspector Shouldn’t Do .217

Reading the Inspection Report .217

Handling Any Problems .219

21 Handling the Closing: Buyer’s Perspective 223

What Has to Happen Before the Closing .223

Who Owns the Home? .224

The Final Walkthrough 224

What You Pay at Closing .225

Don’t Forget the Down Payment .225

Closing Costs .226

Payable in Connection with the Loan .226

Paid in Advance .227

Reserves Deposited with the Lender .227

Title Charges .228

Government Recording and Transfer Charges .228

Additional Settlement Charges .228

Escrow Accounts—Forced Payments .228

And the Total Comes To … .229

What Happens at the Closing .229

What You Should Bring to the Big Event .230

Signed, Sealed, Delivered 230

Exchanging Money .231

Side 1: The Totals 234

Side 2: The Closing Costs .234

The Passing of the Keys .234

Handling Problems 234

Walkthrough Problems .235

Money Problems .235

Loan Problems .235

Title Problems .235

Moving In! .236

Part 5: Selling Your Home 239 22 Deciding to Sell Your Home 241 Why Do You Want to Sell? .242

Likes, Dislikes, Wishes, and Wants .242

What Do You Hope to Gain? .243

Timing the Sale 243

When Is the Best Time to Sell? .243

Buying Your Next Home .244

Buy First .244

Buy and Sell Together .245

Sell First .245

What Costs Are Involved? .245

Contents

What to Expect When You Sell Your Home .246

Step 1: Getting the Home Ready .246

Step 2: Deciding Whether to Use an Agent .246

Step 3: Pricing and Marketing the Home .246

Step 4: Negotiating Offers .247

Step 5: Closing on the Home 247

Step 6: Buying a New Home .247

23 Selling Your Home Yourself 249 Here Come the Agents .249

Hiring an Attorney .250

Using an Escrow Company .250

Setting the Price .251

Figuring Your Net Proceeds .251

Defining Acceptable Financial Terms .251

Marketing Your Home .252

Putting a Sign in Your Yard 252

Taking Out an Ad 252

Marketing Your Home Online .253

Preparing Fact Sheets .253

Showing Your Home .254

Handling Sales Calls .254

Showing Your Home .255

Holding Open Houses .255

Helping the Buyer with Financing 255

Negotiating an Offer .256

Be Prepared .256

Draw Up Offers .257

Review Offers .257

Closing on the Home .257

Knowing When to Call It Quits 258

24 Selling Your Home with an Agent 259 Should You Use an Agent or Sell Alone? .259

What an Agent Can Do for You .260

Finding an Agent .261

Quizzing the Agent .261

Listing Presentation .262

Signing a Listing Contract .263

Types of Contracts .266

What the Contract Should Include .266

Getting Out of a Listing .267

25 Getting the Home Ready 269

Doing Repairs .269

Inspecting the Home Yourself .270

Getting a Professional Inspection .272

Deciding What Repairs to Make .272

Do It Yourself or Hire Someone? .272

Should You Remodel? .273

Cleaning Up .273

First Impressions Count—Clean Up the Outside .274

Clean the Inside .274

Eliminating Clutter .274

Put Everything Away! .275

Undecorating the Home .276

Collecting Information .276

Understanding Seller Disclosure .276

Do You Have to Disclose? .277

What Must You Disclose? 277

Completing a Seller Disclosure Form .280

26 Pricing and Marketing the Home 281 Setting the Listing Price .281

Studying Comparables .282

Getting an Appraisal .284

How the Market Affects Price .284

Deciding What Else to Offer .284

Figuring Your Net Proceeds .285

Showing Your Home .286

Scheduling a Showing .286

Getting the Home Ready .287

Dealing with Criticism .287

Holding an Open House .288

27 Dealing with Purchase Offers 289 Dealing with Other Agents .289

Evaluating an Offer .290

What an Offer Should Include .290

What Price and at What Terms? .293

Checking the Contingencies .293

Checking the Time Limits .294

Making a Counteroffer 294

Accepting an Offer .295

What to Do If You Don’t Get Any Offers .295

Should You Help with Financing? .296

Contents

28 Handling the Closing: Seller’s Perspective 299

What Is Closing? .299

What the Buyer Has to Do 300

What You Have to Do .300

Termites and Other Critters 300

Checking the Chain of Ownership 301

Collecting Documents .301

Hiring an Orchestrator .301

Handling Problems 302

What Happens at Closing .303

Fees You Can Expect 304

The HUD-1 Statement—My Column or Yours? .304

Sign on the Dotted Line .307

Tax Implications .307

Reporting the Sale of Your Home .308

Figuring the Tax Basis .308

Moving Out! .309

A Glossary 311

B Resources 319

Look in almost any newspaper’s residential real estate section (If you’re reading this,chances are you probably already have You’ve probably also been poring over the tangledmaze of Internet sites related to buying and selling a home.) Notice anything peculiarabout the newspaper sections? There basically are four types of articles:

➤ Advice: “A spec house—one built on a speculative basis, without an order on the

books—can be fancy But it could ultimately disappoint discerning buyers because it’snot customized to their tastes.”

➤ Basics: “Inspections get bugs out of sale deals.”

➤ Paid “advertorials”: Articles written by public relations professionals with one goal,

to get you to buy a home For example, “Just imagine … Relax and unwind in thisfive-year-old Florida-style custom ….”

➤ Features: “Family finds home with a heart.” That is great information

Homeowners are sponges for advice Something always needs to be fixed, something ways needs to be replaced, something always could be improved—and nobody is an expert

al-in everythal-ing That’s where those basics come al-in (Can I fix this leaky faucet myself, or do Ineed a plumber?)

That promotional ad copy serves an important purpose, too, whether in the paper or onthe Internet Without it, you’d just have to drive around and look for Realtors’ signs Andthose feature stories—my specialty—help us all live vicariously through others who are liv-ing the “American dream” of home ownership They help us see the possibilities in ourown homes They can stretch our own thinking, showing us new possibilities They can in-spire

But right now, you’re looking for the first two: advice and the basics Inside The Complete

Idiot’s Guide to Buying and Selling a Home, Third Edition, you’ll find it, all in one volume It’s

in language that is easy to understand It’s in bite-size portions, suitable for the enced needing a refresher course, as well as those needing a broad introduction to the nutsand bolts—the infrastructure, if you will, that upholds the dream for all of us

experi-Forgive the sugar My colleagues in the newspaper business can be a cynical lot But I’mnot It truly is a remarkable thing to own your own home It truly will change your life Buying or selling a home isn’t a leisure activity It’s a form of work That doesn’t mean itwon’t be enjoyable It’s kind of like the “work” a gardener spends in a garden Likewise,what you’re doing right now isn’t reading for leisure It’s reading for a reason So, read on.Bend the pages Mark them up Be prepared You’re headed home

Richard Mize

Real Estate Editor

When it comes to some topics (computers, buying and selling a home, Wall Street),you may feel overwhelmed The terms used in each field are confusing, and the ex-perts lord their knowledge over you For example, if you are buying a home, yourlender may say “You’ll want to consider a conventional ARM with a 90LTV for thathome The qualifying ratios used are 28/36.” Excuse me?

You’re an expert in your own field You have your own lingo and expert knowledgethat you use day-to-day No, you aren’t an idiot But when it comes to real estate, youneed explanations in terms anyone can understand You don’t need a degree in realestate law; you just need someone to tell you what you need to know and what’s im-portant That’s what this book does

So You Want to Buy a Home

Owning a home is probably the quintessential American dream From the first days

of settling this country, our forebears (either in spirit or in blood) fought hard to earnthe right to own a spot of land That right and dream have been passed down eversince, not only to their descendants, but to every newcomer who sets foot on thissoil

At times, you may feel as if buying a home is as hard as riding across the plains in awagon train for months Bouncing over mile after mile of flat land, covered in dust,wearing the same outfit for an entire year, until you reach that little piece of landsomewhere in the West Or as hard as riding in the hull of an immigrant ship, yourchildren crowded around your feet, with little to eat, awaiting the start of a new life

in a strange land Once you start the homebuying process, you may actually imaginethat those obstacles would be easier to surmount than the ones you face With thisbook, though, you’ll find your struggle manageable, sometimes even fun

The Complete Idiot’s Guide to Buying and Selling a Home, Third Edition, strives to make

understanding the homebuying process easy The book is divided into five parts, andeach part focuses on a particular step in the homebuying process:

Part 1, “Getting Started,” covers getting ready to buy a home You have to prepare

mentally and financially, and this part tells you what to expect In addition, this partwalks you through choosing an agent (if you want one) and picking a mortgagelender

Part 2, “Choosing the Home for You,” talks about determining where you want to

live and what type of home you want to live in

Part 3, “Understanding Your Finance Options,” focuses on the next step in the

homebuying process: getting financing so you can pay for the home This part ers, in simple terms, the financial options available for purchasing your home

cov-Part 4, “Getting the Best Deal,” brings you to the final step: closing on the home.

Once you find the home you want, you have to convince the sellers to sell it to you

at the price you want to pay This part covers how to make an offer, review a teroffer, and get an offer accepted Before you can move in, you have to have a fewthings done, such as having the home inspected and getting insurance Then youhave the final showdown when you sign a couple hundred documents, turn overyour money, and finally get the keys to your new home

coun-Part 5, “Selling Your Home,” covers selling your home—making the decision to sell,

getting the home ready, deciding whether to use an agent or go it alone, pricing andmarketing the home, negotiating offers, and closing on the home

If you are buying your first home, Parts 1 through 4 will lead you through the cies of the homebuying market, teaching you essential strategies for dealing withRealtors, lenders, inspectors, building contractors, and other scary people If you havealready bought a home and are now buying a new one, this book can help you, too.During the first purchase, you may have felt like a horse being led around by its nose

intrica-“Sign here You need this Pay for this.” And so on This book can give you a betterunderstanding of what you are signing, what you need, and what you pay

Extras

In addition to clear explanations and advice, this book offers vital information thatcan help you accomplish a difficult task more easily, or caution you about a commonpitfall These tips are splashed generously throughout the book and are easily recog-nizable with the following icons:

Real Estate Terms

These notes introduce you to the

mysterious lingo used in real

es-tate After reading these notes,

you can throw around terms such

as LTV and settlement sheet

like the pros.

on the project, and for being one of the best Production Editors I have ever workedwith Thanks are also extended to Fran Blauw for her helpful questions and thoroughcopy edit A heartfelt thanks also to Sidney H Lewis for all his hard work and dedica-tion during the building of our very own dream home.

Special thanks to Stuart Kush for reviewing the book for accuracy and giving me newhomebuilder pointers Stuart served in the Navy for three years during World War II;was self-employed in the decorating business in Hollywood, California, for 43 years;and has been selling new homes in Arizona for the past 10 years He presently sellsnew homes for Fulton Homes Most of his new-home building experience comesfrom his son Larry, who has been in new-home building for the past 25 years

Shelly O’Hara and Maris Bluestein would like to thank Pegg Kennedy, an FC Tuckeragent in Indianapolis, for her expert advice and suggestions; and Sarah Diana, TomMattingly, Katherine Rock Ray, Steve Surette, and Todd Tarbutton for their sugges-tions and comments

Special Thanks to the Technical Reviewer

The Complete Idiot’s Guide to Buying and Selling a Home, Third Edition, was reviewed by

an expert who double-checked the accuracy of what you’ll learn here to help us sure that this book gives you everything you need to know about buying and selling

en-a home Specien-al then-anks en-are extended to Stephen D Bren-adley

Buyer Beware

To avoid common mistakes, look

for this pitiful home Here you’ll

find warnings and cautions

against potential problems or

misunderstandings.

Bet You Didn’t Know

These handy sidebars contain useful information that is not obvious or readily available.

Stephen D Bradley is the vice president of Capital Pacific Mortgage, serving thegreater Phoenix, Arizona, marketplace The company handles FHA, VA, conventional,and subprime loans, as well as first and second mortgages in their market area.Stephen is the responsible individual per the State of Arizona licensing for CapitalPacific Mortgage and has 15 years of experience in the mortgage industry You canreach Stephen at MTGLEDN@CONCENTRIC.NET for any mortgage questions MB-0903082

Part 1 Getting Started

Owning a home can provide you with many benefits Once you make the decision to chase a home, you need to become financially prepared to make that commitment You want to find out how big a down payment you can afford and how much you can spend for a home.

pur-In addition, you need to decide whether you want to work with an agent and find a lender that will help you purchase your dream home.

➤ Discovering the many advantages of owning a home

➤ Understanding the drawbacks of owning a home

➤ Learning who all the real estate people are

➤ Reviewing the buying and selling process

Almost everyone imagines owning his or her own home After all, that’s part of theAmerican dream For generations, most Americans have been driven to own a piece ofAmerica As much of America gets parceled into smaller and smaller pieces, and thosepieces get more and more expensive, that drive isn’t growing any less intense

Owning a home is still as enticing as it ever was, but is it right for everyone? Is it right foryou? If so, what are the advantages and disadvantages? Who are all the people you will beworking with? How do you know what happens when? This chapter explores these ques-tions and more

The Advantages of Owning a Home

Uncle Sam likes to encourage home ownership, so you get a big tax break when you ownyour own home You get to deduct some, if not all, of the interest you pay on the loan aswell as some of the costs involved in financing your home Your property taxes are also deductible On a modest home, you may be able to deduct, for example, $8,000 or moreper year That can translate into thousands of dollars of tax savings, depending on your taxbracket

Home ownership also brings with it the advantage of enforced savings Unlike a rent ment, which goes bye-bye once you pay it, some of the money you pay on your home

pay-goes toward building up your equity You can take out a loan against your equity, and you

can get back the equity when you sell your home

Suppose that you sell your home for $150,000, the realtor fees (6 percent) come to $9,000,and you still have $130,000 left to pay on the principal payment to the mortgage com-pany This means that you will probably receive a check for $11,000 for the sale of yourhome ($150,000 – 9,000 – 130,000 = $11,000), minus any selling costs you incurred.Equity is the percentage of the home you own When you first purchase a home, the bankowns most of it This is most likely because you only had a small percentage to put towardthe down payment on the home When you start making payments, most of the payment

goes toward the interest on the loan (of course, the gage company gets its money first), but a drop or two goesinto the equity bucket

mort-As you pay off more of the loan, more drops go into theequity bucket When you sell your home, that bucket isyours

If you want to build equity in your home faster than ply paying your monthly mortgage, you can usually makeadditional payments toward the principal of your homeloan If you aren’t sure whether you can do this, checkwith your mortgage company and ask if your loan has anyprepayment or additional payment penalties Refer to the

sim-“Prepaying Your Mortgage” section in Chapter 13, Rate Mortgages,” for more information

“Fixed-Real Estate Terms

Equity is the financial interest or

cash value of your home, minus

the current loan balance, minus

any costs incurred in selling the

home.

Bet You Didn’t Know

Another interesting note is that if you continue to make the payments for 30 years until your home is paid off, you will likely pay two to three times the original amount you bor- rowed to purchase your home (depending on your interest rate) Hopefully by then your home will have appreciated (gone up in value) considerably Don’t let this get you

down—the mortgage company is letting you borrow thousands of dollars for the life of the loan (for example, 30 years) It would have probably taken you twice that long just

to save that much; this way, you have your nice home to live in all the while.

Chapter 1 ➤ The Dream of Owning a Home

If you rent an apartment or home, you don’t have much control over the rent Landlordscan raise the rent—sometimes as much as they want As a homeowner, on the other hand,you have the advantage of fixed housing costs If you pay $800 the first month of a 30-year fixed mortgage, you’ll pay $800 the last month, for principal and interest Ask yourparents how much their house payments were—probably between $50 and $500 Thankgoodness for the time value of money If you get an adjustable-rate mortgage, however,the payments may vary somewhat The types of financing are covered in Part 3, “Under-standing Your Finance Options.”

Most homes appreciate—or increase in value—over time Your home is likely to be worth

more when you sell it than when you purchase it; this is known as building equity You can

use the money you make on the sale of your home to finance a bigger and better home or

to finance your retirement (Keep in mind that not all homes appreciate in value.)

The financial and rational advantages are great, but probably the best advantages of ing a home are the control and autonomy that ownership affords you, and the sense ofpride in that ownership There’s just something special about owning your own place

own-Bet You Didn’t Know

You can paint all the rooms chartreuse and knock out walls to remodel if you want It’s your home, and you can do anything you want Well, almost anything Keep in mind that many communities require you to secure a building permit for substantial structural

changes to your home In addition, you might have to get “permission” from your borhood homeowners association to make improvements or add particular items to the outside of your home.

neigh-The Drawbacks of Owning a Home

When the roof is leaking, your mortgage payment is late, and your new neighbors move

in with a 90-pound German shepherd that likes to howl at the moon every night, youmay seriously start to realize that for all the advantages associated with owning a home,there will be some drawbacks

The downside of buying a home is that you must make the monthly mortgage payments;

if you don’t, the lender can foreclose on the home, meaning that the lender can take your

home away from you

In addition to the actual loan, you will have property taxes, homeowners insurance, andpossibly even mortgage insurance fees to pay that depend on your down payment amount(refer to Chapter 12, “Financing 101,” for more information on mortgage insurance).

Other expenses that you probably don’t have as a renterare as follows:

➤ All the utility bills (landlords usually cover some ofthe utilities for apartment dwellers, like water andsewage, and maybe even your electric or gas use)

➤ Maintenance and upkeep on the home and

proper-ty (such as fixing the leaking roof, mowing thegrass, painting the garage, spraying for insects, and

so on)

➤ Homeowners association fees (many new homes,condominiums, co-ops, and townhouses have asso-ciation fees you must pay in order to live in a par-ticular area)

Finally, you can’t pull up stakes and leave as easily if you own a home If you’re a renter,you can give your notice and take off You don’t have any financial responsibilities to thelandlord When you have a home, on the other hand, you have commitments you mustsettle before moving on

In some cases, buying a home isn’t the best idea Here are some scenarios of when you areprobably better off not buying

➤ You’re buying a home to live in solely as an investment You should be aware

that, although most homes do appreciate in value, appreciation is not guaranteed.Many things that you have no control over affect the value of your home—localeconomy, national economy, abandoned buildings or new businesses in the neigh-borhood, a landfill, tacky neighbors who paint their homes chartreuse

➤ You know you’re going to keep the home for only a short time For instance, if

you may be transferred to a new job or get married and move, you may want to sider renting rather than buying When you haven’t owned a home for very long, it’sdifficult to break even, let alone make a profit, when you sell it You don’t havemuch equity built up, plus you have all the costs of selling the home to consider

con-➤ You aren’t sure that you’re going to like the area where you’re considering a chase Do your homework first Don’t just jump in and buy a home because it’s, say,

pur-close to where you work Try visiting the local supermarket or taking your kids to theneighborhood park—anything that will allow you to get to know some of the neigh-bors and get a “feel” for the area

Real Estate Terms

When someone fails to make

payments on a home, the

mort-gage company may force

pay-ment by seizing and selling the

property This proceeding is

known as foreclosure.

Chapter 1 ➤ The Dream of Owning a Home

➤ You cannot count on a steady income to make your payments The lender may

not approve you for a loan If you’re approved and you cannot make the payments,the lender may foreclose You will lose all the money you have invested, and yourcredit rating will be severely tarnished If you have an unsteady income, you maywant to wait until you’re sure you can make the long-term financial commitment ofbuying a home

Don’t let the drawbacks get you down, though—owning a home is quite satisfying and agreat learning experience

Facts About Buying a Home

Along your quest to purchase a home, you will find that everyone has an opinion andsome little tidbit of information to share with you Your best bet is to do your own re-search and ask lots of questions This book is a good place to start, along with all of theWeb sites suggested If you have questions, make sure you find an answer, and preferablyfrom a reliable source (not your neighbor’s cousin who just sold his home back in Omaha).There is a lot to learn about real estate and owning a home Here are some pieces of infor-mation that will help you be better prepared:

➤ Everything will vary You’ll find that there aren’t many tried, true, and trusted facts

about the home-buying and home-selling process Every home buyer and home er’s experience varies wildly One person may sell his home in the first week it is onthe market; it may take another person six months One person may feel an adjust-able mortgage is the only way to finance Another person may say it’s insane to gam-ble like that and insist on a fixed-rate mortgage

sell-Everything varies according to your situation and

what you want

➤ Everything will change Laws about what tax

benefits you get, laws about what the seller must

tell you, and real estate practices can change at

any time

➤ There is no perfect time to buy Some buyers get

caught in the “I’ll wait until I can afford my

dream home” trap These buyers wait and wait

until they think the market is perfect, they find

the home they’ve always wanted, or they can

af-ford the home they’ve always wanted Unless you

have a compelling reason to wait, you shouldn’t

The perfect market, perfect home, perfect price

may not come along Buy what you can afford

and then trade up

Real Deal

You can learn a lot from this book about buying and selling a home, but remember to ask friends and colleagues about their experiences And when dealing with agents and home- owners, don’t be afraid to ask them about everything.

➤ Almost everything is negotiable From the price you pay for the home to when

you can move in, negotiate, negotiate, negotiate When you make an offer, you canand should ask for the moon if that’s what you want

➤ Negotiate to win-win A lot of people think that a successful deal happens only

when they impose their will on another and get their way entirely (a win-lose tion) The best deals, though, are when both negotiating parties are happy (a win-win situation) If you buy a home at the price you want and the terms you want,and the sellers also get the price they want at acceptable terms, you both benefit

situa-Bet You Didn’t Know

Keep your eyes and ears open for changes in interest rates Factors like how well the stock market is doing, what the unemployment rate is, the price of gas and fuels, and other business and economic issues affect the interest rates (like the Federal Reserve altering in- terest rates) You can get more information about the current financial market by reading

publications like The Wall Street Journal You can also try numerous Web sites Check out

www.bankrate.com for up-to-date information on all things financial They will even send you automatic e-mails with information about what is happening in the real estate mar-

ket and where interest rates are heading Click the E-mail rate alerts link below the

Get involved section on the left side of the screen and follow the directions.

➤ The little-known physics Law of Expanding Possessions If you’re moving from

a small home to a larger home, be prepared for the Law of Expanding Possessions.Physicists have yet to understand what causes this phenomenon, which simply stated says, “If you have a two-bedroom home full of junk and move to a four-bedroom home, you will have a four-bedroom home full of junk.”

➤ The redecorating cycle Be prepared for the redecorating cycle When you move in,

you’ll probably find that the couch isn’t going to go with the carpet in the livingroom Then when you recarpet, the recliner is going to look shabby, so you’re going

to need a new recliner And while you’re getting the recliner, you might as well pickout a new coffee table, which will bring you full circle back to the couch, which nowdoesn’t seem to fit in with the new carpet, recliner, and coffee table And after youpaint the room to go with the new couch, carpet, recliner, and coffee table, the

Chapter 1 ➤ The Dream of Owning a Home

dining room will need work Rest assured that one day everything will be perfect.That’s the day you put the “For Sale” sign up and hope to recoup all your redecorat-ing dollars

Now that you have a better idea of what to expect, you are probably wondering who allthe people are who will help you along the way

Who Is Who?

Now that you have read some information on the pros and cons of buying a home, youmight be wondering how to get started Buying this book is a step in the right direction,but you still need to know a little something about the processes and the people you will

be working with to make your dream of owning a home a reality

Here are some of the people you might work with:

➤ Realtor (or agent) If you want to buy a home, it is a good idea to have a realtor

working for you This is the person who will help you find your dream home andhelp get you the best deal Notice that I didn’t say, “get you the best price.” I said

“deal” because sometimes there are other things you can negotiate for that will makethe deal “sweeter.”

➤ Sales associate (or new-home consultant) If

you are trying to build a new home, you might

be dealing with a sales associate who is serving

as the broker for the new home builder

➤ Lender (or mortgage broker) Unless you have

the cash lying around to pay for your new

home, you will be financing your home with a

mortgage company The mortgage company’s

representatives usually have some type of title,

but many are glorified salespeople (beware) If

you are working with a mortgage broker, that

person serves as the liaison between you and

the mortgage company that he or she has set up

for you to work with

➤ Escrow officer (loan officer) When that fateful

day arrives when you must sign on the dotted

line (actually, you will sign on so many lines,

you will almost forget how to spell your own

name), this is the person who walks you

through the process

➤ Seller This is who you are buying the home from or the company you are having

build your new home Or, this might be you, if you are selling your home

Real Deal

If you know people in the real estate business, contact them and pick their brains for the name of a good realtor; referrals are usually your best bet The same goes for finding a mortgage company If you know someone who has successfully closed on a home with a particular lender (and broker), that is a good place to start.

➤ Buyer This is you and your partner, if you are purchasing the home with someone.

Or, this might be the people who are buying your home from you, if you are sellingyour home

Now that you are a little more familiar with all the parties involved in the purchase andsale of a home, let’s move on to the actual steps involved

What Happens When You Buy?

You have decided that you are tired of living in your apartment or rental home, or maybemom and dad are trying to push you out of the nest You want to become one of the mil-lions of Americans who have embarked upon home ownership Now what do you do?Here is a (best-case scenario, mind you) quick-and-dirty, step-by-step process for purchas-ing a home:

1 Take a look at your finances and credit history, and determine (on your own) how

much home you think you can afford (Also pay close attention to Chapter 2.)

2 Obtain financing from an approved lender This means you need to get prequalified

or, better yet, preapproved (Refer to the “Getting Preapproved for a Loan” section inChapter 2.)

3 Narrow down your criteria for the type of home you are looking for.

4 Start a savings plan (if you don’t already have one) for the down payment and

clos-ing costs associated with purchasclos-ing a home

5 Find a real estate agent you feel comfortable with who listens to your wants/needs

and will work for you If you don’t want to work with an agent, skip to step 6.

6 Start looking to find your dream home, whether it be a current home for sale or a

new build

7 Read and understand everything you can about your financing options This can be

confusing, but it is a very important part of the home-buying process

8 Make an offer on a home, possibly a counteroffer, and close on the deal.

Along the way, you will find it necessary to choose a homeowners insurance company, getthe home inspected, perform a walkthrough, and take care of other odds and ends thatmust happen before the keys are turned over to you

What Happens When You Sell?

If you own a home that you need to sell, you will want to pay close attention to Part 5,

“Selling Your Home,” and most likely perform the tasks required to sell your home rightalong with (or before) you close on your new home

Chapter 1 ➤ The Dream of Owning a Home

Here is a (best-case scenario again) quick-and-dirty, step-by-step process for selling yourhome:

1 Find a real estate agent you feel comfortable with who listens to your wants/needs

and will work for you If you don’t want to work with an agent, skip to step 2.

2 Get the home ready for people to view; possibly move out.

3 Price the home realistically and market it strategically.

4 Deal with the different purchase offers you receive (hopefully at least one or more).

5 Close on the home and hand over the keys.

It all may sound a little scary, and it may seem like you will never get everything to pen when it is supposed to happen Well, that is what this book will help you with Andyou will get there soon!

hap-The Least You Need to Know

➤ There are many advantages to buying a home, including tax savings, tion in the value of your home, enforced savings, and having a place to call your own.

apprecia-➤ You should carefully consider the wisdom of purchasing a home if you don’t plan to live in the area for long, you’re not sure you are going to like the

area, or you do not have a steady income.

➤ Learn who all the different people are who will be helping you purchase your

home Make sure they are reliable and that they are willing to work for you.

➤ The process of purchasing a home can appear complicated; learn as much as you can about each step along the way and ask lots of questions.

➤ The process of selling a home can take a few days, months, or even years, depending on many factors you decide on along the way.

Chapter 2

How Much Can You and Your Credit Afford?

In This Chapter

➤ Calculating your total income and monthly expenses

➤ Finding your appropriate price range

➤ Getting prequalified and preapproved

➤ Checking your credit history

If you had enough money to pay cash for your home, buying a home would be easy—simply write a check Unfortunately, few people can pay cash for a home Around 99 percent of home buyers borrow money to buy their home You probably fall into this

99 percent Even if you did have enough money to purchase a home outright, you mightnot want to do so because of the tax benefits

The critical question is how much can you afford to borrow?

All lenders are going to take a close look at your financial situation This chapter covers theupfront costs of buying a home and then helps you take a close, perhaps painful, look atyour financial and credit situation

How Much You Make and How Much You Spend

Before lenders will give you a loan, they will carefully review the money you make and themoney you spend The first thing you should do in figuring out how much money you canspend on a home is to determine your yearly and monthly gross income

Your monthly gross income is the amount you earn each month before taxes For example,

if you earn $36,000 per year, you gross $3,000 each month (36 ÷ 12 = 3) If you and yourpartner combine your gross income to earn $60,000 per year, you gross $5,000 eachmonth (60 ÷ 12 = 5) Your net income is a completely different story.

To begin, gather all your check stubs and income information If you will be buying thehome with a partner, gather income information for this person as well

If you have other income from freelance work or the sale

of furniture that you make in your woodshop, gather thatinformation also Make sure that this additional income

is money that you have paid taxes on; otherwise, the der will not consider it

len-If you have other income from bonuses, know thatbonuses don’t always count This is because bonusmoney is not always guaranteed If you want to haveyour bonus money considered as part of your gross salary,you need to prove that bonuses are a regular part of yourpay You must show a track record of receiving bonusesfor two years Your employer, for instance, may be able towrite a letter saying that the bonus is dependable

If you receive alimony or child support, you can includethis money in your total, if you want You must showthat this is a dependable source of income and will becontinuing for a minimum of three years You may need

a settlement statement from your divorce that states theamount Most lenders will consider only income that can

be verified—from your employer or past tax returns.Keep in mind that lenders will look for an average income They will want to evaluateyour income from the past two years to make sure that it has been steady, and to take intoconsideration any seasonal jumps Usually two years of continuous employment proves

to lenders that you have a steady income If you have had multiple jobs in the past twoyears, lenders may require that you write a letter as to why you have switched jobs often

In addition, if you’re recently out of college, lenders may take into consideration your ture earning power

fu-What If You’re Self-Employed?

Back in the day, banks sometimes looked unfavorably at people who were considered to

be “self-employed.” They were considered a risk and had no guarantee of getting approvedfor a loan Nowadays consultants and small businesses are popping up all over, and thosewho are self-employed are treated almost like people with “real jobs.”

If you’re self-employed, the lender will usually consider as gross income the amount of

Real Estate Terms

In addition to your gross income,

you might have heard of net

in-come, which is the amount you

make after taxes and other

ex-penses A good way to remember

the difference between gross and

net is to picture a fishing net;

the net amount is what is left

after part of the gross amount

falls through.

Chapter 2 ➤ How Much Can You and Your Credit Afford?

paid taxes on only $35,000, the lender will consider $35,000 as your gross annual income.You will have to show two years of tax returns to verify your income

If your self-employed income fluctuates from year to year, you might be asked to vide a letter as to why your income went down from one year to the next Of course noletter is necessary if your income goes up Lenders like consistency—although they don’thave a problem if your income keeps going up Also note that if you grossed $50,000 oneyear and $100,000 the next year, the bank will average the two years to come up with anaverage gross income of $75,000

pro-If you don’t have two or more years of tax returns and your business is mainly freelance orcontract work, it can help to show the lender copies of contracts you have for current andfuture work

Keeping Track of Income

Use the following worksheet to record your yearly gross income To calculate your

month-ly gross income, divide this figure by 12

Calculate your gross income.

You now know how much money you and your partner make each year and each month.You will use the figures along with your monthly expenses to calculate how much youcan borrow in the section “What’s Your Ratio?”

Keeping Track of Expenses

You know the money that is coming in Now you need to figure out the total money that

is going out Lenders consider this your monthly expense You might be surprised to findout how much money you have (or don’t have) left over at the end of the month afterpaying all your bills

You need to collect all your required monthly payments and total them This includes carloans or leases, student loans, minimum monthly payments you must make on any andall credit cards, and so on Use the following worksheet to record your monthly expenses

You will use this figure in the next section to compare some lending ratios.

How Much Can You Borrow?

The first part of the loan equation is complete: You know how much you make and howmuch you spend The next step is to figure out how much you can borrow

If you’re getting tired of all the number crunching, you can use a ballpark method for uring out how much you can borrow Roughly, you can borrow up to 2 to 21/2times yourannual gross salary (sometimes more) If you and your partner make $50,000, you might

fig-be able to buy a home in the $100,000 to $125,000 price range

Lenders and agents are a little leery of the ballpark method For one thing, this method istoo easy, and if they allow things to look too easy, you may figure out you don’t need

them More important, rough estimates can’t take intoconsideration individual circumstances For example, ifone couple with a $50,000 income has $20,000 in savingsand no car payment, they may be able to afford an evenmore expensive home than a ballpark figure would indi-cate If another couple with a $50,000 income has two carpayments, maxed-out credit cards, and intend to get theirdown payment by winning the lottery, they might notqualify for a home in any price range

Understanding Lender Ratios

Lenders compare your income and monthly payments tocertain qualifying ratios—most commonly known as thedebt-to-income ratio If you have a particular lender inmind, call the lender and ask what ratios it uses You will

Real Deal

If you have less than 10 months

left on an installment loan, don’t

include it in your total monthly

debt payments If you’re close to

10 months, consider paying off

the loan enough to bring it under

the 10-month mark Then you

don’t have to count it.

Calculate your monthly

expenses.

Chapter 2 ➤ How Much Can You and Your Credit Afford?

➤ 28/36 (the ratios most often used for conventional loans)

➤ 29/41 (ratios used for FHA loans)

The first number, sometimes called the front-end ratio or housing expense ratio, is the

per-centage of your income that you can spend on housing For example, most lenders sayyour monthly house payment (including loan payment, property taxes, and insurance)shouldn’t total more than 28 percent of your gross monthly income (that is, your grossannual income divided by 12) The ratio used depends on the amount of money you putdown on the home as your down payment

The second number, the back-end or overall debt ratio,

totals your housing expenses plus your long-term

monthly debt, then figures this total as a percentage

of your monthly gross income For example, most

lenders say that your housing expenses plus your

monthly debt should not be more than 36 percent of

your monthly income

How do lenders come up with these ratios? Lenders

don’t like guesses, but that’s basically what the ratios

are The lenders feel if they follow these guidelines,

homeowners will be able to pay off their loans The

ratios are arbitrary, though, and are based on studies

done in the 1930s and 1940s by the Federal Housing

Administration Most lenders sell the loans to a

sec-ondary market, and, therefore, follow the guidelines

set by the agencies that purchase the loans The ratios

will vary depending on the area Also, the bigger your

down payment, the less significant the ratios become

What’s Your Ratio?

To figure out your housing ratio (maximum mortgage payment), use the following sheet and these steps:

work-1 Enter your monthly gross income.

2 Multiply this amount by 28 percent (.28) The resulting figure is what you can

con-servatively afford for a monthly mortgage payment

Real Estate Terms

The housing expense ratio

(front-end) is the percentage of gross monthly income that goes toward paying a mortgage or

rent on a home The overall

debt ratio (back-end) is your

total monthly expenses, ing housing, credit cards, loans, and all other debt.

includ-Calculating your mum mortgage payment housing ratio.