Nolo's Essential Guide To Buying Your First Home
Bu y i n g Yo u r
Home
Nolo’s Essential Guide to
• Negotiate a great price
• Get a low mortgage rate
• Make the most of today’s
market
5TH EDITION
Ilona Bray, J.D.
Alayna Schroeder, J.D.
& Marcia Stewart
Free Legal Updates at Nolo.com
“ Nolo’s excellent guide for novice home buyers provides
fresh, updated information about the whole process that
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without it would be like trying to drive a nail without a hammer!”
—Norma Vally, host of Toolbelt Diva (Discovery Home) and
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True Tales From the Diva of Do-It-Yourself
“ Any rst-time homebuyer owes it to him or herself to get this book. It’s
packed with information you won’t nd anywhere else, yet is remarkably
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“Nolo’s excellent guide for novice home buyers provides fresh, updated
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useful.”
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5th Edition
Nolo’s Essential Guide to
Buying Your
First Home
Ilona Bray, J.D.,
Alayna Schroeder, J.D.,
& Marcia Stewart
LAW for ALL
FIFTH EDITION JANUARY 2015
Editor ILONA BRAY
Cover Design SUSAN WIGHT
Book Design SUSAN PUTNEY
Proofreading ROBERT WELLS
Index SONGBIRD INDEXING SERVICES
Printing BANG PRINTING
Bray, Ilona M., 1962-
Nolo’s essential guide to buying your rst home / by Ilona Bray, Alayna Schroeder & Marcia
Stewart. -- 5th edition.
pages cm
Includes index.
ISBN 978-1-4133-2118-0 (pbk.) -- ISBN 978-1-4133-2119-7 (epub ebook)
1. House buying. I. Schroeder, Alayna, 1975- II. Stewart, Marcia. III. Title.
HD1390.5.B734 2014
643'.120973--dc23
2014019577
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Please note
We believe accurate, plain-English legal information should help you solve many of
your own legal problems. But this text is not a substitute for personalized advice
from a knowledgeable lawyer. If you want the help of a trained professional—and
we’ll always point out situations in which we think that’s a good idea—consult an
attorney licensed to practice in your state.
Acknowledgments
is book was a 100% team eort and couldn’t have been written without
the advice, stories, and ideas of real estate experts and homebuyers from
around the United States. First and foremost, we thank the members of our
advisory board, who spent countless hours reviewing chapters, explaining
local practices, and sharing the best and worst memories from their
professional experiences.
Special thanks to the late Broderick Perkins, a real estate journalist
based in San Jose, California, who reviewed and contributed to every
chapter of this book’s early editions.
Our other invaluable sages included:
• Nancy Atwood, real estate broker with ZipRealty in Framingham,
Massachusetts (www.ziprealty.com)
• Amy Bach, J.D., consumer advocate and Executive Director and
cofounder of United Policyholders, a national nonprot (www.
uphelp.org), based in San Francisco, California
• Timothy Burke, founder and CEO of National Family Mortgage
(www.nationalfamilymortgage.com), based in Waltham,
Massachusetts
• Alicia Champagne, real estate attorney (www.champagneand
marchand.com), short sale negotiator, and Realtor education
teacher in Wilmington, Massachusetts
• Marjo Diehl, Mortgage Adviser at RPM Mortgage in Alamo,
California (www.rpm-mtg.com)
• Sandy Gadow, expert on real estate closing and escrow, and best-
selling author of e Complete Guide to Your Real Estate Closing
(www.escrowhelp.com)
• Kenneth Goldstein, Boston-area attorney with the law rm of Goldstein
& Herndon, LLP (www.brooklinelaw.com), and Chairman of the
Board of Selectman of the Town of Brookline, Massachusetts
• Paul Grucza, Director of Education and Client Engagement for
e CWD Group, Inc. AAMC
®
in Seattle, Washington (www.
cwdgroup.com)
• Richard Leshnower, New York-based real estate attorney
• Paul A. Rude, professional inspector and owner of Summer Street
Inspections, in Berkeley, California (www.summerinspect.com)
• Bert Sperling, city and neighborhood expert and author in Portland,
Oregon, and founder of www.bestplaces.net
• Daniel Stea, broker/owner/attorney at Stea Realty Group in Berkeley,
California (www.stearealtygroup.com)
• Fred Steingold, attorney and author in Ann Arbor, Michigan (many
of his books on small business and other legal matters can be found
on www.nolo.com)
• Russell Straub, founder, President, and Chief Executive Ocer of
LoanBright, a mortgage marketing service based in Evergreen, Colorado
(see www.loanbright.com and www.compareinterestrates.com)
• Tara Waggoner, MBA, real estate broker and Market Manager at
Redn in Houston, Texas (www.redn.com).
A number of other experts provided additional advice—you’ll see many
of them quoted in this book. ey include Neil Binder, New York real
estate investment expert (www.bellmarc.com); Elisabeth DeMarse, CEO
and president at eStreet, Inc., and New York-based real estate industry
expert (www.demarseco.com); Kartar Diamond (www.fengshuisolutions.
net); Debbie Ostrow Essex, child and family therapist based in Berkeley,
California; Stephen Fishman, attorney and Nolo author; Joanna Hirsch,
real estate agent with Pacic Union in Oakland, California (jhirsch@
pacunion.com); Joel Kinney, attorney with Fort Point Legal in Boston,
Massachusetts (fortpoint.me); Annemarie Devine Kurpinsky, associate with
George Devine, Realtor
®
; Pat Lashinsky, former President, ZipRealty; Je
Lipes, Vice President at Rockville Bank in Hartford, Connecticut; Maxine
Mackle, Connecticut Realtor
®
(www.halstead.com); Paul MacLean, retired
home inspector in Austin, Texas; Mark Nash, Associate Broker with
Coldwell Banker, who serves the Chicago, Evanston, Skokie, and Wilmette
areas of Illinois (www.marknashrealtor.com), and author of 1001 Tips for
Buying & Selling a Home; Carol Neil, independent broker and Realtor
®
in
Berkeley, California (www.pacicunion.com); Fiore Pignataro, Realtor
®
with Windermere Realty in Seattle, Washington (www.windermere.com);
Lorri Lee Ragan, formerly of the American Land Title Association (www.
alta.org); Mary Randolph, attorney and author; Frank Rathbun, Vice
President of Communications, Community Associations Institute (www.
caionline.org); Ira Serkes, Berkeley Realtor
®
with Pacic Union (www.
berkeleyhomes.com); Viviane M. Shammas, attorney and real estate broker
in Ann Arbor, Michigan (www.vivianeshammas.com); Debbie Stevens,
Oregon real estate agent (www.ramsayrealty.com); Rich Stim, attorney and
Nolo author; Craig Venezia, real estate author (www.craigvenezia.com);
and Loretta Worters, Vice President of Communications for the Insurance
Information Institute.
No amount of advice can substitute for a personal story, so we’d also
like to thank the many homebuyers who shared the good, the bad, and the
ugly of their own experiences or told us what they’d like from this book,
including Amy Blumenberg, Laurie Briggs, Dave and Danielle Burge, Karen
Cabot, Linda Chou, Jennifer Cleary, Jaleh Doane, Phil Esra, Lisa Guerin,
Gabrielle Hecht, Pat Jenkins, Ellie Kania, Justin and Tamara Kennerly, Chris
and Libby Kurz, Talia Leyva, Willow Liro, Meggan O’Connell, Evan and
Tammy Ohs, Leny and Frank Riebli, Leah Scheibe, Diane Sherman, Bruce
Sievers, Luan Stauss, Tom and Heather Tewksbury, Catherine Topping, Josh
and Gillian Viers, Julie and Malachi Weng-Gutierrez, and Kyung Yu.
Within Nolo, we got huge amounts of help from our talented
colleagues. Rich Stim did an excellent job with the audio interviews.
Other colleagues who lent a hand, researching everything from 50-state
legal matters to fun facts, included Cathy Caputo, Lexi Elmore, Jessica
Gillespie, Stan Jacobsen, Terry McGinley, Kathleen Michon, Stephen
Stine, Leah Tuisavalalo, Charles Walmann, and Jo Warner. Sandy Coury
and Sigrid Metson helped line up advisory board members. Particularly
heartfelt thanks go to the late Steve Elias, whose energy and expertise on
foreclosure matters are sorely missed by everyone at Nolo.
Big thanks to our colleagues in the editorial department, who supported
us through the (long) process of writing this comprehensive (and yet fun!)
text. Kudos to Susan Putney in Nolo’s Production Department who took
a challenging compilation of information and turned it into a beautifully
designed book.
anks also to Nolo founder Jake Warner, who championed this book
idea for many years.
Our basements may be cluttered, our gardens may need weeding, and
our oors may need a good scrubbing—but we love our homes. anks
to the people who helped us get there—professionals (some who taught
us what to do, others who taught us what not to do!) and our families,
who share the joy of homeownership with us.
About the Authors
Ilona Bray is an attorney, author, and legal editor at Nolo. Her other real
estate books include e Essential Guide for First-Time Homeowners and
Selling Your Home: Nolo’s Essential Guide. Her working background
includes solo practice, nonprot, and corporate stints. She sold her rst
home at a prot—despite being in the middle of a real estate downturn—
and bought a larger home. Her fantasy house would be a Greene &
Greene mansion of the same style (like the Gamble House in Pasadena),
with a large sun porch and lots of surrounding trees.
Alayna Schroeder is an attorney whose legal experience has included
everything from work at a corporate law rm to editing and writing
to a stint in the Peace Corps. According to Sacramento Magazine, her
rst home, which she shared with her husband, twin babies, and a
Bolivian-born dog, Luna, was in one of the Sacramento area’s ten Great
Neighborhoods—a fact Alayna tried to remember as she redid the aging
plaster and desperately searched for adequate closet space into which to
stu modern-day baby gear. Alayna’s idea of a fantasy house is always
changing, but she’d settle for an A-frame in the woods with a lake view, big
deck, and gourmet kitchen.
Marcia Stewart is the author or editor of many Nolo real estate books,
including the best-selling Every Landlord’s Legal Guide. Years ago, she
found the perfect “starter” house in one of her favorite neighborhoods.
As her family started to grow, so did the house, with a new second story
and deck. Most recently she (nally!) remodelled her 1950s kitchen. Her
fantasy house would be a Queen Anne Victorian with a home theater and
a beautiful garden and pool.
Your Homebuying Companion ...........................................................................1
1
What’s So Great About Buying a House? .................................................5
Investment Value: Get What You Pay For … And en Some ......................8
Tax Breaks: Benefits From Uncle Sam .........................................................................11
Personality and Pizzazz: Your Home Is Your Castle ...........................................14
No More Landlord: Say Goodbye to Renting .........................................................15
You Can Do It … If You Want To ..................................................................................16
2
What Do You Want? Figuring Out Your
Homebuying Needs ......................................................................................................23
Know Your Ideal Neighborhood: Why Location Matters ..............................26
Know Yourself: How Your Lifestyle, Plans, and Values Affect
Your House Priorities .........................................................................................................28
Know Your Ideal House: Old Bungalows, New Condos, and More .........30
Would You Like Land With at? Single-Family Houses ................................30
Sharing the Joy, Sharing the Pain: Condos and Other
Common Interest Properties........................................................................................33
Factory Made: Modular and Manufactured Homes ......................................... 37
Putting It All Together: Your Dream List ..................................................................38
3
Does is Mean I Have to Balance My Checkbook?
Figuring Out What You Can Afford ............................................................47
Beyond the Purchase Price: e Costs of Buying and Owning a Home
........51
Spend Much? How Lenders Use Your Debt-to-Income Ratio ..................... 57
Blasts From the Past: How Your Credit History Factors In ............................59
What’s Your Monthly Budget? Understanding Your Finances ...................65
Table of Contents
Getting Creative: Tips for Overcoming Financial Roadblocks .....................67
e Power of Paper: Getting Preapproved for a Loan ...................................... 68
4
Stepping Out: What’s on the Market and at What Price ....... 73
What’s the Buzz? Checking Out Neighborhoods From Your Chair ........76
See for Yourself: Driving rough Neighborhoods ............................................85
On Foot: Talking to the Natives......................................................................................86
Sunrise, Sunset: Getting Day and Night Perspectives ....................................... 87
Got Houses? Finding Out What’s Locally Available ...........................................88
How Much Did at One Go For? Researching “Comparable” Sales .....90
Hot or Cold? Take the Market’s Temp ........................................................................92
Just Looking: e Open House Tour ...........................................................................94
Nothing to Look at Yet? Finding Your Dream Development .....................95
5
Select Your Players: e Real Estate Team .......................................... 97
Your Team Captain: e Real Estate Agent .........................................................100
Your Cash Cow: e Mortgage Broker or Banker .............................................114
Your Fine Print Reader: e Real Estate Attorney ............................................120
Your Sharp Eye: e Property Inspector ................................................................ 128
Your Big Picture Planner: e Closing Agent .......................................................132
Strength in Numbers: Other Team Members .................................................... 136
6
Bring Home the Bacon: Getting a Mortgage ..................................137
Let’s Talk Terms: e Basics of Mortgage Financing ....................................... 140
Who’s Got the Cash? Where to Get a Mortgage .............................................. 146
Narrowing the Field: Which Type of Mortgage Is Best for You? ............. 146
Getting Your Cash Together:
Common Down Payment
and Financing Strategies .............................................................................................................. 153
Where Do I Look? Researching Mortgages ............................................................ 155
I’ll Take at One! Applying for Your Loan .......................................................... 156
New-Home Financing ........................................................................................................ 162
Unique Financial Considerations for Co-op Buyers ........................................164
7
Mom and Dad? e Seller? Uncle Sam?
Loan Alternatives ......................................................................................................... 165
No Wrapping Required: Gift Money From Relatives or Friends ............ 168
All in the Family: Loans From Relatives or Friends ......................................... 172
A One-Person Bank: Seller Financing ....................................................................... 182
Backed by Uncle Sam: Government-Assisted Loans ....................................... 185
8
I Love It! It’s Perfect! Looking for the Right House...................191
How Your Agent Can Help ............................................................................................. 194
e Rumor Mill: Getting House Tips From Friends ........................................ 197
Keeping Track of New Listings ...................................................................................... 197
Planning Ahead for House Visits ................................................................................. 198
Come on In: What to Expect as You Enter ........................................................... 199
Do We Have a Match? Using Your Dream List ................................................... 203
All the World’s Been Staged: Looking Past the Glitter ................................ 203
Recent Remodels: What to Watch Out For ......................................................... 204
Walk the Walk: Layout and Floor Plan ....................................................................205
What Do ey Know? Reviewing Seller Disclosure Reports ......................206
Reviewing the Seller’s Inspection Reports (If Any) ...........................................211
Poking Around: Doing Your Own Initial Inspection .......................................215
Hey, Nice Dirt Pile! Choosing a Not-Yet-Built House .......................................215
Buying a New or Old Condo or Co-op? Research the Community .......219
9
Plan B:
Fixer-Uppers, FSBOs, Foreclosures, and More ................. 225
Castoffs: Searching for Overlooked Houses ......................................................... 228
Look What’s Back on the Market! ..............................................................................230
A Foot in the Door: Buying a Starter House ........................................................ 231
Have It Your Way:
Buying a Fixer-Upper or House You Can Add on To ....... 232
Share Your Space: Buying Jointly ................................................................................ 235
Subdivide Your Space: Renting Out a Room ....................................................... 238
Hey, Where’s eir Agent? Looking for FSBOs (For Sale by Owners) ...... 239
Buying a Short Sale Property ..........................................................................................242
Buying a Foreclosure Property ..................................................................................... 246
Buying a House in Probate .............................................................................................. 252
10
Show em the Money: From Offer to Purchase
Agreement........................................................................................................................... 255
Start to Finish: Negotiating and Forming a Contract .................................... 259
More an Words: What’s in the Standard Purchase Contract .............264
Too Much? Not Enough? How Much to Offer ...................................................268
Keeping Your Exit Routes Open: Contingencies .............................................. 273
Putting Your Money Where Your Mouth Is: e Earnest
Money Deposit ................................................................................................................... 278
Divvy It Up: Who Pays What Fees ..............................................................................280
Deal or No Deal: Picking an Expiration Date .......................................................280
ink Ahead: Closing Date ............................................................................................. 281
Strategies in a Cold Market: What to Ask For ....................................................282
Strategies in a Hot Market: Making Your Offer Stand Out ...................... 283
Contracting to Buy a Brand-New Home................................................................284
11
Toward the Finish Line: Tasks Before Closing ...............................287
Wrappin’ It Up: Removing Contingencies ............................................................. 291
Will It Really Be Yours? Getting Title Insurance.................................................301
Yours, Mine, or Ours? What to Say on the Deed ..............................................306
Get Ready, ‘Cause Here I Come: Preparing to Move .......................................310
12
Send in the Big Guns: Professional Property Inspectors .......317
Home Inspection Overview: What, When, and at What Cost? ............... 320
House Calls: Your General Home Inspection ...................................................... 322
Tagging Along at Your General Home Inspection ........................................... 325
Say What? Understanding Your General Home Inspection Report ..........327
Termite or Pest Inspections ............................................................................................ 329
When to Get Other, Specialized Inspections .......................................................331
Trouble in Paradise: Inspecting Newly Built Homes ....................................... 333
13
Who’s Got Your Back?
Homeowners’ Insurance
and Home Warranties ..........................................................................................................337
Coverage for Your House .................................................................................................340
Damage Your Homeowners’ Insurance Won’t Cover .................................... 345
Protection for Others’ Injuries: Liability Insurance .......................................... 347
Your Out-of-Pocket: Homeowners’ Insurance Costs...................................... 350
Insurance Deductibles ........................................................................................................351
Shopping Around for Homeowners’ Insurance ................................................. 354
Types of Insurance Companies......................................................................................355
Jointly Owned, Jointly Insured: What Your Community
Association Pays For ...................................................................................................... 356
Home Warranties for Preowned Houses ............................................................... 357
Home Warranties for Newly Built Houses ............................................................ 358
14
Seal the Deal: Finalizing Your Homebuying Dreams ............. 361
Preview of Coming Attractions: What Your Closing Will Involve ..........364
Is It Really Empty? Final Walk-rough of an Existing House ....................369
Is It Really Finished? Final Walk-rough of a New House .......................... 372
Your Last Tasks Before the Closing .............................................................................375
e Drum Roll, Please: Attending the Closing ..................................................382
Closing Documents Related to Your Mortgage Loan .................................... 383
Closing Documents Related to Transferring the Property ......................... 385
Can I Move In? Taking Possession...............................................................................386
15
Settling Into Your New Home ........................................................................389
Tell the World You’ve Moved ........................................................................................392
Home, Hearth, and Hors d’Oeuvres: Settle in Socially ..................................394
e Safest Home in Town: Yours ................................................................................ 396
Cozy Up …Without Breaking the Bank .................................................................. 397
ere’s a Place for It: Organize Your Records ......................................................403
Back to the Future: Get Your Finances on Track ..............................................407
A
Using the Interactive Forms ............................................... 409
Editing RTFs ............................................................................................................................... 410
List of Forms ..............................................................................................................................411
Index............................................................................................................................................413
Your Homebuying Companion
B
uying your rst house may be one of the rst certiably grown-
up things you ever do. And no matter how ready you feel,
taking a major step like this—particularly one where there
are so many zeros on the price tag—can make you want to just close
your eyes and get it over with.
But if you’re going to invest your time and money, you want to
make sure you don’t nd just any house—you nd the right house, at
the right price, with the right loan. A house you’re happy to stay in for
a long time, no matter what the market does. To do that, you need a
lot of information.
is book is full of nuts-and-bolts information about the homebuy-
ing process. But it’s also got anecdotes and advice that we hope will
remind you to enjoy this exciting, if sometimes frustrating or nerve-
wracking process. Keep in mind what you’re aiming for: your own
home, where you’re free to pound nails in the wall, get a cat, or paint
your bedroom any color you want, without asking the landlord!
By the time you’ve read the key information here (don’t worry,
you won’t have to read every chapter or every section), you’ll truly be
ready. We’ll show you how to:
• choose the appropriate house in the best possible neighborhood,
whether it’s an old bungalow on a tree-lined street, a condo in
the city center, or a custom-built home in a new development
• narrow in on a realistic price range based on your budget, and
strategize ways to aord more
• select from a variety of nancing options, from a 30-year xed
rate mortgage (like the one Mom and Dad got) to a private loan
from a relative or friend
• pick a great real estate agent, mortgage broker, home inspector,
and other professionals
• negotiate and sign an agreement to buy a house (nd out what’s
important in all that ne print)
2
|
NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
• wrap up your nancing, get inspections, and take care of other last
tasks, and nally
• close the deal, arrange your move, and settle into your new home.
You’re going to benet from the expertise of a team of 14 advisers from
around the country who have reviewed this book and added the kinds
of insights you usually get only in personal conversations. For instance,
you’ll meet a mortgage broker who explains why you should avoid oral
loan preapprovals; a real estate agent who cautions against dressing too
well at open houses (it can hurt your negotiating position); a closing
expert with straightforward advice on why you should care about things
like “easements” and title insurance; and a lawyer who suggests how to
save on attorney’s fees.
With this book comes special access to electronic materials on Nolo’s
website. ere you’ll nd a Homebuyer’s Toolkit with over two dozen
forms, checklists, and letters to help keep you organized and on track
during every stage of the process. Whether it’s a “Dream List” that prompts
you to set out your priorities, checklists to carry when you tour a house or
condo, or a set of interview questions for potential real estate agents, you’ll
nd it there. And as a bonus, it includes MP3s with interviews of several of
our advisers, plus this book’s authors, who share their insights.
CHAPTER 1
Learn the
benefits
CHAPTER 2
Decide what
you want
CHAPTER 4
Check out
the market
CHAPTER 5
Choose
professionals
CHAPTER 3
Make a budget
START
Navigating the path to
YOUR FIRST HOME
CHAPTER 1 | YOUR HOMEBUYING COMPANION | 3
e three authors of this book, Ilona, Alayna, and Marcia, bring not
only years of legal and real estate expertise, but also dierent rst-time
homebuying perspectives of our own. One of us bought with a 15-year
mortgage, (since paid o) so she had no house payments when it came time
to pay her son’s college tuition. Another bought with the help of family
members and now has probably the lowest mortgage payment on the block
in one of the city’s up-and-coming neighborhoods. And the third bought
a modest starter home with a hybrid adjustable rate mortgage, xed it up,
and managed to ride out the down market until she could sell.
Our varied experiences help us understand that everyone has dierent
objectives when buying and special challenges when buying for the rst
time. You may just be looking for a place—any place—to get started, you
may want the challenge of a xer-upper, or you might need the convenience
of a low-maintenance condo. We know that you might be doing this alone,
with your spouse or partner, or even with a friend. No matter who you are
or what your goals and objectives may be, we hope you recognize yourself
in some of the stories and experiences reected in this book.
So hang on tight—to this book, that is. It will be your companion,
providing advice, information, and inspiration all along the path to your
new front door.
CHAPTERS 6/7
Get a
mortgage
CHAPTERS 8/9
Find your house
CHAPTER 10
Negotiate
the deal
CHAPTERS 11/12 /13
Inspect, insure, prepare
to move
CHAPTER 14
Seal the deal
CHAPTER 15
Settle in! You’re
HOME
4
|
NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Get Updates, Worksheets, and More at is Book’s
Companion Page on Nolo.com
When there are important changes to the information in this book,
we’ll post updates online, on a dedicated page:
www.nolo.com/back-of-book/HTBH.html
And if you notice a useful sample form in this book, such as a letter
or checklist, you’ll have access to a digital version via the same
companion page. You‘ll find other useful information on that page,
too, such as podcast interviews with the authors and some of the
advisers you’ll get to know in this book. See the appendix for a full list
of forms and podcasts on Nolo’s website.
Investment Value: Get What You Pay For … And en Some ...............................8
Leverage .................................................................................................................................................... 8
Equity, Baby ............................................................................................................................................ 9
It Beats Paying Rent ............................................................................................................................9
You Can Live in Your Investment .............................................................................................10
You Can Borrow on Your Investment ....................................................................................10
My, You’re Looking Creditworthy! ...........................................................................................10
at House Is Yours ..........................................................................................................................11
Tax Breaks: Benefits From Uncle Sam .................................................................................... 11
Tax Credits ............................................................................................................................................11
Mortgage Interest .............................................................................................................................12
Other Tax-Deductible Expenses ................................................................................................12
Itemizing Your Deductions ..........................................................................................................13
Capital Gains Tax Relief When You Sell.................................................................................14
Personality and Pizzazz: Your Home Is Your Castle.....................................................14
No More Landlord: Say Goodbye to Renting ....................................................................15
You Can Do It … If You Want To ..............................................................................................16
“But … I Like Renting” ......................................................................................................................16
“But … I Can’t Afford It” .................................................................................................................17
“But … I’m Single” ..............................................................................................................................18
“But… It’s Too Much Responsibility!” .....................................................................................19
“But…Maybe Prices Will Go Down!” .....................................................................................20
“But … I’m Still Scared!” ..................................................................................................................20
CHAPTER
1
What’s So Great About Buying a House?
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Meet Your Adviser
Daniel Stea, broker/owner/attorney at Stea Realty Group,
in Berkeley, California (www.stearealtygroup.com).
What he does “I spend a great deal of my day simply talking with buyers and
sellers, as well as evaluating properties for them. We‘re always
running ‘comps.’ Prospective buyers want to make sure they’re
not paying too much; sellers want to make sure they’re not
asking too little. We’re always looking at what other properties
recently sold for, since that’s a key indication of where the
market is currently at. Sure, many websites will give you real
estate ‘comparables,’ but these are generally based on the
average price per square foot of other properties that have
recently sold. But it takes a human who has actually walked
through all of those properties to start adding and subtracting
for various attributes such as location, condition, schools, and
so on. at’s one of the values of what brokers bring to the table
and why their services will always be in demand.”
First house
“It was an adorable English Tudor in the Oakland hills, which I
bought for $190,000. Built in 1927, it was full of character—and had a
$90,000 pest report and leaked like a sieve. e original roof was still
there, with multiple subsequent roofs layered right over it. It was a
memorable home! I lived there for five years, completely rehabilitated
it, and then sold it when Oakland real estate was finally coming
around and moved to a home closer to my office in Berkeley.”
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 7
Fantasy house “I’m not sure it exists! Like most of our clients, I’d love to have a
place that’s highly walkable to everything urban. But I’d also like a
view of the San Francisco Bay, which is tough to get unless you’re
a considerable distance up the hills. Only a few homes exist in
that sweet spot in between. And they obtain multiple offers and
sell for a premium price in the current market. Style-wise, I see
something to appreciate in almost every type of house: from the
old ones that need a lot of work to the modern ones with walls of
glass and high ceilings, many of which have more character than
they are given credit for.”
Likes best
about his work
“Finding that we can bring clarity to people’s confusion.
Homebuyers show up full of questions, wondering things like,
‘What is the process?’ and ‘How much should we offer?’ We
educate them about the market and the process and give them
the tools they need to feel empowered. Once they feel confident,
we’re ready to begin shopping.”
Top tip for
first-time
homebuyers
“Be patient. A lot of people come to us in a panic, saying, for
example, ‘We just got into town, we don’t want to waste our
precious money on these exorbitant rents, and we need to buy
something right away.’ But the process will go much smoother if
you give yourself some time—ideally, six months to a year—to get
to know the market, walk the neighborhoods, and learn about
the homebuying process. In fact, if you’re relocating here from
Washington, DC, New York, or Boston, like many of our clients have,
I’d say rent first! It’s very difficult to come into a new city for a month
and know where you want to live. Begin working with a Realtor
®
long before you’re ready to make your first purchase offer. We earn
the same commission whether our buyers purchase now or in a
year—and it’s important for them to be pleased with the home they
select so that they’ll refer us to their family, friends and coworkers.”
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
P
icking up a book on homebuying for some light reading? We’re
guessing not. If you’re reading this, you’re probably seriously
interested in buying a house. But before we launch into how, let’s
explore why—just in case you’ve got any lingering doubts about whether
it’s a good idea. is chapter will preview some of the primary nancial
and personal benets to buying a home (and you’ll nd details on many
of the subjects covered, such as tax benets, in later chapters). en we’ll
talk about some common myths and fears, and how to get over them.
ever did
est thing I
B
Buy my first home. Although Leah was happy with her
rental place, she says, “I wanted a place that I could call
my own, with a backyard for my cats, and space for an office so I could work at
home full time. After three weeks of looking, I found it! And after a year, some of
the best parts of homeownership are things I wasn’t even expecting—like having
already gotten to know more neighbors than I did during a whole six years in
my apartment. Plus, although I’ve never thought of myself as domestic, I’ve had
a surge of interest in decorating—I put up Roman blinds, have been picking out
paint colors, and just bought my first Christmas tree!”
Investment Value:
Get What You Pay For … And en Some
You’ve probably heard people talk about real estate as a great investment.
But what exactly do you get out of the deal? Well, a few things: You’ll build
equity instead of spending cash on rent, you gain immediate benets (a
place to live!), and you’ll eventually have full ownership of an asset that—at
least over the long term—has a good chance of appreciating in value.
Leverage
Buying a home is one of those rare instances where you can control a
very large and potentially appreciating asset with a comparatively small
initial cash investment (your down payment). Better yet, notes adviser
Daniel Stea, “You’re using the proverbial ‘OPM’ (other people’s money)
for the balance of the investment, and that money is being lent to you
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 9
at comparatively low cost given the historically low interest rates we’ve
experienced these past few years. Yet you get to enjoy the appreciation on
the full value of the investment, not just your cash component. It almost
doesn’t seem right!”
Equity, Baby
Over time, as you patiently pay your mortgage, two things may start
happening—your principal loan balance will go down, and the house’s
market value may go up. Both of these mean that you’re accruing equity.
Equity is the dierence between the market value of a house (what it’s
currently worth) and the claims against it (what you have left to pay on
any mortgages or loans you’ve taken out against it). You’d be hard-pressed
to nd another investment where you can borrow a large amount of
money, pay a modest interest rate, and reap every bit of the gain yourself.
EXAMPLE: Hugo buys a home for $300,000 with a $60,000 down
payment (20%) and a $240,000 mortgage. If the market value of the
house is $300,000, Hugo’s current equity in the home is $60,000
(market value minus mortgage debt). A few years later, Hugo has
reduced the principal on the mortgage by $5,000, to $235,000.
Meanwhile, the house’s value has risen to $310,000. Hugo now has
$75,000 in equity: ($310,000 minus $235,000). at’s $15,000 more
than he originally invested.
Of course recent history has shown that the value of a property
doesn’t always increase: It can also decrease, sometimes dramatically.
Fortunately, houses rarely drop in value permanently. And after some
precipitous value drops in the early 2000s, home appreciation in 2013
was running at an average of around 12%, according to the S&P/Case
Shiller Home Price indexes.
It Beats Paying Rent
A good chunk of the money you’ll use to nance your home is money
you’re already spending anyway, on rent. When you buy a house, that
cash is actually going into your investment.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
You Can Live in Your Investment
Some people like to call a mortgage a forced savings plan, because it
makes you sock a little cash away every month in the form of a mortgage
payment—money you will, with any luck, get back when you sell the
place. On the other hand, you might call it a smart investment plan,
because it gives you both a roof over your head and a way to convert your
cash into a potentially appreciating asset.
You Can Borrow on Your Investment
Eventually, as your equity in your home builds, you can borrow against
it at relatively low interest rates, using a home equity loan or a HELOC
(home equity line of credit). ese are also commonly referred to as
“second mortgages.”
e interest rates on these tend to be higher than on primary mortgages,
but lower than on the typical credit card. e money borrowed can be used
for any number of purposes, such as home improvements, college tuition,
or a car. Better yet, if you use the money for home improvements, the
interest is tax deductible, up to $1 million.
Of course, there are risks—if you default and your house goes into
foreclosure, the lender is second in line to be paid from the proceeds of
the sale of your house, after the primary mortgage holder.
My, You’re Looking Creditworthy!
We hear so much about people who ruined their credit score by getting
foreclosed on that it’s hard to remember the reverse side of the picture:
A mortgage is seen as “good debt.” When you successfully pay it down,
credit-reporting companies view that as a sign that you’re responsible and
able to handle a large loan.
“is can do wonders for your credit rating,” says adviser Daniel Stea.
“It makes you a much better credit risk (statistically speaking), which
becomes especially useful if you decide to apply for an auto loan, small-
business loan, student loan for your kid’s college tuition, and so on.”
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 11
at House Is Yours
One benet to buying a house is kind of obvious ... you’re becoming a
homeowner, and when the loan is paid o, you won’t have to pay for a
place to live. You could keep renting the same place you’re in now for 50
years, and at the end of that time you’ll still have to pay monthly rent
checks to your landlord.
Tax Breaks: Benefits From Uncle Sam
You’ll get to claim various federal tax deductions and credits for home-
related expenses. ese can add up to some serious savings.
Tax Deductions Versus Tax Credits
Be careful not to confuse a tax deduction with its more valuable cousin,
a tax credit. A tax deduction is an amount you subtract from your gross
income (all the money you earned during the year) to figure out how
much of your income is subject to tax. For example, if your gross income
is $80,000, and you have a $2,000 tax deduction, your taxable income is
reduced to $78,000.
A tax credit, by contrast, is a dollar-for-dollar reduction in your tax
liability. If your taxable income is $80,000, and you qualify for a $2,000
tax credit, your taxable income is still $80,000, but you get to reduce the
amount of tax you ultimately owe by $2,000.
Tax Credits
As a new homeowner, you may be entitled to certain tax credits.
• Tax credit for first-time homebuyers. At the time this book went to
print, all the tax credits for rst-time homebuyers had expired—but
keep an eye on the news and www.irs.gov for anything new that
might come along.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
• Tax credits for energy-efficiency. A tax credit good through 2016 lets
you claim 30% of the cost of installing geothermal heat pumps,
small wind turbines, fuel cells, or solar energy systems. For more
information, visit www.energystar.gov (search for “tax credit”).
Mortgage Interest
One of the biggest deductions will be the interest you pay on your home
mortgage (available for mortgages of up to $1 million for individuals and
married couples ling jointly and $500,000 for marrieds ling separately).
is one’s particularly advantageous during the rst few years of a xed rate
mortgage, when most of your payment will be put toward interest.
Other Tax-Deductible Expenses
You can also deduct certain other expenses, such as:
• Property taxes. While the amount varies between states and localities,
most people pay around 1% of the home’s value each year in state
property tax. is amount is deductible from your federal taxes if
you itemize.
• Points. Points are additional and usually optional fees paid when
you buy your mortgage (you get a reduced interest rate in return).
ey’re tax-deductible in the year you pay them.
• Interest on a home improvement loan. If you take out a loan to make
improvements that increase your home’s value, prolong its life, or
adapt its use—for example, by adding a deck or a new bathroom—
you can deduct the interest on that loan, with no limit. But you
can’t deduct interest on loans used to make normal repairs, such as
repainting the kitchen or xing a broken window.
• Interest on home equity debt. Sometimes you can deduct interest
on a home equity loan even if the money isn’t used to buy, build,
or improve your home—for example, if you use it toward a child’s
college tuition or family medical bills. e deduction is limited to a
maximum loan amount or the total fair market value of the home
less other mortgages. e maximum loan amount is $100,000
for an individual or married couple ling jointly and $50,000 if
married but ling separately.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 13
• Home office expenses. If you use part of your home exclusively and
regularly for a home-based business, you may be able to deduct a
portion of the related expenses—including the costs of some home
repairs, or even things like landscaping if your home’s appearance
will be important to visiting clients.
• Moving costs. If you move because of a new job that’s more than 50
miles from your current residence, you may be able to deduct your
moving expenses.
• Prepayment penalties. Although we advise against getting a mortgage
with a prepayment penalty (as discussed in Chapter 6), if you do,
and then you make a prepayment, the penalty you pay will be tax-
deductible.
Itemizing Your Deductions
To take advantage of house-related tax deductions, you’ll need to itemize
your tax deductions, rather than take the standard deduction (for 2014 tax
returns, $6,200 for individuals and $12,400 for marrieds ling jointly).
e true tax savings comes in the dierence between your tax liability
when you take the standard deduction and your tax liability when you
itemize. Itemizing involves a step up from the good old 1040EZ, but it’s
not all that complicated. To make it worthwhile, your itemized deductions
should exceed the standard deduction. With the high price of real estate,
it’s not usually too hard to outpace the standard deduction with deductible
homeowner costs, not to mention other deductible expenses like donations
to your favorite charity.
EXAMPLE: Let’s say you get a $200,000 xed rate loan at 4% interest
in 2014. You’re looking at paying nearly $8,000 the rst year in inter-
est alone. at doesn’t count property taxes, points on the mortgage,
or any other tax-deductible expenses.
If you’re single, the standard deduction is $6,200. But if you itemize
your deductions, you could deduct the $8,000 in interest payments
instead. By itemizing even this one deduction, almost $2,000 less of
your income will be taxed.
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TIP
Keep good records. You’ll be able to reap the benefits of itemizing
your deductions only if you know about them and are prepared to prove them
to the IRS—all of them, not just the house-related ones. Keep a file of receipts for
the more common deductions, such as unreimbursed business expenses (office
equipment and travel); educational expenses (tuition and books); charitable
contributions; and unreimbursed medical expenses. Consider getting help from a
tax professional—even your meeting might be tax-deductible!
CHECK IT OUT
Go straight to the source. See IRS Publication 530, Tax Information
for Homeowners, available at www.irs.gov. is publication will give you more
detailed information about the tax benefits of buying a home.
Capital Gains Tax Relief When You Sell
While it may be too soon for you to imagine selling your rst home,
another important benet is available if and when you do. anks to the
Taxpayer Relief Act of 1997, you don’t pay capital gains tax (usually 15%)
on the rst $250,000 you make on the place. Double that to $500,000 if
you’re married and ling jointly, or to $250,000 per person if you co-own
the place.
To qualify, you must (with a few exceptions) have lived in the home
two out of the previous ve years before selling. Many rst-time buyers
use this tax break to move from modest starter homes to roomier homes
that cost more.
Personality and Pizzazz:
Your Home Is Your Castle
If you’ve always been a renter, you know the drill: ings stay the way
they were when you moved in. White walls stay white, ugly carpeting
stays ugly, and the funky bathroom light xture stays funky.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 15
When it’s your home, you get to make your mark. ere’s just no
way to quantify the psychological advantage of personalizing your space.
Even people who’ve never taken an interest in home decorating, repair,
or gardening nd themselves hooked on the creativity and self-expression
possible with home projects.
No More Landlord:
Say Goodbye to Renting
Expressing your personality isn’t the only advantage to leaving rental
living behind. Say goodbye to things like waiting around for things to
get xed, wondering whether the landlord will raise your rent or kick you
out anytime soon, and being
surprised by landlords who stop
by at their own convenience.
Even reasonable landlords
who make prompt and thorough
repairs and never raise the rent
can pull surprises or sell the
property. Owning your own house
reduces the stress and uncertainty
of renting. You’re in charge of
when you move on, who comes
in the front door and when,
and what gets done to the place. While that means you’ve got some extra
responsibilities, you’ve denitely got some extra security and benets, too.
ever did
est thing I
B
Make monthly payments to myself, not the landlord.
At age 25, Talia had only toyed with the idea of buying a
house—she’d thought that, despite her full-time job, it was financially impossible.
But then her landlord raised the rent. Talia says, “I looked into loan options—and
to my surprise, I qualified. Within two months, I bought a converted first-floor
apartment with a little patio, in a safe neighborhood. I love not having to share
a washer and dryer with other people anymore. But even better is the feeling of
independence of having my own place: Because I’m building equity, I like to think
The Future’s So… Expensive!
If you pay $1,000 in monthly rent now,
approximately how much will you be paying
in 40 years, assuming average inflation
(4% per year) and no rent control?
a. $2,500 b. $3,400 c. $4,800
d. None of the above,
because I’ll own a home.
Answer: c or d.
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I’m making those mortgage checks to myself—and they’re not that much higher
than my rent checks were, plus I can claim some significant tax deductions.”
You Can Do It … If You Want To
Are you still on the fence about homebuying? Some people just don’t
feel ready to take the plunge. Below are a list of common “I can’t do
it because …” excuses. Don’t get us wrong: Not every excuse is a bad
excuse. You just need to know whether yours are based on solid facts
rather than plain old fear.
“But … I Like Renting”
Maybe you’re thinking, I really love my apartment or, I’m getting such a
good deal. But even if your current rent seems cheap, cheap is never as
good as free. Yes, we’re aware that buying a house isn’t free. But at some
point, you won’t be paying a mortgage anymore. at will never be true if
you rent.
CHECK IT OUT
Run your own numbers. ese calculators compare the costs of
renting and buying:
• www.nytimes.com(searchfor“Isitbettertobuyorrent?”)
• www.nolo.com/legal-calculators(click“ShouldIrentorbuy?”).
While you’ll need to guess how much you’ll spend on a home to use these
calculators, the result will at least give you a rough comparison. Revisit the
calculators after you’ve looked at Chapters 3 and 6 (covering the financial details
of buying a house).
All that being said, renting might be best in the following situations:
• You plan on moving from the area within the next few years. Buying is
a long-term strategy, with signicant up-front costs. Plus, it’s easier
to move out of a rental than a home you own—selling is almost as
complicated as buying.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 17
• You need flexibility. Buying is best for people whose lives are fairly
stable. If your rst priority is being able to quit your job any time a
friend proposes a round-the-world sailing trip, maybe homeowner-
ship will feel more like a trap than a positive step. (en again, we’ve
met travelers who’ve sublet their house and supported their travels
with the rent payments!)
• You expect your income to decrease soon. If you’re planning to
return to school or quit your 9 to 5 to pursue an acting career, you
might not want to lock yourself into a mortgage. Still, you may be
a potential homebuyer if you can aord something more modest
within your anticipated future income or can pay the mortgage by
co-owning the property or taking in renters.
• It will cost you far more to buy than to rent. Run those numbers,
using calculators like the ones listed above. In a few markets, you
can still rent for less than you can buy—even after you factor in tax
deductions and ination. If that’s the case, you might be better o
renting and investing elsewhere—or simply renting a bigger and
better place than you could hope to buy.
“But … I Can’t Afford It”
Maybe your main reservation about buying a home is that you simply
can’t aord one. Scraping together a 20% down payment can be no small
task when you’ve already got your plate full with your current bills. Or
perhaps you’re afraid you won’t qualify for the gigantic loan you’ll need or
won’t be able to pay it once you get it.
we ever did
est thing
B
Focus on the spaghetti. Caryn and her husband Alec
were stretching to their financial limits to buy a house,
and Caryn says, “We were nervous, but our agent told us, ‘You’ll just need to eat
spaghetti for about a year, and then things will even out.’ For some reason, that
image stuck in my head, and I thought, okay, I can handle eating spaghetti for
a while. In fact, that’s about the way it worked. e first year, we depleted our
savings, not only with the house closing but with repainting and buying furniture.
Now we’ve settled in, and owning a home doesn’t feel like such a big load on our
shoulders anymore.”
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If you’re trying to get a down payment together and nding your
eorts frustrated, don’t lose heart. ere are alternatives: For example, you
may be able to augment your down payment with a loan from a family
member, or even enter into a cobuying arrangement with a friend.
As for the mortgage payment, people who think they can’t aord it
often focus only on the big number—the ve-, six-, or even seven-digit
gure that says what a house is
going to cost. But a mortgage
allows you to spread that
number out over a big portion of
your life.
Finally, let’s not forget that
the rst home you buy isn’t
necessarily going to be the
one you’ll live in forever. By
remaining exible, and starting
with a not-quite-perfect house,
you can break into the housing
market. at’s why they call it a “starter” house—it’s only the beginning.
e equity that you accrue may very well help you get into that next place.
“But … I’m Single”
Some people are reluctant to buy a house because they’re single now, but
hope to be part of a couple before long. But did you know that nearly one-
fth of homebuyers today are single women? Obviously they have gured
out that there’s no secret rule that says only couples get to buy houses.
ever did
est thing I
B
Invest in my present as well as my future. Real estate
agent Joanna knows about not wanting to buy a house
as a single woman—she’s seen it in many of her clients. But, says Joanna, “e
problem with waiting to do something the traditional way is, what do you lose
during that waiting period? I was in my early 30s and ready to have a place of my
own. Plus, it makes sense to spend the money and get a tax write-off rather than
Small Can Be Beautiful
If you think living in a small space means
you’ll be cramped, uncomfortable, and
aesthetically disappointed, check out
www.apartmenttherapy.com. Under
“Tours,” your secret voyeur can look at tiny
spaces other people have transformed into
fabulous homes. Be inspired!
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 19
pour it into rent. is isn’t to say that buying alone wasn’t stressful—I stretched
financially to make it work. But since buying, my house has gone up in value.”
Maybe you’re worried that you’ll have to move as soon as you meet Mr.
or Ms. Right. While that admittedly is possible, it’s also possible that in
the meantime, the increased value of your place will help, not hinder, your
happily-ever-after. If the value of your home increases and you pay down the
mortgage, the two of you will have equity you can use to buy a place together.
Besides—a house that’s perfect for one may accommodate two just ne.
we ever did
est thing
B
Combine our homes. Hannah says, “I was a young profes-
sional and very single when I bought a condo. Two years later,
I
met Chad, who also owned a small home. Before I knew it, we were married and
living in the house, renting out the condo. en we had kids, and the house was just
too small. We sold my place and Chad’s, using the equity to buy a house big enough
to accommodate our kids. It’s nice to have a place that we chose together, with our
family in mind.”
“But… It’s Too Much Responsibility!”
For some, the idea of owning a home just seems like too much to handle.
Admittedly, renting is much simpler than owning. You write a rent check,
and you’re covered for the month. And in many rental arrangements, you
can leave with just a month’s notice—perfect for those with wanderlust.
Telling yourself that renting doesn’t involve responsibility isn’t really
true, though. After all, what happens if you don’t pay the rent? You get
evicted—and then where do you go? Back to Mom and Dad’s? Most people
would rather do whatever it takes to make that monthly payment happen.
So if you’ve already lived away from home, you’re familiar with what’s
needed to make monthly payments and handle monthly nances. Of
course, when you buy you’ll have other responsibilities, like taking care
of your yard or doing repairs, but you’re in charge of prioritizing what
happens when. If you decide you don’t want to repair the creaky stairwell
until you’ve redone your kitchen cabinets, that’s up to you.
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“But…Maybe Prices Will Go Down!”
Trying to time the real estate market? Timing is denitely important,
but it’s not easy to get in to the market at the perfect moment. Even
experienced real estate pundits get it wrong. If prices look to be stable and
you’re just waiting until you can aord to get in, that’s one thing. But if
you’re trying to out-clever the real estate market, you’re likely to nd that
by the time you notice a trend everyone else will have, too; and prices
may jump up before you know it.
So if you’ve watched your local market and economic news carefully,
and have a solid sense of what’s ahead, perhaps waiting for a price drop
makes sense. But don’t put your life on hold. at’s particularly true if
you’re getting married, having a baby, moving into a retirement home, or
doing something else that comes with its own timing demands.
“But … I’m Still Scared!”
Buying a home may seem overwhelming, even if you’ve always wanted to
do it. e process is unfamiliar, there’s a lot of money at stake, and you may
fear getting swept up into buying a place you don’t even like or that will
drop in value. But fear shouldn’t stop you from realizing your homebuying
dreams. To help calm the butteries, take constructive steps such as these:
• Know your strengths and weaknesses going in. en nd ways to address
them, for example with self-education or by hiring professionals.
• Learn what you can expect from professionals. Understand what real estate
agents, mortgage brokers, home inspectors, and other professionals do,
and put them to work for you, saving time and money.
• Observe your local real estate market. We’ll show you how to research
the trends in your area, in order to reassure yourself that you’re
not buying an asset that may drop in value, and has long-term
appreciation potential.
• Understand the process. Read up on all steps of the homebuying
process now, so that you won’t be confused—or need to do any
late-night remedial study—when the process kicks into high gear.
• Get organized. Use all the worksheets and checklists in the
Homebuyer’s Toolkit on the Nolo website to stay on top of key
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 21
What’s Next?
Once you’ve decided you’re ready to buy, it’s time to figure out what’s important
to you. In the next chapter, we’ll discuss how to examine and settle on your
priorities regarding types of houses and neighborhoods.
tasks, such as choosing a real estate agent or inspector or pulling
together nancial papers for the lender.
is book will help you accomplish all those goals. It will tell you
where you are at every step, so that you can breathe, get your bearings,
and proceed with condence. Get the facts, and you’ll be ready.
Know Your Ideal Neighborhood: Why Location Matters ........................................26
Neighborhood Features for Daily Living ...............................................................................26
Neighborhood Features at Boost Resale Value ...........................................................28
Know Yourself: How Your Lifestyle, Plans, and Values Affect
Your House Priorities .........................................................................................................................28
Know Your Ideal House: Old Bungalows, New Condos, and More ...................30
Would You Like Land With at? Single-Family Houses ..........................................30
Old (or Not-So-New) Houses: Benefits and Drawbacks ...............................................31
Newly Built Houses: Benefits and Drawbacks .................................................................... 32
Sharing the Joy, Sharing the Pain: Condos and Other Common
Interest Properties ...............................................................................................................................33
Condominiums: Benefits and Drawbacks ............................................................................34
Townhouses and Duplexes: Benefits and Drawbacks ....................................................36
Co-ops: Benefits and Drawbacks ..............................................................................................37
Factory Made: Modular and Manufactured Homes ...................................................37
Putting It All Together: Your Dream List .............................................................................38
Dream List Directions .....................................................................................................................45
CHAPTER
2
What Do You Want?
Figuring Out Your Homebuying Needs
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Meet Your Adviser
Paul Grucza, CMCA, AMS, PCAM, a community
association expert and educator, author, and association
strategist located in Seattle, Washington.
What he does With 30-plus years of real estate-related experience (including as
a licensed real estate salesperson and property manager), Paul is
now an active lecturer and consultant, and faculty member for
(and past President of) the Community Associations Institute
(CAI, at www.caionline.org). CAI provides nationwide training,
guidance, and resources to the volunteer homeowners who
govern community associations. Paul received CAI’s 1999–2000
“Educator of the Year” award. He established and hosted an
award-winning community association issues television program
for the Dallas-Fort Worth market which is viewed by well over
one million people per week. He’s also the Director of Education
and Client Engagement for e CWD Group, Inc. AAMC
®
in
Seattle, Washington (www.cwdgroup.com), which provides
professional management and consultant services for a variety of
condominiums and planned communities.
First house “It was an absolutely rundown but gorgeous Mission-style bungalow
built around 1922, in one of the first incorporated subdivisions
outside Buffalo, New York. e house was the builder’s model for
that subdivision, so it had all the features, including inlaid floors,
woodwork, and leaded glass. I spent the next 11 or so years lovingly
restoring it—regrouting the bathroom tile, refinishing the woodwork,
rebronzing the heat duct covers, replacing the modernized light
fixtures through a restoration company, and much more. It turned
out to be the most beautiful home I’ve ever owned.”
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 25
Fantasy house
“My true fantasy house would be a comfortably sized home
situated on a bluff that overlooks Puget Sound and the mountains.
Living in Seattle affords the opportunity to evaluate lots of
wonderful properties, but since working with an architect, my
fantasy will become a ‘fantasy retirement home,’ one that meets
the need for view and accessibility. A redo of a midcentury rambler
would be nice, but a built-from-the-ground-up is not bad, either.”
Likes best
about his work
“My daily interaction with a wide variety of people. Solving
homeowner issues. Training and speaking to a variety of groups.
ey include homeowners, developers, service professionals,
managers, and board members. is brings me more joy than
anything—and after nearly 33 years, I’d better enjoy my work!”
Top tip for
first-time
homebuyers
“Regardless of the type of property you’re looking for—whether
a house, a condo, a cabin, a doublewide, or whatever—leave
your emotions at home. Look at the property and its practical
application in your life, and at what it will cost to turn it into
your home.”
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Y
ou know you’re ready to buy but are probably wondering, “Where
do I start?” ere’s a lot to think about, like what kind of home or
neighborhood you want, and what features you can’t possibly live
without. is chapter will help you:
• identify neighborhood characteristics that t your personality and
that maximize house-resale value
• understand how your lifestyle and plans should play into your
choice of house
• learn the benets and drawbacks of dierent types of properties
(single-family houses, condominiums, or co-ops, plus new or old
places), and nally
• create a Dream List, describing and organizing your priorities, to
use when house shopping.
Later chapters will teach you how to do the looking, how to gure out
whether you can aord what you want, and what to do once you’ve found
a place. For now, focus on organizing your thoughts and priorities.
Know Your Ideal Neighborhood:
Why Location Matters
If you’re a lifetime renter, you’ve probably always thought about location
in the short term, knowing you could move at the end of your lease.
Buying is dierent: You’re committing yourself to a location for at
least a few years. And you’ll probably feel a sense of investment in your
community that you didn’t before. So get serious about identifying your
location preferences, then make sure these preferences won’t mean buying
a house with low resale prospects.
Neighborhood Features for Daily Living
Not everyone wants the same features in a neighborhood, and you’re the
one who’s got to live there. Before letting anyone else tell you what the best
neighborhoods are, consider your preferences and priorities regarding:
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 27
• Character and community. For some, the uniformity of well-planned
developments is pleasing; others enjoy the variety of older, one-of-a-
kind homes. Visualize your ideal neighborhood, whether it features
trees and parks or
restaurants and bars.
• Safety. While most
everyone prefers less
crime, safety often
comes with a trade-o.
For example, a rural
neighborhood might
be safe, but a city’s
resources and nightlife
will be very far away.
• Resources and
accessibility. ink where
the important places and
resources in your life
are, like your workplace,
child’s school or day
care, grocery stores, health care providers, public transportation or
major roadways, cultural amenities, and more. How much time are
you willing to spend traveling to those places?
• Schools. If you’re planning on sending children to public schools, the
quality of nearby schools will be important.
• Zoning and other restrictions on owners. If you want the freedom to
remodel your home, you’ll have to be in an area that allows that.
Or, if you appreciate community uniformity, you’ll like living
somewhere that limits the changes owners can make to their houses
or property.
is isn’t a complete list, and you should think about features that are
unique to your needs. For example, adviser Bert Sperling notes, “If you’re
lucky enough to be a stay-at-home parent, you may nd yourself lonely
during the day if you have to travel a considerable distance to nd some
community for you and your youngsters.”
They Call That a House?
You won’t believe what people live in!
Here are a few creative houses:
• eGoldenPyramidHouseinWadsworth,
Illinois: e largest 24-karat gold-plated
object ever created.
• eShoeHouseinHellam,Pennsylvania:
Just what it sounds like—in the shape of a
work boot, made of light-colored stucco
and featuring shoe-themed stained-glass
windows in every room.
• Alive-inwatertowerinSunsetBeach,
California: from the 1940s, converted to a
three-story house.
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Neighborhood Features at Boost Resale Value
When it comes to the long-term value of your home, location really does
matter. If you have a desirable piece of property that’s also in a desirable
location, more people will want to buy it. at keeps its value relatively
high compared to nearby homes in less sought-after locations (which
people may buy partly because they can’t aord anything else).
Not surprisingly, many of the features that attract rst-time
homebuyers boost resale value, like high-quality schools, low crime rates,
convenient amenities, and neighborhood character and community.
Another major factor aecting resale value is conformity. Buying a
house that’s much bigger than the houses around it is usually a bad idea.
at house will appreciate at a slower rate, because buyers drawn to a
neighborhood of smaller homes won’t be able to aord the larger home,
and buyers drawn to larger homes won’t be drawn to that neighborhood.
And if a house is just too unique—because the owner has customized it
too much—it’s going to stick out like a sore thumb.
Finally, try to get an idea of whether a neighborhood is up and
coming. You can tell by looking at whether there seems to be a lot of
remodeling, new landscaping, or trendy-looking shops. Bert Sperling
adds, “If you read the signs correctly, you could get in on the ground
oor of the next hot new neighborhood.”
Know Yourself: How Your Lifestyle, Plans,
and Values Affect Your House Priorities
Later in this chapter, we’ll show you how to prepare a Dream List to help
you nd the right house. Before making your list, reect on what you want
the house for. (To live in, duh, we got that.) Although it may be hard to
imagine where your life will be in a few years, do your best to consider:
• Who is going to live in the home? You may be on your own now, but
in the future, might you bring in a roommate, signicant other,
child, elderly parent, or pet? If so, factor this into your priorities
for things like number of bedrooms, quality of the school district,
number of oors, or availability of outdoor space.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 29
• What do you plan to do in the home? If you plan to work at home, spend
a lot of time in the kitchen, or entertain frequently, plan adequate
space for that. Conversely, consider whether you really need to spend
extra for a huge gourmet kitchen if you eat takeout every night.
• What does your lifestyle require? If you travel for business, you might
want the convenience of a condo with easy airport access. Or if
you’re into nightlife, you might want to be able to stroll home and
crash at 2 a.m.
• How do you like to spend your time at home? Do you love the idea
of remodeling an old home or creating a beautiful garden? Are
you scared to death of anything that hints at the word “handy”? If
you’d rather be throwing a cocktail party than mowing the lawn,
the big house in the suburbs may not really be right for you.
ever did
est thing I
B
Look for a house with scope for my artistic side.
A graphic designer and yoga teacher, Diane had wanted
to buy a house for years—but knew it would be a financial challenge. She says,
“I scraped together enough to buy a small cottage, with a disastrous backyard—
and I turned it into my art project. I painted those white walls celery green, brick
red, and tan. I spent all winter pulling weeds, then put in flagstone and flowers.
And eventually I sold it for a large profit—enough to buy a duplex, so now I’m a
property investor!”
“Where Could I Be in Five Years?”
Instead of planning where you think you’ll be in five years, why not play
“Where could I be in five years?” Try it with a friend or partner over a glass of
wine, or while walking in the park. You’ll have to be a little realistic—do you
really think you’ll win the lottery?—but optimistic, too. You may see yourself
finding a better job in another city, or having your first baby. Imagining the
possibilities can help you not only define your housebuying objectives, but
see how those goals fit into your life’s priorities.
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Know Your Ideal House:
Old Bungalows, New Condos, and More
You probably have a vision in your mind of the house you want, whether
it’s a cozy cottage with fruit trees; an elegant brick townhouse with no
yard; or a modern, glass-enclosed loft with views of the city. For an
overview of your options, read on. (And when
you’re reading the bios of our advisers in this
book, take a peek at their fantasy houses!)
Of course, where you live will play a huge role
in what you can buy. For example, in Chicago or
New York City, you may be looking at apartments
in high-rise buildings, while in less urban areas,
most of the homes may be single-story ranch houses or newly built homes
within developments.
Would You Like Land With at?
Single-Family Houses
You wouldn’t think we’d have to dene “house,” would you? But since
a number of dierent house types are available, let’s be clear about what
each one is. Technically speaking, a “house” is a detached, single-family
dwelling. When you own a house, you own both the structure and the
property that it sits on, all by yourself. Your house won’t be attached
to the next one, and you won’t be cursing an upstairs neighbor for
stumbling across the oor at 3 a.m.
Even if you know you want a house, however, an important question
remains—new or previously lived in? Each has its own benets and
headaches.
CHECK IT OUT
Interested in house styles? To decide whether you prefer a “Colonial,”
a “Victorian,” or an “Italian Renaissance,” look online at sites such as:
• www.architecture.about.com(click“HomeStyles”)
Isn’t my house classic?
e columns date all
the way back to 1972.
Cher, Clueless
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 31
• www.oldhouses.com(click“OldHouseStyleGuide”)
• www.wikipedia.org(searchfor“Listofhousestyles”).
Old (or Not-So-New) Houses: Benefits and Drawbacks
If you’re in an uber-urban area or your price range dictates it, older houses
may be all that are available to you. Or you may just prefer a touch of
historical charm. Either way, you’ll get all these benets:
• Affordability. Older homes tend to cost less to purchase than new,
customized homes. (ough this isn’t a universal rule—in large
cities, where the majority of new building is far outside the city, it
can be the reverse.)
• Established neighborhood. Instead of looking at mounds of dirt
while perusing architectural drawings, you’ll be able to get a feel for
the neighborhood by taking a stroll.
• Established landscaping. You’re not likely to nd a tree-lined street,
or a wisteria arbor over your front gate, in a new development.
• Construction. Older homes are often built with high-quality materials
such as thick beams, solid-wood doors, and heavy xtures.
• Character. Crown molding and built-in cabinetry are just a few of
the fun features found in older homes—but rarely in newer homes.
ere are also drawbacks to previously loved homes, including:
• Lower resale value. Older homes, on average, sell for less than their
newer counterparts.
• Replacement costs. e years take a toll on appliances, water heaters,
and roofs—and replacing them isn’t cheap.
• Efficiency. Older houses tend to be less energy ecient than newer
ones.
• Style. Although you can probably switch out the former owner’s
unique style choices (like magenta bathroom tile), it may require a
fair amount of sweat equity (meaning your sweat builds equity).
• Layout. Older houses were built for another era … an era before
plasma screen TVs and home oces. Rooms may be smaller and
laid out dierently than you’d like, with too few electrical outlets.
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Of course, not every used home is old. If you buy one that was built
only a few years ago, some of the drawbacks described above will be
eliminated. Likewise, you’ll lose some of the benets.
Newly Built Houses: Benefits and Drawbacks
Well over half a million new homes are built in the United States each
year, often in planned communities or developments. (Of course, you
can always buy a piece of land and build a custom home—but that’s a
dierent book, with its own unique set of issues.) No surprise—buying a
new home has unique benets, including:
• It’s mine! It’s new! A new house is a blank slate, clean and virtually
untouched.
• It’s custom-built. Although most builders oer a limited choice
of oor plans, you usually get to dene details like paint colors,
ooring, and xtures (though good taste comes at a price).
• Suited to modern tastes and needs. New houses are built for today’s
lifestyles and trends, so you’ll be able to nd features like induction
cooktops, a mud room, and lots of natural light. Also, you shouldn’t
have to worry about replacing a water heater or roof anytime soon.
• Livin’ green. New houses tend to be more energy ecient than older
homes, so per square foot, you’ll probably spend less money on
things like heating and cooling costs. And with some searching,
you might nd a “green builder” who uses environmentally friendly
building techniques and materials (see the U.S. Green Building
Council’s website at www.usgbc.org).
• Community uniformity and planning. Many new homes are built
in planned unit developments (PUDs). Like condominiums,
PUDs often have rules to maintain neighborhood aesthetics, and
amenities like swimming pools and community centers.
But buying new also has these drawbacks:
• It costs HOW much? New houses are generally worth more, but
their cost mounts quickly as you customize them to your wishes.
Developers often oer unique nancing alternatives (discussed in
Chapter 7), which may make a new house purchase more aordable.
• Who’s this guy?! You might have to deal with the developer’s
salesperson or representative, without the benet of your own real
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 33
estate agent to protect you. If you hope to use an agent, be sure to
bring him or her along on your rst visit—otherwise, you may lose
your chance.
• Not time-tested. While it’s exciting to get a brand-new home, you’ll
be the rst to discover whether all the lights work, the dishwasher
runs, the water heater heats, and more.
• It will be done when?! Developers don’t always nish houses when
they expect to, and often don’t compensate purchasers for the
delay. Instead, the ne print may release them of liability. Worse
yet, nancially unstable builders have been known to go bankrupt
before the houses are nished at all, or before adding amenities
such as a golf course or swimming pool.
• More rules? As we’ll discuss when we get to condos, some PUDs
require all owners to live by a set of written rules. Short of selling,
there’s often little you can do to get out of these rules if you don’t
like them.
Sharing the Joy, Sharing the Pain: Condos
and Other Common Interest Properties
Maybe a traditional house isn’t for you—perhaps it’s out of your price
range, you’re looking to avoid all the maintenance, or you want to live in
an area that just doesn’t have many regular houses. In that case, you may
want to consider an alternative, like a condominium (“condo”) or co-op.
ese types of properties are often referred to as common interest
developments (CIDs), because they involve shared ownership or responsi-
bility for common areas like hallways, recreation rooms, or playgrounds.
How a place looks physically doesn’t really make a dierence—any of
these three might look like an apartment, at, loft, or townhouse; old or
new; in the city or the country. (Detached houses in PUDs count too, but
since we’ve already covered those, we won’t include them in this section.)
Are you picturing yourself out on the roof with a hammer, doing your
share for the common good? Don’t worry, you won’t likely be asked to
perform repairs or x elevators. But you will have to become a member of
a community association, which makes sure those things are done. Your
monthly membership fee (formally called a “maintenance assessment” or
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
“regular assessment”) will help keep common areas in good shape and
provide a cash reserve for unanticipated or larger projects like replacing a
roof. If you want to actively participate in the association, you can attend
meetings and voice your opinion—or even get yourself elected to the
board of directors. If you don’t, you just write the check and hope the
more active owners are like-minded.
ere are three types of community associations: planned community
associations (for PUDs, detached family homes, and townhouses),
condominium associations, and co-op associations. We’ll point out any
signicant dierences among them as we go.
TIP
What the association leaders do. ough every CID homeowner must
join the community association, the board of directors handles the day-to-day
work and decision making, such as coordinating repairs and collective services like
trash pickup; managing amenities such as swimming pools, playgrounds, and tennis
courts; preparing annual budgets; and conducting meetings.
Condominiums: Benefits and Drawbacks
When you buy a condo, you buy the interior space of your home. Your
walls, ceiling, and oors dene your boundaries instead of fences and
sidewalks. Everything in the common space—be it stairwells, swimming
pools, sidewalks, or gardens—the whole community owns together and is
nancially responsible for. Some of the benets of condo life include:
• Affordability. A condo often costs less to buy than a house (although
in major metropolitan or resort areas, the opposite is sometimes
true). Maintaining a condo can also be less expensive, since costs
that otherwise might be duplicated—like landscaping, roong, and
some insurance—are shared.
• Convenience. If you aren’t into maintenance, you’ll appreciate that
the condo association—particularly in a larger community—
is likely to hire a management company to take care of the
landscaping and common areas. You may also get valuable on-site
amenities like a gym or pool.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 35
• Community. Because you’re all part of the same community
association, you’ll get the opportunity to know your neighbors,
whether you wish to or not.
Every rose has its thorns. Some of the drawbacks to condo living include:
• Rules, rules, rules. You’ll be subject to a document called the master
deed or Declaration of Covenants, Conditions, and Restrictions
(CC&Rs). is sets forth not only rules for the community
association board to follow, but rules governing all owners. You’ll
be told what you can do in the common space, and even what you
can do with or in your own unit from the color of your curtains or
blinds to the type of owers you can plant.
• Buy for less, sell for less. Condos generally appreciate at a slower rate
than houses. And some have gotten into serious nancial trouble in
recent years, leaving homeowners unable to sell at all.
• Privacy. Since you’ll be sharing common areas and usually walls
or ceilings, too, you’ll be giving up some privacy. Also, if having a
large outdoor space to garden, entertain, or keep a pet is important,
you might be frustrated by the outdoor spaces, which are usually
either miniscule or communal.
Diet-Time for Fido?
What kinds of things do CC&Rs limit? Common examples are:
• whetheryoucanhaveapet,andifso,itsmaximumheightorweight
• whetheryou’llgetaparkingspace,orwhetheryourguestscanparkin
the lot
• whetheryoucanchangethecolorofyourcurtainsorpainttheoutside
of your unit
• thelocationorappearanceofthingslikeyourmailbox,clothesline,
satellite dish, flags, and wreaths
• howlongvisitorscanstaywithyou
• whetheryoucanrentyourunittosomeoneelse,and
• whetheryoucansmokeinyourunit.
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• You share all costs, whether you want to or not. It may be frustrating to
see your monthly membership dues spent on things you never use,
like the swimming pool. And if you’re the kind of person who can
live without a repair until you have spare cash, tough luck—you’ll
be forced to pay your share on the association’s schedule, sometimes
in excess of your regular fees. If you get behind on paying your
assessments, your condo association may have the power to foreclose
on you (even if you’re up to date on your mortgage)!
• It can cost more than you expect. In addition to your monthly mem-
bership or maintenance assessments (which can themselves be several
hundred dollars), you may have to pay additional fees called “special
assessments.” ese are one-time fees collected for major purchases
the association can’t aord to make with its current reserves (for ex-
ample, to replace the roof). Do your research: In recent years, with
many new buildings not fully occupied, the few owners in some
CIDs have found their special assessments very high.
TIP
Size matters in condo developments. Your experience will be a lot
different in a Boca Raton megaplex than in a Brooklyn brownstone. In a building
with fewer units, you may find the rules less constricting—but you may also be
more responsible for day-to-day operations and costs.
Townhouses and Duplexes: Benefits and Drawbacks
One compromise between a single-family dwelling and a traditional
condo is a townhouse. Townhouses are usually built in rows and share
at least one common wall (also called “row houses”). Like single-family
houses, each townhouse owner has title to the building and the land it sits
on. Like condos, townhouses may share some common areas, governed by
a community association (but unlike condos, the community association
usually owns the common area).
Just be sure, when you start househunting, to nd out for sure what
type of property you’re looking at. If a careless ad or agent calls a property
a townhouse, but it’s really a condo, you’d own a little less personally
(because the land isn’t yours, nor is the outside of your unit) and should
pay less accordingly.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 37
Co-ops: Benefits and Drawbacks
Co-ops sound so glamorous, don’t they? But what are they, other than
swanky apartments in New York City for the rich and famous?
Like condos, co-ops (short for housing cooperatives) are dened by
their ownership structure. When you own a house or condo, you own
a piece of physical property. When you own a co-op, however, you own
shares in a corporation. e corporation,
in turn, owns the building you live in,
and you get a proprietary lease to live in
a specic unit within the building. e
lease allows you to live there as long as
you own your shares and spells out any
restrictions on your use of the unit.
As with any corporation, your shares
also give you voting rights. Shareholders
elect the board of directors, who make
most of the decisions and manage
daily operations or hire sta to do so. e shareholders pay a monthly
“maintenance fee” to cover these and other costs. Usually, the more
desirable the unit a shareholder has, the higher the maintenance fee.
Because of your limited ownership and other nancial issues
(discussed in Chapter 6), co-ops are sometimes dicult for the average
rst-time homebuyer to aord. e limitations also mean that co-ops
tend to be quite slow to appreciate in value.
Factory Made:
Modular and Manufactured Homes
Buying a prefabricated home no longer means living in an insubstantial-
looking box. In fact, it’s a creative possibility and a growing trend.
Modern, multistory dwellings, now known as “modular homes,” are built
in blocks in factories and transported to properties, where they’re fully
assembled to comply with local building codes. If you decide to buy a
property and build a home on it, a modular home might be a relatively
low-cost option.
Celebrities Who’ve
Owned Co-ops
Among the big names who’ve
made a co-op home (or maybe
one of their homes) are Glenn
Close, Jimmy Fallon, Chloe
Sevigny, Sean Combs (a.k.a.
Diddy), Matthew Perry, and Kelis.
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However, you’ll have to consider additional expenses like transporting
the home; getting the proper permits and access to utilities and sewer
lines; hiring professionals for installations; and adding features like
landscaping, driveways, or fences. A local contractor may be able to give
you a brief overview of the costs, players, and timeline.
CHECK IT OUT
Check out modular homes styles, from the traditional to the ultra-
modern, at:
• www.modularcenter.com
• www.houseplans.com
• www.linwoodhomes.com.
Another low-cost option is the manufactured house, once commonly
referred to as a mobile home. ese too have come a long way.
Manufactured homes comply with federal
building standards but aren’t constricted
by local or state building codes.
Manufactured homes are typically
transported to communities of other, similar
homes, and the owners lease the land the
homes sit on. If the lease is terminated or the
land is sold, the owners can be required to
leave and take their homes with them. Since
a lot of the value of a home is in the land,
these homes tend to lose value over time, and moving one may cost more
than it’s worth. Manufactured homes are often more dicult to nance,
too. e bottom line is that they’re low-cost options to more permanent
properties but don’t usually oer the same equity-building advantages.
Putting It All Together: Your Dream List
Now it’s time to ll out what we call your “Dream List.” is is a handy
worksheet where you’ll write down your “must haves,” such as number
of bedrooms, size or type of house, neighborhood, maximum price, and
Million-Dollar
Mobile Homes?
Yes, you’ll find them in Malibu:
Even the rich and famous
(like Minnie Driver) sometimes
retreat to manufactured home
communities.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 39
anything else you consider a minimum requirement in a home, such as
a garden. ere’s also space for you to note your “would likes,” features
you’d prefer but could live without or possibly add later (such as a deck).
Of course, expressing your preferences
doesn’t mean you’ll get all of them. But later,
when you’re out househunting, carrying a
copy of your Dream List will help make sure
you keep your priorities straight.
e Dream List also includes a section for
things you absolutely won’t accept, under any
condition, such as a dark kitchen with few
windows. You might need this reminder one day, when you nd a house
that’s perfect in every other respect.
TIP
Check in with your partner. If you’re buying the house with another
person, make sure you assess your priorities and complete the Dream List
together. It won’t help to make a list of priorities, only to find out they’re in direct
conflict with your fellow buyer’s.
ever did
est thing I
B
Put my practical needs as a single woman first. Hope
thought she was looking for a cute Craftsman with
wainscoting, high ceilings, and a yard. “In fact,” she says, “I almost bought a house
that fit my supposed ideal. But at the last minute, I realized it wasn’t going to work.
My work hours don’t leave time for home maintenance, and my safety was an
issue in that neighborhood. So I switched gears and bought a late ’80s townhouse
with a drive-in garage with direct access to the house, in a nicer neighborhood. It’s
architecturally boring, but I’m comfortable there, the homeowners’ association
deals with most of the maintenance, and I haven’t had a moment’s regret.”
ONLINE TOOLKIT
e “Dream List” can be found in the Homebuyer’s Toolkit on the
Nolo website. (See the appendix for the link.) A filled-in sample is shown below.
Ooh! I forgot about the
washer and dryer! I’ve been
dreaming about that my
whole New York life!
Carrie, Sex and the City
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Dream List
Address: 43 Belvedere Road, Oakland, CA Date visited: March 3, 20xx
Contact: Tom Macht, Hills Realty, 510-555-3479
General Features Must Have Would Like
is House
Type (house,
condo, etc.) or
Style (Colonial,
loft, etc.)
Single-family
house in good
shape with few
stairs from the
street
Ranch style
or layout with
bedroom on 1st
floor, accessible for
elderly parents
80 years old, but
seemingly in great
shape. Two-story. Den
on first floor could be
used as guest room.
Upper price limit $900,000 $ 750,000 $ 850,000 list price
Age above/below Less than 75
years old
Less than 50 years
old
80 years old
Min. square footage
1,500 2,000 1,750
Min. lot size
2,500 square ft.
3,500 square
ft.
3,000 square
ft.
Number of
bedrooms
3 4 3 (plus den that could
double as guest room)
Number of
bathrooms
2 full baths 3 full baths 2.5 (half-bath off of
kitchen and full bath
in master bedroom)
car garage 1-car garage Large attached
2-car garage
No garage
Parking Driveway
parking, not on
an incline
Same Driveway parking
close to house, level
surface
Fireplace
Not a deal breaker
A gas fireplace Nonworking fireplace
Flooring Hardwood, at
least in living
room and dining
room
Hardwood floors
in good shape, in
entire house
Hardwood floors in
living room and dining
room, but covered by
wall-to-wall carpet.
Floors need refinishing.
Other Good separation
from neighbors’
houses
Lots of privacy,
especially in
backyard
Houses are fairly close,
but trees provide
some privacy on 1st
floor
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 41
Dream List, continued
Floor Plan Must Have Would Like
is House
Formal living/
dining
Separate living
and dining rooms
Large living room
for entertaining.
Small living and dining
rooms, open on to
each other
Great room Don’t care Don’t care No
Number of floors 2 1
2 (short flight of stairs)
Basement/attic
Clean, dry base-
ment for storage;
no flooding
problems
Large finished
basement for kids’
playroom plus
storage, half-bath
Basement in good
shape; could be
divided into kids’ play
space and storage
area. No bathroom.
Other
Kitchen Must Have Would Like
is House
e basics Large sunny
kitchen, lots of
counter space
and storage
Gourmet kitchen
with beautiful
cabinets, walk-in
pantry, natural
lighting plus
recessed lighting,
hardwood floors
Decent-size kitchen,
good light, adequate
storage. Cabinets need
resurfacing. Linoleum
floor will need
replacing. Lighting
fixtures outdated.
Dishwasher
Built-in
dishwasher
Same Only portable
dishwasher, but could
add a built-in one
Other appliances Gas stove, large
refrigerator in
good shape
New stainless
steel appliances,
including
commercial stove
Refrigerator and oven
don’t match, but are
only a few years old.
Eat-in
Space for small
table for four, or
breakfast counter
Breakfast nook
opening on to
deck
Breakfast nook! Now
to add the deck …
Other
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Dream List, continued
Other Rooms Must Have Would Like
is House
Laundry Washing
machine and
dryer
Separate laundry
room on 1st floor,
with space to hang
clothes and iron
Washing machine and
dryer in basement.
Bare bones.
Family Space for kids
to hang out,
separate from
living room
Large finished
playroom in
basement
No separate play-
room, but kids’ rooms
are large, and extra
space in basement.
Den/study
A room suited for
office, with space
for two desks,
bookcases, and
file cabinets
Two separate
offices with built-in
bookcases would
be fantastic!
Den on first floor could
double as guest room/
office. Master bedroom
nook could be made
into small office.
Other
Outside Must Have Would Like
is House
Deck/patio Sunny deck off of
kitchen or ability
to easily add one
Large deck plus
patio in garden
Small deck off of
second floor master
bedroom; would be
easy to build deck off
kitchen.
Garden
Sunny yard for
garden
Established
garden, fruit
trees, good soil,
underground
watering system.
Mainly sunny, with
a few shade trees.
Back yard needs work.
A few rose bushes
and succulents, but
potential. Completely
open (no shade). No
drip system.
Fenced yard Yes—need for
dog
Beautiful
hardwood fence
and large secure
backyard
Fence in bad shape.
Will need to replace, or
fill in some areas with
holes.
Pool/hot tub
Not necessary
Not necessary
No
Other
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 43
Dream List, continued
Structure Must Have Would Like
is House
Central heat/air Central heat
Central heat and AC
Central heat
Insulation roughout
house and attic
roughout house
and attic
Only attic is insulated
Upgraded
plumbing
A must
Copper plumbing
Not sure about the
material, but plumbing,
water pressure, etc.
seem fine.
Other
Storage Must Have Would Like
is House
e basics
Good storage a
must in entry-
way, bedrooms,
kitchen, base-
ment, bathrooms,
and other rooms.
Custom built-
in closets in all
rooms, lots of
shelves, drawers,
cupboards (espe-
cially in kitchen)
Adequate coat
closet in entryway.
All closets need
updating, except for
large walk-in closet in
master bedroom.
Linen closet
Linen closet near
bathroom
2 large linen
closets, 1 near
bedrooms, other
bath
Small linen closet
on 2nd floor only,
outside of bathroom
Other
Convenience Must Have Would Like
is House
Work within
miles/minutes
1 hour tops by
car
15 minutes by car
(one can dream)
30-minute drive to
City (45-60 minutes
in rush hour).
Alternative = good
public transport
Church/place of
worship within
miles/minutes
N/A N/A N/A
Other
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Dream List, continued
Neighborhood Must Have Would Like
is House
Quiet street Residential area;
no speeding cars,
walking distance
to grocery, other
shops.
Same Street a little noisy
(dog next door),
basically okay. Only a
few blocks to lake and
great shopping area!
Safe neighborhood A must! Same Seems safe; need to
talk with neighbors,
check crime stats.
Good schools A must! Lake Hills school
district, schools
within walking
distance
Lake Hills school
district! Elementary
school is short
(15-minute) walk
from home.
Rules/restrictions N/A (we don’t
want to live
in community
association)
N/A N/A
Community
association fees
N/A N/A N/A
Accessible public
transport
Short walk or
drive to BART,
and close bus stop
Short walk or
drive to BART.
Bus stop at corner
10-minute drive to
BART, bus stop a
5-minute walk
Other
Absolute No Ways Under Any Condition
Bad schools, high-crime area, fixer-upper.
Notes
is house is definitely a possibility—especially because of schools and location. We
may be able to get it for less than list price—enough to cover some changes we’d like,
such as refinishing/replacing floors, resurfacing kitchen cabinets, adding a built-in
dishwasher, repairing backyard fence. May even be able to swing adding a deck off
the kitchen!
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 45
What’s Next?
Now that you know what features you’re looking for, it’s time to figure out
whether you can afford them all. In Chapter 3, we’ll explain how a lender is going
to evaluate your finances and what you should do to evaluate them yourself.
Dream List Directions
is Dream List includes the more common features found in many
homes, but you can add others to this list (perhaps a must-have hillside
location with a view) or delete some features. Add as many details as you
want in the left-hand column (“General Features”). At the end of the
Dream List, there’s a section for those things you absolutely will not accept,
under any condition. ere’s also a section at the end for notes, such as
comments about a particular house or neighborhood—something you want
to be sure to remember, such as a quiet location at the end of a cul de sac.
Fill in the “Must Have” column with your minimum requirements
and the “Would Like” column with features you’d prefer but could live
without. For example, for the “Number of Bedrooms” feature, you might
write “3” in the “Must Have” column and “4” in the “Would Like”
column. In some cases, you’ll add additional information: For example,
you might put a checkmark indicating that a house meets your upper
price limit, and then note the actual price of the house. If a “Must Have”
can be added when you move in, such as a deck or second bathroom, you
can also note this.
If you ll out the left columns of the Dream List now and print more
copies, you can use this sheet over and over again. Each time you visit a
house, simply write in the address and note how it compares in the right-
hand column (“is House”). Save copies for homes that seem like good
possibilities.
Beyond the Purchase Price: e Costs of Buying and Owning a Home ......... 51
Down Payment ...................................................................................................................................51
Principal, Interest, Taxes, and Insurance ...............................................................................54
Up-Front Costs ...................................................................................................................................55
Recurring Costs ..................................................................................................................................56
Spend Much? How Lenders Use Your Debt-to-Income Ratio ...............................57
Maximum Acceptable Ratios: e 28% and 36% Rules ................................................ 57
Calculating Your Own Debt-to-Income Ratios .................................................................58
Blasts From the Past: How Your Credit History Factors In ..................................... 59
How Lenders Use Credit Scores .................................................................................................60
Getting Your Own Credit Report and Score ......................................................................60
What Your Credit Score Means ................................................................................................. 61
Understanding Your Credit Report ........................................................................................ 62
Correcting Credit Errors ................................................................................................................63
Repairing Your Credit ..................................................................................................................... 64
What’s Your Monthly Budget? Understanding Your Finances ............................. 65
Getting Creative: Tips for Overcoming Financial Roadblocks .............................67
e Power of Paper: Getting Preapproved for a Loan ................................................68
Why Preapproval Is Better an Prequalification............................................................69
What You Need to Show for Preapproval ............................................................................70
Where to Go for Preapproval .....................................................................................................71
CHAPTER
3
Does is Mean I Have to Balance
My Checkbook? Figuring Out
What You Can Afford
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Meet Your Adviser
Russell Straub, a former mortgage broker and founder,
President, and Chief Executive Officer of LoanBright,
a mortgage marketing service based in Evergreen,
Colorado, whose services involve two websites, www.
loanbright.com and www.compareinterestrates.com.
What he does Helps LoanBright serve its goal of giving homeowners a
convenient way to find the right mortgage company as well as
a loan with favorable terms. Homebuyers visit the company’s
website, compare interestrates.com, enter some basic
information, receive a list of lenders or brokers and available loan
terms, and consent to being contacted. At the other end of the
transaction, LoanBright helps mortgage brokers (particularly sole
proprietors or independent ones) meet these potential clients.
First house “It was a condo in Boston, a 350-square-foot studio—big enough
for me, by myself. I bought it during a run-up in real estate prices—
at the peak, as it turned out! I was working as a manufacturing
engineer and didn’t know a thing about real estate. I chose my
mortgage broker because she lived two floors up from me in my
apartment building, but she managed to shepherd me through.
Although the 1980s real estate crash hit not long afterward, I
held onto the place. In fact, even though I now live in Colorado,
I still own the condo and rent it out, and it has since tripled or
quadrupled in value.”
Fantasy house “Right on the ski slopes at Vail. I already spend some time there, but
not enough. If you’ve been there, you know the style I’d like—wood,
European looking, with a wood-shake tile roof, ski in/ski out.”
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 49
Likes best
about his work
“My short commute from home is great. Also, I like how each of us
at LoanBright brings something different to the table, with varying
interests and viewpoints, which we can combine into something new.
I’m also conscious of the fact that we have the ability to change the
lives of the solo or small-business mortgage and loan brokers whom
we consider our primary customers. Many of them are honestly
struggling—some are single moms—and it’s a competitive business,
with more people doing the jobs than there are transactions. We’re
trying to do the right thing for them. It’s also satisfying to be able
to help homebuyers get competitive loan quotes, potentially saving
them thousands of dollars on their new mortgage.”
Top tip for
first-time
homebuyers
“Do your homework. Read about the process, ask your questions,
and talk to more than one broker and lender. It can take a while to
get the hang of it. But I read a survey recently saying that consumers
booking a hotel room online spend an average of one hour or more
selecting a hotel. If homebuyers would spend a proportionate
amount of time researching their prospective purchase and
mortgage, they’d come out way ahead. But I’ve met many who
spent less than an hour getting educated about buying a home!”
ONLINE TOOLKIT
For more tips from Russell Straub, check out his audio interview on
the Nolo website. (See the appendix for the link.)
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U
p to this point, we’ve been able to focus on the fun stu—
nding out all the great reasons to buy a house and imagining
what the new place will look like. Now it’s time to take a step
into the world of nances—nothing that will require an accounting
degree, fortunately. You may be wondering why we’re even bringing up
boring nancial stu before you’ve started seriously househunting. at’s
what a mortgage broker is for, isn’t it?
But wouldn’t it be horrible to put an oer on a house and begin
shopping for a loan, only to discover that you couldn’t qualify for the
amount you needed or the terms you expected? Even worse, what if you
were able to get a loan, but discovered after moving into your new home
that you’d borrowed more than you could handle—at least, without
moonlighting?
Don’t Play the Multiplication Game
You may have heard of a formula where you multiply your household’s
gross annual income by two and a half to find out how much you can afford
to spend. is may be fun and easy, but it won’t help you draw realistic
conclusions. It fails to factor in important things like how much debt you
currently have, the terms of your mortgage, or how much you already have
saved for a down payment. If you really want to guess how much you can
spend before reading this chapter, you’re better off using a reliable online
affordability calculator like the one at www.nolo.com/legal-calculators.
Getting familiar with your nances before there’s a prospective
property in sight—even if you just sit down for an hour or two—will
show you how much you can realistically aord to spend and prepare you
to choose the best possible loan. is chapter will help you by:
• explaining the costs of purchasing a house
• demystifying the process mortgage lenders use to decide how much
you can borrow
• providing simple ways to calculate what you can really aord based
on your lifestyle and nances
• showing you how to boost your nancial prole, and
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 51
• explaining what it means to get preapproved for a loan and why
you should do so.
If you’ve already found a place and are trying to gure out how to pay
for it, don’t skip this chapter. A quick look at your nances will still help
you decide whether your prospective home’s cost is within your budget
and whether you’re likely to get the loan terms you’re counting on.
Beyond the Purchase Price:
e Costs of Buying and Owning a Home
Buying a house means some new expenses beyond the purchase price. A
rst-time homebuyer should plan to drop some cash for:
• the down payment
• the loan principal, loan interest, taxes, and insurance
• up-front costs, mostly to close the deal, and
• recurring ownership costs.
e exact amounts of these expenses depend on you, the house you
buy and where you buy it, and the type of mortgage you get. But even if
you can’t predict exact amounts, understanding these expenses and what
drives them will save you some sticker shock.
Do We Have to Talk About Money?
We know, all this talk about numbers makes watching a a file download
seem fascinating. But if you pay just half a percent more than you could have
if you’d done some research—say, 4.5% instead of 4.0%, on a 30-year, fixed-
rate mortgage for $200,000—you could end up paying almost $21,000 more
in interest over the life of the loan.
Down Payment
You may be plunking down a hefty chunk of change, in the form of a
down payment, to buy your home. Down payments are traditionally
calculated as a percentage of the purchase price. Although most lenders
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
tightened lending practices after the 2007/2008 nancial crisis and began
requiring down payments of 20%, many are relaxing standards once
again. If you have excellent credit, you should be able to qualify for a
mortgage with between 5% and
10% down.
Nevertheless, there are many
benets to making a large down
payment:
• No PMI. If you pay 20% of your
purchase price, you don’t have to pay
private mortgage insurance, or PMI,
which lenders routinely require of
homebuyers who borrow more than
80% of the home’s value, to protect the lender if you default.
• Smaller monthly mortgage payments. If you borrow less money, you’ll
have less to pay back, leaving you more cash for other things.
• Less interest overall. If you borrow less, you’ll owe less in total
interest. For example, if you got a 30-year, xed rate loan for
$200,000 and paid 4.0% interest, you’d pay approximately
$143,735 in interest over the life of the loan. But you’d pay only
about $114,989 over the life of a $160,000 loan with the same terms.
e bank would get over $28,746 more in interest just because you
didn’t put $40,000 down at the beginning.
• It’s like money in the bank. No matter what the market does, putting
cash into your home is a low-risk way to use it.
• Lower interest rate. Borrowers who take out mortgages for more than a
certain amount ($417,000 in most places in 2014, but higher in high-
cost areas such as Alaska and Hawaii—up to $625,500 in 2014—and
can change annually) get what are called “jumbo” loans, with higher
interest rates. If making a down payment will lower your loan to below
that amount, your interest rate will probably drop, too. Likewise, if
you’re a borrower with poor credit, you might be able to obtain better
loan terms if you fork over more cash at the beginning—the lender
gures you’ve got more incentive to keep paying if you stand to lose
your down payment when the lender forecloses.
Tick, Tick, Tick
Finding the house you want to buy might
not take as long as you think. According
to a 2008 survey by the National
Association of Realtors
®
, the typical
homebuyer spent 12 weeks searching
before settling on a house.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 53
Where Will I Get Down Payment Money?
If you’re interested in making a down payment but haven’t saved the cash,
here are some alternative sources:
• Agiftorloanfromfamilyorfriends. If you have a loved one with
available cash, you may be able to get a low-interest loan, or even a gift.
Nearly one third of first-time homebuyers get help from friends and
family—either as a gift or a loan—for the down payment. However,
you’ll need to keep an eye on your lender’s rules regarding the source of
your down payment. Adviser Russell Straub notes, “If one gets an FHA
mortgage, there are no restrictions on the amount or percentage of the
gift so long as it comes from a blood relative. If one gets a conventional
mortgage and the gift is for less than 20% of the purchase price, however,
the borrower(s) must make at least 5% of the down payment from their
own funds, and the gift(s) must be from a blood relative.”
• WithdrawalfromyourIRA.You can withdraw up to $10,000, penalty-
free, from an individual retirement account (IRA) to purchase (or
build) your first home. Your spouse or cobuyer can do the same.
For more information, see IRS Publication 590, Individual Retirement
Arrangements (IRAs), available at www.irs.gov.
• Borrowfromyour401(k).Check with your employer or plan adminis-
trator about whether you can borrow from your 401(k) plan. Also ask
how much you can borrow (usually, $50,000 at most). But be warned:
Lenders will factor the monthly 401(k) loan repayment amount into
your mortgage qualification ratio. For more information, see IRS Publi-
cation 575, Pension and Annuity Income, available at www.irs.gov.
• Currentassets.If you have other investments, like stocks or bonds, con-
sider cashing them out—but be sure to factor in the taxes you’ll owe. You
may be also able to sell an asset like a car or valuable musical instrument.
• Don’thaveabigwedding!Okay, we’re half joking here. But you
wouldn’t believe the number of couples we’ve met who said that,
in retrospect, they wish they’d kept the wedding small and put that
money toward a house.
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ever did
est thing we
B
Makea30%downpayment. According to Nigel, “When
Olivia and I decided to buy a house together, we were
earning nonprofit salaries (low). But our parents were excited to see us settle
down and gave us generous gifts. Between that and emptying our savings
account, we had about 30% to put down—which convinced the seller to choose
our bid from among the many others, because we’d obviously have no trouble
financing the rest. Now we have absurdly low monthly payments—less than
we’d be paying in rent—and the house has appreciated in value. Also, we’re in a
position to help our parents out financially, if they need it.”
Principal, Interest, Taxes, and Insurance
Ever heard of PITI (pronounced “pity”)? It stands for principal, interest,
taxes, and insurance, all of which must be factored into your homebuying
plans. Here’s the breakdown on these expense items:
• Principal. e amount you borrow from the lender and must pay
back, month by month.
• Interest. A percentage of the overall borrowed amount that the
lender charges you to use its money. e exact rate varies widely.
• Property taxes. Taxes vary by state and sometimes by local area, but
expect to pay somewhere around 1% of the house purchase price
each year, if the place you live ts the national average.
• Insurance. Coverage for theft, re, and other damage to the
property (required by your lender) and usually for your liability to
people injured on your property or by you.
Average rates run upwards of $600 per
year, and over $1,000 annually in many
locations. Private mortgage insurance or
PMI also factors in here. If a homebuyer
puts down less than 20%, the annual PMI
cost can range from ½% to 1.5% of the
loan amount.
It makes sense that these four items have
their own acronym, PITI, because for some homebuyers (usually those
whose down payment is less than 20%), all four must be paid straight to
Worst states for
property taxes?
e five with highest rates
nationwide are: #1: New Jersey,
#2 Illinois, #3 New Hampshire,
#4 Wisconsin, and #5 Texas.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 55
the mortgage lender each month. e lender turns around and pays the
appropriate party. e lender’s rationale is that if you don’t pay these bills
(or your mortgage) and the lender gets the property, it doesn’t want to get
stuck with your tax or insurance bill, too.
TIP
PITI is paid differently when you buy a condo or co-op. Instead of
paying the lender, you may have to pay your community association or co-op board
for your portion of the mortgage and real estate taxes (on a co-op), or for insurance
on the jointly owned parts of the property (on either a condo or a co-op).
Added together, your total PITI may come to a lot more than your
current monthly rent. at makes owning a home look like an expensive
proposition. But it’s not an apples-to-apples comparison. First, remember
that your mortgage payments typically reduce your loan principal, so
your payment is building equity, not just going into a black hole. Second,
your interest payments and property taxes are tax-deductible.
EXAMPLE: Mieko and Lyle buy a house for $250,000, putting down
$25,000 and nancing the remainder with a 30-year xed rate mort-
gage at 4%. Not only are their monthly mortgage payments $1,074
a month, but the mortgage lender also collects $450 each month to
pay their homeowners’ insurance and annual property taxes, for a total
monthly payment of $1,524. e money for the tax and insurance
bills is held in an escrow account, which the lender draws on to pay
the bills when due. At the end of the rst year, Mieko and Lyle will be
able to deduct about $11,328 from their taxable income: $2,400 for
property taxes and about $8,928 for interest paid on the mortgage.
Up-Front Costs
Until now, we’ve been talking about costs associated with the house itself.
But you’ll also have to spend some pretty serious cash at the beginning
to make the sale happen. (Sort of like paying rst and last month’s rent.)
Particularly if you’re trying to save up for a decent-sized down payment,
you’ll need to plan for the following additional up-front costs:
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• Closing costs. An array of miscellaneous and sometimes aggravating
charges—for everything from couriers to loan points (discussed
below) to insurance premiums—are lumped into a category called
“closing costs.” ese vary across the country, but are usually 2% to
5% of the house purchase price.
• Points. Borrowers sometimes agree to pay a “loan origination fee”
or “points” to obtain a specic loan. Each point is 1% of the loan
principal (so one point on a $100,000 loan is $1,000). Paying points
can lower your interest rate, so you pay less in the long term. But
you’ll probably need to pay the cash up front (although with some
FHA loans, points can be amortized into your loan—meaning
added on, with interest accruing).
• Moving costs. How high these will go depends on how far you’re
moving, how much stu you have, and whether you use a
professional moving company.
• Service setup costs. You may have to pay fees to set up cable, a
security system, high-speed Internet, and similar services in your
new home.
• Emergency fund. It’s a good idea (and sometimes a lender
requirement) to have a couple months’ worth of PITI payments
saved, in case something goes unexpectedly awry.
• Remodeling costs. If you buy a xer-upper or a planned remodel,
you might need thousands of dollars in cash early on, just to make
the place livable. Estimate high for these expenses—they’re almost
always more than anyone expected.
Recurring Costs
Yes, there’s more. Whether new or old, your house will need regular
maintenance—gutters cleaned and trees trimmed regularly, a paint job
every few years, new appliances when the old ones die, and so on. If you
buy in a common interest development, your own maintenance costs
may go down, but you’ll have to pay monthly dues and sometimes spe-
cial assessments for unanticipated projects like resurfacing a damaged
parking lot. While not part of your PITI, all of these expenses will aect
your monthly cash ow.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 57
TIP
Adjust your deductions. Once you know the details of your mortgage,
work with a financial professional to change your withholdings to account for your
lower tax liability, freeing up more money for other expenses.
Spend Much?
How Lenders Use Your Debt-to-Income Ratio
Once you understand what you’ll be paying for, and that you’ll probably
need a mortgage to make it happen, the obvious question is, how much
can you borrow? To know that, you need to understand how lenders
think. Just as you’re trying to get the best loan, lenders are looking for the
best borrowers.
Without knowing you personally, lenders need some criteria to gure
out how risky it is to lend you money. If you make your payments, they’ll
turn a prot, either in interest or by selling your loan on the secondary
market (more on that in Chapter 6). If you don’t, they’ll have to chase
you down for the cash or sell the property to try to get it.
One of the criteria that lenders use is the comparison between your
income and your debt load, called your “debt-to-income” ratio. ey
also look at your track record for paying previous debts, or your credit
history, discussed below.
e concept of “debt-to-income ratio” isn’t as complicated as it sounds.
e lender simply looks at your household’s gross monthly income, then
makes sure that your combined minimum debt payments—for your PITI
(including any community association fees), credit card, car, student loan,
personal loan, 401(k) loan, and others—don’t eat up more than a certain
percentage of that amount. e idea is to make sure you have enough
cash left over for your mortgage payment.
MaximumAcceptableRatios:e28%and36%Rules
How high can your debt-to-income ratio go? Traditionally, lenders have
said that your PITI payment shouldn’t exceed 28% of your gross monthly
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income. is is sometimes called the “front-end” ratio. Also, your overall
debt shouldn’t exceed 36% of your gross income (also called the “back-
end” ratio). (Your gross monthly income means the amount you earn
before taxes and other monthly withdrawals, plus income from all other
sources, like royalties, interest, alimony, or investments.)
EXAMPLE: Fernando and Luz have a gross annual income of $90,000
($7,500 per month) and a moderate amount of existing debt. If they
plan to spend 28% of their gross monthly income on PITI, they’ll
pay $2,100 each month. Assuming they spend about $300 of that on
taxes and insurance, they can borrow about $375,000 using a 30-year,
xed rate loan at 4% interest.
Khanh and May also have a gross annual income of $90,000,
but they’re debt-free. So, depending on the size of their down pay-
ment, they may qualify for a loan using slightly more than 28% of
their gross monthly income on PITI. In an extreme case, they could
qualify to allocate up to 36% of their gross monthly income on PITI.
Spending the same on taxes and insurance, they can borrow about
$500,000 using a 30-year, xed rate loan at 4% interest. With the
same income but a higher debt-to-income ratio, Khanh and May can
spend a lot more money on a house than Fernando and Luz.
CHECK IT OUT
Ready to run some numbers? Online affordability calculators show
how a traditional lender will use your debt-to-income ratio to set your maximum
monthly mortgage payment. Find such calculators at www.nolo.com/legal-
calculators, www.hsh.com, www.bankrate.com, and www.interest.com. Make
sure any calculator you use factors in the amount of your down payment, your
income and your debts, and your estimated taxes and insurance.
Calculating Your Own Debt-to-Income Ratios
All you need to gure out your own debt-to-income ratios is your
combined gross monthly income gure plus that of anyone buying with
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 59
you. is will tell you approximately what a lender will say you can aord
to spend each month on a mortgage payment. See the sample Debt-to-
Income Ratio Worksheet below.
ONLINE TOOLKIT
You’ll find a blank version of the “Debt-to-Income Ratio Worksheet”
in the Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.)
Sample Debt-to-Income Ratio Worksheet
Gross monthly income: $2,000
Gross monthly income × 0.28 $560 Maximum monthly PITI payment
Gross monthly income × 0.36 $720 Maximum monthly debt overall
Blasts From the Past:
How Your Credit History Factors In
Aside from your available income, your lender’s main preoccupation will
be with your credit history. Most lenders want to know whom they’ll be
competing with to get your monthly dollars, how much you’re borrowing
from those various
sources, and how good
you’ve been about
paying money back
in the past. You’ve
probably undergone
credit history checks
before, like when you
applied for a car loan or
rented a new apartment.
Credit reporting bureaus exist to keep track of your borrowing habits.
e three major companies are Equifax (www.equifax.com), Experian
Managing Your Money Is So Easy!
You just use your credit cards! You pay your American
Express with your Discover, your Discover with your Visa,
your Visa with your MasterCard. Before they catch up
with you, you’re buried in a glorious crypt in Bel-Air!
Camilla, character on TV series e Naked Truth
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(www.experian.com), and TransUnion (www.transunion.com). ey use a
formula compiled by the Fair Isaac Corporation to calculate your “FICO”
score (which we’ll call your “credit score”; but beware when you see this
term other places, because anyone can compile a number and call it a
“credit” score).
In 2012, FICO introduced something called the FICO Mortgage
Score. Some lenders may use this instead of, or in addition to, your
regular FICO score. e goal of the FICO Mortgage Score is to capture
more information than does the regular FICO score, such as your history
of child support payments, rental payments, and more (all gleaned from
public records).
How Lenders Use Credit Scores
Lenders use your credit score to decide whether to lend you money and, if
so, how much and on what terms. If you’ll be nancing your home jointly
with others, the lender will look at each person’s credit score. Unfortunately,
that means that if one of you has a low score, it will probably aect the
terms of the loan oered to all of you. If any of you has serious skeletons in
the nancial closet, either clear out the closet, reconsider the joint purchase,
or get creative with your nancing strategies.
Getting Your Own Credit Report and Score
e best way to know exactly what prospective lenders will be looking at
is to look at it yourself rst. Federal law requires each of the three major
consumer reporting companies (named above) to provide you with a free
copy of your credit report once every 12 months.
CHECK IT OUT
e only authorized source for free credit reports: Go to www.
annualcreditreport.com. Other websites may advertise a “free report” but try to
sell you something in the process. is site also links you directly to the websites
for the big three reporting bureaus.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 61
the hard way
L
essons learned
Being financially responsible left me with no credit
history! When Willow decided to buy her first house, she
didn’t expect her lack of debt to create a problem. Willow explains, “I’d worked
my way through school and taken out a student loan that I’d paid off almost
immediately. And I’d always used a debit card instead of a credit card. As a result,
I had to jump through all sorts of extra hoops, providing a letter from my old
landlord showing that I paid the rent on time; showing records of my payments
of phone bills, cable bills; and even having my parents add my name to their
credit card account. (at last strategy worked faster than I expected—within
one month, my credit score was the same as theirs.) Here I thought I’d been so
good at controlling my finances, yet I discovered I’d been completely naïve when
it came to creating a record of debt payments.”
It’s a good idea to ask all three agencies for your credit report. ey
sometimes have dierent information, and your lender may be looking at all
three reports. You can do this simultaneously, but it means that you won’t
be able to get another free report from any of them for another full year.
Federal law doesn’t require the agencies to give you your credit score,
which is dierent from your report. You’ll probably have to pay extra to
get the score (unless you live in a state like California that requires that
consumers be given their scores for free when getting a mortgage). You
can get your credit score either from the individual consumer reporting
company websites or by going to www.myco.com.
What Your Credit Score Means
When you get your credit score, it will be a number somewhere between
300 and 850—the higher the better. If your score is above 720, it’s
considered pretty strong. Most people are in the 600s or 700s. A higher
number tells the lender you pay your debts on time, have limited
sources of revolving credit, and have an established record of using
credit prudently, making you a good credit risk. A lower number (below
around 620 for conventional mortgages and 580 for FHA mortgages)
means you look more risky—perhaps because you have enough revolving
credit that if you maxed it all out you couldn’t pay all your bills plus a
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mortgage; you’ve missed payments in the past; or you’ve never used any
credit source, so the lender doesn’t know what to make of you.
A low score will make it dicult to nd a willing lender. And any
lender you do nd will expect you to pay more for that privilege of bor-
rowing, probably in the form of higher interest. (If your credit is less than
perfect, you may be able to clean it up, as we’ll discuss below.)
CHECK IT OUT
What makes up a FICO score? It includes your payment history
(35% of the score), how much you currently owe (30%), how long you’ve been
a borrower (15%), whether you have any new credit accounts (10%), and the
types of credit you use (10%). To learn more, go to www.myfico.com, a Fair Isaac
website for consumers.
Understanding Your Credit Report
Get ready: Your credit report may go on for literally pages and pages.
Focus on making sure the most critical information is mistake-free,
particularly these bits of data:
• Name, Social Security Number, and addresses. Especially if your name
is a common one, you may have multiple aliases. And an address
you don’t recognize may mean someone with the same name is
incorrectly listed on your report.
What Makes Up Your Credit Score
Payment history
Amounts owed
Length of credit history
New credit
Types of credit used
35%
15%
10%
10%
30%
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 63
• Creditors. Make sure you actually borrowed money from the
creditors that appear, and that the amounts borrowed are accurate.
Keep in mind that some types of loans, like student loans, can be
sold or transferred. In that case, all creditors that have held the
loan will appear, but the pretransferred or sold accounts should no
longer be designated “open.”
• Open credit lines. Make sure any lines of credit you’ve closed are no
longer shown as open. Dierent reporting companies use dierent
terminology, so if you’re not sure, call to clarify.
• Collections and judgments. Make sure any collections actions or
judgments are reected accurately.
• Late payments. ese notations will usually indicate a late payment
of 30, 60, or 90 days. Make sure they’re accurate.
Correcting Credit Errors
Credit reporting mistakes happen frequently. Inaccuracies in the report
aect your score, and if your score drops, so does the likelihood of you
getting the best possible loan. You’ll want to spot and correct any errors
before a lender sees your report, not after you’ve applied for a loan and
been rejected.
All manner of mistakes are possible—from bits of credit history that
aren’t yours to a false claim that you paid a bill late. To correct such
errors, contact the reporting agency in writing. If all three agencies
misreported the information, you’ll have to contact all three. Each
agency may have a dierent procedure and forms to use for disputing the
report. When you discuss issues over the phone, make sure to document
conversations, including the date and name of the person you spoke with.
Finally, if you have any documentation that supports your claim, send a
copy with an explanatory cover letter.
e credit reporting agency has 30 days to investigate your complaint
and give you its ndings. If it can’t verify that its version of events is
correct, the agency is supposed to remove the information from your le.
If it won’t, you have the right to place a statement in your le giving your
version of what happened.
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Sometimes you can also work directly with your current and former
creditors to correct inaccuracies or solve problems. If you’re willing to
pay the disputed amount, or the creditor is willing to settle for a lesser
amount—which it sometimes is—the creditor may also agree to clear the
item from your credit history. Likewise if you have proof of an error, it
may be faster to go directly through the creditor than to correct it through
the reporting bureau.
CHECK IT OUT
Need help patching up your credit? See Credit Repair, by Attorney
Margaret Reiter and Robin Leonard, J.D. (Nolo). It offers plain-English explanations
and over 30 forms and letters to help you negotiate with creditors, get positive
information added to your credit record, and build a financial cushion. Also, the Debt
Management section of Nolo.com includes dozens of useful articles on credit repair.
Repairing Your Credit
Rome wasn’t built in a day, and credit history can’t be repaired in one,
either. If you or a coborrower have a poor credit history, Fair Isaac
suggests you start cleaning it up six to 12 months before applying for a
loan. If your credit history is really messy, it may take even longer.
But here’s some good news: Even if you have a long, ugly credit
history, your score will be weighted in favor of your latest performance.
Turn over a new leaf by following these strategies:
• Pay on time from now on. Don’t miss due dates for credit cards and
other bills. Setting up automatic payment plans can help, and your
lender may reduce your interest rate in return.
• Pay the worst first. Start by paying o high-interest debt, like on
credit cards. Also, keep your balances low on revolving lines of
credit. Don’t just move the debt around—that won’t fool the credit
scorers, nor will it free up cash for a mortgage payment.
• Don’t cancel credit cards. Paying a balance down to zero but keeping
the card active is typically much better for your credit score than
actually cancelling the card.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 65
TIP
Check out FHA-backed loans. Some low down payment federal loan
programs are less strict about credit background. See Chapter 7 for details.
What’s Your Monthly Budget?
Understanding Your Finances
Now that you’ve seen what lenders look at to decide how much you can
spend, it’s time to think about what you believe you can spend. e point
is to avoid taking on so much debt that you lose sleep or have to give up
sushi for ramen noodles.
the hard way
L
essons learned
Should’ve budgeted for furniture! According to adviser
and real estate broker Tara Waggoner (whom you’ll meet
in Chapter 15), “I know a couple who, for the first nine months living in their first
home, literally had almost no furniture beyond a card table and a futon. ey’d
rented a much smaller place before. In working out their budget, they forgot
to take into account that they’d have to furnish all the rooms that they were so
excited about in their new home: a media room, an office, and five bedrooms
(they had kids). ey laugh about it now.”
In fact, if you look closer at that debt-to-income ratio, you’ll realize
that it has a built-in problem. It’s based on your gross income—the
amount you theoretically make before your paycheck gets eaten by taxes
and other withdrawals. Your mortgage payment could, depending on
your lifestyle, end up exceeding what actually remains.
e easiest way to understand your current spending and savings
pattern is to do a budget worksheet. You can do this using either special
budgeting software, a spreadsheet like Excel, or with old-fashioned
pencil and paper. List all your expenses, including food, entertainment,
clothing, transportation and car-related expenses, health and dental care,
child and pet care, student loans, and utilities. Hold onto your receipts,
and if you use an ATM card or make electronic payments, look at your
bank statement to see where it’s all going each month. Include automatic
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monthly withdrawals on your budget worksheet—for your DSL line,
online DVD rentals, or gym membership. Of course, you can leave your
current rent and any rental-related expenses out of your calculations.
CHECK IT OUT
ese websites have free budget worksheets you can print and fill
out, or budgeting software to purchase:
• www.mint.com
• www.vertex42.com
• www.planabudget.com
• www.quicken.intuit.com.
Next, compare your monthly expense total to your monthly net income
—what comes home, not what you make before taxes and the rest. e
dierence between that take-home pay and your expenses is the amount of
disposable income that you can use for new-house-related expenses.
CAUTION
Self-employed? Expect some frustration in qualifying for a loan.
Lenders typically require you to have been self-employed for at least two years,
and calculate self-employment income based on an average of the most recent 24
months. So, for example, if you’ve been self-employed for only 14 months, your
income—no matter how high—may be excluded for loan qualification purposes.
Similarly, if your first 12 months’ self-employment income was only $12,000 but
the next 12 months yielded $120,000, your 24-month average would be only
$5,500 per month.
Most people try to modify their spending habits if their disposable
income isn’t enough to cover the PITI. Having all your expenses in front
of you helps you decide where to make such cuts. It also prepares you to
draw the line if a lender or mortgage broker encourages you to pay more
than your true budget allows. Remember, the lender mainly cares that you
can pay back the money you borrow—not that you do it while living the
life you want. If Pilates classes or Friday happy hours are important to you,
then stick by your own budget and plan.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 67
CAUTION
Not to scare you, but… Fred Steingold, an attorney-adviser whom
you’ll meet in Chapter 5, thought you should know just how deeply a lender can
dip into your finances if you ultimately fail to make payments on your mortgage.
“e U.S. is divided into ‘recourse states’ (the majority) and ‘nonrecourse states,’
explains Steingold. “In a recourse state, if the value of the home drops and you
stop making mortgage payments, the lender may not only sell the home in a
foreclosure sale, but also hit you with a deficiency judgment for the remainder of
the mortgage debt.” In other words, the lender can go after assets of yours other
than the house securing the mortgage. To find out your state’s law on this, go to
www.nolo.com and search for, “State Foreclosure Laws.”
Getting Creative:
Tips for Overcoming Financial Roadblocks
After running the numbers, you may feel that you can’t aord a decent
house, or maybe any house. But no matter your nancial woes, there are
steps you can take to ease them, including:
• Reduce your debt. is will free up cash for monthly house
payments and reduce your debt-to-income ratio.
• Make a new budget. Revise your monthly budget, keeping your
homebuying goals in mind. If you have targets, you’re more likely
to control your spending habits to meet them.
• Reduce spending. You may be able to get a roommate until you’re
ready to buy a place, apply an expected work bonus toward your
fund, go back to basic cable, or shop more at thrift shops. Check
out local freecycle groups (www.freecycle.org) for free items.
• Borrow from a nontraditional source. Consider dierent and creative
options for borrowing money, from your family to the seller of the
house you buy. For details, see Chapter 7.
• Get a buying partner. Perhaps you know someone who has cash and
would be interested in jointly owning a property. Keep in mind
that owning together doesn’t have to mean living together, or even
owning equal shares.
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• Cash out other investments. Consider cashing out money invested in
stocks, bonds, mutual funds, or other property to come up with a
down payment, thus also reducing your monthly payment.
• Sell an asset to raise down payment cash or reduce monthly spending.
Adviser Russell Straub explains, “I’ve frequently encountered
homebuyers with high-end cars and huge car-loan payments. ey
often either had equity in the car or were paying so much per
month on the car loan that it made their back-end ratio (the 36%
ratio) too high. By selling the car (and maybe replacing it with a
more modest vehicle or using public transport, car-sharing with a
service like Zipcar, or ride-sharing with Uber or Lyft), they were
able to qualify for a bigger house payment.”
• Consider other home types, sizes, conditions, or locations. Remember
that condominiums are often cheaper than houses and old houses
are generally cheaper than new.
• Wait. If you expect prices and interest rates to remain stable, your
income to increase, and to save more money, you might delay your
house purchase. With increased income, you may be able to borrow
more; with an increased down payment, you may not need more.
e Power of Paper:
Getting Preapproved for a Loan
Knowing what house-related costs will be laid at your feet, roughly how
much a lender will let you borrow, and how much you’ll really want to
spend based on your income, lifestyle, and other factors, you can think
about getting preapproved for a loan. Preapproval means you get a letter
from a bank or lender committing to lend you a certain amount. It’s often
expressed as a monthly amount, because interest rates may vary, but the
amount you can aord to pay each month does not.
CAUTION
Preapproval is not a guarantee. e bank hasn’t really fully processed
your request, and will place several conditions on your final approval. In fact,
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 69
you’ll need to comply with a host of requests for information. Lenders have
become more prone to declining final approval than ever before, so be prepared.
But it still helps you….
Preapproval does two important things: It gives you some certainty
that you can aord the houses you’re considering, and it makes you more
attractive to sellers. You’ll know exactly how much you can borrow, and
sellers will know that if you’ve put an oer on their place, you can actually
(subject to the bank’s nal approval) come through with the cash.
TIP
You don’t need to use the lender that preapproves you. It would
make matters easier if you did, but there’s no need to feel bound. You (or your
mortgage broker) might find a better deal by the time you’ve chosen a house.
Why Preapproval Is Better an Prequalification
You may have heard of loan prequalication, but don’t confuse it with
preapproval. When you get prequalied, you give a lender some basic
information about your income and debts, and the lender estimates what
you’ll likely be able to borrow. But the lender doesn’t commit to lending
you that money, so prequalication mainly helps you ballpark the price
range you should be looking at and readjust your expectations if need be.
Prequalication certainly won’t wow any sellers. On the plus side, prequal-
ication is free and easy to do (in person, over the phone, or on the Internet).
Preapproval is a dierent story. It will actually cost you a little money (in
the $30–$40 range), because the lender will check your credit history. (is
cost may be negotiable.) But preapproval will also give you more—a written
commitment to lend you money. Don’t accept a verbal preapproval.
Of course, the lender will attach a few conditions to that commitment.
If, for example, you lose your job, the bargain is o. And make sure your
preapproval letter doesn’t contain too many conditions. For example, if
the letter conditions the loan on a credit check, it means the lender hasn’t
really done its homework, and you’re not really preapproved.
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What You Need to Show for Preapproval
To get preapproved, you’ll need to provide the lender with some nancial
data. is is actually a blessing in disguise—it’s all stu you’ll need to dig up
to get a loan anyway, and it’s about the last thing you’ll want to be thinking
about later, when you’ve found a place to buy and are juggling other tasks.
Here’s what you’ll need to pull together and photocopy. If you’re
buying with someone else, both of you will need to give the lender every
item on the list.
• pay stubs for the last 30 days
• two years’ W-2s and potentially two years of personal and business
tax returns
• proof of other income
• proof of other assets (such as stocks or pension funds)
• three months of bank records (all pages) for every account you have
• source of your down payment (for example, bank records from you
and anyone gifting you money)
• names, addresses, and phone numbers of employers for the last
two years
• names, addresses, and phone numbers of landlords for the last two
years
• information about your current debts, including account numbers,
monthly payment amounts, and so on
• other records and documents.
ONLINE TOOLKIT
Use the “Financial Information for Lenders” checklist in the
Homebuyer’s Toolkit Nolo website. (See the appendix for the link.) It will
help you keep track of all the items listed above, which you’ll need for loan
preapproval (and later, final loan approval).
You’ll also need to ll out an application—if you’re working with a
mortgage broker, you’ll probably get help with it, and can draw much of
the information straight from the documents listed above. e lender will
ask you for additional information once you’ve selected a property—that
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 71
is, if you use that lender. If you switch lenders, you’ll have to give the new
one the whole works. e additional material includes:
• a property appraisal (you’ll have to pay for that, usually about
$300–$400—the lender will set it up once you’ve selected a
property), and
• proof that you’ve obtained homeowners’ insurance.
Where to Go for Preapproval
Your options for getting preapproved include working with a mortgage bro-
ker, going directly to a local bank or institutional lender, or using an Internet
aggregator—a website that compiles loan information from a lot of dierent
lenders into one place. For more on how to research mortgages, see Chapter 6.
If you haven’t yet found a mortgage broker, there’s no harm in going
straight to a lender for preapproval. First, make sure the lender is willing to
do two things: give you the up-front letter stating that you’re preapproved
up to a certain amount, and then give you another letter later, when you
actually bid on a home. is second letter will reect a preapproval amount
equal to the amount you’re oering to pay for the property. e second
letter is important because when you give a preapproval to a seller, the
seller doesn’t need to know that you can aord to pay more. at kind of
revelation can hurt your bargaining position.
Preapproval is usually a quick process. If documents are transmitted
electronically, you could be preapproved within hours. At its longest, it
should take only a few days.
CAUTION
If you change plans and, instead of a single-family home, decide to
buy a condo, townhouse, or other home within an association, tell your lender
A S A P. As adviser Paul Grucza explains, “I’ve seen people lose their ability to get
a mortgage because either the lender forgot to factor in the regular and special
assessments owing on this type of property, or the buyer forgot to mention them.
is can be enough to push buyers right over the margin, so that they no longer
qualify for a mortgage in the amount they were preapproved for.”
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What’s Next?
Confident that you’re not going to break your personal bank or end up without
a home loan, you can now start checking out the housing market. We’ll show
you how in Chapter 4.
CHAPTER
4
Stepping Out:
What’s on the Market and at What Price
What’s the Buzz? Checking Out Neighborhoods From Your Chair ..................76
Where Do You Begin? .....................................................................................................................77
What’s the Neighborhood Like? ................................................................................................77
How Safe Is It? ......................................................................................................................................79
Will the Services You Need Be Nearby? ................................................................................80
Is It Zoned for How You Want to Use It? ............................................................................81
Is It a Planned Community, With Restrictions on Homeowners? ...........................84
How Good Are the Local Schools? ...........................................................................................84
See for Yourself: Driving rough Neighborhoods ......................................................85
On Foot: Talking to the Natives .................................................................................................86
Sunrise, Sunset: Getting Day and Night Perspectives ................................................87
Got Houses? Finding Out What’s Locally Available .....................................................88
How Much Did at One Go For? Researching “Comparable” Sales .............. 90
Hot or Cold? Take the Market’s Temp ...................................................................................92
Just Looking: e Open House Tour .......................................................................................94
Nothing to Look at Yet? Finding Your Dream Development ...............................95
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Meet Your Adviser
Bert Sperling, a city and neighborhood expert based in
Portland, Oregon. He’s the founder of www.bestplaces.
net and author of Cities Ranked & Rated (Wiley) and
e Best Places to Raise Your Family (Wiley). e New
York Times wrote a profile about Bert titled simply (and
accurately) “e Guy Who Picks the Best Places To Live.”
What he does For nearly 30 years, Bert has been helping people find their own
best place to live, work, play, and retire. As the foremost creator
of popular best-places studies, he’s in constant contact with the
national media, and regularly publishes his latest findings. His
creative yet useful research topics cover everything from the best
cities for dating to the worst ones for migraine headaches.
First house “It was a 1920s Craftsman bungalow in Portland, Oregon. My
wife found the house and said, ‘We’re buying it’—and she was
absolutely right, it was a wonderful deal and a great place to raise
our two sons. Affording it was a stretch, especially because interest
rates were high, but we were tired of renting and were able to
assume the seller’s mortgage. We loved the neighborhood—only
five minutes from downtown and close to shops, restaurants, and
bus lines. I’m a big fan of urban neighborhoods.”
Fantasy house “We’ve already found it! It’s a cedar-shingled, Northwest coastal
style place in Depot Bay, Oregon. e house is right on the rocks
overlooking the ocean—a wonderful getaway, though ocean
living is a bigger challenge than many people realize. We’re under
constant assault by the weather, with winds over 100 miles per
hour. One of our requirements was high-speed Internet service so
we can stay at the beach house for extended time periods and still
keep up on our writing and research.”
Brett Patterson
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 75
Likes best
about his work
“I tell people I’ve got the best job in the world. It’s wonderful to
see all the differences in where people live and establish homes,
and to be able to share their stories with others. I really believe
there’s no worst place to live. Every place is someone’s home and
has things that mean a lot to them, even though some aspects of
living there might be challenging.”
Top tip for
first-time
homebuyers
“Start by figuring out what type of homebuyer you are. For
example, are you a ‘money is no object, because I’ll live here
forever’; an ‘I don’t care about resale, I just want to find a good fit
for my family’; or an ‘I’ve got to find a fixer-upper if this is going
to work’ type? Most of us have to watch how much we spend, so
think about the long term, don’t get in over your head, and don’t
buy the best place on the block.”
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V
isualizing your perfect nest, and calculating what your budget
will allow, was important. But now it’s time to step out and
see what the market really has to oer—before you turn into
a serious house shopper, and possibly even before you nd a real estate
agent. is background work may take only a few weeks. Or, says adviser
Bert Sperling, such research “can be so much fun that you’ll want to take
a year or more exploring new places and seeing how they might t your
lifestyle.” In any case, your eorts will be so worth it, helping you to
know when to leap at a house and what price to oer. You’ll want to:
• get a feel for the communities where you might want to live (if you
don’t already know)
• look at the houses already on the market, possibly including houses
in developments, still under construction
• research the prices other sellers have recently paid for houses like
the one you want, and
• gauge whether the local market is kinder to buyers or to sellers.
TIP
Eager to skip all this and just start shopping? It’s possible to check
out the market and keep your eye out for your dream house simultaneously—
but it’s harder. Without a sense of the market, you may waste your time, for
example rushing to turn in a too-low bid in a hot market. Or you might waste
your money, for example by bidding too high in a cool market. Give yourself time
to explore and be open to changing your mind about what you want.
What’s the Buzz? Checking Out
Neighborhoods From Your Chair
Use the tips below to help you either nd the right neighborhood for
you, conrm your feelings about one you’ve already chosen, or open your
mind to new possibilities. We’ll start with the tasks you can accomplish
online or by phone, then discuss visiting in person in a later section.
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Where Do You Begin?
Most people have a good idea of where they want to live, sometimes
right down to the street. But if you’re moving from far away, you may
not know your new town’s uptown from its downtown, much less the
names of the neighborhoods. And even if you’re already a local, there are
probably places on your map you haven’t explored.
Starting with a blank slate lets you play tourist in your new
hometown- (or neighborhood)-to-be and begin making friends and
contacts. Here are some eective strategies:
• Talk to friends, colleagues, and relatives about where they live. Ask
what they like best and least about the area—you’re sure to uncover
some surprises.
• Out-of-towners: Start with whatever or whoever drew you to that
town. If it’s a new job, ask your employer for sta contacts who’d
be willing to share their experiences. e best people to talk to are
those who’ve moved from far away themselves.
• Look into where like-minded folks congregate. Perhaps you have
a particular interest or hobby, such as knitting, photography,
cooking, or music. Contact some related shops or businesses (or
“like” on Facebook) to nd out about the local scene. eir owners
or employees can share insights on where things are happening and
how to join in.
• Check websites of local real estate agents. Many include detailed
community and neighborhood information. Even if you haven’t
hired an agent yet, you can call one and ask for information—
the agent will probably jump at the chance to display knowledge
to a potential client. Most agents know a lot about dierent
neighborhoods, or at least about one neighborhood, since many of
them specialize.
What’s the Neighborhood Like?
One of your biggest questions will be the character of your prospective
neighborhood. Is it a place where you walk to get tapas or drive to pick
up cheeseburgers? Will the local hotspot be a sports bar or a blues bar?
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TIP
What about your neighbor’s beliefs? Adviser Bert Sperling notes,
“Perhaps the two biggest definers of local feel are things we’ve been told to avoid
in polite conversation—religion and politics. Variety may be the spice of life,
but you’re going to find it very difficult to feel comfortable in your new town or
neighborhood if you’re the only person with a particular point of view. Do some
research to find out which way a place is leaning.”
Community character is one of the hardest issues to research (especially
if you’re completely new to the area), but these resources will get you started:
• www.streetadvisor.com. Search based on various lters (prices,
personality, things to do, and so on) or enter a street address and
see how the locals describe their area, whether it’s seeing racoons at
night or getting heckled by crackheads. You can also ask questions.
• Official website of the city or county where you are house-hunting.
ese typically provide welcoming information for new residents,
such as demographics, crime statistics, and contact information for
police departments, post oces, public libraries, hospitals, parks
and recreation centers, and more.
• Sperling’s Best Places. is website, at www.bestplaces.net, is known
for its “best of” lists. Its studies will tell you the best and worst
towns for everything from aordable housing to getting a good
night’s sleep. e site also gives statistical information, by zip
code. You can nd out the percentage of your neighbors who vote
Democrat or Republican or are aliated with a particular religion,
the cost of living, climate, local home characteristics, and more.
• www.neighborhoodscout.com. is relatively new site’s search tool
provides reports on neighborhood residents’ ethnicity, wealth,
educational background, and other characteristics.
• City-data.com. is site compiles scads of information about specic
cities and neighborhoods (cost of living, home prices, and local
transportation and amenities, attractions, history of natural disasters,
and news stories). Photos, too!
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• Foursquare.com and Yelp.com. Even if you check out only the
reviews on restaurants or nightlife, you’ll start getting a good sense
of the neighborhood. But there’s much more to be found, including
neighborhood reviews on Yelp.
• Neighborhood-specific Facebook pages, Twitter accounts, or websites.
ese are usually set up to alert locals to events happening nearby.
• Wikipedia. Don’t forget this popular site, which may oer
interesting information on a city’s or locality’s history, geography,
demographics, arts, education, and resources.
• your own, custom search. One of the best tactics is to use an Internet
search engine (like Google, Yahoo, or Bing). Says Bert Sperling,
“Here’s your chance to play detective and sift through all the clues
to nd your perfect new home. Just enter the name of any place
(such as ‘Oak Park, Chicago’) and stand back as the search engine
presents page after page of incredibly useful insights, opinions, and
facts that you won’t nd any other way. ere are blogs, message
boards, forums, and specialized websites, all curated and cataloged
by the search engines, which would be nearly impossible to discover
by any other means.”
How Safe Is It?
If you’re planning to live in your new home for a long time, make sure
you feel secure there. Bert Sperling notes, “Smaller cities tend to have
lower crime rates than large ones; that’s part of the tradeo you make
for being part of a vibrant urban scene. Still, crime in large cities is often
centered in certain areas, which you can avoid.” Crime statistics for cities
are available at www.city-data.com. For an estimate of neighborhood
crime risk, check out www.bestplaces.net, which oers crime-risk indices
down to the zip code level.
e most accurate source for neighborhood crime stats is from the
local police department. Most larger cities put local crime reports online,
often on a city map. “Pay attention to the categories of the reported
crimes,” advises Bert Sperling. “An occasional car break-in may be
tolerable, but not gunre.”
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ever did
est thing I
B
Not assume an okay-looking neighborhood had low crime.
Before buying her first house, Talia says, “I came close to buying
a place in another neighborhood. It had looked fine when I was driving around.
But my agent suggested I contact the local police station. I did and discovered that
because this neighborhood was surrounded by areas where crime was much higher,
it actually got its own share of break-ins and assaults. e crime rate was too high
for me to feel comfortable living alone. I
shifted focus to another area, where I now
live and feel safe.”
One crime issue that’s easier to
research online concerns registered
sex oenders. Nearly every state
has passed a law, usually called
“Megan’s Law” (after a young
victim of abduction and sexual
assault), requiring state governments
to distribute information about
sex oenders living in dierent
communities. Many states have
websites giving oenders’ addresses
(an easy way to access these is via
www.parentsformeganslaw.org).
Search for “Megan’s Law” and the
name of your state. But take the information you nd with a grain of
salt—not all of these websites are regularly updated, and some contain
inaccuracies or misleading information.
Will the Services You Need Be Nearby?
e existence or proximity of schools, parks, shopping, and more could
make or break your neighborhood decision. Fortunately, nding these is a
relatively straightforward research task, with such websites as:
• www.walkscore.com. Shows the proximity of local restaurants,
shops, schools, and other amenities and calculates the time it takes
to get there by walking, biking, or using mass transit. Also delivers
a “Walk Score” for each neighborhood or city.
Safest Cities in the U.S.
ese cities had the fewest violent
crimes per capita, according to
Business Insider:
1. Irvine, California
2. Fremont, California
3. Plano, Texas
4. Madison, Wisconsin
5. Irving, Texas
6. Scottsdale, Arizona
7. Boise, Idaho
8. Henderson, Nevada
9. Chandler, Arizona
10. Chula Vista, California
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 81
• www.google.com. To estimate your commute time and distance, go
to Google Maps, enter your work address and an address from the
neighborhood where you might live, and receive an estimate for
various commuting options.
• www.yelp.com. Use Yelp to nd nearby restaurants and businesses,
and check out their reviews.
• www.usnews.com/best-hospitals. is is an annual report called
“America’s Best Hospitals,” supported by U.S. News & World
Report. Also check out “Hospital Compare,” with fact and statistics
about all U.S. hospitals, presented by Medicare.gov.
Is It Zoned for How You Want to Use It?
After liberating yourself from your landlord’s rules, you might be less
than excited to discover that the home business you’d always dreamed
of starting is prohibited, or that you can’t turn the garage into an in-
law cottage or add a second story.
Local zoning rules or other city
regulations (even criminal laws) are
usually to blame. It’s also worth
knowing what general uses the
neighbors are allowed.
First, nd out from the
municipal planning and building
department what zoning category
each neighborhood you’re interested
in falls into. A classication called
single-family residential is the
norm. But some neighborhoods
with ordinary houses might
actually be zoned for multifamily
residential, transitional, or a mixed use such as residential plus
commercial. One of these other classications might be good for you.
For example if a home business is in your plans, mixed commercial and
residential might be perfect. But these alternate classications can also
be a problem, particularly when it comes to your neighbors’ future plans.
It’s the Law!?
ere’s probably a story behind these:
• UniversityCity,Missouri:You’renot
allowed to have a garage sale in your
front yard.
• InBoston,youcan’tpermitmanurein
your home. It’s okay in your stable, but
“no more than two (2) cords” of it at a
time. (Let’s hope Bostonians know how
much a “cord” is.)
• Boulder,Colorado:Youcan’tputindoor
furniture outdoors in your yard.
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Multifamily zoning, for example, might mean the house next door could
be replaced with an apartment building.
Also realize that zoning ordinances usually deal with more than how the
property can be used. ey typically dictate the allowable square footage of
a home and sometimes how tall it can be and where it can be placed on the
property. A home may have to be set back a certain distance from the street
and be a certain distance away from neighboring homes. is can aect
your plans to add an extra room or deck.
Research the zoning and other municipal rules further—ideally with the
help of your real estate agent or attorney—if any of the following are true:
• You intend to operate a home business. In an area zoned residential,
take a careful look at the local rules—they don’t always give a clear
thumbs up or down. Some, for example, prohibit home businesses
in general but allow exceptions, such as for writers, artists,
accountants, consultants, and other businesses that are unlikely to
cause noise or trac problems. Even then, a city ordinance may
prohibit you from employing anyone on-site who doesn’t actually
live in your home. To nd out local rules that may apply to your
business, contact the planning or zoning department for the city
or county you plan to live. Finally, If you’re buying a condo, co-
op, or similar property, be sure to check any restrictions on home
businesses. Also talk to other local home-business owners about the
restrictions, and whether their neighbors have raised any fuss.
RESOURCE
Planning on starting a home business? Check out the articles on
home businesses in the Business Formation and Taxes sections of Nolo.com. And
for detailed information, including more tips on zoning, see the Nolo books Legal
Guide for Starting & Running a Small Business, by Fred Steingold (or the Women’s
Small Business Start-Up Kit, by Peri Pakroo). Also check out Home Business Tax
Deductions: Keep What You Earn, by Stephen Fishman (Nolo), which discusses
issues like when you can deduct general home maintenance.
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 83
• You plan to remodel the house or garage or add other structures (even
a fence, pool, or child’s tree house). Rules for changing an existing
house can be notoriously sticky and require permits. Local view
ordinances may restrict your ability to add a second story. You
might talk to a local architect in advance—they’re used to dealing
with, or getting around, the rules.
• You plan to park a boat, RV, or large vehicle in your driveway. Some city
planners have decided this doesn’t look so good.
• e house has historic landmark status, or looks like it should. Once
a house is so designated, any remodeling—even basic things like
a new paint job—may be subject to rules on style and color. Still,
owning a historic home can be personally satisfying and oer high
resale value if you restore it.
• You plan to cut down a large tree. Yes, your landscaping may be a
topic of separate regulation, excluding shrubs and owers.
• You have any other special plans for the property. Local rules
are limited only by the imagination of the local government.
Bizarre ones sometimes pop up in response to one homeowner’s
inappropriate actions, like having put
up too many holiday lights.
• Vacant lots are widespread in the
neighborhood, or you see a lot of new
construction. You’ll want to know
what might legally be built there.
• You plan on keeping any farm animals
such as roosters or a goat. ey may
well be prohibited.
If you’re thinking of raising
chickens in your backyard, check out
BackYardChickens.com, which includes everything from links to local
laws to reviews of dierent types of breeds. Citychicken.com also collects
local laws. Or, If you’re planning on becoming an amateur beekeeper,
know that some cities prohibit bees, while others allow them if immediate
neighbors provide written permission. One place to start your search is
the Apiary Inspectors of America website, www.apiaryinspectors.org.
Which celebrities keep
chickens?
e likes of Barbra Streisand,
Tori Spelling, John Cleese, Reese
Witherspoon, Jennifer Aniston,
and Rachel Weisz are reported
to share their properties with
feathered, egg-laying friends.
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Is It a Planned Community, With Restrictions
on Homeowners?
If you move into a community interest development (CID), you may nd
your choice of house paint colors limited to white, white, or white—and
that’s just for starters. e homeowners’ associations that oversee such
communities often regulate how individual homeowners are expected to treat
and use their property (such as fence style in a detached house or curtain
color in a condo or co-op). A home located in a traditional subdivision
consisting of lots may also be controlled by subdivision restrictions.
For now, just realize that these sorts of restrictions exist, and plan to
research them further if you look at a CID.
How Good Are the Local Schools?
If you have children, or plan to, then the quality of the local school
district is probably high on your list. But even if you don’t plan on
children, you should be concerned with school quality, because the next
family that buys your home might want children. And they’ll pay more
if the local schools are great.
To get statistical information about how schools perform in your state,
check your department of education website, usually accessible from your
state’s main Web page. Other good online resources include:
• www.greatschools.org, a national, independent nonprot organization,
it helps parents choose schools and support their children’s education,
and provides ratings and comments by parents.
• www.education.com. Presenting information and statistics about
local schools, with ratings and parent reviews.
ever did
est thing I
B
Visit local public schools. Violet says of her family’s
move from Connecticut to Pennsylvania, “Our criteria
for choosing a neighborhood were: school district, school district, and school
district. We’d heard there were two excellent districts close to my husband’s
new job. So I took my son and daughter to visit the principals and teachers and
watch classrooms in action. e school in one of the neighborhoods had great
classroom morale, lots of activities, and ethnic diversity. Wouldn’t you know it,
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the houses in that neighborhood were mostly million-dollar-plus McMansions.
But we found a fixer-upper we could afford. It was worth the hard work to make
it livable—the kids love their school.”
See for Yourself:
Driving rough Neighborhoods
You can tell a lot about an area by cruising through it, most likely by car.
When you get a real estate agent, he or she will also drive you around,
but it’s good to go on your own rst, free to explore the seedier spots. You
may nd yourself thinking, “I could live here,” or “Get me out, fast.”
First, open an online map, and locate the areas where you might like
to live. Do yourself a favor and print out some of the maps, so they’re
easier to consult while you’re driving around. And, you can make notes
for later reference. Pay special attention to places on the map you’ve
never been that are close to or within your highlighted area. en
systematically drive up and down the streets, imagining yourself living
there. (e character of a neighborhood can change in the space of a city
block, or right after a natural divider such as a freeway, park, or large
housing complex.)
Look beyond the houses and think about whether the local features
t your lifestyle—would you, in fact, walk to the bus stop, garden in the
front yard, or jog at the local track? Focus on questions like:
• How well are the homes maintained? Neat homes and yards are signs
that homeowners feel invested in their properties.
• Who’s around? You can tell a lot about a neighborhood by who’s out
and about, whether it’s children on bicycles or post partiers walking
to breakfast joints on Saturday morning.
• How’s the traffic? Are people driving sanely or zooming around with
music blasting? Does the major street leading to the neighborhood
become a noisy parking lot during rush hour?
• What types of local businesses are there? Franchise chains, funky
coee shops, and upscale restaurants could become your favorite
hangouts—or you could be in for frustration if your favorite cuisine
is nowhere to be found or there’s no dry cleaner nearby.
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• Look for indicators of future growth. Is there a light rail line being
built nearby? Are there bike lanes, or nearby transit stops? “ese
transportation alternatives are very much in demand right now,”
notes Bert Sperling. Also look for new “inll” housing, small
apartment buildings, and mixed-use structures (with shops on the
bottom, apartments above.) Sperling adds, “ese are all bets that
smart investors are placing on the growth of an area.”
• Check the signs. Literally. If you see lots of “For Sale” signs, it could
mean people are moving out, and you’d want to know why—a new
factory or mini-mall being built nearby? A surge in crime? You’ll
either have a greater chance of snagging a bargain, or you may
decide to look elsewhere. On the other hand, a lot of homes for sale
could also mean the neighborhood is hot, hot, hot!
If you like what you see, you might even add another color highlighter
to the map, showing your favorite streets (useful for cross-referencing with
later home sale ads). You’re guaranteed to nd a surprise or two.
the hard way
L
esson learned
e grill’s going every night! Barry is a vegetarian, while
his girlfriend Ann is not. After a long search, the couple found
an adorable house near a commercial street dominated by Korean restaurants.
Barry says, “We carefully had the house inspected and talked to the neighbors
about safety. But we’d visited the house only in daylight. Our first evening after we
moved in, we noticed a cloud of aromatic smoke coming from a nearby Korean
barbecue. I was horrified, and Ann started mischievously suggesting sneaking out
for a bite. We love the house, but it took awhile to get used to the permanently
barbecue-scented night air.”
On Foot: Talking to the Natives
ere’s probably no better way to nd out what a certain neighborhood is
like than talking to people who already live there. Pick a day when you’re
feeling relaxed (preferably not open-house day). en walk around, paying
attention to smells and sounds. (Cocooned in your car, you might not
notice odors coming from a nearby brewery, airplane or freeway noise, the
buzzing from a local generator, or rowdiness at a nearby commercial strip.)
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 87
Talking to people in neighborhoods still under construction is obviously
harder—but it may be possible if you’re not the rst to buy. Or, you can
look in surrounding developments to get a general feel.
Look for people out gardening, or walking their dogs. It might feel
funny to strike up a conversation with a stranger, but complimenting said
garden or dog is a pretty reliable conversation starter. Explain that you’re
thinking of buying, and ask questions like:
• What do you like most and least about this area?
• Which streets are considered the best to live on?
• Do you feel okay about walking outside at night?
• Do you have kids? Do they go to public school here?
• Are there any changes planned that will make the neighborhood
better or worse (such as a new development, changed policing
system, or pending school initiative)?
• What kind of person would be happiest living here?
ONLINE TOOLKIT
Use the “Questions for Talking With Locals” worksheet in the
Homebuyer’s Toolkit on the Nolo website. It includes the questions above, as
well as space for your notes. (See the appendix for the link.)
Coee shops and local restaurants are also good places to meet people,
including the business owners. And even on open-house days, you can
meet a lot of locals and talk to real estate agents about community issues
(though the agents won’t be oering up much negative information).
Sunrise, Sunset:
Getting Day and Night Perspectives
ere’s a reason open houses are usually scheduled on Sunday afternoons:
e sun is high in the sky, the neighborhood is quiet, and no one’s
working. Life couldn’t be better! To plug back into reality, though,
try visiting a neighborhood at dierent times of the day or week. In
neighborhoods with lots of local schools, it can sound like a parade is
passing weekdays around 3:00—and then the insanely bright oodlights
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at the football eld click on after dark. Neighborhoods located in lovely
little gulches or valleys may seem dull by early afternoon, when they lose
their daily dose of sunshine. And late at night, if you see more tough-
looking characters hanging out on street corners than dog walkers, you
might want to recheck those crime stats.
we ever did
est thing
B
Drive through the neighborhood at night. Sam and
Kari were looking to buy a place at a time when the
market was crazy and their options limited. According to Sam, “When we saw
a nice, affordable house right on the border of a good neighborhood, we were
so excited! On a whim, we drove back later that night. ere was a whole other
side to that neighborhood: Cars slowly cruised by blaring music, and loud groups
loitered around, drinking and smoking. Seeing our bewildered looks, an elderly
neighbor asked whether we were lost, then advised us, ‘Don’t buy here; it’s
not safe. I’d get out if I could.’ We took her advice and are so glad we took that
evening drive.”
Got Houses?
Finding Out What’s Locally Available
By now, you’ve probably narrowed down your search to specic neighbor-
hoods. So, you’re probably curious about what’s for sale there right this
minute. It’s the easiest research task you’ll ever take on, thanks to widely
available advertisements, in:
• Realtor.com. is is the granddaddy: the MLS database of homes
for sale kept by Realtors
®
nationwide, and once guarded as closely
as the Coca-Cola™ recipe. Now you can usually access it—or
selected portions of it—for free on various websites. Start with the
National Association of Realtor’s (NAR) website, www.realtor.com.
It also oers an app, with a direct feed to current listings. Or, try
searching for “MLS” and the name of your state or city. (e homes
won’t change much, but the formatting will.)
• Trulia.com. is well-designed search engine oers attractive features
like the ability to search by type of home (such as single-family or
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condo), to limit your search to foreclosures or houses where the seller
has already reduced the price, and (under “Local Info”), colorful
maps that show you average list prices by zip code. Trulia also oers
an app (www.trulia.com/mobile), which allows you to quickly locate
nearby homes for sale and open houses.
• Zillow.com. e website oers extensive listings of homes for sale,
including FSBOs and foreclosures. And with its award-winning
mobile app (www.zillow.com/iphone), you can not only pull up a
map that shows homes for sale near your exact location, but save
your favorites and sign up for notications of when new listings hit
the market or old listings drop their prices.
TIP
e farther you get from the original MLS, the greater the possibility
for inaccuracies. Although many websites draw from the MLS, they’re not always
as quick to update listings—for example, when a sale is pending. So you may fall in
love with a home on-screen only to discover that it’s no longer available.
• Real estate sections of city or community newspapers. City papers
often have online classieds, but don’t forget tiny community
papers—they sometimes have the best classieds, because they’re
devoted to a limited geographical area.
ONLINE TOOLKIT
Wondering what FB, HDWD, or S.S. Kit means? You must be reading
a paid-by-the-word ad. For some deciphering help, check out the “Common Real
Estate Abbreviations” list in the Homebuyer’s Toolkit on the Nolo website. (See
the appendix for the link.)
• e Owners Network at www.owners.com. ese homes (so-called
“FSBOs”) are being sold without help from real estate agents, so
they may not appear in the MLS. Also try www.forsalebyowner.
com. For more on buying a FSBO, see Chapter 9.
• Websites sponsored by local real estate brokers. Some brokers provide
photos, neighborhood information, and advice. Try local Re/Max
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Realtor
®
’s websites, for example. Or, just enter a search phrase such
as, “Chicago real estate,” and you’ll nd all the big real estate rms
and many smaller ones specializing in the local area.
• Looking for a newly built home? Check out www.move.com (by the
National Association of Home Builders), where you can rene
your search with criteria such as “Green Features” or “Pool.” Also
worth checking are www.newhomesource.com (with extensive
information on custom, “build-on-your-lot” builders) and www.
americanhomeguides.com. It’s best to search all three sites; each
gives dierent results.
And you can always do a general search, such as “houses for sale in
Ithaca, New York,” to make sure you haven’t missed anything.
How Much Did at One Go For?
Researching “Comparable” Sales
All the houses you see advertised come with a price tag—but the price
may have little to do with reality. How much a buyer actually pays will
probably vary from the list price, up or down, by thousands or even tens
of thousands of dollars. In a cool market, many sellers have an inated
idea of what their house is worth, and it eventually sells for less. In hot
markets, some sellers set an articially low list price in hopes of attracting
a large pool of potential buyers, which results in outrageously high bids.
ere’s no sense in choosing—or eliminating—a neighborhood or area
based on price until you nd out how much houses there are really selling
for. (Later, such knowledge will ensure you don’t pay too much or oer too
little for a particular house.)
Look at nal sale prices of houses comparable to the type you’re interested
in, or “comps.” e most accurate comps come from houses that sold recently
(preferably within the last six months) within the same general area (around
six blocks) and with the same basic features as the house you hope to buy
(like number of bedrooms, square footage, garage, neighborhood, lot size,
general condition and construction quality, and landscaping).
You’ll never nd two exactly comparable houses, so do your best to
take a sort of average. Your agent, once you’re working with one, will also
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 91
be able to give you this type of information, with even more recent data.
And when you’re ready to bid on a particular house, the agent may draft
up a report on the comps. But for quick and dirty comp data, use the
websites listed below.
CHECK IT OUT
Here’s where to get comparable sales data. A number of free online
services track the prices that homes sold for. Two cautions apply, however: One,
the listings and estimates may be out of date, or just plain out of whack, since
they’re generated by a computer, not a person. Two, beware of signing up to be
contacted by an agent.
• www.zillow.com(under“Homes,”click“RecentHomeSales”)
• www.trulia.com(under“Buy”click“RecentlySoldHomes”andentersearch
information such as a zip code or a neighborhood name and city).
EXAMPLE: Paul and Leslie want to buy a three-bedroom house in
Ardmore, Pennsylvania. ey take the address of one such local home
and pop it into one of the websites above. e closest matches are a
three-bedroom, one-bath house that sold for $250,000 three months
ago; a three-bedroom, 1½-bath house that sold for $275,000 ve
months ago; and a three-bedroom, one-bath that sold for $228,000 six
months ago. Without looking at the actual houses, they project that
they’ll need to pay somewhere in the mid- to high-$200,000s for the
house they want. ey might also posit that prices are rising, that the
house currently for sale may be overpriced, or that adding a one-half
bath can measurably raise the value of a house. Unfortunately, websites
don’t tell you about details such as house style, condition, landscaping,
or charm. As Paul and Leslie start visiting actual houses and working
with a knowledgeable agent, they’ll have a chance to sharpen their
understanding of local house values.
Eventually, your knowledge of sale prices will turn you into a sort of ama-
teur appraiser and help you decide on the appropriate price for houses you’re
looking at. Don’t discount the value of your own research and intuition:
House values depend partly on buyers’ subjective responses to them, and
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you’re a buyer. Placing an exact market value on a house is an inexact science,
though appraisers, real estate agents, and sellers do their best to come close.
Hot or Cold? Take the Market’s Temp
To gure out home values, you also need to know whether you’re in a market
that’s primarily hot or cold (or balanced somewhere in between). At local
open houses, do you have to wait in line just to squeeze up the stairs, or do
you nd yourself all alone with a chatty seller’s agent? When talking with
friends and neighbors about homebuying, do they tell stories of how being
outbid on houses drove them to couples’ counseling, or how they’re plotting
how to get a bargain from a seller whose house has languished on the market
for weeks? ese are just a few of the more extreme indicators of whether the
local—emphasis on the word “local”—housing market is hot or cold.
A hot market means there are more buyers than sellers, or not enough
houses on the market to satisfy demand. As soon as a house is listed for
sale, it’s snapped up, and sellers can be inexible about the price and
buyers’ other negotiating requests. In the hottest markets, sellers may pit
you against other buyers competing to oer the highest price, the shortest
closing period, and the smoothest transaction.
A cold market means there are more sellers than buyers, and houses
may remain on the market for months at a time, waiting for a buyer. If, as
happened a few years back, this is coupled with a major economic down-
turn, foreclosures can ood the market and bring down prices. is gives
the buyer leverage when negotiating, because the longer a seller has wait-
ed, the more desperate he or she may be to unload the place. Meanwhile,
sellers know that you have other options.
TIP
Markets can be lukewarm or mixed, too. As Realtor
®
Mark Nash
notes, “Hot and cold is a generalization. For example, in some markets, starter
single-family homes could be hot, and penthouse condos could be cold.”
e urgency of your house search, and your approach to sellers, will all be
shaped by knowing whether you’re in a market that’s hot, cold, transitional,
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 93
or balanced in the middle. It’s not hard to gure out the basic “hot or cold?”
question—as long as you focus in at the neighborhood level and aren’t fooled
by general headlines. e more dicult part is to gauge where the market is
going—a market can move up or down in a matter of weeks.
e housing market can be aected by the local and national economy,
mortgage interest rates, the availability and cost of housing (including
rentals), the supply of and demand for homes (which can vary by time
of year), and more. Scads of real estate commentators make their living
trying to predict what’s next, but none know for sure. Nor do they
specialize in the corner of the world you’re looking at, which might have
its own mini hot and cold regions.
You’ll develop a sense of where your local market is going once you
start seriously househunting. If, after several weeks, you nd yourself
able to predict the asking prices of newly oered homes, the market
is probably pretty stable. If, on the other hand, you notice open house
or “price reduced” signs on houses you looked at a few weeks ago, the
market is probably plateauing or cooling. And if you’ve been outbid on a
house or two and notice that the list prices of similar houses seem to be
inching out of your range, the market is heating up and you’ll need to
act quickly. A real estate agent can also tell you about trends, based the
increasing number of listings in their MLS database and the average time
that houses stay on the market.
TIP
Don’t put your life on hold trying to predict the future. For every
person who waited for the market to drop and got a good price, there’s another
one who watched it pass them by. Just find a house you want at a price that’s fair
and affordable at the time. If you’re planning to stay there for more than a few
years, you’ll weather any downturns.
the hard way
L
esson learned
Waiting for the downturn that never came. Eva, an artist,
says, “At one point, I thought I’d never marry and decided
to buy my own house. I began looking, accompanied by my dad, who’d offered
to pitch in on the down payment. But every time I found a place I liked, my dad
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said, ‘at’s way too much, prices will come down soon.’ He said that first about
houses in the $200,000 range. en I watched as similar houses started selling for
$300,000, then $400,000. I bought a tiny place soon after, which fortunately has
since risen in value. But it kills me that I could have had it for much less a couple
years earlier—or could have had a bigger house that would fit my, guess what,
husband and new baby!”
Just Looking: e Open House Tour
Visiting open houses—where sellers throw the doors open to just about
any interested party—is educational, free, and fun. For now, don’t look
only at houses that are smack dab in your price range. By looking at too-
expensive and too-cheap houses, you’ll get a feel for what various house
features—like another bedroom or an updated kitchen—are worth.
As you visit open houses, compare their features to your Dream List,
to get a sense of which items will or won’t be easy to nd. Now’s a good
time to rene your list, too, if you realize that “a fenced yard would be
great,” or “I can’t live next to an apartment complex.”
Remember, unless you’re ready to read the rest of the chapters and
ramp up your activities in a hurry, don’t fall in love with a house yet.
You’re still getting to know what’s out there. In later chapters, we’ll
discuss how to take a hard look at a particular house—evaluate its
physical condition, whether it’s priced appropriately, and whether it
meets your long- and short-term needs—as well as how to prepare an
appropriate oer.
If a house really does look perfect, and you can’t resist, at least heed
this nal warning: Don’t sign anything on the spot. You may meet an oh-
so-friendly agent who says, “I can write up your oer, no problem!” at
agent represents the seller, whose interests, including getting the highest
price and the most advantageous terms, will be put rst. Go home, take
a deep breath, look at later chapters of this book, and do some quick
shopping for a buyer’s agent—if you really want to buy that house.
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 95
we ever did
est thing
B
Just start looking. Fiona was more convinced than her
girlfriend that they could handle the financial commitment
of a house. Fiona says, “Even after we’d done our research, had a mortgage broker
evaluate our finances, and asked our parents to pitch in on a down payment, she
resisted going to open houses. According to her stressed-out logic, we weren’t
really ready, so it was a waste of everyone’s time. Finally I got her out looking, and
it was great—seeing open houses suddenly made the process fun. Of course, it
was also a reality check, since we realized we could afford less than we’d thought.
But we ended up finding a wonderful house, with great neighbors.”
Nothing to Look at Yet?
Finding Your Dream Development
If you’re thinking of buying a newly built home, your community-to-
be may look like a large sandbox. But that doesn’t mean you can’t do
advance research. Your most important task will be to choose the best-
quality developer before you go any further. Why? Well, as with any
other product, dierent house manufacturers make dierent quality
products, or have dierent track records for reliability. You don’t even
want to go near a house built by a developer at the low end of the quality
spectrum, or who’s teetering on the edge of bankruptcy, no matter how
aordable it seems.
Figure out which developers are working in your area, which are worth
buying from, and whether they oer the types of houses you want. To nd
developers, use the websites listed under “Got Houses? Finding Out What’s
Locally Available,” above. en use the following tips to research them:
• Talk to people. is includes others who have purchased from a par-
ticular developer, local contractors, real estate professionals, appraisers,
and city planning sta. Don’t stop until you’ve gathered information
about each local builder’s reputation from a variety of sources.
• Ask tough questions of the developer and others. You’ll want to nd
out how long the developer has been in business; how well funded
the business is; whether it’s ever been sued and for what; and the
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credentials of the developer, its employees, and contractors. Don’t
just take the developer’s word for it—double-check with your state’s
licensing board and the local building oce.
• Search online. To hear feedback from other consumers, try searching
Internet blogs, local newspaper websites, and homeowner-run
websites such as HomeOwners for Better Building (www.hobb.org).
Also search for local news stories about the builder or developer to
see whether complaints have arisen about the quality of the homes
or other sensitive issues.
• Call your local Better Business Bureau. It’s often the rst place that
people turn to with complaints about local developers.
What’s Next?
You’ve hopefully gotten a sense of which neighborhoods not only have a
character you like, but offer the safety, schools, or other amenities you need.
You’ve also gotten a sense of the local market and whether it offers houses you
might want at a price you can afford. You’re almost ready to do some serious
house shopping. But first, let’s figure out who’s going to help you do it.
CHAPTER
5
Select Your Players:
e Real Estate Team
Your Team Captain: e Real Estate Agent ....................................................................100
Who Real Estate Agents Are ....................................................................................................100
What Your Agent Does for You ..............................................................................................102
Make Sure Your Real Estate Agent Plays for You ..........................................................104
How Real Estate Agents Are Paid ..........................................................................................106
Using an Agent When Buying a Newly Constructed House ...................................107
Getting the Best Agent Out ere .......................................................................................108
Your Cash Cow: e Mortgage Broker or Banker ........................................................114
Your Personal Shopper: e Mortgage Broker ................................................................114
What Your Mortgage Broker Does for You .......................................................................115
Getting the Best Mortgage Broker Out ere ................................................................ 116
Straight to the Source: Dealing With Lenders ................................................................ 120
Your Fine Print Reader: e Real Estate Attorney ..................................................... 120
Who Real Estate Attorneys Are .............................................................................................. 121
What Your Real Estate Attorney Does for You .............................................................. 122
Getting the Best Attorney Out ere .................................................................................123
Your Sharp Eye: e Property Inspector ...........................................................................128
Who Inspectors Are ......................................................................................................................128
What Your Inspector Does for You ......................................................................................128
Getting the Best Inspector Out ere ................................................................................129
Your Big Picture Planner: e Closing Agent.................................................................132
Who Closing Agents Are ............................................................................................................ 133
What Your Closing Agent Does for You ............................................................................ 133
How You’ll Pay the Closing Agent .........................................................................................134
Getting the Best Closing Agent Out ere ...................................................................... 134
Strength in Numbers: Other Team Members ............................................................... 136
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Meet Your Adviser
Fred S. Steingold, an attorney and author based in
Ann Arbor, Michigan.
What he does Fred’s legal expertise includes real estate and business matters.
He has helped hundreds of homebuyers with key tasks like
drafting and reviewing sales contracts, checking title insurance
commitments, and looking over closing documents. Fred is a
coauthor of the Nolo book Negotiate the Best Lease for Your
Business and the author of several other Nolo books.
First house “An 1,100-square-foot ranch house in an Ann Arbor subdivision,
with just enough room for our two young children. I fondly
remember sitting on the back porch during long summer evenings
and walking to nearby University of Michigan football games on
crisp autumn afternoons. But I don’t miss the small size of that
house, and the crank-open windows with gears that were always
getting stripped.”
Fantasy house “Any house designed by Sarah Susanka would be fun to live in. She’s
an architect in Minnesota and the author of a series of books on
not-so-big houses—they’re sparkling gems with alcoves, woodwork,
and interesting lighting. She knows how people want to live.” (Note
to readers: Check out Sarah’s work at www.notsobighouse.com.)
CHAPTER 5 | SELECT YOUR PLAYERS: THE REAL ESTATE TEAM | 99
Likes best
about his work
“e range of people I get to work with. My first-time homebuyer
clients are always so excited—and often more than a little
nervous. I like walking them through the process and helping
them overcome problems with the seller, the lender, and
sometimes with their own real estate agent. Once in while, a
purchase is about to fall apart over some knotty detail, and I can
come up with a creative solution to save it. It’s all part of helping
these (usually) young buyers move up in the world.”
Top tip for
first-time
homebuyers
“You’re probably expecting me to give law-related advice, but I’d
say have a thorough inspection! Most us don’t know how to spot
a potentially leaky basement or roof, or other expensive problems.
But an experienced inspector can give you a heads up so you can
opt out of the deal or have repairs made on the seller’s dime. And
if you’re having a house built for you, make sure to learn about the
builder’s reputation. You’ll be extremely frustrated if the new house
isn’t ready until eight months after the promised date—or if you
have to chase the builder to get postclosing warranty work done.”
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B
uying a rst home is a complex process, and there’s no reason to
do it alone. You can bring together a team of experts who’ve seen
it all before (many times!). ey’ll not only help you understand
what you need to do but also perform key tasks themselves. Your real
estate team should likely include:
• a real estate agent, who will help you nd, negotiate for, and
complete the purchase of your home
• a mortgage broker or banker, who will help locate the best
nancing
• a real estate attorney (in several but not all states), who will make
sure the deal is properly and fairly drafted and that the seller has
good title
• a home inspector, who will examine the property’s condition for
defects, and
• a closing or escrow agent, who will help ensure that the transfer
happens smoothly and on time.
Unlike a sports team, these players may not work together directly. But
even if they never meet, they share a common goal: to help you purchase your
house on the best possible terms. Still, you’re the boss (and the checkbook),
so you’ll want to be condent about your players and their abilities. In this
chapter, we’ll explain each person’s role and how to select top players.
Your Team Captain: e Real Estate Agent
Your real estate agent has the broadest role of any team member: You’ll
work together from start to nish.
Who Real Estate Agents Are
You’ve probably heard dierent names—broker, agent, or Realtor
®
—used
to describe real estate agents. ese convey dierent levels of experience,
training, and knowledge.
• Agents. A “real estate agent” is the most generic of the choices.
Agents must be licensed in the state where they work. is usually
means completing 30 to 90 hours of classroom instruction, passing
an exam, and renewing their licenses every one or two years.
CHAPTER 5 | SELECT YOUR PLAYERS: THE REAL ESTATE TEAM | 101
• Brokers. A real estate broker is, in most states, one step up from
an agent. Brokers have more real-estate-related education and
experience. In many real estate agencies (also referred to as
“brokerages”), the buyer works with an agent on a daily basis,
but the agent is supervised by a broker. If the buyer has problems
the agent can’t resolve, the broker will handle them. In smaller,
independent agencies, the buyer may work directly with a broker.
When we use the term “real
estate agent,” we’re referring
to both agents and brokers.
And in fact, some states
blend the terms, allowing
all real estate agents to
call themselves brokers.
In Washington State, for
example, an agent who has
met the basic qualications
is called a “designated
broker,” as distinguished
from the more elevated
“managing broker.” Arizona
and Oregon make the
distinction between brokers
and principal brokers. Other states may call the junior brokers
associate brokers or something else. Bottom line: Ask any agent
you might hire for the details on his or her licensing designation
and check your state’s department of real estate licensing for
conrmation and more information.
• Realtors
®
. Over half of all licensed agents are members of the National
Association of Realtors
®
(NAR), a trade association. NAR members
can use the designation “Realtor
®
.” ey must comply with the
NAR’s standards of practice and Code of Ethics. Membership also
suggests that the agent is up-to-date on real estate issues (because
NAR provides training, member newsletters, and other resources)
and has a network of contacts through the organization.
Real Estate Agents
on the Silver Screen
•
Annette Bening plays Carolyn Burnham
in American Beauty.
•
Jack Lemmon, Kevin Spacey, Alan Arkin,
and Ed Harris play competing agents in
Glengarry Glen Ross.
•
Julianne Moore plays Marlene Craven in
e Hand at Rocks the Cradle.
•
Craig T. Nelson plays Steven Freeling in
Poltergeist.
•
Silvia Miles played a real estate agent in
Wall Street.
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Realtors
®
may also have advanced designations/certications through
the NAR and its aliate organizations. You’re particularly interested
in the Accredited Buyer Representative (ABR) or Accredited Buyer
Representative Manager (ABRM) designations, given to Realtors
®
or
brokers specializing in representing buyers.
What Your Agent Does for You
Your real estate agent is your team captain, answering to you but coordi-
nating other players and handling multiple tasks. Expect your agent to:
• Suggest neighborhoods. Although this book helps you look for the
right neighborhood, your agent should be able to pinpoint possible
locations. Ideally, your agent will live in or around the area you’re
interested in and give you an insider’s perspective.
• Show you comparable sales data. To help you gauge the market value
of any house you’re interested in, your agent should compile a written
report (called a comparative market analysis, or CMA) of comparable
properties (“comps”) that sold in the last three to six months. (If
prepared by a broker, the same report may be called a “broker’s price
opinion,” or BPO.)
• Find prospective homes that meet your needs. You’ll tell your agent
how much you want to spend, what physical characteristics are
important to you, and what type of neighborhood you’re looking
for. A good agent will search for properties that meet your criteria
and show them to you as soon as they’re available. Any competent
agent knows that this task may take one day or one year—in either
case, the agent will patiently help you nd what you’re looking for.
• Walk through prospective properties with you. Your agent will actually
take you to look at properties, too. Your agent acts as another set of
eyes, helping you think about practicalities (like whether the house
provides enough storage space or has an impractical oor plan), and
spotting potential problems (like a water stain on the ceiling indicating
a possible leaky roof, or an old plumbing system in a sparkling new
kitchen). e agent might also suggest easy-to-make improvements,
such as converting an unused nook into a home oce space. e agent
will coordinate a second and even third showing, if needed.
CHAPTER 5 | SELECT YOUR PLAYERS: THE REAL ESTATE TEAM | 103
• Draft a written offer and negotiate the sale. In the majority of states,
your agent will help you draft an oer or other written statement
that includes your oer price and terms. In other states, a lawyer
would do this. (e oer process will be discussed in detail in
Chapter 10.) e agent will
also ensure you receive any
legally required disclosures
about the physical condition
of the property. After your
oer is accepted, the agent
will act as an intermediary
between you and the seller,
negotiating over issues that
come up, such as repair needs
identied by your home inspector. Adviser Daniel Stea urges,
“Make sure your agent has the ability and commitment to negotiate
the best price on your behalf. Too many are so eager to get into
contract or to move the deal to the next step that they push less
hard than they could have.”
• Explain the process. Your agent should (beginning at your rst
meeting) be able to summarize the process of and timeline for
searching for homes, writing an oer, nding and applying for
nancing, opening escrow, checking title, obtaining homeowners’
insurance, removing contingencies, and closing the deal.
• Open escrow. Your agent should open escrow for you (help begin the
process of nalizing your purchase) or give you recommendations
for a reputable escrow or closing company or real estate attorney
(depending on what state you’re buying in). (In some states, however,
the seller customarily chooses the escrow or closing company.)
• Manage day-to-day activities leading up to the closing. Once your oer
is accepted, you have a lot to accomplish before the deal is nalized,
such as scheduling home inspections, lining up nancing, and
getting insurance. Your agent should guide you through each step,
either handling the tasks directly or working with the appropriate
professionals. Your agent should also be present for major events
like inspections, the appraisal, the nal walk-through, and the
Who’s the typical Realtor®?
According to the National Association
of Realtors
®
, most of its agent members:
• earnabout$47,000peryear
• havebeenintheeldforabout
12 years, and
• areapproximately56yearsold.
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closing. And if your sales contract contains contingency clauses,
your agent can help make sure that you comply with the deadlines
for contingency removals.
Will You See More of the Agent or an Assistant?
Experienced, busy agents will often be serving a number of clients simul-
taneously. ey may not, for instance be available to walk through a home
with you on a moment’s notice. Such agents may work with a team of fellow
agents or assistants and ask one of them to step in for matters such as this—
then return to your side for important matters such as negotiations.
Should you be worried about getting “pushed off” onto an assistant? As
with many things, it depends on the quality of the agent. An excellent agent
will have a well-trained team, every member of which you can trust to give
you the help you need. You should perhaps be just as worried about hiring an
inexperienced agent who has all the time in the world to help you.
Still, when establishing your relationship with the agent, it’s worth asking
who exactly you’ll be working with and how accessible you can expect your
agent to be.
Make Sure Your Real Estate Agent Plays for You
Real estate agents make a living representing one of two parties: the buyer
or the seller. Since most agents have several clients at a time, they often
represent both types in dierent transactions, sometimes selling houses
for sellers, other times helping buyers purchase houses.
Usually, this isn’t a problem unless the agent simply takes on too many
clients and gets stretched thin between competing tasks. However, it can
become one when the agent who is selling a house for one client has—or
takes on—another client who wants to buy it. en the agent could act as
a “dual agent.”
is frequently results when a prospective buyer visits an open house,
expresses interest, and the seller’s listing agent says, “Don’t worry that you
don’t have an agent yet, I’ll write the deal up for you.” Adviser and realtor
®
CHAPTER 5 | SELECT YOUR PLAYERS: THE REAL ESTATE TEAM | 105
Daniel Stea says, “Buyers too often fall for this, thinking it might save them
money—which it likely won’t—or because the listing agent implies that
the buyers might have a better shot at getting their oer accepted this way.
In reality, the listing agent may simply be attempting to generate a second
commission by representing
the buyer.” In rare cases, the
selling agent may even claim
that you have to use that
agent’s services, because he or
she found you rst!
You can imagine the
potential problems when one
agent represents two parties
with opposite interests: While
the buyer wants to buy the
place for as little as possible,
the seller wants to sell for as
much as possible. Back when
dual agency was more common, many buyers who’d told their agents
that they were willing to pay more for a house than they’d oered were
appalled when their agents turned around and told the sellers that exact
information.
ese days, if an agent wants to represent both sides, most states
require that the agent get written consent from both parties. But it’s
not a good idea to consent to this. You want someone who is on your
team all the way. Your safest bet is to get your own, buyer’s, agent—one
contractually bound to represent only you (though your agent must still
be fair and honest with the seller).
One good way to nd out whether your agent will ever be a dual
agent is to ask, before hiring, “Will you ever represent me in a dual
agency?” Only work with agents who say “no.” If you become interested
in a property listed by that agent, he or she can help you nd another
agent to complete the deal.
In a similar situation called a designated agency, you’re represented by
one agent, and the seller is represented by another agent who works in the
same brokerage. In states where designated agency is allowed, all parties
Real-Estate Fiction
•
Death by Real Estate, by Maggie MacLeod
(Daybreak Publishing): Barb Parker is a
mystery-solving real estate agent.
•
Closing Costs, by Seth Margolis (St. Martin’s
Press): Five couples try to survive the
cutthroat Manhattan real estate market.
•
Good Faith, by Jane Smiley (Anchor):
A divorced real estate agent is lured into
a development deal by a newcomer to his
small town.
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must normally agree to it in writing. e risk of divided loyalties is much
less than with a dual agency. Still, you’ll want to be condent that your
agent is trustworthy and be careful about what you disclose.
Finally, on the other side of the table sits the seller’s agent, often
called the “listing agent.” e seller’s agent is hired by the seller. While
the seller’s agent is ethically and even legally bound to be fair and honest
toward you, this agent focuses on representing the seller’s best interests.
You want the seller’s agent to remain where he or she belongs—on the
other side of the table.
How Real Estate Agents Are Paid
After hearing about what a good agent can do for you, you may start
mentally calculating whether you can t one into your budget. e good
news is, your agent is one person in this process you won’t have to hand
money to. e seller ordinarily pays the entire commission (averaging 5%
to 6%), which is split between the seller’s agent and yours (usually, 2½%
to 3% each). You do end up indirectly paying for your agent’s services,
though, because the seller will probably factor the cost of paying both
agents into the purchase price of the home.
Some people will tell you that agents are mainly out to make buckets
of money, by maximizing their commission and minimizing the amount
of time they spend with you. ey caution you that agents will show you
only properties above your price range, push you to oer too much, or
rush you into a purchase.
It’s true that the more you spend, the higher the agent’s commission
goes. However, to say that agents are solely motivated by money is an
overgeneralization—in fact, it’s often not in the agent’s own interests to
behave this way. If, for example, you’re pushed to oer an extra $10,000 on a
home, and then don’t qualify for the mortgage, the agent will have wasted a
lot of time. Or what if you pay the extra $10,000, then feel the agent trapped
you into it? You’ll never use that agent again and will tell your friends not
to, either. Neither prospect will appeal to the professional, experienced agent
you’ll be choosing—not to mention the fact that an extra $10,000 on the
sales price adds up to only about $150 in increased commission.
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To avoid a possible misunderstanding about how your agent gets paid,
make sure there’s a written agreement between the two of you. is should
spell out the extent of the agent’s expected services and your nancial
obligations, and deal with other matters such as whether you’ll go to
mediation in the event of a dispute. No need to sign this immediately—
many agents will wait until you’re ready to submit your rst oer (at which
time such an agreement is required in some states and by some real estate
companies). Before signing this agreement, however, it’s not good form to
give more than one agent the impression that you’ve chosen him or her to
help you nd and buy a home!
Using an Agent When Buying a
Newly Constructed House
When buying a new house from a developer, or having one built for you,
you can be represented by your own real estate agent. However, the agent
usually needs to be with you on your very rst visit or the developer won’t
allow the agent to collect the commission or referral fee.
Developers usually have salespeople, paid by and loyal to the
developer, who they’d prefer to have you use for the tasks your agent
would normally handle, such as drawing up written agreements. Of
course, these usually favor the developer, for example, limiting the
developer’s responsibility for shoddy work or late completion. It’s worth
bringing your own agent to advocate on your behalf and help you
negotiate a fair deal.
However, if you’re represented by an outside agent, the developer may,
as a way of recouping part of the commission or referral fee (particularly
in a hot market), be less exible about price or less willing to give special
incentives or upgrades.
TIP
Consider adding an attorney-review contingency to your contract.
If bringing your own real estate agent appears unnecessary or impossible, at least
insist that an attorney review your agreement. You can make this a condition of
the sale (a “contingency”), as discussed in Chapter 10.
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Getting the Best Agent Out ere
It’s worth putting some eort into nding an experienced real estate
agent with whom you’ll enjoy working. You could just walk into any
real estate agency, but you’d probably end up with whoever had time to
spare. Instead, start by getting recommendations from family members,
friends, colleagues, or neighbors who’ve bought homes—particularly in
the neighborhoods you’re interested in.
If you come up dry, check out the NAR website at www.realtor.com, and
click “Find REALTORS
®
.” Yelp, Zillow, Trulia, and Realtor.com are also
becoming rich sources of agent reviews. Your state association may also pro-
vide similar information. But keep in mind that this is a membership listing
based on location and doesn’t distinguish between good and bad agents.
CHECK IT OUT
Check their license. To make sure a prospective agent is currently
licensed in your state, visit www.arello.com, the Association of Real Estate License
Law Officials. e site can also link you to relevant laws and regulations.
Once you’ve got a few names, choose a few agents to meet in person.
e agents’ websites may contain their photos and descriptions of their
skills, services, or philosophies. You’re looking for an agent who is
knowledgeable about the area and the type of house you want to live
in, experienced, easily reachable and responsive to your needs, ethical
and honest, compatible, and loyal. If you’re interested in checking out
unusual types of deals (a house in foreclosure or a short sale, for example,
as discussed in Chapter 9), ask the agent about his or her experience with
such transactions. At the interview, ask concrete questions about the agent’s
experience, certications, and more, and how the agent’s skills will be put
to work for you. Also request the names of their three most recent clients,
as references. en, (assuming you’re interested in the agent) follow up and
call those clients, to make sure they had a positive working relationship.
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Real Estate Agent Interview Questionnaire
Ask potential agents the following questions, as well as anything special to your
transaction, like their experience helping buyers looking for fixer-uppers or newly
constructed houses.
Name of real estate agent and contact information (phone, email, etc.):
Date of conversation:
1. Do you work full time as a real estate agent?
2. How long have you been in the real estate business? How many people
work in your office?
3. Do you have additional certifications beyond your general real estate
license? If so what are they?
4. Will you ever represent me as a dual agent?
5. How many residential real estate transactions have you been a part of in
the past year?
6. In how many of those transactions have you represented the buyer?
7. What was the price range of homes you helped clients buy within the
last year? What was the average price?
8. Do you specialize in a certain type of property?
9. Do you specialize in a certain geographic area?
10. Do you partner with other agents or use assistants?
11. How will I reach you? Are there days or times you’re unavailable, or do
you have any vacations planned? What if you’re on vacation when my
house is closing?
12. Can you provide at least three names of recent clients who purchased
first homes with you, who will serve as references?
NOTES:
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ONLINE TOOLKIT
For a comprehensive set of questions for both the agent and his or
her references: Use the “Real Estate Agent Interview Questionnaire” and the “Real
Estate Agent Reference Questionnaire” in the Homebuyer’s Toolkit on the Nolo
website. (See the appendix for the link.) Samples of these forms are shown above.
we ever did
est thing
B
Got an agent who specialized in our neighborhood. Craig
and Lorena had been looking for an affordable starter
house in a much-desired neighborhood for months, with no luck. Lorena explains,
“Although our agent specialized in our target neighborhood—she lived there—
there just weren’t many houses we liked at a price we could afford. We’d just about
given up when she called us. A neighbor of hers was getting ready to sell and was
willing to let us have first peek. We loved the place and immediately put in an offer,
which was accepted. e place was never even advertised!”
Real Estate Agent Interview Questionnaire Best Answers
1. Yes.
2. e longer the better, but at least three years. If the agent is still relatively new, definitely
make sure he or she is part of a respected, vibrant office where agents share ideas and advice.
3. More certifications show a commitment by the agent. A Realtor® ABR or ABRM designa-
tion indicates that the agent has significant experience working with buyers.
4. Only acceptable answer is “No.”
5. Should be a minimum of ten.
6. Should be at least half, but experience with representing sellers is relevant, too. Most
agents start out representing buyers, then begin representing sellers after they’ve gained
experience and their happy clients have come back ready to sell. Representing sellers also
helps an agent develop a fuller sense of the whole transaction.
7. Should be about your price range.
8. Should be the type of property you’re interested in, like a single-family house, condo, or
co-op.
9. Should be the geographic area where you’re looking to buy.
10. If so, find out who you’ll be working with, what their real estate experience is, and what
they’ll be doing.
11. Make sure you can reach the agent when you need to. If you plan to buy soon, make sure
the agent will be readily available (not on vacation).
12. Only acceptable answer is “Yes.”
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Real Estate Agent Reference Questionnaire
Here’s what to ask the agent’s referrals. You can add any other questions that
interest you, such as special issues if you’re buying a foreclosure or a new house in a
development.
Name of real estate agent:
Name of reference: Date:
1. How did you choose the agent? Did you know the agent before you
worked together?
2. What kind of house did you buy?
3. Was the agent responsive? Did the agent return calls promptly, follow
through on promises, and meet deadlines?
4. Did the agent take the time to find you the right property?
5. How long did you look?
6. How many houses did you look at before you bought? Did you make any
previous offers that fell through, and if so, why?
7. Did the agent show you houses in your price range?
8. Are you happy with the house you bought, and the neighborhood it’s in?
9. Did the agent help you coordinate other details of your purchase, like find-
ing financing and working with the title company, inspectors, or insurance
agents? If you bought a new home from a developer, were there some items
that needed completion or adjustment after the closing? If so, did your
agent help nudge the developer to get the work done?
10. Did the agent keep you up to date, and explain everything in terms you
understood?
11. What was the best thing about working with this agent? e worst? Would
you work with the agent again?
OTHER COMMENTS:
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TIP
Don’t spill your beans. Wait to tell the agent your own objectives
(where you want to live, how much you want to spend, and what type of
property you’re looking for) until your questions have been answered. You don’t
want the agent to feed you the answers you want to hear.
If It Doesn’t Work Out: Firing an Agent
One common misconception is that once you’ve chosen an agent, you can’t
fire that person. Whether you can extricate yourself from the relationship
(and what it will cost you to do so) will probably be determined by the terms
of your agreement. So make sure to get a signed agreement, and try to insert
a clause at the outset allowing you to release the agent with sufficient notice
(usually, about 48 hours) if things aren’t working out. Watch out for a clause
that requires you to pay a cancellation fee if you dump your agent. And to
give you more flexibility, try to limit the relationship to 30 or 60 days rather
than, say, six months.
Even if your agreement doesn’t specifically give you the right to fire
your agent, if an agent isn’t showing you appropriate properties, or isn’t
responding to your calls or inquiries, or you just don’t like working with that
person, you may want to move on. Of course, if the problem can be resolved
by a simple conversation, it’s wiser to try that first. But if that’s fruitless and
the agent isn’t willing to walk away, you may need to discuss the issue with
the managing broker (the agent’s boss).
If you decide to end a working relationship, do it before you find a house
you want to buy. It would be totally unethical—and risk a lawsuit—to try to
get out of the relationship just to avoid letting the agent claim the commission.
CHAPTER 5 | SELECT YOUR PLAYERS: THE REAL ESTATE TEAM | 113
Who Does What
It’s your agent’s job to … But it’s still your job to …
Talk to you about your needs.
Research houses and neighborhoods
that meet your needs and give you
data on comparable properties.
Show you houses with features that
you want, in your price range.
Help you write up offers (except in
states where attorneys do this).
Deliver your offer to the seller.
Notify you of counteroffers and help
you negotiate with the seller.
Recommend professionals like brokers,
inspectors, and closing agents; help you
coordinate working with these people.
Attend important events like inspections,
appraisals, the final walk-through, and
(usually) the closing.
Explain the process, timeline, and
technical concepts.
Respond promptly to your phone calls
and inquiries.
Help with any snafus you encounter
during the process.
Disclose a dual or designated agency.
Research and choose the right
agent, and negotiate the terms of
the agency.
Clearly explain and describe to the
agent what you’re looking for.
Choose the right neighborhood.
Choose the best house for you.
Choose your professionals, like the
mortgage broker, inspector, and
closing agent.
Secure your financing.
Respond promptly to your agent’s
questions.
Avoid, or at least knowingly consent
to a dual or designated agency
relationship, if the situation arises.
Decide on the key terms of your offer.
Speak up if there is a problem.
Read all documents carefully.
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Your Cash Cow:
e Mortgage Broker or Banker
Even in inexpensive housing markets, you’ll likely be taking out a
mortgage to nance your purchase. In the next chapter, we’ll talk about
how to research options, select the best loan, and actually apply for it.
Here, we’re going to talk about the people you’ll work with to do that.
More than half of all buyers get their loans through a mortgage broker
or mortgage banker—a professional who’s in the business of compiling
and ltering through the options for you. Your other primary alternative
is to go directly to a bank, credit union, or other commercial lender.
If you’re buying a newly constructed home, the developer may line
up nancing for you—but it’s worth checking out other options. While
developers often form relationships with specic lenders, the terms oered
sometimes favor the developer more than the buyer.
TIP
A “mortgage broker” and a “mortgage banker” aren’t the same
thing. A mortgage broker is the middleman who brings you and a lender
together. A mortgage banker is a lender who actually lends you money.
Your Personal Shopper: e Mortgage Broker
A mortgage broker acts as your agent to “shop lenders” for the best
possible loan terms, given your nancial situation and goals. Nearly
all states now require mortgage loan ocers and brokerages to be
licensed. is information is easily veried by using the National
Mortgage Licensing System (NMLS) website at www.NMLSConsumer.
org. Individual mortgage brokers are also sometimes certied by the
National Association of Mortgage Brokers (NAMB). To be NAMB-
certied, brokers must show a certain amount of work experience
and other qualications, pass a written exam, and attend continuing
education training. ere are two types of NAMB certication: Certied
CHAPTER 5 | SELECT YOUR PLAYERS: THE REAL ESTATE TEAM | 115
Residential Mortgage Specialist (CRMS) and Certied Mortgage
Consultant (CMC).
As for compensation, mortgage brokers make most of their money
by marking up the costs on the loan the wholesale lender is oering.
is may get passed on to you in the form of points (one point is 1%
of the loan value), processing fees, or a higher interest rate. Although
the broker’s commission ultimately comes out of your pocket, a savvy
borrower can negotiate down a fee that seems excessively high. Of course,
a good mortgage broker should be able to save you the equivalent of his or
her earnings and then some, by nding you a more aordable mortgage
than you could locate on your own.
TIP
Choose a mortgage broker before you find a house. If you wait to
get a broker until you’ve found a property you want to buy, you’ll have very little
time to find the best professional.
What Your Mortgage Broker Does for You
To help you nd the best loan possible, a good broker will:
• Talk with you about your nancial situation and goals.
• Find and explain nancing options available to you.
• Work with you to get preapproved for a mortgage.
• Help you complete and assemble the documentation the lender
needs. is might include your loan application, conrmation of
employment and wages, nancial information, and credit report.
• Once approved, review loan documents before you sign them. If the
lender refuses to approve your loan, your mortgage broker should
explain what went wrong and help nd alternative mortgage options.
• Coordinate the property appraisal.
• Order title insurance.
• Continue to act as a liaison between you, your real estate agent,
and the lender up through the closing day.
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TIP
Run your own numbers. e mortgage broker’s view of your finances
will be much like the lender’s—a measure of what you can qualify for based on your
debt-to-income ratio. Don’t look to the mortgage broker to tell you what you can
comfortably afford: Conduct a personal evaluation of your finances, as explained in
Chapter 3.
Getting the Best Mortgage Broker Out ere
Good mortgage brokers possess many of the same traits as good real
estate agents—integrity, professionalism, and experience. ey should
also be skilled (and patient) at explaining complicated nancing concepts.
In addition, good mortgage brokers stay informed about the policies,
requirements, and products of various mortgage lenders, so as to provide
you with up-to-date and accurate advice.
Get recommendations from friends, coworkers, and other homeowners.
Your real estate agent is another good resource. A less reliable option is the
“Find a Mortgage Professional” feature on the NAMB website, www.namb.
org. NAMB membership is just a starting point: You’ll want to learn more
about each broker’s education, experience, and philosophy. Ask whether the
broker will tell you up front about every fee he or she will charge you (you
may want to negotiate these fees, as we’ll discuss in Chapter 6).
Next, interview two or three prospective mortgage brokers. Ask about
their experience and certications, plus any questions special to your
situation (like whether they can provide help getting an FHA or other
government-backed loan). Also ask for the names of three references, and
follow up to check whether these folks enjoyed working with the broker
and are still happy with the loan they got.
In the experience of adviser Fred Steingold, “Local sources are often
the best option for obtaining a mortgage loan. Yes, you can get a lot
of good information about mortgages online. But when it comes time
to actually apply for your loan, working with someone face to face can
reduce the chance for glitches in the process. Even if the local mortgage
terms appear less benecial than those oered online, paying a little more
can be worth it for this personalized attention.”
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Mortgage Broker Interview Questionnaire
To get the best mortgage broker on your team, ask the following questions, as
well as any special to your situation (for example, concerning a credit history
issue, your interest in an FHA or other government-backed loan, or the broker’s
experience with self-employed buyers).
Name of mortgage broker and contact information (phone, email,
NMLS number, etc.):
Date of conversation:
1. Do you work full time as a residential mortgage broker?
2. How long have you been in the residential mortgage business?
3. Are you licensed (if applicable) and certified by the National Association of
Mortgage Brokers?
4. How many residential mortgages have you brokered in the past year?
5. How many of those transactions were with first-time homebuyers?
6. Can you describe a tricky deal you were able to successfully close?
7. Can you provide at least three names of recent clients who will serve as
references, at least one of whom was a first-home buyer?
NOTES:
Best Answers:
1. Yes.
2. e longer the better, but at least two years.
3. Yes.
4. Should be a minimum of ten.
5. e more the better, but should be at least five.
6. Hopefully, you’ll hear about a tough
situation that the broker handled well. A
broker who has done only easy deals may
not have the experience you need.
7. Only acceptable answer is “Yes.”
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Mortgage Broker Reference Questionnaire
Here’s what to ask the mortgage broker’s references. You can add any other
questions that interest you, for example, whether the person tried to negotiate
the broker’s fee down.
Name of mortgage broker:
Name of reference:
Date:
1. How did you choose the mortgage broker? Did you know the broker before
you worked together?
2. What kind and size of loan did you get? Are you happy with it?
3. Was the broker responsive? Did the broker return calls and emails promptly,
follow through on promises, and meet deadlines?
4. How long did you look?
5. Did the broker give you a variety of options?
6. Did the broker allow you to lock in your interest rate for either 30, 45, or 60
days prior to the closing?
7. Are you happy with the loan you got?
8. Did the broker help you coordinate other details of your purchase, like
working with the title company or insurance agents?
9. Did the broker keep you up to date, and explain everything in terms you
understood?
10. What was the best thing about working with this mortgage broker?
e worst? Would you work with the broker again?
OTHER COMMENTS:
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ONLINE TOOLKIT
For a handy set of questions to use in your interview and when
checking references: Use the “Mortgage Broker Interview Questionnaire” and the
“Mortgage Broker Reference Questionnaire” in the Homebuyer’s Toolkit on the Nolo
website. (See the appendix for the link.) Samples of these forms are shown above.
Who Does What
It’s your mortgage broker’s job to … But it’s still your job to …
Offer you loan products that meet
your needs.
Explain financing concepts and loan
products.
Coordinate loan approval with the
lender.
Check your credit, help you fill
out your application, arrange the
appraisal, and verify your financial
information.
Before the deal closes, make sure
all of the lender’s underwriting
conditions are met, coordinating
with you and the lender, appraiser,
credit report company, title
company, flood insurance certificate
provider (if applicable), and
mortgage insurance provider.
Make sure all loan conditions are met
and the cash is transferred for closing.
Give the mortgage broker all relevant
information about your financial picture.
Provide personal financial documents.
Decide which loan you want.
Negotiate the terms of the loan if you
think the broker’s markup is too high.
Return your broker’s calls and respond
to inquiries.
Read all documents.
Double-check that you’ve gotten a
rate-lock commitment in writing.
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Straight to the Source: Dealing With Lenders
Sometimes, a homebuyer goes directly to a lender, rather than dealing
with a mortgage broker. e buyer may like the personal aspect of
walking into a local bank branch or even have found a better deal than is
available through a broker. You can often nd a lender’s advertised rates
on the Web or in your local newspaper—we’ll talk about searching for
that in Chapter 6.
If you decide to work with a lender, you’ll probably still be dealing
primarily with a person within the institution called a “mortgage banker”
or “loan ocer.” is person performs the same duties (more or less) as a
mortgage broker, except that instead of scouring the entire loan market,
the loan ocer will help you identify which of the bank’s own portfolio
of loan products suits your needs. In other words, you’ll be limited to the
loan packages oered by that institution.
e loan ocer should help you ll out your application and handle nec-
essary paperwork like obtaining your credit report and getting an appraisal.
However, once you’ve chosen a bank, you won’t be able to choose your loan
ocer as you would a broker—or your available choices will be limited.
How much personal contact you have with a specic loan ocer
depends on the lender. Lenders come in all shapes and sizes, from the
behemoth bank to the local credit union.
Some operate almost entirely online, even having you apply online.
Examples include QuickenLoans, LoanDepot, and DiscoverHomeLoans.com.
ese
lenders may be keeping their overhead low by cutting out the operating
costs of the local oce, passing the savings on to you. If you work with online
lenders, you’ll have to rely more heavily on technology (email, fax machines,
and scanners) to transmit documents. You may also have to accept that you’ll
never meet the loan ocer face to face or that you’ll be dealing with several
dierent people during the transaction.
Your Fine Print Reader:
e Real Estate Attorney
In some states, such as New York, real estate attorneys are a regular part
of the homebuying process. Even in states where this isn’t the case, you
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may need an attorney’s assistance in a complex transaction. After all,
if you don’t use an attorney and the transaction later goes awry, you’ll
still have to hire one, at much greater time and cost. If there’s anything
legally unusual about your planned purchase, save yourself headaches by
working with a lawyer to structure the deal, not salvage it.
What’s legally unusual? Adviser Fred Steingold suggests getting an
attorney involved in situations such as these:
• You’d like to rent the home for an extended period, such as a year,
before you’re obligated to buy it.
• You’d like to move some belongings into the home’s garage or
basement before the closing date.
• You’d like an escalation clause that gives you the right—within
limits—to meet or exceed any competing oer.
• You’d like to make sure that a current tenant in the home will be
moving out before closing.
• You’re willing to let the seller retain possession of the home for a
time beyond the closing, but you want to make sure the seller will
pay you a fair rent.
Easements are another classic example of when a lawyer’s help might
be warranted. Adviser Daniel Stea recalls a transaction in which the seller
and neighbors had a verbal easement allowing the neighbors to access their
parking spot through the seller’s driveway. “e buyers naturally wanted
to have this arrangement reduced to writing—and that writing is the sort
of thing a lawyer should really draft, to make sure nothing is left out.”
However, Stea also notes that, “I’d estimate that out of every 50 home sales
that I handle in California, only a couple need a lawyer’s assistance.”
TIP
ere’s no substitute for your own attorney. Don’t expect the seller’s
attorney, the closing agent (who may be an attorney), the real estate agent, the
mortgage broker, or anyone else in the transaction to look after your legal interests.
Who Real Estate Attorneys Are
A real estate attorney is, by denition, one who focuses on real estate
transactions. is may sounds obvious, but you don’t want to get stuck
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working with an attorney whose main expertise is estate planning or
corporate mergers. Ideally, your attorney will have several years of real
estate law experience, at least some of it working directly with other,
more experienced attorneys. Additionally, in most cases, you’ll want an
attorney who specializes in helping buyers with their residential real estate
transactions: drawing up contracts, researching title, and the like. An
attorney who specializes in litigating disputes is a better t if you think
you’ll need to sue or you might be sued—but when structuring your deal,
you’ll be trying to avoid that result.
CHECK IT OUT
Are attorneys always involved in real estate transactions in your
state? Any experienced real estate agent should be able to tell you this right
away, but you can also check with your state bar association. Find it through the
American Bar Association’s website at www.americanbar.org (search for “state
and local bar associations”).
What Your Real Estate Attorney Does for You
Depending on your needs and which state you’re in, your attorney may
become involved in one or more of the following: negotiating, creating, or
reviewing the sales contract; overseeing the homebuying process to check
for compliance with all terms and conditions of the contract; performing a
title search or reviewing the title abstract or title insurance commitment (to
determine whether there are any liens or encumbrances on the property);
explaining the eect of any easements or use restrictions; negotiating or
representing you in a contract dispute with the seller; reviewing the closing
documents ahead of the closing and representing you at the closing.
TIP
Check your prepaid legal plan. Such plans—perhaps provided by
your employer—may provide legal services for homebuyers, so if you have one,
this may be the time to use it. However, make sure the plan truly offers the level
of service you need. Make sure you’ll be represented by the same attorney every
step of the way, and won’t be dealing primarily with a paralegal or secretary.
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An attorney can also assist you in complex transactions, for example if:
• Legal claims have been made against your prospective house that
must be satised by the time the property is sold—for example, a
construction lien imposed by a contractor whom the seller hasn’t
paid yet for remodeling work. Your lawyer can make sure that the
seller’s lawyer addresses this issue.
• Problems show up with the title: for example, the driveway is
shared by the house you want to buy and the neighboring house,
but that isn’t reected in the home title. Your lawyer can prepare an
agreement for you and the neighbor to sign that can become part of
the title documents.
• You need help reviewing community interest development agree-
ments and documents like CC&Rs, a co-op proprietary lease, or a
new home contract drafted by the developer.
• You need to structure a private loan from a relative or friend to
make the purchase.
• You are purchasing the house jointly with others and need to
structure a cobuyer agreement and document how title will be held.
• A little later on, the seller tries to wiggle out of the deal, and you
want your lawyer to inform the seller of the legal consequences for
failing to perform.
“One of the most valuable things we do for our clients is simply to
make sure that all discussions about seller repairs and the condition of
property have been put into writing,” says adviser Alicia Champagne.
“e object is to avoid situations like one I had, where our client had been
told by the seller’s listing agent, as they talked in the house’s basement,
that the seller would extend a $1,500 escrow credit for replacing the hot
water heater. Unfortunately, no one ever told any of the attorneys about
this. We got to the closing, and the buyer said, ‘Where’s my $1,500?’ e
seller’s attorney simply refused to authorize payment. And without any
proof in writing, there was nothing we could do.”
Getting the Best Attorney Out ere
You may be tempted to get the cheapest attorney you can, but it’s smarter
to get one who’s a real estate expert, even if it costs more. If you pay
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the attorney by the hour, the seasoned one will take less time than,
for example, a criminal defense lawyer, who’ll need to spend time just
researching real estate laws.
Many, but not all, states require you to have a written fee agreement
with your lawyer. It’s worth doing, anyway. Your agreement establishes
the terms of representation: what the lawyer is expected to do, how much
you’ll pay and on what basis (for example, hourly or a at rate), and when
the lawyer must be paid. Often you’ll have to pay some advance money,
called a retainer—but the rest of the lawyer’s fee will be paid later.
TIP
Count the hours. If you have an hourly arrangement with your
attorney, here’s a way to keep costs in check: Ask that the attorney contact you
before starting each discrete task (like reviewing condo CC&Rs) and give you an
estimate of how long that task will take. If it sounds reasonable, say okay, but
require the attorney to contact you if additional time is needed.
To nd potential attorneys, start by getting recommendations from
friends, coworkers, and trusted real estate professionals. If that doesn’t
pan out, you can get names from professional organizations or use lawyer
referral services (such as the Nolo lawyer directory, at www.nolo.com).
en interview three or four attorneys. Clarify in advance whether you
must pay for this interview time. Some attorneys oer free consultations,
others don’t. It may be worth paying, though, to start your purchase o
with a highly regarded attorney. At the interview, ask about not only the
attorney’s general legal skills, but also how much time he or she spends on
transactions similar to yours—especially if you’re buying a condo, co-op, or
newly built house. Make sure the attorney is familiar with local real estate
practices and relevant state and local rules that apply to your transaction.
If possible, get and check references for any attorney you plan to hire,
especially if a substantial amount of legal work (and money) is involved.
While some attorneys will be reluctant to provide names of clients
(because of client condentiality), it doesn’t hurt to ask.
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Who Does What
It’s your attorney’s job to … But it’s still your job to …
Provide the services outlined in your
agreement, such as drafting an offer
or contract, reviewing the contract, or
verifying title.
Tell you how much services will cost.
Keep everything confidential.
Explain problems, complications, and the
meaning of legal documents or terms.
Advocate on your behalf to make sure
contract terms are legal, fair, and
satisfactory to you.
Explain your options for describing your
method for taking ownership on the
title, and the legal effect of each option.
Give the attorney all relevant
documents and information.
Return your attorney’s calls and
respond to inquiries.
Make all decisions affecting your
transaction, such as whether to
complete the sale if there is a cloud
on title.
Decide how you want to take title.
ONLINE TOOLKIT
For a handy set of questions to use in your interview and reference
checks: Use the “Attorney Interview Questionnaire” and “Attorney Reference
Questionnaire” in the Homebuyer’s Toolkit on the Nolo website. (See the appendix
for the link.) Samples of these forms are shown below.
TIP
You can look up an attorney’s bar record. Attorneys who violate
ethics rules may be disciplined by the state bar (the organization in charge of
licensing and regulation). Many states have online tools that allow you to check
records; search online for “bar association” and the name of your state.
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Attorney Interview Questionnaire
Ask the following questions, as well as any specific to your transaction—for
example, regarding the attorney’s experience with condo, co-op, or newly built
house purchases.
Name of attorney and contact information (phone, email, etc.):
Date of conversation:
1. What percent of your time do you spend helping residential real
estate buyers?
2. How many years have you been handling residential real estate legal matters?
What are the typical services you provide?
3. Do you charge hourly rates (if so, at what rate) or flat fees for services?
4. Are you an active member of the state bar association?
5. Have you ever been subject to any bar association disciplinary proceedings?
6. Have you ever been sued for malpractice? What was the result?
7. How many individual homebuying clients have you represented
in the past year?
8. Can you provide the names of three recent clients who will serve
as references?
NOTES:
Best Answers:
1. More than 50%.
2. e longer the better, but at least two years.
3. No one right answer—you’ll want to compare fees
between attorneys. But try not to base your deci-
sion solely on how high or low the fees are.
4. Only acceptable answer is “Yes.”
5. Only acceptable answer is “No.”
6. Only acceptable answer is “No.”
7. Should be a minimum of seven.
8. Not all attorneys will provide ref-
erences, but if one does, it’s worth
your time to follow up.
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Attorney Reference Questionnaire
Here’s what to ask the attorney references. You can add any other questions that
interest you—for example, if you’re seeking a particular type of legal help, such as
with buying a co-op.
Name of attorney:
Name of reference:
Date:
1. How did you choose the attorney?
2. Did you know the attorney before you worked together?
3. What kind of legal services did the attorney provide?
4. Was the attorney responsive? Did the attorney return calls and emails
promptly, follow through on promises, and meet deadlines?
5. How long did you work together?
6. Are you happy with the attorney’s services?
7. Did the attorney keep you up to date, and explain everything in terms you
understood?
8. What was the best thing about working with this attorney? e worst?
Would you work with the attorney again?
OTHER COMMENTS:
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Your Sharp Eye: e Property Inspector
Before you buy a home, you’ll have it inspected at least once (per a
contingency you’ll put in your contract, as discussed in Chapter 10). e
purpose is to make sure that you’re getting what you pay for—namely,
a house in as good a condition as it appears to be. Suppose you make
an oer assuming a place is in tip-top shape, then discover that the
foundation needs to be redone? e value of that property suddenly
plummets—you might not even want to buy it at all.
e traditional inspection contingency allows 14 days for inspections
to be completed, and three days after that for you to approve them. at’s
not much time—in some U.S. regions, market conditions may shorten the
inspection period dramatically, and the better inspectors have a waiting
list. So it’s good to choose your inspector before agreeing to buy a house.
Who Inspectors Are
A general home inspector visually examines the home, inside and out, for
mechanical and structural aws that could aect performance or safety.
en the inspector prepares a written report summarizing the ndings.
General inspectors usually have a background in general contracting, resi-
dential homebuilding, or engineering. Some states require home inspectors
to pass a test and be licensed, while others do not. e more specialized
inspectors have other areas of expertise and backgrounds and may need a
state license (licensing is fairly common for pest inspectors, for example).
What Your Inspector Does for You
A general home inspection is usually limited to areas that can be seen
during one visit without disturbing or damaging the property, such
as viewing the condition of the roof, visually inspecting the electrical
system, and examining the foundation. is inspection may also reveal
that more specialized inspections are needed, for example, of the chimney
or foundation.
A structural pest inspection, which most lenders require, is more
limited in scope. e inspector looks for any pests, such as fungi,
termites, or beetles, that can damage the structure.
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Getting the Best Inspector Out ere
When choosing a general home inspector, look for one who’s been in
the business for many years and is not only licensed (if that’s available in
your state), but aliated with a professional or trade organization, most
notably the American Society of Home Inspectors (ASHI). Ideally, you
also want someone who has been a residential homebuilder or contractor.
Many buyers use a home inspector recommended by their real estate
agent. Be careful: Inspectors who rely too much on agent referrals may
be reluctant to nd problems that could end up scuttling the deal, thus
disappointing the agent. at’s why it’s worth getting independent
recommendations from your friends, coworkers, and recent homebuyers.
TIP
e general inspector shouldn’t do the repairs. A general home (not
pest) inspector evaluates problems and recommends solutions. But no ethical
inspector would say, “And guess what, I can fix that for you, at this price.” at’s a
conflict of interest, violates the standards of the main industry trade groups such
as ASHI, and is prohibited by law in many states.
Unlike general home inspectors, pest inspectors traditionally are the
ones who do the extermination and x-up work. Yes, it’s a potential
conict, but that’s the way the industry works, and the good news is
that they actually have an interest in nding problems. For that reason,
it’s safe to go with your agent’s recommendation; the remainder of this
section will focus on general, not pest, inspectors.
To nd a general inspector who will give the house a thorough going-
over, interview two or three, asking questions about their experience, price,
and scope of services. Also ask any questions specic to your situation, like
whether the inspector has experience with historic remodeled properties.
en request the names of three recent references, and follow up to
make sure they were impressed with the inspector’s eye for defects and
communication abilities—and haven’t found subsequent problems!
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Home Inspector Interview Questionnaire
Ask potential inspectors the following questions, as well as anything specific
to your situation, like whether the inspector has experience with historic or
remodeled properties:
Name of inspector and contact information (phone, email, etc.):
Date of conversation:
1. Do you work full time as a home inspector?
2. How long have you been in the home inspection business?
3. Are you affiliated with ASHI?
4. How many home inspections have you done in the past year in this area?
What types of houses?
5. What kind of inspection report do you provide? Can I see an example?
6. Do you have current, active errors and omissions insurance?
7. What did you do before you were a home inspector?
8. Can I accompany you on the inspection? Can I take photos or videos?
9. Can you provide at least three names of recent clients who’ll serve
as references?
NOTES:
Best Answers:
1. Yes.
2. e longer the better, but at least two years.
3. Only acceptable answer is “Yes.” ASHI is
the national organization with the most
stringent professional standards.
4. Should be a minimum of 15.
5. Many inspectors have sample reports on their
websites; you want as comprehensive a report
as possible, versus a short checklist. And you
definitely want to see a sample report if there
isn’t one on the inspector’s website.
6. Only acceptable answer is “Yes.”
7. Only acceptable answer is a building-
related position, such as a contractor or
building inspector.
8. Only acceptable answer is “Yes” to
the question of whether you can
accompany the inspector. But whether
you’ll be permitted to take photos or
videos is a matter of the inspector’s own
preference.
9. Only acceptable answer is “Yes.”
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Home Inspector Reference Questionnaire
Here’s what to ask the inspector’s references:
Name of inspector:
Name of reference:
Date:
1. How did you choose the inspector?
2. Did you know the inspector before you worked together?
3. What kind of inspection did you get and how much did it cost?
4. Was the inspector responsive? Did the inspector return calls and emails
promptly, follow through on promises, and meet deadlines?
5. Did the inspector take the time to explain everything to you?
6. Did you go along on the inspection?
If not, why not?
If so, how long did it take?
7. What kind of report did you get?
8. Are you happy with the home inspection services and report you got?
9. Did the inspector keep you up to date, and explain everything in terms you
understood?
10. What was the best thing about working with this inspector? e worst?
Would you work with the inspector again?
OTHER COMMENTS:
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ONLINE TOOLKIT
For a comprehensive set of questions for both the inspector and
his or her references: Use the “Home Inspector Interview Questionnaire” and the
“Home Inspector Reference Questionnaire” in the Homebuyer’s Toolkit on the Nolo
website. (See the appendix for the link.) Samples of these forms are shown above.
Who Does What
It’s your home inspector’s job to … But it’s still your job to …
Inspect the house for defects.
Write a summary report of the
findings.
Recommend repairs or further
inspections, if necessary.
Attend the inspection.
Read the inspector’s report.
Coordinate follow-up inspections.
Negotiate with the seller over problems
discovered during the inspection and
arrange for or hire someone to make
the necessary repairs.
Your Big Picture Planner: e Closing Agent
A lot has to happen between signing the agreement to buy a house and
closing the deal—it’s a process that usually takes at least a few weeks.
You want to make sure that the house is in good shape, your nancing
is squared away, and that the seller doesn’t pull any surprises. And on
the closing day, a number of documents need to be signed, and money
transferred back and forth.
To take care of the many details, it makes sense to have a third party—in
many states, a completely neutral third party—to make sure both of you are
doing what you promised. at’s where the closing agent (sometimes called
the “escrow agent,” “escrow ocer,” “closing ocer,” or “title agent”) comes
in. Every state’s requirements for who can serve in this role are dierent.
In states where attorneys handle the closing (such as Massachusetts and
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New York), you might not have one neutral intermediary, but instead two
attorneys, yours and the seller’s, sharing the tasks.
Who Closing Agents Are
Even though we call a closing agent a member of “your” team, the agent is
really looking out for both you and the seller (unless you’re each using your
own attorney). e closing agent acts as a check on both of you, to make
sure you complete the transaction according to the terms of the purchase
agreement. e agent usually works for a title or escrow company.
What Your Closing Agent Does for You
Although you may not meet your closing agent until you’re far into the
purchase process—possibly until closing day—the agent will be working
behind the scenes long prior to that. (You can meet your closing agent before
then, if you want to—and if you have questions or envision some hairy
complications, it’s a good idea to get in touch.) Expect your closing agent to:
• Arrange your title insurance. e closing agent will order or perform
(if he or she already works for a title company or is an attorney)
a title search and arrange for a title insurance commitment to be
issued. e title search and title insurance commitment will show
whether the seller is actually in a legal position to sell the property
to you and whether any liens, easements, or other encumbrances
aect ownership of the property (we’ll translate that gobbledygook
in later chapters). After the seller clears up any title defects and
your purchase is closed, the closing agent will help make sure you’re
issued a title insurance policy.
• Coordinate with lenders. e closing agent is going to coordinate
with two dierent sets of lenders: the seller’s lender(s), assuming
the seller hadn’t already paid o the mortgage, and your mortgage
lender(s). e closing agent will make sure the seller’s lenders are
paid in full when the property is sold.
• Establish an escrow or trust account. e closing agent will keep any
money you deposit in a separate bank account, called an escrow
or a trust account, until the closing date, when the money will be
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transferred to the seller. e seller may also agree to deposit money
there, for repairs. In states where both parties are represented by
attorneys, the seller’s attorney opens this account.
• Prorate expenses. e closing agent will gure out who, between
you and the seller, pays what proportion of any property tax,
municipal assessments, and condo or association fees owing or paid
during the time period around the sale.
• Follow instructions. e closing agent will follow written
instructions prepared by you and the seller and make sure that
all these tasks are accomplished by the date of closing—and
sometimes even after the closing. For example, the closing agent
may retain funds from the seller’s check to assure that all utility
bills get paid for service the seller received before the closing date.
• Record the deed and pay the seller. At the closing, the agent will
transfer payment to the seller. Afterward, the closing agent will
publicly record the new deed that transfers the property to you.
How You’ll Pay the Closing Agent
e closing agent is paid a fee that’s included in closing costs. In some
locations, it’s customary for the buyer to pay the fee; in other locations,
the seller; and elsewhere the fees are split. Your real estate agent should
know the local custom, though you and the seller can negotiate
something dierent.
Getting the Best Closing Agent Out ere
Who chooses the closing agent depends on local custom and how strongly
you, as the buyer, feel about having a voice in the matter. e choice of
a closing agent is usually made early on and spelled out in the purchase
agreement. Often the closing agent is someone either the buyer’s or seller’s
real estate agent knows, however. If you want to use a particular company
or individual, mention it to your agent at the outset so it can be included
in your oer.
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Who Does What
It’s your closing agent’s job to …
But it’s still your job to …
Collect and coordinate
paperwork, including financing
and required disclosures.
Obtain a title report and
coordinate issuance of a title
insurance policy.
Prorate costs like taxes,
insurance, and loan interest.
Hold deposits of money in a
separate account and transfer
them as appropriate.
Pay recording fees and taxes.
Transfer and record the deed.
Transfer your payments to the
seller.
Understand and sign off on the instructions
that guide the agent’s activities.
Obtain homeowners’ insurance and
supply the closing agent with the details,
including premium amount.
Read the preliminary title report and,
with the help of your real estate agent or
attorney, resolve any disputes.
Arrange for a timely money transfer of
whatever portion of the closing costs you
agreed to pay (or arrange to have them paid
through financing).
Coordinate directly with other parties—
inspector, real estate agent, or mortgage
broker—to make sure everything is in
order, including advising your agent when
contingencies can be removed.
Read all documents carefully before signing.
TIP
Choose a closing agent who’s conveniently located. You’ll have to
drive there at least once, for the closing, and maybe more often, for example, to
sign a power of attorney or deliver an old divorce decree.
To make sure you’re choosing the best closing agent, get referrals
from not only your agent, attorney, or mortgage broker, but from trusted
family members, friends, neighbors, or colleagues. Adviser Sandy Gadow,
author of e Complete Guide to Your Real Estate Closing, suggests making
sure your referral source found the closing agent to be ecient, accurate,
and able to handle the closing according to schedule.
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Strength in Numbers: Other Team Members
Although we’ve covered the key players for most homebuyers’ teams,
there are a few other professionals whom you’ll either want to consider
bringing in or might interact with along the way. ese include:
• Tax professional. You may want to consult an accountant or other
tax pro to make sure you’re taking advantage of all the tax benets
of buying a home. is is particularly important in the year you
buy, when many of your expenses may be deductible.
• Insurance agent or broker. You’re going to need to purchase
homeowners’ insurance for your house (the lender will require
coverage of physical hazards, at a minimum, as described in
Chapter 13). To do that, you’ll probably work with an insurance
broker. Your other option is to directly contact representatives of
insurance agencies whose services come highly recommended.
• Contractor. If you’re considering remodeling, or want to have someone
lined up to handle any problems that an inspector’s report identies,
it’s worth getting recommendations for a good contractor early on.
at way, you can have the contractor look at the house and tell you
how much the remodel or repairs or repairs would cost, or whether it’s
worth buying in the rst place.
What’s Next?
With a team of professionals beside you, you’re ready to really launch your
home search. In the next chapter, we’ll discuss one of the most important parts
of homebuying: financing your mortgage.
CHAPTER
6
Bring Home the Bacon:
Getting a Mortgage
Let’s Talk Terms: e Basics of Mortgage Financing .................................................140
All About Interest Rates ............................................................................................................. 141
All About Points..............................................................................................................................144
Who’s Got the Cash? Where to Get a Mortgage .........................................................146
Narrowing the Field: Which Type of Mortgage Is Best for You? .......................146
Fixed Rate Mortgages ..................................................................................................................147
Adjustable Rate Mortgages ......................................................................................................149
Getting Your Cash Together:
Common Down Payment
and Financing Strategies ................................................................................................................................153
e Traditional: 80/20 .................................................................................................................. 154
e Golden Past: Little or Nothing Down ........................................................................ 154
Where Do I Look? Researching Mortgages ...................................................................... 155
Online Mortgage-Related Sites ............................................................................................... 155
Newspaper Ads ...............................................................................................................................156
Banks and Other Direct Lenders ............................................................................................156
Mortgage Brokers ...........................................................................................................................156
I’ll Take at One! Applying for Your Loan ..................................................................... 156
Assembling Your Documents .................................................................................................. 157
Filling Out the Application ....................................................................................................... 158
Getting an Appraisal..................................................................................................................... 159
Monitoring Your Loan Once You’re Approved .............................................................. 160
New-Home Financing ..................................................................................................................... 162
Mortgage Rate Buydowns .........................................................................................................162
Other Developer Financing Incentives ............................................................................... 163
Unique Financial Considerations for Co-op Buyers ..................................................164
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Meet Your Adviser
Marjo Diehl, Mortgage Adviser at RPM Mortgage in
Alamo, California (www.rpm-mtg.com), NMLS #280959,
DRE License #00896740.
What she does Discusses alternatives with people buying or refinancing their
homes, to help them determine the best available financing
options depending on their specific financial and personal
goals. She then works the mortgage transaction all the way to
completion, including assisting the borrowers with preparing
the loan application and gathering the documentation, dealing
with the underwriters to get the loan approved, ordering
loan documents, making sure the loan closes successfully, and
communicating with all parties—buyers and real estate agents—
the whole way through. Diehl’s work has recently included
handling an increasing number of FHA loans, as first-time
homebuyers get into the market with minimal down payments.
First house “It was a condominium in San Leandro, California, that I bought at
age 24, while I was working as a flight attendant. It was all I could
afford, but it was a dream to be able to stop renting and have a
place of my own! Buying as a single woman wasn’t as popular then,
and some people were surprised. But it worked great for me. It
was close to my job at Oakland airport. I probably spent 40% of
my time away from home, traveling. It was also nice to have the
homeowners’ association looking after the exterior maintenance. I
stayed in my condo for two years, until I got married and bought a
single-family home with my husband.”
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Fantasy house “e house I live in now is my fantasy house! It’s in a beautiful
neighborhood, with views overlooking a canyon with lots of
trees. We’ve upgraded it completely, with granite countertops,
hardwood flooring, and big windows that take advantage of all the
views. We also relandscaped the backyard, with lots of flowers and
color. Our kitchen, which we’re in all the time, overlooks our yard,
and sometimes we just stand there and gaze out the window,
enjoying the scenery and peacefulness that surrounds us.”
Likes best
about her work
“Working with the variety of people that I do, and helping them
make financial choices that are truly best for them. I particularly
like working with first-time buyers, helping them reach financial
goals that a lot of times they didn’t think were possible. For
example, I did an FHA loan recently for a couple who were just
finishing a bankruptcy. I was actually surprised that we were able
to complete the transaction without a hitch, given that their
bankruptcy had not yet been released. ey were so thrilled when
the house closed.”
Top tip for
first-time
homebuyers
“I think it’s so important to live where you want to live—don’t just
buy in order to buy, but pick a location where you know you’re
going to feel safe and be happy, within the range of your own
affordability. Some people seem to just settle; they get anxious
and want to get the home purchase done and over with, now,
instead of being patient and waiting for the right home or the
right situation to present itself.”
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I
f you’re like most homebuyers, you simply won’t have the cash on
hand to buy a home outright. ankfully, in spite of ever-tighter
standards, there are still lenders willing to front you the money you’ll
probably need.
If you’ve already started researching mortgages, you may have been
put o by all the numbers and ne print. People start out promising
themselves, “I’m going to learn all about mortgages,” and end up saying,
“I’ll take whatever’s available; I just want to buy this house.”
But you don’t need to swing to either extreme. With a little buyer’s
savvy, you can avoid a mortgage that’s just plain wrong for you or costs
more than it should. We’ll show you how by looking at:
• the basics of mortgage nancing—interest rates, points, and more
• dierent loan options—xed rates, adjustable rates, and everything
in between
• how much to borrow versus how much to put down
• where to research mortgages, and
• the mechanics of applying for and getting a loan.
Let’s Talk Terms:
e Basics of Mortgage Financing
Before you start mortgage shopping, let’s cover the basics: what a
mortgage is and how it works. A mortgage is a loan to purchase property,
with the property as collateral. at means that if you buy your dream
home, and you don’t make the payments,
the mortgagee (the lender, in common
parlance) can recover what it’s owed by
foreclosing on the property—that is,
taking possession of and selling it.
Naturally, the lender gets into this
risky business to make money. It does that
primarily by charging interest and points
(one-time fees when you take out the loan). e variety of mortgage
options means you can borrow the same amount of money but with
dierent terms and end up paying very dierent amounts back. While
e average home buyer spends
double the time researching a
car purchase as he or she does
researching a mortgage.
—Zillow
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 141
interest rates and points look like tiny numbers and percentages in the
beginning, they add up to real dollars later.
EXAMPLE: Rob and Amy have found their dream house but don’t
have a mortgage yet. e local bank oers them a $350,000, 30-year,
xed-rate mortgage at 4% interest, with no points. e monthly
principal and interest payment would be about $1,671, and they’d
pay about $251,543 in interest over the life of the loan.
Meanwhile, Jimmy and Devon are interested in the same house.
ey go to a broker to discuss their options. She nds them a
$350,000, 30-year, xed rate mortgage at 3.5% interest, with one
point. e point will cost them $3,500, but their monthly payment
will be about $1,572, and they’ll pay about $215,797 in interest over
the life of the loan, $35,796 less than Rob and Amy.
All About Interest Rates
Most of us have been borrowing long enough—either to buy a car, go to
college, or get this season’s fashion must-haves—to understand what interest
rates are and that we don’t like them. An interest rate is an amount charged
by a lender, calculated as a percentage of the loan amount. Interest rates are
usually high on credit cards (sometimes above 20%), but thankfully lower
on other forms of credit, like mortgages. And as we discussed in Chapter 1,
interest paid on your mortgage is tax-deductible.
In the 2000s, home mortgage interest rates hit record lows, continuing
well below 4% in 2014. When this book went to print, they looked
unlikely to climb anywhere near early-1980s levels (15% and up) in the
foreseeable future. Nevertheless, with the economy in ux, we should
expect some volatility.
You’re not stuck with your rst mortgage for life. If you sell the
house, you’ll get a new mortgage when you buy your next one. And if
you decide to stay put, you can renance your mortgage (essentially,
trade it in for a better one) if rates drop and the value of your house
holds steady or climbs. ough you might pay fees to renance, it could
be well worth it. (If the value of your house drops, however, renancing
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may not be an option—the precise reason that many homeowners, who
were counting on renancing, found themselves instead pushed into
foreclosure in recent years.)
MonthlyPaymentsfora$100,000FixedRateMortgage
is chart shows the variation among monthly payments for a 30-year,
$100,000 fixed rate mortgage at different interest rates.
Interest Rate Monthly Payment
3.0% $422
3.5% $449
4.0% $477
4.5% $507
5.0% $537
5.5% $568
6.0% $600
6.5% $632
7.0% $665
7.5% $699
8.0% $734
What ose Percentages Really Mean
Unfortunately, mortgage interest rates aren’t always as straightforward
as they appear. For one thing, you may see them expressed two dierent
ways: as a base rate and as an annual percentage rate (“APR”). ose two
numbers aren’t going to be the same. e base rate is the actual rate used
to calculate your payment, while the APR is the total cost of taking out
the loan, factored out over the life of the loan and taking into account
any fees you pay, like appraisal fees and credit reports. Lenders provide
the APR because they’re legally required to.
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 143
e APR should be a good indicator of what a loan really costs, except
that it factors the costs over the life of the loan—and the chances of living
in the same place for the whole term of a mortgage, without renancing,
are pretty low. However, the APR can be informative—like when a
loan is advertised at a very low interest rate, but a slew of additional fees
increase the cost dramatically.
Why You Might Not Be Offered the Advertised Interest Rate
To complicate matters, the rates you see advertised aren’t necessarily what
you’ll be oered personally. For starters, interest rates change daily, so if
you’re looking at them on a Sunday, by Monday they may be higher or
lower. And the rates you’re oered will depend on some factors unique to
you, such as:
• e type of mortgage you choose. You’ll typically be oered a lower
initial interest rate on an adjustable rate mortgage (ARM) than on
a xed rate mortgage. Notice we said initial—stay tuned for more
on that later in this chapter.
• How risky you are as a borrower. If you have a history of paying bills
on time, a steady high salary or other signicant income, low debt,
plan to make a hefty down payment, and request a loan that isn’t
humongous relative to your overall nancial situation, you’ll probably
be oered a comparatively low interest rate. If the opposite is true,
your rate may be higher, to compensate the lender for the added risk.
• e loan-to-value ratio. A large down payment tells the lender that
you’re not likely to walk away from your investment. A small one,
however, makes the lender nervous. If you default, the lender will
spend time and money chasing you down and may have to initiate
foreclosure proceedings. Also, the lender could lose money, if you
owe more than the house is worth. It protects itself from such
risks by charging you higher interest.
• Whether the loan can be resold. Lenders often resell loans on the
secondary mortgage market, discussed below. at frees up the
lender’s capital to make more loans (meaning make more money). If
your loan doesn’t qualify for resale, it’s less desirable for the lender.
You’ll pay a premium to make up for that.
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e Secondary Mortgage Market and Jumbo Loans
A whole market exists in which original lenders sell loans to secondary
lenders. Usually the original lender is paid a flat fee upon sale, and the new
lender gets to collect the rest of your mortgage payments, including interest.
Why does this matter to you? Because the primary players in this
secondary market, Fannie Mae (the Federal National Mortgage Association)
and Freddie Mac (the Federal Home Loan Mortgage Corporation), buy only
those loans that meet certain financial criteria, including that the mortgage
doesn’t exceed a certain amount (which varies by location and is regularly
adjusted: for 2014, it was $417,000 in most places, but as high as $625,500 in
high-cost areas and up to $938,250 in Hawaii, Alaska, Guam, and the Virgin
Islands). If your loan won’t qualify for sale to Fannie or Freddie (a given if it’s a
“jumbo” loan—over the monetary limit), you’ll probably be offered a higher
interest rate.
• Whether the loan has points. Loans with points (an optional up-front
fee) will normally come with a lower interest rate.
You can’t be certain of the interest rate and the exact terms of your
mortgage until you’ve selected and applied for it. But knowing what
aects the rate will help you view all options with a critical eye.
All About Points
No, this isn’t some obscure score in the homebuying game. A point is
a loan fee equal to 1% of the principal on the loan (so one point on a
$100,000 mortgage is $1,000). Points are added to the cost of some
mortgages in exchange for a lower interest rate. You probably won’t be
oered more than two or three points on a loan, because the lender
would have to signicantly reduce your interest rate to make it nancially
benecial to you.
Depending on how far the interest rate is lowered, it can, in theory, be
benecial to get a loan with points, particularly if you have the cash, are
planning to stay in your place for a while, and don’t plan to renance soon.
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 145
But paying points on a loan is nowhere near as useful a strategy as it
once was, for the simple reason that, as adviser Marjo Diehl explains,
“Lenders are currently only oering around a ⅛% better rate per point.
It’s been this way for the last few years, with the result that 100% of my
clients now opt for no-points loans.”
ere’s a chance that this lender pricing approach could change by the
time you’re reading this, however, so be sure to talk the matter of points over
with your mortgage broker. You can also run some comparative numbers
on the latest loan oerings (with and without points). Use the below table
(which shows how long you’d need to stay in a house to make up for your
points payment through a lowered interest rate) and online calculators.
When to Pay Additional Points for a Lower Interest Rate
Use this chart to determine how many years you should stay
in a house to recoup the cost of points.
Additional
Points
Interest Rate Reduction
⅛% ¼% ⅜% ½% ⅝% ¾% ⅞% 1%
0.25
2.3 yrs. 1.1 0.7 0.5 0.4 0.3 0.3 0.3
0.5
5.3 2.3 1.5 1.1 0.8 0.7 0.6 0.5
0.75
10.0 3.7 2.2 1.6 1.3 1.1 0.9 0.8
1.0
23.5 5.3 3.1 2.3 1.8 1.4 1.2 1.1
1.25
7.2 4.2 2.9 2.3 1.8 1.6 1.3
1.5
10.0 5.3 3.6 2.8 2.3 1.9 1.6
1.75
13.5 6.5 4.4 3.3 2.7 2.3 2.0
2.0
21.0 8.0 5.3 3.9 3.2 2.6 2.3
2.25
No matter
how long you
plan to have
the loan, don’t
pay the extra
points.
9.8 6.2 4.6 3.6 3.0 2.6
2.5
12.0 7.2 5.3 4.1 3.4 2.9
2.75
15.0 8.5 6.0 4.7 3.8 3.3
3.0
21.0 9.8 6.8 5.2 4.3 3.6
3.25
11.4 7.7 5.9 4.7 4.0
3.5
13.5 8.7 6.5 5.2 4.4
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CHECK IT OUT
Ready to run some numbers? Various websites have calculators
that allow you to figure out whether a points or no-points loan works best for
you, such as www.mtgprofessor.com and www.dinkytown.net. Also check out
calculator apps from QuickenLoans, Zillow, and others.
One advantage to points it that they’re tax-deductible in the year
you pay them. In slow markets, sellers sometimes pay for points as an
incentive to the buyer, and you can even deduct those. In the rst year,
when money is tight, this might be a signicant advantage.
Who’s Got the Cash? Where to Get a Mortgage
ere are two major players in the mortgage game, both of whom can help
you get the loan you need. You may work with a mortgage broker, who will
help you nd the best available mortgage from among a variety of lenders.
Or you may go straight to a lender (sometimes called a mortgage banker),
which will probably mean fewer options, but possibly a better deal. For
more information on choosing a mortgage broker or lender, look back at
Chapter 5.
Narrowing the Field:
Which Type of Mortgage Is Best for You?
Mortgages come in two basic avors: xed rate mortgages and adjustable
rate mortgages (also called ARMs). ere are variations on these two
types, and some are better for certain kinds of buyers than others.
ough you’ll discuss your unique situation with your broker or lender,
you can rst educate yourself about the options.
CHECK IT OUT
Mortgages have their own lingo. For a glossary that will help you
decode it go to www.mtgprofessor.com (under “Other Tools,” click “Glossary”).
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 147
Fixed Rate Mortgages
If you like predictability and stability, you’ll probably like xed rate mort-
gages. e interest rate is set when you get the loan and never changes.
If you borrow $250,000 at 4.65% interest, you’ll continue to pay 4.65%
interest until you’ve paid o the loan.
TIP
Despite the fixed rate, you’re not actually paying the same amount
of interest each month. at’s because in the early years of your loan when the
principal is at its largest, you technically owe more interest. But the lender calculates
your payment so it’s the same amount each month (the loan is “amortized”). e
way amortization shakes out, the interest you owe makes up a greater portion of
your early monthly payments. As you gradually start to reduce the principal, less
interest accrues, and so more of your payment goes to reducing principal. So, for
example, on a 30-year $200,000 loan, at 4% interest, your monthly payments of
$955 would include $667 of interest in the first payment and $3 in the last.
Beyond buyers who crave predictability, xed rate mortgages are good
for those who want to stay put long term, particularly if interest rates are
low. Even if interest rates go sky-high, you’ll have a xed rate you can live
with. You pay a premium for this stability, because xed rate mortgages
usually have higher starting interest rates than ARMs. at protects lenders
who are stuck giving you a nice low rate for the full term of the loan, even
when interest rates increase and other buyers are paying them more.
eGoldStandard:30-YearFixed
e ultimate in predictability and stability tends to be the 30-year xed
rate loan. It allows borrowers to nance their home purchase at a preset
interest rate and pay it o over a full 30 years. ese loans make sense for
people who plan to live in their homes for several years. (Of course, you
don’t have to stay in your house that long.)
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e Saver’s Special: 15-Year Fixed
If you’re extremely disciplined and can aord it, you might consider a
shorter-term xed loan, most typically a 15-year mortgage. Like any xed
rate mortgage, these have stable interest rates and predictable terms. By
paying more each month, you ultimately pay less interest overall. As an
added plus, you probably get a relatively low interest rate.
You can see why they’re not as popular, however: Paying money back
faster means committing yourself to relatively high monthly payments.
EXAMPLE: Adina wants to take out a loan for $150,000 to buy a new
condo. She can choose between a 30-year, xed rate mortgage with a 5%
interest rate, and a 15-year xed rate mortgage with a 4% interest rate.
With the rst loan, Adina will have a monthly principal and inter-
est payment of around $805. After 30 years, she’ll have paid about
$139,888 in interest. If Adina takes the second loan, she’ll have a
signicantly higher principal and interest payment, approximately
$1,110 each month. However, at the end of 15 years, she’ll have paid
o her mortgage and spent about $49,716 on interest ($90,172 less
than with the 30-year mortgage).
Shorter-term xed rate loans free your income for other purposes earlier
than longer-term mortgages do. If you know you’re going to want money
for something else—for example, to pay college tuition, purchase a second
home, or retire—such a loan can act as a serious forced savings plan.
at doesn’t necessarily make it the most nancially savvy option,
however—especially not if you can make money by investing elsewhere
or reducing your higher-interest debt (like on credit cards). For example,
if you commit to a 15-year mortgage instead of contributing your money
to a retirement plan, you could end up house-rich but cash-poor—with
a place to retire in, but not enough money to do so. A better way to
accomplish your savings goals might be to take out a longer-term loan
and contribute the cash you’ve freed up to a 401(k) or IRA.
As a compromise, some people take out a 30-year xed rate loan but
then make higher-than-required monthly payments to the loan principal.
e more principal you pay, the less interest accrues, so if you make
early payments, you also end up paying less interest overall. While this
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strategy won’t save you quite as much money as a shorter-term xed rate
loan would (since your interest rate will probably be a little higher), you
face less future risk. If someday you can’t aord to make more than the
minimum payment, you’re not locked in.
TIP
Put it to principal. If you decide to make a prepayment, write on the
check that the payment is to be applied toward principal. Otherwise, the lender
might apply it toward the next payment that’s due, which will defeat your purpose.
Adjustable Rate Mortgages
As the name implies, the interest rate on an adjustable rate mortgage
(“ARM”) can uctuate during the loan term—and no one can predict with
certainty where interest rates will go. For buyers who aren’t put o by this
risk, or see buying their rst home as a short-term stepping stone, the ARM
may be an attractive option.
e relatively low initial interest rates are certainly eye-catching and
have made ARMs a favorite among new buyers.
But what about those uctuating interest rates? ey’re denitely
the main risk factor in an ARM. After the starter rate runs out, the
rate adjusts periodically at an agreed-upon term. is term (called the
adjustment period) may vary from one month to several years. Buyers
in the last several years were lured by lenders oering ridiculously low
initial interest rates, only to nd their payments completely unaordable
once the rate adjusted (sometimes, as quickly as a month later). is
contributed to the very problems in the mortgage market that make
lenders more careful about oering ARMs today.
When you’re looking at the loan description for an ARM, check out
a number called an index: e lender will adjust your rate to equal the
index plus an extra amount, so that it makes a prot. at bit of prot,
calculated as either a set amount or percentage, is called a margin.
Luckily, your lender doesn’t get to invent the index. It will draw on a
particular published, market-driven number. Common indexes include the
London Interbank Oered Rate (LIBOR), the 11th Federal Home Loan
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Bank District Cost of Funds (COFI), U.S. Treasury Bills, or Certicates of
Deposit (CDs). e LIBOR is usually the most volatile, meaning it jumps
up or down quickly and dramatically, while the COFI is less volatile. Also,
an index that averages rates over the long term (a year or every six months) is
preferable to one that moves up and down based on the weekly “spot” rate.
Another number to seek out when comparing ARMs is the life-of-the-
loan cap. is is a maximum on the ARM’s total interest rate, no matter
how high the index rises. e lender usually allows a well-padded 5%–6%
above the starting interest rate, which can aect your monthly payment by
hundreds or even thousands of dollars. Still, it’s far better than getting an
ARM without a life-of-the-loan cap—that’s downright dangerous.
In addition to a life-of-the-loan cap, most ARMs limit how much your
interest rate can increase at any adjustment period. is number is called
the periodic cap. It’s also a oor, limiting the amount the rate can decrease
at one time. Look for an ARM that doesn’t change by more than 2%–3%
at each adjustment period. Otherwise, your monthly payment could
shoot up very rapidly.
EXAMPLE: On a $200,000 loan, you’re choosing between a 30-year,
xed rate mortgage with a 5.85% interest rate and an ARM with an
initial 5.5% rate. e life-of-the-loan cap on the ARM is 11.5%. Your
monthly principal and interest payment on the xed rate loan would
be approximately $1,180 and never increase above that. Your monthly
payment on the ARM would start at approximately $1,136. However,
if your interest rate adjusts to the maximum 11.5%, your payment
could go as high as $1,980—about $700 more.
Traditional ARMs
e traditional ARM works like this: e loan starts out at a below-
market interest rate, called a teaser rate. is rate adjusts frequently, as
frequently as every month in some cases. As we’ve seen, that adjustment
can make a big dierence in your monthly payment.
In the past, many people who chose a traditional ARM couldn’t
really aord the home that they were hoping to buy. But if you can only
aord the monthly payment in the rst few months when the interest
rate is articially low, what are you going to do when it goes up? Failing
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 151
to recognize the possibility of a raise in ARM payments down the line
is exactly what put many homeowners into foreclosure a few years back.
As a result, lenders will no longer let homebuyers qualify for a mortgage
based on their ability to make the initial, low ARM payments. You’ll have
to also show that you can aord higher ongoing payments.
With the benets of easy loan-qualication gone, and interest rates
still low (at the time this book went to print), adviser Marjo Diehl says,
“I basically don’t recommend ARMs to my clients any more, with the
exception of hybrid xed and adjustable rate mortgages” (discussed below).
CHECK IT OUT
Interested in a traditional ARM? You’ll need to know what maximum
amounts you could owe each month. Your mortgage broker should be able to
calculate this for you, or you can use an online ARM payment calculator, like the
ones at www.nolo.com/legal-calculators, www.interest.com, or www.dinkytown.net.
Interest-Only ARMs
e interest-only variety of ARMs were once very common, but are now
dicult to nd. is is, at least at the beginning, just what it sounds like:
You start out paying only the interest that accrues on the loan principal,
making for very low monthly payments. e downside is that you don’t
reduce the amount you borrowed (there’s no “P” or principal in your
PITI). And of course, you have to start paying o the principal some
day—usually between three and ten years later. At that time, you’ll have
to pay much higher monthly payments.
Interest-only loans are attractive when home prices are going up fast,
with rst-time buyers squeezing into the market. ese buyers hope to
make the low monthly payments long enough for their house to rise in
value, then either sell without having to pay o the loan principal or
renance on better terms.
But as the crash in most real estate markets shows us, this can be a
dangerous strategy. Such buyers pin all their hopes on the value of the
property increasing, especially because interest-only payments don’t
increase their equity. If the value of the property drops, the buyer could
face a serious loss, particularly if forced to sell (maybe due to a job
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transfer) or after a change in the terms of the loan (an adjustment to
the interest rate). And the buyer would remain responsible for paying
the dierence between the amount the house can be sold for and the
remaining loan balance.
Buyers who pay down principal are in a much better position to
weather unexpected drops in home prices. Even if forced to sell, they’ll
owe less than their interest-only counterparts, because they’ll have built
up some equity by reducing principal.
Judging an ARM Beauty Contest
If you decide to get an ARM, here’s a summary of the features to examine:
• Initial interest rate. is should be significantly less than is available on
a fixed rate mortgage, to balance the added risk of rate increases.
• Adjustment period. Look for annual or biannual (not monthly)
adjustment periods.
• Index. A slow-changing index (such as the COFI) is preferable to a
rapidly changing, volatile one.
• Life-of-the-loan cap. Don’t agree to pay a maximum interest rate
greater than 6% above the initial rate.
• Periodic cap. e interest rate should change only a reasonable amount
at each adjustment period; 2% is about right on a one-year ARM.
• Low margin. e margin should be as low as possible; around 2.2% on a
six-month ARM or 2.5% on a one-year ARM.
• No prepayment penalty. You will almost never see these anymore, but
watch out if you do; you don’t want to be charged extra for making
early payments or refinancing.
• Assumability. ARMs are sometimes assumable, which means that when
you sell the house, the next buyer can take over your loan. If interest
rates are high then, this can be an incentive to prospective buyers.
However, the new buyer will have to separately satisfy the lender’s loan
qualification criteria.
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 153
Hybrid Loans
Hybrid loans, like hybrid cars, can save you money. While hybrid cars do
it by eating less gas, hybrid loans do it through lower interest rates. ey’re
a safer and more realistic option for many
rst-time buyers who want to break into
the market but don’t plan to be in their rst
homes forever.
Hybrids work like this: For a set period
of time, you pay interest at a xed rate—
usually, below the market rate on a regular
xed mortgage—and after that, the rate
becomes adjustable. e xed-rate term is
usually three, ve, seven, or ten years. e frequency of the adjustment
varies, but it’s usually every six months or one year. (A “5/1,” for example,
means that the rate is xed for ve years, then adjusts every year.)
at means you want to know how long you’ll be in your home before
signing up for a hybrid ARM. If you’re not sure or you want to maximize
exibility and reduce risk, select a hybrid with a longer xed-rate term (such
as ten years). You might have to pay a slightly higher interest rate, but you’ll
save the cost of a renance, if you realize at the end of the shorter term
that you’re not ready to go. And you’ll save yourself the stress of trying to
predict where you—and interest rates—are going to be in ten years.
Getting Your Cash Together:
Common Down Payment and Financing Strategies
Talk to someone who bought their rst home a decade or so ago, and you
may hear, “We put zero down!” or “We got two mortgages so we could
avoid private mortgage insurance!”
But with the market having done a
huge turnaround, such methods have nearly dropped o the map. To make
sure you understand the full range of possibilities, however, we’ll explain all
the strategies here, from the traditional to the more creative.
Someday, you’ll be
able to paint your
front door red!
at’s what homeowners in
Scotland reportedly do after
they’ve paid off their mortgage.
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eTraditional:80/20
Lenders feel safe with buyers who pay 20% down and nance the rest. If
you’re willing to pay that much up front, the lender is relatively condent
that you’re not going to default: You’ve already shown you’re a serious
saver, and you’ll have a lot on the line. Even if you default, the lender has
a good chance of collecting what it’s owed if it sells the house through
foreclosure, because you have
more equity in the property.
In turn, the advantage to you
of putting 20% down is that
you avoid paying for private
mortgage insurance (PMI), and
you’ll pay less interest overall.
Of course, if you’re in a
very hot market, you may
not want to wait until you’ve
scraped together a 20% down
payment. at’s especially true
if increasing prices mean you’ll later have to pay even more for a house
(uh oh, that 20% amount just became a moving target). You could
end up being priced right out of the market. What’s more, if values are
rising while you’re saving, you won’t reap the benets of the increased
value—instead, you’ll pay for it down the road, when you’re nally able
to aord a place.
e Golden Past: Little or Nothing Down
While 100% nancing was all the rage some years ago, lenders today
almost universally don’t allow borrowers to use it. If the value of the
property drops and you haven’t paid o a signicant portion of the
mortgage, the lender stands to lose everything; and after the downturn in
the housing market, lenders simply aren’t willing to risk that.
TIP
Want to make a low down payment? Check out FHA mortgages,
described in Chapter 7.
Not a Recommended Strategy
Homer: Homer Simpson does not lie twice on
the same form. He never has and he never will.
Marge: You lied dozens of times on our
mortgage application.
Homer: Yeah, but they were all part of a single
ball of lies.
—e Simpsons
CHAPTER6 | BRING HOME THE BACON: GETTING A MORTGAGE | 155
Where Do I Look? Researching Mortgages
Once you understand your loan options, you can start researching where
to get the best deals. We advise exploring several research avenues, from a
mortgage broker to online. en you’ll have plenty to choose from, or at
least know what to ask a mortgage broker about.
As you research, organize your ndings in one folder or le. You might
create a worksheet or spreadsheet to compare dierent mortgage features
like interest rates, fees, or other terms or requirements. ere’s also one
available online, on the Federal Trade Commission website (search
for “FTC Mortgage Shopping Worksheet”). No need to ll out your
worksheet for every mortgage, just the few you’re seriously considering.
Online Mortgage-Related Sites
In addition to sites operated by individual lenders, various sites aggregate
lender information and allow you to compare dierent loan options.
At bankrate.com, for example, you can compare rates based on your
geographic location, the amount you want to borrow, and the terms
you’re seeking. en you can contact the prospective lenders directly to
get more information.
CHECK IT OUT
Check out these sites to compare different lenders:
• www.bankrate.com
• www.hsh.com
• www.compareinterestrates.com.
Be careful, however, about any websites that require you to enter
personal information like your name, Social Security Number, or
address. In the worst case, you can actually agree to purchase a mortgage
online—not the smartest impulse buy. More likely, you’ll be contacted
by potential lenders, or they’ll check your credit history (and multiple
inquiries can aect your credit score, though all checks within a 14-day
window are treated as one).
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Newspaper Ads
e real estate sections of newspapers often advertise interest rates (in print
or online). Usually, lenders will list the dierent loan products they oer,
with their base interest rate, APR, any points, and sometimes fees charged.
ese are probably the lowest rates oered to the very best borrowers—not
necessarily the rate you’ll get. Also, because interest rates change daily,
printed numbers may not be an accurate reection of what actual rates are.
Use them only to ballpark what’s available.
Banks and Other Direct Lenders
You can also research rates through banks and other direct lenders (such
as savings and loans, credit unions, and investment rms). You can do
this online, pick up printed information that’s available in bank lobbies
or sent in the mail, or talk to a loan ocer. Your options range from large
national lenders to small local ones: Don’t assume a bigger bank means a
better loan.
Mortgage Brokers
A mortgage broker is an obvious resource and should be able to give you
detailed information and help you get preapproved when you nd a good
loan. For more information on choosing a broker, refer back to Chapter 5.
I’ll Take at One! Applying for Your Loan
Assuming you get preapproved for a loan (described in Chapter 3), you’ll
have already dealt with most of the necessary loan paperwork and given a
lender a laundry list of your relevant nancial information. (Even if you
decide to work with another lender, you’ll still have all the documents in
one place.) If you don’t get preapproved, you’ll probably get a loan after
you’ve made an oer on a house and may be pressed for time. Usually,
your contract will give you a few days to nd nancing on terms laid out
in the contract. e lender is still going to want the documents listed in
Chapter 3, as well as those below.
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Assembling Your Documents
After preapproval, and after you’ve chosen a house, but before the loan is
nalized, your lender will need:
• A copy of the house purchase contract. Your real estate agent should
be able to provide this directly to the broker or lender.
• A preliminary title report. (Called a “title insurance commitment” in
some parts of the United States.) e title company should give this
directly to the lender or broker. e report tells the lender whether
the seller owns the property free and clear and whether there are
any nancial or other encumbrances on the property.
• A property appraisal. e appraisal report (which the lender will
arrange for) tells the lender whether you’re asking to borrow more
than the house is worth. If the actual value of the home is lower
than the purchase price, then the lender is not well protected if it has
to foreclose, and the loan won’t meet its loan-to-equity standards.
Let’s say the purchase price for your home is $500,000 and the
lender is willing to lend you 80% of the home’s value ($400,000).
Your 20% down payment would be $100,000. But if the appraiser
says the home is worth only $450,000, the lender would be willing
to lend you only $360,000 (0.80 x $450,000 = $360,000). You’d
likely have to come up with a $140,000 down payment to close the
deal (unless the seller agrees to lower the price).
It’s also typical for the lender to ask permission to get more nancial
information about you, either from you directly, or by contacting
dierent entities that have that data. is can include getting not only
your credit history, but also your employment records (from current and
past employers), bank records, and possibly even IRS tax records.
ONLINE TOOLKIT
e “Financial Information for Lenders” checklist in the
Homebuyer’s Toolkit on the Nolo website includes a complete list of the
documents you need to apply for a loan. (See the appendix for the link.)
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the hard way
L
essons learned
e mortgage paperwork will be ridiculous. “I thought we
were in good shape,” said Catherine, who recently bought a
condo in San Francisco. “Both my husband and I had gotten job promotions, and
we’d saved up for a 20% down payment. Still, we had to supply reams and reams of
paper. I sent the lender something like 12 months’ worth of my checking account
statements, which it went through line by line, asking about various transactions.
ey wanted to know, for instance, why I was paying someone $365 a month. It was
to our dog walker!”
Filling Out the Application
Many lenders use a standard mortgage application form called the
Uniform Residential Loan Application (sometimes called “Form 1003”),
mainly because it’s used by Fannie Mae and Freddie Mac. You might want
to take a peek at the form before it’s given to you, at www.efanniemae.
com. Although the form is quite long, a lot of the information is stu you
already know. e rest, the loan ocer or mortgage broker should be able
to help you with.
If you’re lucky, your mortgage broker or loan ocer will actually
oer to ll out the form for you (sometimes after asking you to ll out
a mini-version). At a minimum, they should be willing to explain how
certain items should be lled out. Ultimately, however, you’re responsible
for making sure the information is accurate, truthful, and complete, so
review the form carefully before signing.
TIP
Play it straight. ink a little fib on your application is no big deal?
Watch out: It’s known as mortgage fraud, and as mortgage broker Russell Straub
explains, “It’s rarely prosecuted on the front end, but if a mortgage goes bad and
ends up in foreclosure, a scapegoat is usually looked for. e original application
is scrutinized, and in the worst cases—which I’ve seen—borrowers go to jail.”
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How About Locking in a Rate?
Interest rates change frequently. If you apply for a loan and rates go up
before the sale is complete, the lender will require you to pay the higher rate.
To avoid that, you can ask for a “lock in” or “rate lock.” It ensures you get
the interest rate quoted to you. If interest rates are on the rise, this is a great
thing, especially if you can’t afford a higher rate.
ere are some downsides: Lock-ins are usually tied to a specific property,
and they’re usually short term. Typically, you can get a lock for 30 to 60 days
without much trouble, but you may have to pay for it, perhaps in the form of
extra points or a slightly elevated interest rate.
What if you’re planning to buy a short-sale property (as discussed in
Chapter 9)? Realize that the seller’s lender may take several months to issue
a final approval—probably more time than you can get a rate lock for. You
will, according to adviser Russell Straub, “really need to get an actual purchase
contract with a fairly firm closing date in order to lock in an interest rate.”
If you get a lock-in, make sure it’s in writing and specifies the interest
rate, closing costs, and any points you’ll pay on the mortgage. For more
information, see www.federalreserve.gov/pubs/lockins.
Getting an Appraisal
e nal step in your loan application process is for the property you are
buying to be appraised. Lenders today have to order appraisals through
an appraisal management company. e idea is that the appraiser is an
independent third party who will provide a written, objective evaluation of
the home, thus assuring the lender that the buyer will
have enough equity to
meet its lending guidelines.
e appraiser will take a careful look at the property, inside and out,
and take numerous pictures to show your lender the quality of the home.
e appraiser will also consider how the local real estate market is doing
and comparable sales data from nearby homes.
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If the appraiser says your house is worth as much as or more than the
amount you’re paying for it, and everything else in your application looks
good, your loan should be approved. If—as is all-too common—the
appraisal report indicates you may be paying more than market value
for the home, however, you may be in for complications. e lender will
use the lower of the appraised value or the contract value in determining
how much money it is willing to lend on the property. If the value of the
property comes in lower than the contract price, you may have an option
to “appeal” the appraisal. You would most likely do this by providing
comparable sales information that might previously have been overlooked.
But think twice: What if you really did agree to pay an excessive price?
Unless the property is uniquely valuable to you, you may not want to buy
it at that price after all—or should at least commission an independent
appraisal. (And you should be able to back out, based on your contract’s
“nancing contingency,” to be discussed in Chapter 10.)
Monitoring Your Loan Once You’re Approved
After you’re approved for the loan, you can focus your energy on other
things. Trust us, plenty of other tasks will be competing for your attention.
But realize that the loan isn’t actually made until the day you close on the
house. It’s worth staying in touch with your broker or lender, particularly
if you have continuing concerns about the terms of your loan or approval.
Also be mindful of any date restrictions (for example, lock-in deadlines) as
you nish the purchase process.
But before you forget about the details of your loan entirely, make sure
you get a Good Faith Estimate (GFE) from the lender. You’re entitled to
receive this document within three days of applying for your loan.
Lenders are required to give you a standard GFE that looks like the
sample below. Read it carefully. It spells out some very important details
about the loan you’re getting—for example, the initial interest rate, the
initial payment amount, whether the amount can rise, and whether the
loan has a prepayment penalty or balloon payment.
e GFE is important in another respect too: it prohibits lenders from
raising certain costs at closing, and it locks the amount other costs can go
up. For example, lenders cannot increase the origination fee (the up-front
fee paid to the broker, usually a percentage of the loan amount), and can
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Sample From Good Faith Estimate (page 1)
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only increase title insurance costs by up to 10% over the estimate on the
GFE. is prevents lenders from tacking on “junk fees” at closing.
ONLINE TOOLKIT
e Homebuyer’s Toolkit on the Nolo website contains a blank “Good
Faith Estimate.” (See the appendix for the link.) A partial sample is shown above.
New-Home Financing
If you’re buying a newly constructed home, the developer is likely to oer
you some unique nancing alternatives. e usual possibilities include clos-
ing costs paid by the developer, mortgage subsidies (buydowns), or allow-
ances for upgrades like higher-quality xtures. All are more common when
developers have large numbers of unsold properties and there’s a large supply
of new homes on the market. (And in particularly slow markets, developers
may oer packages featuring everything from cruises to free replaces!)
Mortgage Rate Buydowns
To make its houses more aordable, a developer may oer to “buy down”
your mortgage. at means subsidizing the interest rate you pay for the
rst two or three years by prepaying part of the mortgage interest. In a 2-1
buydown, for example, you pay a below-market interest rate (and make
reduced mortgage payments) the rst year of the loan, and a slightly
higher (but still below-market) rate the second year, with the developer
lling in the gaps. e two-year period is meant to cover the time when
money is usually tightest for rst-time homebuyers. e rate adjusts to
market levels in its third year.
EXAMPLE:
Year Interest rate you pay
Monthlypaymentona$300,000
xed-rate,30-yearmortgage
1 2.5% $1,185
2 3% $1,265
3–30 3.5% $1,347
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Depending on the particular developer, you may be able to apply
a buydown to a mortgage you nd yourself or you may be limited to
mortgages oered through a developer’s preferred lender. You usually
need good credit to qualify for this type of program.
And as with any loan package, make sure the buydown works for you—
will you really be able to pay the increased mortgage payments after the
initial reduced-rate period? If there are any strings attached, such as high
initial points or above-market interest rates after the buydown period ends,
also consider how much you’ll end up paying over the life of that loan. If
you can aord higher monthly payments from the start, you may nd a
more competitive mortgage elsewhere. Use one of the mortgage calculators
recommended in Chapter 6 to compare mortgage options.
Other Developer Financing Incentives
Many developers oer special nancing deals to new homebuyers who
use the developer’s in-house or preferred lender. In some cases, the lender
has done a blanket appraisal of all houses in the particular development,
so you don’t have to pay for a new appraisal. e lender will probably also
oer special mortgage programs, often with faster or easier approval for
creditworthy purchasers and simpler closing procedures. To seal the deal,
developers may oer to pay closing costs or points; provide upgrades, such
as better-quality carpet or countertops; even oer gift certicates for home
design stores.
Although the developer may present its in-house nancing as the
world’s greatest deal or even the only possible deal, don’t cave to the
pressure without doing your research. It might seem easier (time- and
paper-wise) to go with the developer’s recommendation, but that
convenience may come at a price—namely, above-market interest rates.
Particularly if the developer is anxious to sell, you might instead get a loan
from another lender but negotiate with the developer for another benet
like a lower purchase price (a better deal than most nancial incentives);
a mortgage buydown; extra features, such as more closets or built-in
bookshelves; or upgrades such as higher-quality lighting.
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Unique Financial Considerations
for Co-op Buyers
Much of the standard nancial advice regarding homeownership doesn’t
apply to co-ops. Here’s a summary of what’s dierent:
• Two-tiered financing. Two loans are often involved with co-ops. First,
the cooperative will take out a mortgage for its purchase of the property
(which you’ll probably help pay for, as part of your regular maintenance
fees). Later, you’ll probably need a loan to purchase your shares.
• Higher down payment. Co-op boards frequently require buyers to
make large down payments—often upwards of 25% of the purchase
price. Your co-owners have good reason for this: ey want to make
sure you’re in sound nancial shape and can aord your monthly
maintenance payments.
• Higher interest rates. Some lenders are reluctant to nance co-op
purchases, because if a buyer fails to pay on time, there’s no house
to foreclose on, only intangible shares in a corporation. Fewer
willing lenders and greater risk translates into higher interest rates.
• Tax deductions. Tax deductions for co-op mortgage and maintenance
payments are more complicated than with condos or single-family
homes. While the co-op management will help you calculate how
much of the maintenance payment can be deducted, you may need
to consult a tax professional.
• Flip taxes. A “ip tax” is a misnomer—it’s really a transfer fee levied
by the co-op when a member sells. It can be calculated dierent
ways: for example, based on the number of shares the seller holds,
a at amount, or the sale price. Usually the seller is responsible for
this fee, but the seller may pass it o to the buyer.
What’s Next?
You’ve probably got a good idea of which traditional method for financing your
home works, if any. Still, you might want to consider alternatives. In Chapter 7, we’ll
discuss such methods as borrowing from family or friends or getting government-
assisted or seller-backed financing.
CHAPTER
7
Mom and Dad? e Seller?
Uncle Sam? Loan Alternatives
No Wrapping Required: Gift Money From Relatives or Friends .....................168
How Gift Givers Can Avoid Owing Gift Tax ...................................................................169
Why You Need—And How to Get—A Gift Letter ...................................................... 170
All in the Family: Loans From Relatives or Friends ...................................................172
Structuring the Loan ....................................................................................................................172
Benefits of Intrafamily Loans to the Borrower ............................................................... 173
Benefits of Intrafamily Loans to the Lender ................................................................... 174
Will Private Financing Work for You? ..................................................................................176
How to Approach Mom, Dad, or Another Private Lender ......................................177
Creating Your Loan Documents .............................................................................................181
A One-Person Bank: Seller Financing ..................................................................................182
Getting a Mortgage From the Seller .................................................................................... 183
Assuming the Seller’s Mortgage ............................................................................................. 184
Backed by Uncle Sam: Government-Assisted Loans .................................................185
FHA Financing ..................................................................................................................................186
VA Loans .............................................................................................................................................187
State and Local Programs ..........................................................................................................188
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Meet Your Adviser
Timothy Burke, founder and CEO of National Family
Mortgage (www.nationalfamilymortgage.com), based in
Waltham, Massachusetts. National Family Mortgage has
facilitated over $200 million in mortgage loans between
relatives.
What he does “Despite what the ‘CEO’ title might suggest, I’m part of a small
business (launched in late 2010) where everyone works as part
of a team, each person doing a bit of everything. A good part of
my time is spent interacting directly with clients; we’ve already
helped thousands of families across the U.S. properly document
and manage mortgage loans between relatives. I also deal with
company finances, marketing, connecting with press, and more.”
First house “I don’t own a house yet! Investing in my company has taken first
priority up to now. However, I’m recently married, and would like
to buy a home one day. We’re sort of waiting to see where we want
to put down roots and start a family.”
Fantasy house “It would be a classic New England farmhouse, with several wooden
rocking chairs on a wraparound porch, and overlooking natural
beauty—perhaps some conservation land.”
CHAPTER 7 | MOM AND DAD? THE SELLER? UNCLE SAM? LOAN ALTERNATIVES | 167
Likes best
about his work
“It’s very rewarding when clients return to us to structure
additional loans. at tells us that we’re doing something right.
And I do feel like National Family Mortgage is part of some
exciting changes in the way people engage with financial services
and handle their finances. Why pay a bank if you don’t have
to? e financial crisis and Occupy Wall Street movement have
motivated people to take a harder look at such issues. It might
sound cheesy, but I feel like we’re helping make dreams come true,
in a win-win transaction that hopefully benefits everyone.”
Top tip for
first-time
homebuyers
“Don’t focus solely on the purchase price and mortgage payments.
You’ll need to get ready for a host of new expenses that come with
homeownership: like maintenance, property taxes, landscaping,
furniture, and if you live in an area like mine, snow removal! I’d
suggest doing a complete review of your spending habits, lifestyle
goals, and ideally retirement plan (the earlier you start saving,
the more effectively your nest egg will grow), in order to properly
budget for a home you’ll be able to afford over the long term.”
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W
ith competing payment pressures from student loans and
other bills, and the high cost of housing, it’s hard—if not
impossible—to come up with all the cash needed to buy
a house. You may be struggling to get a down payment together or to
qualify for a mortgage. And most traditional loans don’t provide much
exibility, especially if down the road you want to make an adjustment to
your payment schedule.
If this sounds familiar, we suggest you look into alternative, more
exible or aordable forms of nancing. (Yes, this could mean your
mother—but keep reading; it may be worth it.) We’ll cover:
• gifts or loans from family members and friends
• nancing directly from your house’s seller
• low-down-payment loan programs available through federal, state,
and local agencies, and
• special nancing options available for new homes, such as direct
nancing from developers (buydowns).
No Wrapping Required:
Gift Money From Relatives or Friends
Don’t be shy: Many rst-time homebuyers (over one-quarter) get some
gift money from a relative (usually their parents) or a friend, according to
the National Association of Realtors
®
. If used for the down payment, such
gifts help buyers reduce their monthly mortgage payments or increase the
amount of house they can aord. Large gifts may even be used to nance
the entire purchase. Some buyers also use gifts for moving costs, home
furnishings, and remodeling.
By making your home purchase possible, the giver gets not only
emotional satisfaction, but nancial and tax benets. If someone is
planning on leaving you money by inheritance anyway, a gift is a way to
reduce the size of their taxable estate (large enough gifts can be taxed,
though the laws on this are continually in ux). And better yet, your
parents or other gift givers can watch you enjoy the money during their
lifetime, rather than watch you pay extra interest to a bank.
CHAPTER 7 | MOM AND DAD? THE SELLER? UNCLE SAM? LOAN ALTERNATIVES | 169
CAUTION
If you’re expected to pay it back, it’s not a “gift.” Adviser Timothy
Burke says, “at may sound obvious, but I notice that a lot of folks, especially
young people; tend to think of a ‘loan’ as money coming exclusively from a
bank, but view all financial help from family, even if there’s an expectation of
repayment, as a gift. If you represent to your primary mortgage lender that the
money coming from your family is a gift when you actually have every intention
of paying it back, you may—even if unwittingly—be committing mortgage fraud.
e lender is keenly interested in the difference, as it will factor loans into your
debt-to-income ratio for loan qualification purposes, while leaving gift money
out of the equation.”
For advice on approaching your parents or others for a cash gift, see
the discussion below on borrowing money from family or friends.
How Gift Givers Can Avoid Owing Gift Tax
Believe it or not, the IRS attempts to keep track of cash gifts—and
if someone makes total gifts over a certain amount during his or her
lifetime, that person’s estate can end up owing “gift tax,” even though the
recipients of the money don’t! Fortunately, not every gift counts toward
this total, and the gift giver has to give away quite a bit of money for it to
apply. Anyone can give a tax-free gift up to $14,000 per year to another
person (2014 gure; it’s indexed to go up with ination) without any tax
implications. at means, for example, that every year, your mother and
father can give you $28,000 (plus $28,000 to your spouse or partner, if
you have one), without it counting against the lifetime tax-free limit.
EXAMPLE: Leslie and Howard would like to buy a house for $280,000
and hope to raise a 20% down payment, or $56,000. If each set of
parents gives Leslie and Howard $28,000, the couple have reached
the needed amount, with no tax liability for anyone.
If a relative or friend wishes to give you more than $14,000 during
a single year, that person will need to le a gift tax return (Form 709)
with the IRS. is doesn’t mean the gift giver will have to pay gift taxes,
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because computing the gift tax debt is (as of recent years) put o until the
giver’s death. At that time, the rst $5.34 million of all the gifts made over
the person’s lifetime will be exempt from the tax. For more information,
see IRS Publication 559, Survivors, Executors, and Administrators, available
at www.irs.gov; and the Estate Tax section of Nolo.com. If a sizable
amount of money is involved, your relative or other gift giver should
consult an estate planning or tax attorney.
Why You Need—And How to Get—A Gift Letter
If you use gift money to buy your house (not just furniture), your bank or
mortgage lender will require written documentation from the gift giver
stating that the money is in fact a gift, not a loan. Remember, the lender
is carefully evaluating how heavy a debt load you’ll have. It wants to make
sure it’s not competing with another creditor for your monthly payments.
e “gift letter” should specify the amount of the gift, your
relationship to the gift giver, and the type of property (the exact address,
if you know it) for which the money will be used. Most important, it
should state that the money need not be repaid. Ask the gift giver for a
letter or prepare your own for the giver’s signature. Your lender may also
have a gift letter form.
ONLINE TOOLKIT
e Homebuyer’s Toolkit on the Nolo website includes a “Gift
Letter” you can tailor to your situation. A sample is shown below. (See the
appendix for the link.)
If the gift money hasn’t been transferred to your account yet, the
lender may want verication that the money is available, including the
name of the nancial institution where the money is kept, the account
number, and a signed statement giving the mortgage lender authority to
verify the information.
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Gift Letter
A relative or friend should prepare this gift letter for your bank or other lender.
Before finalizing the letter, check with your lender to make sure that it includes
all required information, such as evidence of the donor’s ability to provide
these gift funds.
Date:
To: [name and address of bank or lender]:
I/We [name of gift-giver(s)] intend to make a GIFT of
$ [dollar amount of gift] to [name(s) of recipient(s)] ,
my/our [relationship, such as daughter] , to be applied toward the
purchase of property located at: [address of the house you’re buying,
if known].
ere is no repayment expected or implied in this gift, either in the form
of cash or by future services, and no lien will be filed by me/us against the
property.
e SOURCE of this GIFT is: [the account the gift is coming from].
Signature of Donor(s):
Print or Type Name of Donor(s):
Address of Donor(s): Street, City, State, Zip:
Telephone Number of Donor(s):
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Preventing Emotional Fallout From Gift Money or Family Loans
To avoid family blow-ups, it’s usually best if parents or relatives discuss the gift
or loan with other close relatives (like your siblings). ey might do well to make
similar loans on the same terms to all children and document the transactions.
Preferential treatment, or lack of documentation of intentions, are known to
cause jealousy and conflict, especially if loans remain outstanding at the time of
death and the children have differing recollections of the parents’ intentions.
All in the Family:
Loans From Relatives or Friends
Private loans are another popular way to nance a home: About 7% of
homebuyers borrow money from family or friends, according to the 2013
NAR “Prole of Home Buyers and Sellers.” (And that’s just for their
down payment. It doesn’t include those few lucky buyers whose parents
lend them the entire purchase amount.)
Before you say, “Oh no, not my family,” consider that the numbers
probably wouldn’t be this high unless there was something in it for the
family member or friend, too. Take a look at the total amount of interest
you’re likely to pay before your mortgage is paid o—wouldn’t it be
better to keep that amount within the family?
is section will explore private (also called intrafamily) loans, including:
• dierent ways to structure a loan from family or friends
• the benets for borrower and lender
• how to raise the issue with your family member or friend, and
• dealing with the legal and tax issues concerning private nancing.
Structuring the Loan
You can use a loan from family or friends for your:
• Down payment. An intrafamily loan can be helpful if you’re short
on cash and want to avoid paying for private mortgage insurance
CHAPTER 7 | MOM AND DAD? THE SELLER? UNCLE SAM? LOAN ALTERNATIVES | 173
(PMI), but can save up to pay back your private lender over time or
when the house is sold.
• First mortgage. You could sidestep the traditional lending industry
and nance your entire purchase price with a mortgage loan from
your relatives, friends, or others.
• Second mortgage. A private loan may also be used to supplement
a bank mortgage. How is that dierent from a down payment
loan? Your private lender records the mortgage publicly, putting
themselves in line behind the bank for repayment if the house is
foreclosed on—a good way to protect the private lender. It’s unwise
to forgo this step unless the loan is relatively small (less than
$10,000), for the reasons discussed below.
If you’re borrowing part of the house’s purchase price from an
institutional lender, check whether it requires you to structure your
private loan in a certain way or limits the amount you can privately
borrow. For example, if you’re borrowing down payment money, many
institutional lenders require that at least 5% of the purchase price comes
from your own funds.
Especially if a sizable amount of money is involved, you should get
some advice on how to structure the loan from a real estate attorney.
Benefits of Intrafamily Loans to the Borrower
Some of the reasons that rst-time homebuyers turn to family and friends
for help nancing their houses include:
• Interest savings and tax deductions. Family and friends often charge
1½% to 2% interest points less than conventional lenders, resulting
in thousands of dollars in interest savings over the life of the loan.
And if you document the loan properly (as we describe below), you
can usually deduct the mortgage interest charged on your taxes,
just as with a traditional mortgage.
• Flexible repayment structures. While a bank is probably going
to require an unchanging monthly payment schedule, a private
mortgage holder might be more exible. For example, you may
mutually agree that you’ll make quarterly (not monthly) payments
or delay all payments for the rst few years. And if down the road
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you want to temporarily pause payments (perhaps to take unpaid
leave from work after the birth of your rst child), your parents or
other private lender may agree to that. Good luck nding such a
exible institutional lender.
• No points or loan fees. Institutional lenders often charge thousands of
dollars in loan application and other fees. Family and friends don’t.
• Easier qualifying. Your relatives or friends probably won’t require
that you have a great credit score. You qualify as long as your
lender trusts that you’ll pay back the loan. Of course, a “yes” isn’t
automatic, but as adviser Timothy Burke points out, “Family
members tend to have a better sense than anyone of whether their
child or other relation can be counted on to honor their debt.”
• Saving on private mortgage insurance. If you borrow more than 80%
of the house purchase price from an institutional lender, you’ll have
to pay PMI. By borrowing privately, you can avoid this cost.
• Minimal red tape. To borrow from an institutional lender, you must
ll out an application form and provide documentation verifying
every item on the form, then wait for approval. Friends and family
don’t usually adopt this level of scrutiny.
• Better deal on the house. If you’ve arranged private nancing in
advance and can close quickly, sellers who are time pressured may
accept a slightly lower oer.
• No lender-required approval of house’s physical condition. Private
lenders don’t usually require that a house’s major defects be repaired
before closing, as institutional lenders do. at would let you buy a
xer-upper and take care of its defects later. (Of course, you should
still have the house professionally inspected.)
Benefits of Intrafamily Loans to the Lender
Here are a few ways that making a private loan can also benet your
family members or friends:
• Competitive investment return. You can oer to pay an interest rate
that’s higher than your lender could get on a comparable low-risk
investment like a money-market account or certicate of deposit
(CD). (And you’re still likely to pay less than you would to a bank.)
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• Ongoing source of income. Some investments just sit there and gain in
value or pay occasional dividends. With your private loan, your lender
will receive regular payments from you, which can be reinvested.
• A financially liquid asset. Some investments, such as long-term
CDs, are hard to cash out in an emergency. Don’t worry; we’re not
saying your family lender can change his or her mind. But he or
she can potentially sell your mortgage to someone else. (ere is a
secondary market for the purchase and sale of existing mortgages,
or you may be able to renance if your lender wants out.)
• Low risk. Your parents or other private lender can count on two
things: rst, your commitment to repay the loan, somehow,
someday, even if the original repayment schedule needs to be
rejiggered; and second, that your house oers collateral. If worse
comes to worst, you can sell it and repay the loan. (Or your lender
can foreclose on you, though few would ever do that.)
• Estate planning protection. If your family members were planning to
leave you money anyway, this lets them get a head start. By leaving
a clear paper trail, they reduce the possibility for complications and
transfer of money outside the family in the event of a later divorce,
death, or remarriage.
• Emotional satisfaction. Don’t underestimate the sense of achievement
that your loved ones get by watching you gain a foothold in the
world, with their help.
If all this sounds unrealistically rosy, consider Timothy Burke’s
experience: “Not only do we see return customers, as I mentioned, but
the default rate among our clients is very low—under 1%. When a
borrower can’t make the payments, it’s usually due to a legitimate crisis,
such as a medical emergency. In that case, the family lender is typically
quite willing to restructure the loan in some way. As long as you go into
this arrangement with clear expectations, and document it properly, it can
create a sense of mutual support, not conict.”
ever did
est thing I
B
Borrow from Mom and Dad. When Amy decided to buy
a 1904 farmhouse in Northampton, Massachusetts, she
assumed she’d get her mortgage from a bank. en, her mother made her an offer
she couldn’t refuse: Borrow $180,000 from Mom and Dad, at a competitive 5.75%
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interest rate. Her mother figured, “Why is my daughter paying the bank when she
could be paying me?’” In addition to helping their daughter, Amy’s parents earn a
decent yield on a low-risk investment, not easy in these days of low interest rates.
“It’s a little bit scary borrowing from your parents, but this is an official thing,”
says Amy. And her mother jokes, “e mortgage was actually $173,000, but she
wanted a little extra for shoes.”
Will Private Financing Work for You?
Still feeling hesitant? e following questions will help you decide whether
private nancing will work for part or all of your home nancing:
• How much money do you need? If it’s $5,000 or $10,000 to help with
the down payment, that will probably be a lot easier to come by
than $50,000 or $100,000.
• How long do you need to borrow the money for? Some private lenders
may be ne with a ten- or 20-year repayment period (and for tax
reasons, may actually prefer a longer term). But if your relative or
friend wants the money completely repaid in a few years, make sure
such an arrangement is nancially feasible for you.
• Do you have any other options? Is your credit so bad that no bank will
approve the loan (or you’ll only qualify at really unfavorable terms)?
• Does a close relative or friend have the money to lend for the amount
and term you need? If your parents are well-o but are going to need
money soon for retirement or to pay your brother’s college tuition,
they may not be in a position to help.
• What are the personal costs to you? If you risk hurt or jealous feelings
of siblings, cousins, or others; a sense of perpetual debt or guilt; or
similar hazards, the loan may not be worth it.
• What are the costs to set up a private loan? Getting specialized help
from an attorney and accountant to structure your private mortgage
may run in the thousands. Companies like National Family Mort-
gage may be able to set up and manage the loan for much less. Or,
just go back to your conventional lender, especially if the private loan
would be fairly small (say, less than $10,000).
• Does your family member or friend trust you? Your lender wants
assurance that you’ll eventually pay the money back, so not only
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love, but trust, will be key. If you have a history of credit problems
and debts, you’ll need to show concrete evidence—to your lender
and yourself—that you’ve learned how to responsibly handle debt.
How to Approach Mom, Dad, or
Another Private Lender
Even people who are convinced that private loans are a win-win proposition
may blanch at the thought of asking for one. But if you approach it like a
business proposition, it’s not so hard. You’re oering a loan at a fair rate of
interest, secured by a promissory note and a mortgage.
Unfortunately, family loans are enough of a business proposition that
they in some cases may fall under the federal Dodd-Frank Act, which is
implemented by the Consumer Financial Protection Bureau and governs
mortgage lender licensing. Because of this, you may want to consult an
attorney before getting too deep into proposing a loan to your family
member—particularly if they’re not a member of your immediate family
(parent, child, spouse, sibling, grandparent, or grandchild).
Here’s a little more on why Dodd-Frank might aect you: Although
most state laws regarding mortgage transactions contain exemptions for
loans made within the family, and indeed Dodd-Frank contains a similar
exemption, it applies that exemption only to “immediate family.” Aunts
and uncles, for example, would be expected to comply with Dodd-Frank,
as if they were a mortgage lending company. And just guring out the
compliance requirements could be a huge hassle—which, again, is why
we suggest checking in with an attorney for help.
To present it this way, of course, you’ll need to nd the appropriate
time and place. Never surprise a potential lender by blurting out a request
at a social event or informal occasion, such as on the way back from
shopping. Make an appointment, even if you see your parents (or brother
or old roommate) regularly and the formality seems odd. Give them a
general idea of what you want to talk about, but save the details. For
example, you might say, “As you know, I’m actively house hunting now
and looking for various ways to nance this. Rather than go into all the
details now, I’d like to sit down and talk with you about this.” If you sense
resistance, back o gracefully.
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If you get a positive response, schedule a specic time to meet. Be
prepared to discuss your proposition logically and honestly. Ideally,
you will have done a lot of homework trying to arrange a loan from
a traditional lender, so you’ll have all the numbers at your ngertips.
Bring along photocopies of all relevant documents, such as the nancial
materials you pulled together for your bank or other lender.
Prepare a separate one-page list of key terms and issues you want to
discuss with a relative or friend, including:
• the amount you want to borrow, at what interest rate and
repayment schedule (see below for advice)
• the amount of money you have available for the down payment (the
higher it is, the lower the lender’s risk of loss)
• your nancial ability to make monthly payments (even without
setting rigid qualication rules, your lender will want to know)
• the nancial protections you’ll oer the lender (a promissory note
and mortgage, as described below), and
• the nancial benets to the lender (how your proposed interest rate
compares to money-market and CD rates).
When you meet, give the potential lender ample time to ask questions,
and don’t expect a decision on the spot.
e Loan Amount and House Purchase Price
How much you’ll ask for depends on how much you expect to pay for
your house and how much you think your parents or other private lender
can spare. Your intrafamily loan will most likely be a second mortgage, to
supplement nancing from a bank or other traditional lender. e terms
“rst” and “second” literally refer to who gets paid rst if there’s a foreclo-
sure. Your bank or institutional lender will no doubt insist on being the
rst in line, regardless of the size of its loan.
Your house purchase price won’t be exact unless you’ve already made
an oer and had it accepted. If you’re still looking, be prepared to show
the potential lender a close estimate, based on the price range you’re
looking in. If your private lender wants to make sure the house you nd
will be worth what you plan to pay, oer to get it appraised prior to
purchase (if you’re not already doing that for an institutional lender).
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e Interest Rate You Propose to Pay
For a private loan, the interest rate you and your lender pick can in theory
be anything between 0% and the limit set by usury law in your state. But
for practical as well as tax reasons, it’s best to charge a rate that’s higher
than the Applicable Federal Rate (or AFR; more on that below) but lower
than what you’d pay to an institutional lender. Propose paying a little
less than half the dierence between these two. For example, if xed rate
mortgages cost 3.5% and the AFR is at 2%, you might propose paying
2.75% interest.
Websites such as www.compareinterestrates.com, www.bankrate.com,
and www.hsh.com will give you a sense of current institutional interest
rates. A simple search for “IRS AFR” should bring you to the right page,
or you can nd it posted on www.nationalfamilymortgage.com. By the
way, although the AFR and interest rates change month by month, your
loan doesn’t have to follow suit—it’s ne to stick with the rate you settle
on initially, in the month you sign the loan.
ONLINE TOOLKIT
Use the “Private Loan Terms Worksheet” in the Homebuyer’s Toolkit
on the Nolo website to organize your presentation to a parent or other private
lender. (See the appendix for the link.)
TIP
Is your family reluctant to charge you that much? Tell them they
can always decide later to “forgive” you some or all of your payments, of not only
interest but principal. For tax reasons, they should write you a letter referencing
the loan and stating the amount they’re forgiving. ey’ll also have to factor this
decision into their gift tax obligations—forgiven loan payments are considered
gifts. And it’s best not to structure the whole loan with the assumption you’ll
never repay—the IRS sees this as a fraudulent way of avoiding gift tax, by
stretching a one-time gift out over several years.
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Check the AFR: Too-Low Interest
May Cause Your Lender Tax Problems
e IRS sets a minimum rate for private loans, called the “Applicable Federal
Rate” (AFR), each month. e exact percentage varies but is usually less than
bank mortgage rates and higher than money-market account or CD rates. In
mid-2014, the AFR averaged a little more than 3% for long-term loans (those
lasting longer than nine years). For the current rate, search the IRS website at
www.irs.gov.
What’s the big deal if your private lender charges you less than the AFR—
or even no interest at all? No problem for you (who wouldn’t want a low in-
terest rate?), but there may be tax ramifications for the lender. is is mainly
an issue if you’re borrowing a substantial amount of money from a relative or
friend, or receiving a loan on top of a gift that exceeded the $14,000 annual
exclusion. If the interest rate doesn’t meet the AFR, the IRS will “impute” the
interest to your lender—meaning it will act as though your lender really re-
ceived the AFR-level interest on the loan. e question then becomes, where
did the interest money go? Aha, reasons the IRS, your lender gave it right
back to you, as a gift. en the IRS can demand that the private lender file a
gift tax return for any amount over the annual gift tax exclusion.
Also, even if your private lender charges you less than the “imputed”
interest rate, the IRS requires him or her to report interest income at the
imputed rate. If the lender doesn’t and is audited, and the IRS discovers the
omission (unlikely), the IRS will readjust his or her income using the imputed
interest rate and charge the tax owed on the readjusted income plus a penalty.
eoretically, the IRS could zap the giver under both income and gift tax rules.
Other Proposed Loan Terms
You don’t need to go into your discussion with a completely drafted loan
agreement—after all, part of your objective will be to negotiate those
details with the lender. Still, you can show that you’ve thought carefully
about how to structure the loan protably for both of you, by suggesting a:
• repayment schedule (such as monthly or quarterly)
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• mortgage term (length)
• payment amount, and
• plan if things go wrong, such as late payments and fees, what
constitutes loan default, and loan restructuring options.
Again, be sure to run these by your institutional lender, if any, before
nalizing your loan agreement with a relative or friend, to make sure you
won’t be undermining your qualication for institutional nancing.
Gracias, Arigato, Merci
Find a way to show your thanks for a gift or loan—a card, lunch at your new
house, and maybe more. In case you’re stuck for gift ideas, check at www.
redenvelope.com. But be aware that, depending on your relationship with
your relatives, they may also expect frequent stays in your new guest room,
want you to follow their decorating advice, or feel that they can comment
on your spending habits. en again, some may act like this without having
contributed to your house purchase!
Creating Your Loan Documents
If your relative or friend agrees to lend you money, you’ll need to nalize
the loan with the proper legal paperwork. A handshake isn’t good enough
for anyone. For one thing, it’s easy to misunderstand something you’ve only
talked about. Clarifying and writing your agreement down now avoids
disputes, as well as memory lapses down the line. For another, failing to
record your lender’s mortgage on the property leaves that person out in
the cold if some other lender or creditor forecloses on your house—they
wouldn’t be entitled to any of the proceeds, some of which might go to a
creditor who came along later (like a contractor who worked on your house,
whom you haven’t yet repaid and who les a lien). And nally, written proof
that you’re paying mortgage interest allows you to deduct it at tax time.
To make your agreement legally binding, you’ll need these two
documents:
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• Promissory note. You‘ll need to sign a note for the amount of
the loan, including the rate of interest, repayment schedule, and
other terms, such as penalties for late payments. You can nd
several promissory notes (including installment payments with
and without interest and lump-sum payments with and without
interest) for sale on Nolo’s website (www.nolo.com). If you’re
borrowing only a few thousand dollars or less, a promissory note
may be all you need. But for most intrafamily loans, it makes legal
and nancial sense to also prepare a mortgage.
• Mortgage (or “deed of trust,” in some states). A mortgage gives your
lender an interest in your property to secure repayment of your debt
(per the promissory note). It needs to be recorded with a public
authority, such as the registry of deeds.
Unless you’re experienced in real estate transactions, we recommend
you get an expert’s help with preparing and recording a mortgage and
related legal documents. Ask your lender or closing agent for advice, or
check out a company like National Family Mortgage. We’ll let adviser
Timothy Burke explain the advantages of working with a company like
National Family Mortgage, namely that, “It makes the process easy.
Our intrafamily mortgage payment processing platform issues monthly
statement to borrowers and lenders, collects and credits loan payments,
and provides year-end tax forms. We even oer a way for borrowers to
have their monthly insurance and property tax premiums put into a
separate escrow account, just like you’d get with a bank mortgage.”
A One-Person Bank: Seller Financing
Surprisingly, the seller can be one of the most exible sources of nancing
for your new house. Seem counterintuitive? ere are several ways that
sellers can help—admittedly not that common, but keep your eyes open
for situations where:
• e seller is having diculty nding a qualied buyer or is anxious
to move a house that’s been on the market a long time.
• e seller would prefer to be paid over time at a favorable interest
rate rather than receive all the equity at the time of sale, perhaps to
supply a regular income for upcoming retirement.
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• e seller can justify a higher price by helping with the nancing.
• e seller’s house has substantially appreciated in value over the
years, so that the seller will owe a high amount of capital gains tax
when it’s sold. By in eect selling the house to you over time, the
seller can reduce the tax hit.
Here’s a brief overview of the various forms of seller nancing. As
with loans from family and friends, be sure to consult with your primary
lender to nd out how seller nancing will aect your eligibility, and get
expert help for documenting and recording the mortgage.
Getting a Mortgage From the Seller
A form of seller nancing often called a “seller carryback” allows the
seller to essentially sell you the house on an installment plan. e seller
transfers ownership of the house to you at the closing, but in return
receives a promissory note entitling him or her to scheduled payments and
a mortgage, providing a lien on the property until the loan is repaid. It’s
often structured so that the buyer has a balloon payment after a few years,
at which point you’d either renance or move out of the house. is kind
of arrangement works best for a seller who already owns the house free and
clear and won’t have to turn around and pay o a bank loan upon sale.
You can also use seller nancing to cover a second mortgage, when
the amount you’ve saved for a down payment plus your bank loan doesn’t
quite add up to the sales price. Experts say you can save 1% or 2% by
oering to accept a seller-nance arrangement rather than taking out a
second bank loan.
If seller nancing looks like an option, approach the seller in an
organized way (see our suggestions, above, for approaching family and
friends). Be prepared to provide detailed information about your income,
credit, and employment history, plus references—more information than
you’d need for a close relative. As with other private loans, seller nancing
can be exible and creative. You might ask the seller for:
• a competitive interest rate (less than you’d pay for a xed-rate
mortgage)
• low initial payments (unless you can easily aord high ones)
• a mortgage rate buydown (as described below)
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• no prepayment penalty
• no large balloon payment for at least ve years, plus the right to
extend the loan at a reasonable interest rate if market conditions make
it impossible to renance or pay the balloon payment in full, and
• the right to have a creditworthy buyer assume the second mortgage
if you sell the house.
is is a hard bargain, so be prepared to give up on the less
important
terms.
Assuming the Seller’s Mortgage
Another option might be to assume the seller’s mortgage: Essentially, you
would take the seller’s place with the seller’s bank or mortgage holder,
subject to all the conditions the seller agreed to. is type of nancing
makes most sense when the interest rate on the seller’s mortgage is lower
than the current market rate. It’s all aboveboard, done with the lender’s
consent (unlike something called a “wraparound,” where you pay the
seller and the seller pays the unwitting bank—not recommended).
One problem with assumable mortgages is that you’ll probably have
to pay much more for the property than the seller owes on his or her
mortgage and will either need a very large down payment or a second
mortgage to cover the dierence. Since second mortgages are usually at
a higher interest rate, you won’t want to assume a seller’s mortgage if the
savings on the assumed mortgage will be cancelled out by the higher rate
on the second mortgage.
Another potential problem is that usually, only adjustable rate mortgages
(plus FHA and VA loans, with some conditions) are assumable, so the
interest rate probably won’t stay where it is. Examine how high it might go
using the suggestions in Chapter 6.
Finally, the seller usually wants something out of the deal, too: often,
a higher asking price. at’s because the seller is still on the hook for the
mortgage if you default.
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Backed by Uncle Sam:
Government-Assisted Loans
e government thinks homeownership is a good thing—in fact, the fed-
eral Department of Housing and Urban Development (HUD) declares
that its mission includes the creation of quality aordable homes for all.”
at may translate into some nancial help for you, depending on where
you live and whether you meet the eligibility requirements for programs
administered by the:
• Federal Housing Administration (FHA)
• U.S. Department of Veterans Aairs (VA), or
• state and local housing nance programs.
We provide a brief overview of government low-down-payment and
insured mortgage programs below, with contact information so you can
check the latest oerings and eligibility requirements. New programs
spring up all the time.
e application process for many government loan programs is similar
to applying for a conventional loan. Your mortgage broker or lender can
tell you what’s available, which lenders participate, and whether or not
you qualify based on your income and other eligibility requirements (such
as your veteran status) and the price of the house you want to buy.
TIP
All types of homes qualify. Government loans are often available
for loans for new houses, condominiums, co-ops, and manufactured homes—
although there will be a few more hoops to jump through in terms of inspections,
warranties, and other requirements.
CHECK IT OUT
Looking for a list of all government housing loan programs? Check
out the “Housing” and “Veteran” loans sections at www.govloans.gov. In addition,
be sure to see the sites mentioned below for FHA, VA, and state and local housing
finance programs.
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FHA Financing
e Federal Housing Administration, or FHA (an agency of HUD), helps
people get into a home using a low down payment. e FHA itself doesn’t
provide nancing, but it does provide government insurance for a variety
of xed- and adjustable-rate mortgages issued through FHA-approved
lenders. e insurance means that if you default and the lender forecloses,
the FHA reimburses the lender for its losses. is reduces the lender’s risk
and increases the lender’s willingness to oer low-down-payment plans.
e FHA’s most popular program (Section 203(b)) requires a low down
payment—usually a minimum 3.5% of the sales price. is, coupled with
higher loan limits, makes FHA nancing more popular with homebuyers
now than in previous years. (Maximum loan limits vary by area, but in
2014 are generally between $271,050 and $621,500 for single-family
homes in the continental U.S. and up to $938,250 in Alaska, Guam,
Hawaii, and the Virgin Islands.) FHA loans are assumable by qualied
buyers, which may make your house easier to sell when the time comes.
Also, there is no prepayment penalty, should you decide to renance or
pay o your loan early.
FHA loans are a particularly good option for buyers with less than stel-
lar credit histories (including bankruptcy), because they’re generally easier
to qualify for than conventional loans.
Another important benet to FHA loans, according to adviser Marjo
Diehl, is that, “Unlike with other loans, you’re allowed to get the entire
down payment, as well as the closing costs, gifted to you. And family
members are allowed to cosign on the loan to assist you in qualifying.”
Not only gifts, but loans from family members are permitted by the
FHA, Timothy Burke notes, “on a secured or unsecured basis, up to 100%
of the borrower’s required funds to close. is may include the down pay-
ment, closing costs, prepaid expenses, and discount points.”
Sound good? Unfortunately, FHA loans don’t work for all buyers,
because of:
• Fees. Like all loans, FHA loans might include a loan origination fee
(though some have dropped them) that you must pay at closing,
plus a higher-than-normal mortgage insurance premium (the up-
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front portion of which can be added to the amount of the mortgage
loan—but not the ongoing premium payments).
• Appraisals. e lender must have an appraisal of the house you want
to buy done by an FHA-approved appraiser. If the appraised value
is less than what you pay for the house, you must make up the
dierence in cash (not with the FHA loan).
• Ineligibility of major fixer-uppers. Standard FHA loan programs won’t
help you buy properties needing signicant repairs; any work recom-
mended by the appraisers must be done before the sale closes. (If
you’re buying a serious xer-upper or foreclosure home, check out the
FHA’s Rehabilitation Mortgage Program, known as Section 203(k).)
If you’re planning to buy a condominium, stringent FHA requirements
passed in early 2010 may aect you. Lenders will be able to obtain FHA
backing only if all the following are true:
• In the case of new projects, the developer has applied for and
received preapproval of the entire project before individual buyers
apply for their loans.
• e development maintains a reserve fund of 10% of the amount of
its annual budget.
• No single investor (whether a person or a company) owns more
than 10% of the units.
• No more than 15% of the condo owners are behind on paying
their dues.
VA Loans
e VA provides access to competitive loans, usually with no down
payment and no PMI, and no prepayment penalty, for men and women
currently in military service and to veterans with an honorable discharge.
ere are specic eligibility rules that primarily relate to the length of
service. For example, service personnel now on active duty are eligible after
serving 90 days of continuous duty, regardless of when the service began.
Eligible veterans must have a good credit history, proof of employment
during the past two years, enough cash to cover any down payment plus
the closing costs, and enough income to meet monthly mortgage payments.
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e VA doesn’t actually make these loans but, similar to the FHA,
guarantees repayment to the lender of certain loans (available from
participating private lenders, such as mortgage companies, banks, and
savings and loans). e most common oerings are 30-year xed rate
mortgages or ARMs.
e VA itself doesn’t set a maximum loan amount, but its rules
eectively set limits:
• e amount of the loan the VA will repay is based on the size of the
loan—in 2014, up to 25% of FHA-estimated median home values.
VA maximum guaranty amounts are adjusted annually.
• e loan amount may not exceed the property’s “reasonable value,”
based on the VA’s appraisal of the property.
You must pay the VA an administrative (“funding”) fee for the loan,
typically ranging from 1.5% to 3.3% of the total borrowed (depending on
the amount of the down payment). Also, the VA places certain limits on
what closing costs you may be charged for.
To avoid making a cash down payment, your loan must be at or below
the VA’s appraised value for the house. Of course, despite the VA providing
backup, you’re still expected to repay the whole loan.
CHECK IT OUT
To apply for the VA’s “Certificate of Eligibility” (which may take
several weeks) and see lists of participating lenders, contact the VA. See its
website, www.va.gov (under “Benefits,” click “Home Loans”), or call 800-827-1000.
Check out VA publications such as VA-Guaranteed Home Loans for Veterans.
Regional VA offices (listed on the main VA site) may also provide loan information.
State and Local Programs
Your state or local housing nancing agency may sponsor special home
nancing programs at competitive rates and with low-down-payment
options for rst-time homebuyers. Also look for other local benets, such
as down payment assistance or local tax credits.
CHAPTER 7 | MOM AND DAD? THE SELLER? UNCLE SAM? LOAN ALTERNATIVES | 189
CHECK IT OUT
Looking for more information on state and local homebuyer
programs? See the HUD website, at www.hud.gov/buying/localbuying.cfm.
What’s Next?
Now that you understand all your financing options, you’re ready to get out there
and buy a house. Chapter 8 shows how to make the most of your house search.
CHAPTER
8
I Love It! It’s Perfect!
Looking for the Right House
How Your Agent Can Help ..........................................................................................................194
e Rumor Mill: Getting House Tips From Friends ..................................................197
Keeping Track of New Listings ..................................................................................................197
Planning Ahead for House Visits ............................................................................................ 198
Come on In: What to Expect as You Enter.......................................................................199
Picking Up the Paperwork ......................................................................................................... 200
First Questions to Ask .................................................................................................................200
Do We Have a Match? Using Your Dream List .............................................................. 203
All the World’s Been Staged: Looking Past the Glitter ..........................................203
Recent Remodels: What to Watch Out For .....................................................................204
Walk the Walk: Layout and Floor Plan ...............................................................................205
What Do ey Know? Reviewing Seller Disclosure Reports ...............................206
What’s in a Typical Disclosure Report .................................................................................207
Understanding Your State’s Disclosure Requirements ..............................................209
Penalties for Failing to Disclose ...............................................................................................210
Can You Trust the Disclosures? ............................................................................................... 210
Reviewing the Seller’s Inspection Reports (If Any) .....................................................211
Poking Around: Doing Your Own Initial Inspection ................................................ 215
Hey, Nice Dirt Pile! Choosing a Not-Yet-Built House ................................................ 215
Choosing Which Lot Your House Will Be Built On ......................................................216
Choosing Your House Design and Upgrades .................................................................. 218
Buying a New or Old Condo or Co-op? Research the Community ................ 219
Read the Large and Fine Print ..................................................................................................220
Ask Lots of Questions .................................................................................................................. 224
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Meet Your Adviser
Nancy Atwood, District Manager with NRT, based in
Framingham, Massachusetts. Nancy is responsible for the
legal compliance and mentoring of real estate agents who
directly serve buyers and sellers.
What she does Nancy started out with ZipRealty, as an agent, then moved up
to a position as broker, responsible for 175 full-service buyer and
seller agents statewide. She was named a ZipRealty outstanding
employee of the year in 2006. ZipRealty was acquired by Realogy
in 2014, and became part of its brokerage subsidiary, NRT.
First house
“It was a three-bedroom ranch-style home in Harvard, Massachusetts
(not the college—Harvard is a rural town, 32 miles west of Boston).
Finding it took a little work—I wasn’t in real estate then, and our agent
kept showing us places that cost $30,000 more than our absolute limit
or needed more work than we were then capable of handling. But
eventually we found this place and were so excited to be moving out of
the city and into an area with good schools and more open space. Still,
the house itself was so small that our kids would sit on the washing
machine to talk to me while I made dinner.”
Likes best
about her work
“I really like training and helping agents, especially those new to
the business—I’m so excited when one of my agents makes his or
her first deal. I tell them that it’s not a sales job, but a support job,
in which customers need to trust you with the largest purchase in
their lives. I’m also particularly interested in ethical issues around
real estate. Because it’s a commission-based job, agents sometimes
forget that our fiduciary responsibility is to the clients, not the
commission. I tell them you can’t control other people’s ethics,
but you can control your own. My agents like to hear that, they
get it, and I’m proud of the fact that we’ve never had one ethics
complaint filed against us here in Massachusetts.”
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 193
Fantasy house “e house I live in now. Around 1984, my husband and I bought
four acres of land, designed a house, and had it built in Harvard,
one quarter mile from the center of town. It’s contemporary
in style, very open and sunny, with passive solar energy. I know
some couples fight over home construction, but for my husband
and me it turned out to be an incredible bonding experience.
We spent every weekend at Lowe’s or Home Depot, choosing
fixtures, lighting, and hardware. He did such tasks as the wiring,
while I focused on designing the kitchen. It’s the biggest room
in the house, with granite countertops so I can just roll out
my homemade pizza dough, and windows that overlook our
neighbors’ horse farm.”
Top tip for
first-time
homebuyers
“Choose an agent you can trust. Interview your agent, and ask lots of
questions—not only about the agent’s experience, but about their
level of caring and consistency of customer referrals. For example,
when interviewing, I ask agents what they’re most proud of. If
they say something like, ‘I’m still invited to so-and-so’s home every
December during the holidays,’ that’s wonderful. ere are really a
lot of agents like that out there. Don’t let the negative things you
may have heard about some agents make you settle for one who
isn’t both caring and professional.”
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T
he brakes are o, and you’re ready to visit houses that seem to
match your Dream List, and choose one. “Whatever you do,
don’t settle,” says Realtor
®
Maxine Mackle (after 20-plus years of
experience in the Connecticut market). “You should be really enthusiastic
about a house be fore you make
an oer on it.”
But rst, breathe deeply and
cultivate some nonattachment.
Sellers of beautiful houses
usually know they’ve got a
gem and price it accordingly.
Meanwhile, the market
contains its share of duds:
houses with dark rooms, weird
layouts, and repair nightmares. is doesn’t mean your perfect house isn’t
out there, just that you’re unlikely to nd it on day one. So to make your
search productive, we’ll show you how to:
• get help from your real estate agent, friends, and neighbors
• compare each house with your Dream List, looking past the fancy
furniture or staging, the need for xing up, or the shininess of a
recent remodel
• see whether you can live with the layout
• review disclosure and other information you receive from the seller
• do your own, informal inspection for repair issues, and
• understand how to approach buying a not-yet-constructed house, or
one in a common interest development (CID).
How Your Agent Can Help
While you should take an active role in househunting, your agent’s
expertise will be invaluable in several ways.
Survey Says:
e average homeowner looks at ten to 12
houses before buying one. Some must be
looking at a lot more than that, so don’t sweat
it if you’re one of them! One of this book’s
coauthors looked at over 200 houses before
buying (she had a very patient agent).
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 195
TIP
Take a photo with your smartphone, get instant info about the
house. e award-winning (not to mention addictive) “Homesnap” app brings
up data about price (if the house is currently on the market) or estimated value
(if it’s not), school district, tax assessments, its size, and more. (Inputting an
old-fashioned street address works, too, but who can resist trying the photo
function?) And while you’re at it, the “Walk Score” app can tell you how the
house rates for walkability to nearby restaurants, shops, schools, and more.
Diving deep into the Multiple Listing Service (MLS). Using this database,
your agent can probably access more information than the general public
Adviser Nancy Atwood explains, “Not only does the MLS provide basic
information about the house’s price, features, and current status (‘active,’
‘under contract,’ ‘sale pending,’ or ‘closed’), it allows us to check out a home’s
complete market history (how long it’s been for sale, previous oers, oers
that fell through, and so forth). For example, the current listing might say
that the house has been on the market for only 64 days. But with a little
digging, we can see that it has actually been on sale for two years, having
previously been listed with another broker. at tells us that the place is
over-
priced; I’d want to question the current listing broker about what’s going on.
Or, if a previous oer fell through, we’d ask the listing agent why. Termites?
A bad inspection? e MLS can also access public records. For example, we
can look at whether a house has been heavily renanced—which might be
important if it’s causing the seller to refuse to lower the list price to its cur-
rent market value. Having all that information handy is really good.”
TIP
No need for embarrassment, your agent has heard it all. Some
agents’ stories might as easily have come from a therapist: homebuyers they’ve
counseled about whether to have children, couples whose divorces they
predicted. Get used to your agent knowing your private concerns, but try to work
out issues on your own. A house visit isn’t the place to argue about whether you
need an extra bedroom for your mother-in-law to live in.
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Knowing the inside scoop. Apart from the MLS, the agent has been
watching the market for longer than you and may hear about houses
coming up for sale long before they’re advertised—valuable even in a
down market, where the most desirable houses become the focus of
buyers’ interest. You’ll be driving along and hear your agent say, “If you
can wait another week, that house will be on the market.”
Identifying reasonable sellers. When the market is dropping, some
sellers may be stuck in the past, or bent on getting a certain price. Your
agent may be able to nd out which houses’ sellers are worth negotiating
with or are ready to drop their price.
Arranging showings. Your agent should take you to tour homes you’re
interested in—more than once per house, if need be.
Helping evaluate houses. Another set of eyes can be a great help when
visiting houses. Your agent may point out defects that you missed or
possibilities you hadn’t imagined. Just don’t let your agent’s judgment
overtake your own. And don’t be shy about visiting houses without your
agent—you can always bring the agent back for a second look. (And you
absolutely should bring your agent back into the process when it’s time to
prepare an oer.)
And more. Some agents nd creative ways to help. For example, home-
buyers visiting from out of town may nd their agent is willing to pick
them up at the airport and make hotel reservations. Realtor
®
Mark Nash
keeps ve umbrellas in his car for rainy days. And agents regularly work
evenings and weekends, showing you houses, reporting back on houses
they’ve previewed, and more.
we ever did
est thing
B
Visit open houses without our Realtor
®
. Although Pat and
her husband loved their Realtor
®
(their second one, after
they’d fired the first), she was extremely busy. And, says Pat, “We knew finding an
affordable house in a good school district, with yard space for our children, wasn’t
going to be easy—so we spent Sundays looking at every open house we could.
By a stroke of luck, an agent at an open house told us that a nearby house would
be up for sale soon. Its owner lived out of state and needed to sell in a hurry. Our
Realtor
®
made some calls, and we put in a bid. On Christmas Eve, we found out
that our bid had been accepted, and we got the house!”
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 197
What’s Better? Open House or Individual Appointment?
e answer may actually be “both.” Open houses are great for scoping out
the possibilities quickly and anonymously, particularly on an action-packed
Sunday. Visiting open houses unaccompanied by your agent can be nice for
gauging your own reactions with no outside influence. But a quick visit is never
enough—if a house looks promising, it’s worth revisiting, with your agent.
e Rumor Mill:
Getting House Tips From Friends
People planning to sell their house don’t usually make a big secret out
of it—they tell friends and neighbors, long before they formally list the
house. If you can tap into the same
network (most likely if you already
live nearby), you may nd out about a
house before it’s up for sale.
Tell friends, neighbors, your hair
stylist, the orist, your dentist, and
more. Some home seekers even print
up letters explaining exactly what
they’re looking for and promising a
treat or reward to anyone who helps
them nd a house.
Keeping Track of New Listings
One of the most dicult parts of buying a home can be simply nding
an acceptable one that’s up for sale! Although the real estate market has
improved in recent years, it’s still true that fewer homes come on the
market than is considered “normal.” at means that in many areas of
the U.S., buyers pounce on new homes as soon as they come up for sale.
Luke: Maybe one place wasn’t so bad.
Lorelai: Oh good, describe it to me.
Luke: I don’t know. It had walls with a
kind of a floor with a light.
Lorelai: Okay, hold on there, mister.
If you tell me it’s got a roof, I’m stealing
that baby out from under you.
—From the TV series Gilmore Girls, 2000
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is requires a proactive approach to househunting. As discussed, your
agent can be a good inside source of information here. Another good
strategy is to sign up for new-listing alerts from real estate websites such
as Realtor.com or Zillow.
Planning Ahead for House Visits
Don’t get too ambitious—most buyers nd that visiting between four and
eight houses per day is all they can handle before their brains fry. To make
the most of your visits, do some prep work. Make sure you’ve got not only
the complete list of houses you want to visit and a map, but all the items
on the House Visit Checklist shown below.
ONLINE TOOLKIT
You’ll find a blank version of the “House Visit Checklist” on the
Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.)
While you’re looking at a house, the seller’s agent (and the seller if
present) are evaluating you. Dress comfortably but professionally, without
overdoing it. As Illinois Realtor
®
Mark Nash puts it, “A lot of bling or
overdress means the seller or agent will think you can aord full price. You
want to be well groomed, understated, and home-price-range appropriate.
is is a business transaction—don’t give them a negotiating edge by
allowing them to overread you.”
TIP
If the house has a rental unit, never tell existing tenants what you
will or won’t do as owner. For instance, saying “I’ll keep the rent low” could
create false expectations, leading to later arguments. But be friendly, and ask
tenants for information concerning roof leaks, sewer backups, break-ins, and
more. Tenants may reveal things you’d never learn any other way.
Unless your child is small enough to carry in a sling or backpack, leave
the kids at home for the rst visit. Most parents can focus better without
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 199
chasing a toddler or hearing choruses of “is will be my bedroom”/“No,
mine! ” You can (and should) get your kids’ okay later. And this should go
without saying, but don’t bring your pets.
House Visit Checklist
Tuck the following into your bag:
your Dream List (from Chapter 2)
your list of Questions for the Seller or Condo/Co-op Checklist
(from later in this chapter)
your First-Look Home Inspection Checklist (from later in this chapter)
something for taking notes (a pen and paper or smartphone)
binoculars (handy for examining the roof)
a camera, camcorder, or smartphone, to remind yourself of what
you saw
a tape measure and notes on the type and size of your furniture.
Come on In: What to Expect as You Enter
Okay, your feet are crossing the welcome mat, and you’re getting
your rst peek inside. e seller’s agent is probably in one of the front
rooms, happy to greet you and to answer questions. If you’ve made an
appointment, either the seller’s agent will let you and your agent in, or the
agent will get a key from a lockbox. In rare cases (and with FSBOs), the
seller will be there as well.
TIP
If it’s really awful, you can leave! No need to be polite and do the full
tour. While some aspects of a house can be changed, such as filthy blinds or old
cabinets, trust your instincts and don’t waste your time.
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Picking Up the Paperwork
Your rst task is to see what paperwork the sellers have made available
to you. is might include a property fact sheet, with basic information
like the house’s size and amenities; a disclosure form that details what
the seller personally knows about the condition of the house’s features,
appliances, and environment; and/or a pest report and possibly a general
inspection report, including details discovered by a professional.
You probably won’t get all three of these—you may get none, or only
the basic fact sheet or a yer. How much information a seller is legally
required to give potential buyers varies from state to state (though they
may give more).
TIP
“As-is” on a fact sheet equals red flag. It normally means the seller
wants you to buy the house without requesting payment for any repairs, perhaps
without even doing a home inspection. Ask what it means to this seller.
First Questions to Ask
If the house looks promising, you and your agent should ask some basic
questions concerning repair needs, utility costs, neighbors, and more.
You’ll most likely ask these of the seller’s agent, but if the seller is there, or
is selling without an agent, ask the seller directly.
ONLINE TOOLKIT
Use the “Questions for Seller Worksheet” in the Homebuyer’s
Toolkit on the Nolo website. (See the appendix for the link.) A sample is shown
below. Tailor this worksheet to your interests, for example, adding a question on
whether there’s hardwood flooring under any carpets. (Also, if you’re buying a
condo or co-op, the Toolkit contains a separate checklist for you.)
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 201
Questions for Seller Worksheet
Here are some basic questions you and your agent will want to ask about a
particular house, in terms of repair needs, utility costs, and neighbors. Add
anything else to this list of interest—for example, if you have specific questions
about the garden. You’ll most likely ask the seller’s agent these questions, but
if the seller is there, or is selling without an agent, ask the seller directly.
1. How long has the house been on the market? ___________________
2. What repairs or improvements have been done in the last few years?
______________________________________________________
______________________________________________________
______________________________________________________
What are the house’s major or most immediate repair needs?
______________________________________________________
3. Does the seller use a particular repairperson, plumber, electrician, or pest
control person? If so, please provide their names: _________________
______________________________________________________
4. How much money does the owner pay for monthly utilities
(gas, garbage, electricity, water, cable, or satellite)?
$ _____________________________________________________
Are there any other ongoing costs? $ __________________________
5. Has the owner had any problems with water or dampness in the
basement or any other part of the house?
6. Is there a furnace and a central A/C system, and if so, when was it installed?
7. How are the neighbors? Are there issues regarding fences, trees, or
property lines? Is there any kind of organized neighborhood association?
Are there many school-aged kids on the street?
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Questions for Seller Worksheet, continued
NOTES:
How to evaluate the answers:
1. If it’s more than a few weeks (depending on how fast houses are moving in
your market), ask whether there’s been a price drop and whether any offers
have fallen through and why. Maybe it’s overpriced and ripe for you to
make a lower bid on.
2. Some of these repair problems may be stated in the pest or other
inspection report, but it’s helpful to have the agent summarize them for
you. Don’t hesitate to be direct and ask things like “Have there been any
roof leaks?”
3. Any use of repairpeople can reveal repair issues the seller didn’t mention
when answering Question #2. e information will also be useful if and
when you move in!
4. If you’re stretching just to buy the house, make sure it doesn’t come with
unusually high ongoing costs.
5. e basement and attic are likely suspects here. Moisture problems are
hard to repair and hard to insure.
6. Installing a new furnace or A/C can be another major expense—and one
that’s important to deal with soon, for the sake of your personal comfort.
7. Difficult neighbors can’t be repaired, while a community that works togeth-
er can enhance livability. Specifically ask about their level of noise; coopera-
tion regarding fence, tree, or parking issues; and any behavioral problems or
oddities (school-age kids can, unfortunetely, be a source of trouble).
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 203
Do We Have a Match? Using Your Dream List
Even the “right” house probably won’t be just as you imagined. Carrying
your Dream List (with the rst two columns lled out) will help you stay
organized and avoid getting distracted—for example, being so impressed
with stainless steel appliances that you forget that one bathroom won’t be
enough. Fill out your Dream List before leaving each house. At the end of
a day’s househunting, when you can barely remember your own name, it
will answer questions like, “Was it the brick house that had the patio?”
TIP
Get organized. Keep a file for each house that seems like a possible
match. Include your filled-out Dream List, property fact sheet, and other paperwork.
All the World’s Been Staged:
Looking Past the Glitter
In the old days, you’d see houses for sale pretty much as the sellers lived
in them—with their furniture, dishes, and clutter. But in many parts
of the U.S., the real estate industry has learned that by emptying out
and then gussying up a place, with rented furniture, owers, curtains,
artwork, and more, buyers will be wowed into paying more—often tens
of thousands more—for a home.
e resulting makeover job goes by the trade name “staging.” And it’s
your job to look past it, to see whether the house has good bones or is just
wearing a lot of cosmetics and concealer. To avoid being hypnotized:
• Figure out whether each room has all the furniture it needs. Stagers
usually remove most of the owner’s furniture and then bring in
a select few pieces—some smaller than normal. As you look at
a bedroom, for example, picture it with your queen-sized bed,
nightstands, and bureau, not the twin bed and delicate side table.
• Notice where flowers and knickknacks have replaced functional objects.
In a normal laundry room, you’d expect to nd detergent, laundry
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baskets, and a drying rack. Not in a staged house—you’re more likely
to see a wicker basket lled with uy, lavender-scented towels.
• Observe what your eyes are being led toward—and therefore away
from. If the entry hallway is small and dark, you can bet you’ll see a
glorious display of owers on a nearby table.
• See whether your stuff will fit into the closets and cabinets. With the
owners having moved out their clutter, you might not immediately
notice that there’s no hall closet, linen closet, medicine cabinet,
basement, or attic.
• Figure out what style the house is without the staging. Stagers can
make a ranch house look like a Victorian, or a 1950s drab home
look like an Arts and Crafts bungalow.
• Turn on all the lights, including table lamps. Stagers often set lamps
next to beds or couches, even though there’s no electrical outlet. A
lack of outlets is a common defect in older homes. Also, check that
kitchen and laundry appliances actually have a source of power and
other connections needed for operation.
• And smell that apple pie. If the house smells dreamy or the music
sounds divine—well, someone made it that way. And they don’t
come with the house.
Staging isn’t all trickery—if it’s well done, you might pick up some
ideas for how you’d do up the place yourself. Just don’t pay more than the
house is worth simply because it looked gorgeous after the staging job.
Recent Remodels: What to Watch Out For
If you can aord a house that someone else has xed up, great—you can
save a lot of eort and ongoing maintenance. But not all sellers have good
motives, judgment, or taste. In particular, watch out for houses where the
seller has:
• Never lived there, but fixed it up to make a profit. is is called
“ipping.” Unfortunately, since the seller had no personal stake in
the house, you can’t count on good materials or workmanship. If
you get as far as making an oer, you’ll of course hire an inspector.
But before things get that serious, save yourself a heap of trouble
by making sure the necessary permits were issued and getting an
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 205
independent appraisal before relying on appraisal reports the seller
shows you. Fraud cases involving ipping are surprisingly common,
where the appraiser is in cahoots
with a seller and overvalues the
house based on supercial or low-
quality improvements.
• Made fix-ups to suit unique
tastes. Overcustomizing can be
detrimental to a house’s value,
like if the seller was a sports fan
who did the whole house in team
colors. If you and the seller are
kindred spirits, great—but good
luck nding the next buyer.
• Overimproved the house. A
property can actually be made so fabulous that it’s no longer
comparable to surrounding homes. Unfortunately, surrounding
homes set the standard for home values in that area. You might
enjoy the house while you live there, but be prepared for slow rises
in value and diculty reselling.
Walk the Walk: Layout and Floor Plan
e physical layout of a house can make a huge dierence in whether you’re
comfortable living there. When visiting a house, imagine going through
your daily activities. For example, “I’m opening the refrigerator—it bumps
the oven door, and I’ll have to chop vegetables on this tiny countertop
across from the sink.”
ever did
est thing I
B
Not buy the house with the weirdly placed bathroom.
Kurt, an avid gardener, was close to bidding on a two-bedroom
Victorian. He says, “It was on a corner, with a lot of garden space around it. I was
already visualizing planting roses. e problem was, the one and only bathroom was
stuck right between one bedroom and the kitchen. It just had a door on each side.
Imagine being a guest and having to worry about locking both doors! I’m hugely
relieved I held off.”
Donkey: Whoa. Look at that. Who’d
wanna live in a place like that?
Shrek: at would be my home.
Donkey: Oh and it is LOVELY. You
know, you’re really quite a decorator.
It’s amazing what you’ve done with
such a modest budget. I like that
boulder. at is a NICE boulder.
From the movie Shrek, 2001.
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What Do ey Know?
Reviewing Seller Disclosure Reports
One of the most important pieces of paper in this process is the disclosure
report, which most—but not all—states legally require sellers to give
prospective buyers. (Exceptions are sometimes made for certain properties,
such as those in probate, where the original owner has died.) And it’s
become a standard practice even in states where the laws don’t require it.
Most seller disclosures are made using a standard form, upon which
the seller will check o features of the property and rate or describe their
Feng Shui Tips
e Chinese practice of feng shui is based on a simple truth: Your exterior and
interior surroundings can influence your life. Even if you don’t believe it, a house
with good feng shui may appeal to later buyers. According to feng shui consultant
and author Kartar Diamond (www.fengshuisolutions.net), “Every house has what
I call an energetic blueprint. is can either enhance or undermine your health,
well-being, and career.” ough some feng shui issues can be fixed, Diamond
recommends homebuyers avoid the following problems:
Exteriors
• lotsofcracksintheoutdoorpavement
• atriangular-shapedlotoronethatnarrowsintheback
• acornerhouseonabusystreet
• ahouseatthebottomofacul-de-sacorbelowstreetlevel
• treesthatappeartobeleaningawayfromtheproperty(likethey’retryingtoescape!)
• ahousewithinviewofacemetery,church,hospital,restation,uglyeyesore,
or place that makes a lot of noise, like an auto repair shop or bar.
Interiors
• chronicallydarkroomsortight,congestivespaces
• unevenoors
• bigexposedbeamsinthebedrooms
• frontdooraligneddirectlywithbackdoororwindow
• toiletorkitchenincenterofhouse
• stairsrightbehindentrancedoor.
CHAPTER 8 | I LOVE IT! IT’S PERFECT! LOOKING FOR THE RIGHT HOUSE | 207
condition. If the house hasn’t yet been built, the developer obviously
won’t have much to disclose—but may still need to tell you about things
like the type of soil; previous uses of the property; possible future uses of
surrounding land; and the developer’s intentions regarding existing trees,
streams, and natural areas.
What you read may aect your decision whether to make an oer. To
nd out more about a topic mentioned in the form, ask for it in writing.
And if you receive the disclosure form after making an oer, you can
cancel the sale if you don’t like what you read. Even after the sale has
closed, if a problem pops up that you believe the seller knew about and
didn’t disclose, you can sue the seller on that basis.
Exactly when you’re given the seller’s disclosures varies by state. In a
few states, such as Alaska, Kentucky, and New Hampshire, sellers must
give you disclosures before you’ve made an oer. But most states don’t
require the seller to do this until after you’ve made an oer, often just
before the two of you sign the purchase agreement.
What’s in a Typical Disclosure Report
e typical disclosure form is a few pages long and describes features like
appliances; the roof, foundation, and other structural components; electrical,
water, sewer, heating, and other mechanical systems; trees, natural hazards
(earthquakes, ooding, hurricanes); environmental hazards (lead, asbestos,
mold, radon, or contamination by use as a meth lab); and zoning.
Some disclosure forms also cover legal issues, such as ownership problems,
legal disputes concerning the property, or community association fees.
Strange but true, the forms might also require information about suicides,
murders, and other deaths on the property; nearby criminal activity; or other
factors, such as excessive neighborhood noise.
ONLINE TOOLKIT
See the sample disclosure forms in the Homebuyer’s Toolkit on the
Nolo website. (See the appendix for the link.) ey’re from Iowa and California,
representing a range between short and long versions of the form. (California’s
disclosure laws are among the most demanding in the country and require sellers
to also fill out a Natural Hazard Disclosure Statement, also included.) A page from
the California transfer disclosure form is shown below.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
California Real Estate Transfer Disclosure Statement
CALIFORNIA CIVIL CODE § 1102.6
THIS DISCLOSURE STATEMENT CONCERNS THE REAL PROPERTY SITUATED IN THE CITY OF ,
COUNTY OF , STATE OF CALIFORNIA, DESCRIBED AS
.
THIS STATEMENT IS A DISCLOSURE OF THE CONDITION OF THE ABOVEDESCRIBED PROPERTY IN COMPLIANCE WITH
SECTION 1102 OF THE CIVIL CODE AS OF , . IT IS NOT A WARRANTY OF ANY
KIND BY THE SELLERS OR ANY AGENTS REPRESENTING ANY PRINCIPALS IN THIS TRANSACTION, AND IT IS NOT A
SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES THE PRINCIPALS MAY WISH TO OBTAIN.
I
COORDINATION WITH OTHER DISCLOSURE FORMS
is Real Estate Transfer Disclosure Statement is made pursuant to Section 1102 of the Civil Code. Other statutes
require disclosures, depending upon the details of the particular real estate transaction (for example: special study
zone and purchase-money liens on residential property).
Substituted Disclosures: e following disclosures and other disclosures required by law, including the Natural
Hazard Disclosure Report/Statement that may include airport annoyances, earthquake, fire, flood, or special
assessment information, have been or will be made in connection with this real estate transfer, and are intended to
satisfy the disclosure obligations on this form, where the subject matter is the same:
n Inspection reports completed pursuant to the contract of sale or receipt for deposit.
n Additional inspection reports or disclosures:
II
SELLER’S INFORMATION
e Seller discloses the following information with the knowledge that even though this is not a warranty,
prospective Buyers may rely on this information in deciding whether and on what terms to purchase the subject
property. Seller hereby authorizes any agent(s) representing any principal(s) in this transaction to provide a copy of
this statement to any person or entity in connection with any actual or anticipated sale of the property.
THE FOLLOWING ARE REPRESENTATIONS MADE BY THE SELLER(S) AND ARE NOT THE REPRESEN TATIONS OF THE AGENT(S),
IF ANY. THIS INFORMATION IS A DISCLOSURE AND IT IS NOT INTENDED TO BE PART OF ANY CONTRACT BETWEEN THE
BUYER AND SELLER.
Seller n is n is not occupying the property.
A. e subject property has the items checked below (read across):
n Range n Oven n Microwave
n Dishwasher n Trash Compactor n Garbage Disposal
n Washer/Dryer Hookups n Rain Gutters n Carbon Monoxide Device(s)
n Fire Alarm n TV Antenna n Satellite Dish
n Intercom n Central Heating n Central Air Conditioning
n Evaporator Cooler(s) n Wall/Window Air Conditioning n Sprinklers
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