Audrie’s Home Buyer’s Guide

Homebuyingtips.net
The Web-site for people Buying homes

www.audrie.com               www.homebuyingtips.net         Copyright © 2003 by audrie.com

As you might expect, the material is grouped into the same six sections found on our web site. 

How much house can you afford?
The amount of cash available for a down payment largely determines the price you can pay for a house. If you have neglected to save, Government programs are available to assist those with low down payments, or if you are lucky, family or friends might help.

Where do you want to live?
As in the old adage: “location, location, location,” selecting a neighborhood should come before selecting a house. We provide sources for school comparisons, crime statistics, and other information on selecting a neighborhood.

Getting pre-approved for a mortgage loan.
The Buyer who shops early, when there is no pressure to buy a specific house, can save thousands of dollars on the cost of a mortgage loan. This is especially important for first time home buyers who might not understand that the interest rate is only part of the cost of a mortgage loan. In this section, we explain mortgage terms and guide you through the process of shopping for a mortgage loan.

Selecting a house
We list and explain things to look for when viewing a new, or pre-owned home. We also guide you in how to get the most out of your real estate agent and your professional home inspector. (Yes, unless you’ve had personal experience in the home construction business, you do need a professional inspector.)

Negotiating a price
The first step is to compare the Seller’s asking price to recent selling prices for similar homes in the same neighborhood. We provide sources of pricing information to make these comparisons. We also discuss strategies for negotiating with the Seller and guide you through the Offer and Counter-offer process. 

Closing the deal
We review the things you must do between the time the Seller accepts your Offer and the day you take possession of the property. We provide an example and explain a Settlement Statement, the final summary of what the Buyer and the Seller must pay and what each gets.

Our web site includes several calculators to estimate most things you might want to estimate during the home buying process. One of the simplest of these calculators is  depicted below (and at: http://www.homebuyingtips.net/Down_payment.htm ).

Purchase Price  (enter $124,000 as 124000)
Cash available for Down payment
Required Mortgage Loan
Down payment + Mortgage loan  = Purchase price but Additional cash is required to cover closing costs
Estimated buyer's closing costs

After entering the purchase price of a home and the cash available for a down payment, click “calculate” to get the amount of the required mortgage loan plus an estimate of closing costs. This is not all that helpful but it’s a good introduction to using our calculators, which, by the way, do not accept $ signs, commas or periods. In all cases a number such as $84,500 must be entered as 84500. $79.95 must be entered as 79.

All of our Calculators for home buyers can be accessed from links at: www.homebuyingtips.net/Calculator_index.htm or from the link directory in the left column of most of our web pages. 

Popular Calculators

• Closing Costs: Provides estimates of cash required for closing costs. http://www.homebuyingtips.net/Calculator_ClosingCost.htm
• Mortgage Payments: Calculates monthly mortgage loan payments . http://www.homebuyingtips.net/Calculator_mortgage_pay.htm
• Pre-Qualification: Provides an estimate of the mortgage loan amount you can get based on your income and expenses. http://www.homebuyingtips.net/Calculator_pre_qual.htm
• Monthly cost of home ownership: Calculates after-tax monthly cost of owning a home. http://www.homebuyingtips.net/Calculator_TotalMonthly.htm

• Lender’s View of mortgage payments: This calculator estimates monthly mortgage payments that include taxes and insurance. http://www.homebuyingtips.net/Calculator_LendersView.htm

Down Payment

“If I had known, I would have started saving much sooner” - I must have heard that phrase a thousand times during my career as a real estate agent. Earnest people with well paying jobs had simply failed to save enough cash for a reasonable down payment on a home. 

The 20% Solution: In an ideal world you would have saved  $20,000 as a cash down payment if you wanted to buy a $100,000 house.  That is 20% of the purchase price.

 Why not 10 or 15 percent? Actually, homes can be bought with as little as 3% or even zero down payment, but the best terms and lowest interest rates are reserved for those with 20%. Lenders have learned that buyers are not likely to default and walk away from a home in which they have invested a 20 percent cash down payment.

Most mortgage lenders will require private mortgage insurance (PMI) if your down payment is less than 20 percent of the purchase price of the property. PMI protects the lender if you default on repaying the loan. By itself, PMI is not very expensive, but Buyers with low down payments are also charged higher mortgage origination fees. These combined fees can push the cost of a mortgage loan to 4% of the loan amount ($3,200 on a $80,000 loan).

A 20% down payment is almost always the cheapest way of purchasing a home. But 20% can be a big number, so if the down payment needed to purchase a $140,000 home are stretching you, consider scaling back to a $110,000 or $90,000 home where you might more easily afford the 20% down payment, 

…or see if you can get help from family, friends or government programs.

The 10% Standard:  with rising home prices making it impossible for most first -time home buyers to come up with a 20% cash down payment, 10% has become the standard for people buying their first home.  These buyers pay a monthly fee for private mortgage insurance (PMI) and a higher interest rate than buyers with 20% cash but they pay a lot less than buyers with only 5% of the purchase price in cash.

Can your family help ?

More than 20 percent of all first time home-buyers get financial help from parents or other relatives. If Mom and Dad can truly afford a $10,000 loan, don’t be afraid to ask.

The lender will probably ask them to sign a letter stating that the money is a gift that does not have to be repaid. Your parents might also have to provide a bank statement or other document to show that they have the money to give.

Your parents can also help with a cash loan. Some lenders will not grant a mortgage loan if all of the buyer’s down pay­ment is borrowed, but in many case, lenders will simply factor in a repayment plan to your parents with your other financial obligations. That will reduce the size of the loan they are willing to make, but it might be enough to buy that dream house.

Relatives can help with other aspects of home buying besides a down payment. They can pay closing costs or moving expenses, or they can pay off credit card bills and make the house hunters appear more credit worthy.

Get a partner or two.
More and more people are coming to the conclusion that owning a portion of a house is better, financially than renting. Single parents have joined forces, brothers and sisters, and even former college roommates have chipped in to buy a house. Many of these buyers have found that ownership of a half house can easily lead to ownership of a whole house in a few years.

Typically, partners purchase a two-family house, and each takes one apartment, but sharing a single-family house is increasingly popular. People who can’t afford a $180,000 house in a nice neighborhood, simply purchase half that house at $90,000. This works best when the house is laid out in manner conducive to sharing. For example, a house with a master bedroom/bath at one end and another bedroom and bath or two at the opposite end works better than a layout with all of the bedrooms clustered at one end of the house.

Get a lawyer to draw up an agreement covering every aspect of the joint ownership, and absolutely do not buy with a partner without full disclosure of each others financial situation. “…in my experience joint ownership works best when each partner has similar incomes and assets” … Audrie

The Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Farmers Home Administration (FmHA) all sponsor programs that enable buyers to purchase homes with extremely small, and in some cases zero down payment. These agencies do not provide mortgage loans themselves. They insure the lenders against loss on loans to people who qualify for federal programs.

Secure in the knowledge that the Federal Government will pay off your loan balance if you default, mortgage lenders are willing to provide low interest loans with very low down payment.

The FHA helps low-to-moderate income folks get mortgage loans with as little as 3% down payment. These loans are not available in all areas and tend to be concentrated in neighborhoods targeted for development. The FHA is part of the Department of Housing and Urban Development (HUD), so check with the HUD web site at www.hud.gov/buying/mortprog.cfm to find out if your income and target neighborhood qualify you for a FHA insured loan.

Due to paperwork required by federal agencies, not all mortgage lenders choose to participate in the FHA program, but the FHA (or the above web site) can provide a list of approved lenders in your area.

The VA helps veterans and eligible people on active duty buy a primary residence. Like the FHA, the VA can provide a list of mortgage lenders that participate in the VA’s low down payment and low interest loan program. Check the VA’s web site at www.homeloans.va.gov/

RHS: The Rural Housing Service of the U.S. Department of Agriculture offers both direct loans and loan guarantees to people buying homes in a rural area (and in some counties that can be a lot closer to downtown than you might imagine). Direct loans are available to home-buyers with incomes below the median income of the community where they live. Mortgage guarantees are available for mortgage loans up to 100% of the appraised value of the property. Check the Rural Development web site at: www.rurdev.usda.gov/rhs/Individual/ind_splash.htm

Mortgage lenders decide how much money they will lend you based on methods similar to Audrie’s Mortgage Size Calculator at: www.homebuyingtips.net/Mortgage_size.htm or www.homebuyingtips.net/Buyers/Mortgage_size.htm

Audrie’s calculator will estimate a maximum mortgage loan amount based on your gross annual income and current monthly payments on long-term obligations such as auto-loans, credit cards, and other unavoidable recurring payments. The program makes statistical assumptions about food, clothing, housing and all other expenses, then estimates:

The calculator initially assumes that you can put down 10% of the purchase price but the down payment can be moved up to 20% or down to 3% to see the effect on maximum mortgage loan amounts and home prices. These estimates are for conventional mortgage loans (those not backed by a government agency). Buyers qualifying for VA or FHA loans should get slightly larger loan amounts.

Audrie’s calculator provides accurate estimates because most mortgage lenders follow loan-evaluation criteria set by Ginnie Mae (GNMA: the Government National Mortgage Association) and Fannie Mae (FNMA: the Federal National Mortgage Association). Mortgage lenders follow these criteria because Ginnie Mae and Fannie Mae guarantee repayment of loans that meet their rules.

In what appears to be a trend, more and more lenders are using loan evaluation software provided by Fannie Mae, or at least following the Fannie Mae formula that aims to keep the borrower’s monthly "housing expense" below 33% of monthly before-tax income, where monthly "housing expense" is defined as monthly mortgage payment + property taxes + insurance.

Given that mortgage lender's calculations ignore the cost of neat stuff like maintaining the house, or savings for college tuition and retirement, most of us should focus on mortgage amounts less than the maximum a mortgage lender will lend. If lenders are willing to loan $160,000, we would advise planning on a $130,000 loan and a house costing no more than $155,000.

Why bother shopping for a mortgage loan if all mortgage lenders use the same evaluation criteria? Because lenders use the same criteria to decide how much they will lend, but they use very different criteria to decide how much they will charge in terms of interest rates, points and other fees. One mortgage lender might charge $1,600 in up front fees for a $120,000 loan, while another lender might charge as little as $400 for the same size loan.

On this and the next few pages we provide detailed calculations which might be more than you care to know at this time. You can easily skip to page 15 on the first reading. On the other hand, the monthly cost of home ownership is the most important number in deciding what you can afford to pay for a home. Unless you like living dangerously, the monthly cost of home ownership had better fit comfortably within your monthly income.

First we will explain Audrie’s calculator. If you have a computer handy and can get to the Internet, the discussion will be easier to follow if you go to our calculator at: www.homebuyingtips.net/How_big_a_house.htm . This calculator estimates monthly cost of home-ownership. We’ll review the terms used by the calculator then take you through a manual calculation.

Use the calculator by entering the price of a house you are interested in buying and a down payment you can afford (as with all Audrie calculators, commas, $ signs, and periods are not accepted: enter $149,000 as 149000). Click calculate and the calculator calculates the mortgage loan amount needed and the monthly mortgage payment needed to carry that mortgage amount.

The estimated monthly payment is initially based on a 30 year fixed term mortgage at 7% interest rate, but the term can be changed to 15 or 20 years. The interest can be moved to as low as 5.25% and as high as 9.75%.

In addition to the monthly payment, the calculator estimates monthly cost of home-ownership by including estimates for:

• Monthly Property taxes
• Monthly Insurance
• Monthly Maintenance

Monthly Property Taxes
On average, property taxes are 1.5% of the property's purchase price per year ($1,500 per year for a $100,000 house, or $125 per month). Check with the county tax office (listed in government pages of local phone directory) to get exact rates in the town where you plan to live. If your town has higher than average taxes you can move the 1.5% up in increments to 2.0%.

Monthly Insurance
Your mortgage lender will require you to have home insurance, and in any case you will want to cover the cost of rebuilding your home should it be destroyed by fire or other disaster. We estimate monthly home insurance at .036% of the purchase price ($36 per month for a $100,000 house). If you know of different insurance rates in your area you can adjust our .036% estimate down to .032% or up to .04%.

Monthly Maintenance
We estimate annual maintenance cost at 1% of the purchase price ($1,200 per year or $100 per month for a $120,000 house). Actual maintenance cost for the first several months may be zero but eventually you will have to repair or replace some part of the property. You might increase our 1% to 1.5% to allow a monthly amount for improvements like adding a deck or putting in new kitchen cabinets.

Pre-tax Monthly Cost of Home-ownership:
We get pre-tax Monthly cost of home ownership by adding the above three items to the Basic monthly mortgage payment.

Monthly Property taxes
+ Monthly Maintenance  
+ Monthly Insurance  
+ Basic Monthly mortgage payment 
Monthly cost of home ownership

After-tax Monthly Cost of Home-ownership
To get the after-tax cost of home-ownership the calculator estimates the tax benefits of home ownership and subtracts that from the pre-tax cost. The buyer’s federal filing status and annual taxable income provides the buyer’s federal tax rate which the calculator uses to estimate the reduction in taxes due to home ownership. This amount is subtracted from the Pre-tax Monthly Cost of Home-ownership to give After-tax Monthly Cost of Home-ownership.

Manual Calculation of Monthly Cost of Home-ownership

If your computer is down or for some other reason you can’t get to our web site, you or anyone else in your household can perform the following calculations. In our example we use a house with a purchase price of $150,000. We also assume a down payment of $15,000 and a 30 year, fixed term mortgage loan for $135,000 at an interest rate of 7%.

Start by using Table I  on the next page to estimate basic monthly mortgage payments. Go to the first column of Table I and find “7%,“ then go across to the “30 Year” column to find $665.30 as the monthly payment on a $100,000 loan. Unless you happen to have a $100,000 loan you will need to convert the $665.30 to the monthly payment for your loan amount. You do the conversion with the following formula:

Your Loan amount x Payment shown in table = Your Monthly mortgage payment
                          100,000

Your Monthly payment = Your loan amount x Payment shown in table
                                                                    100,000

For our example we need the monthly payment for a $135,000 loan so we substitute $135,000 for “Your Loan Amount” in the above formula  and 665.30 from the table as follows:

Your Monthly payment = $135,000 x 665.30 = $898.15 
                                                 100,000

$898.15 is the basic monthly mortgage payment for our $135,000 mortgage loan. To this we must add Property taxes, Insurance, and Maintenance. We estimate these by using the following national averages:

Property taxes (annual): 1.5% of the purchase price.
We divide by 12 to get monthly rates
Monthly Property taxes = .015 x Purchase price
                                                       12
For our sample house we substitute $150,000 for the purchase price.
Monthly Property taxes = .015 x Purchase Price = .015 x $150,000 = $187.50
                                                          12                    12   

Property taxes (annual): 1.5% of the purchase price.
We divide by 12 to get monthly rates
Monthly Property taxes = .015 x Purchase price
                                                       12
For our sample house we substitute $150,000 for the purchase price.
Monthly Property taxes = .015 x $150,000 = $187.50
                                                       12   

Maintenance (annual): 1% of the purchase price
We proceed as above by dividing by 12 to get a monthly rate, then substituting $150,00 for the purchase price.
Monthly Maintenance = .01 x Purchase Price = .01 x 150,000 = $125.00
                                                  12                                      12

Insurance (monthly): .036% of the purchase price This is already in monthly form so we don’t have to divide by 12, we simply replace Purchase Price with the $150,000 price of our sample house. Monthly Insurance = .00036 x Purchase Price = .00036 x 150,000 = $54.00. The easy part is adding monthly property taxes, maintenance and insurance to the monthly mortgage payment to get pre-tax monthly cost of home ownership.

Monthly mortgage payment               $898.15 

Monthly Property taxes                  187.50

Monthly Maintenance                     125.00

Monthly Insurance                        54.00  

Monthly cost of home ownership       $1,264.65 (pre-tax)

The above ignores the considerable savings in income tax that comes from home ownership. To get a more accurate picture of the cost of home ownership we need to estimate the tax benefit and subtract that benefit from the pre-tax monthly cost.

Start by multiplying the basic monthly mortgage payment by 12 to get the annual mortgage payment ( 12 x $898.15 = $10,778) which for the first few years is a good estimate of your deduction from taxable income.

Subtract your annual mortgage payment from last year’s taxable income to get a new taxable income. Use the Federal tax tables to calculate a new, lower tax on the new, lower taxable income. The difference between your original tax and the new, lower tax is your annual tax benefit from home ownership. Divide this annual tax benefit by 12 to get a monthly tax benefit. The after-tax monthly cost of home ownership is equal to the pre-tax cost minus the monthly tax benefit.

Most buyers know where they want to live, usually close to work, friends and family, and in homes that testify to their hard work and success. Typically, several neighborhoods will meet those requirements....

You may get lucky and find the perfect neighborhood right away, but you are far more likely to end up considering the strengths and weaknesses of several neighborhoods, which on the surface, look very much alike.

We advocate a walking tour through each neighborhood. A walk, not a slow drive! You don’t meet people when you are driving and what you want to do is talk to people who live in the neighborhood. Ask how they feel about their neighborhood. Spark a little neighborhood rivalry by mentioning the other neighborhoods you are considering.

Okay, so you’re too shy to ask strangers about their neighborhoods. Look to your real estate agent. A good one can guide you to the neighborhoods with the most value, which usually means neighborhoods with good schools and low crime rates.

Schools
Single people and couples who do not plan to have children need to consider school quality because schools have a big impact on resale value. Most buyers put high value on a good school and few are willing to buy in areas without one.

Can you go out safely at night? Are break-ins common? Does the town maintain rescue vehicles? How large is the police force in relation to the population? How does this compare with other areas? Real estate agents are often reluctant to knock a neighborhood, but the community relations department of the local police force can provide much of this information, sometimes even over the phone. Look them up in the local telephone directory.

Like school reports, crime rate statistics are available on the Internet. The following sites provide free crime rate statistics for most neighborhoods:
APBnews: www.apbnews.com/resourcecenter/datacenter/index.html
U.S. Dept of Labor: www.bls.gov/bls/regnhome.htm

For a fee, crime rate statistics are also available at HomeFair’s Relocation Crime Lab: www.homefair.com/homefair/calc/crime.html

Go to our web page at: www.homebuyingtips.net/Location_crimerate.htm for links to all the above sources of crime rate statistics.

Even when we know crime rates and school quality we often find ourselves spending time visiting neighborhoods and touring houses then coming home with a jumble of feelings and not enough tangible stuff to compare.

Audrie's Neighborhood checklist is a handy and simple tool to compare neighborhoods on criteria such as price trends, personal comfort and convenience. Most of the checklist items are described below. Use them in conjunction with advice from your real estate agent.

Price Trends
A good real estate agent will tell you about price trends in the neighborhoods where he or she does business. Price trend information can also be found on Internet sites such as Domainia.com that provide actual selling prices of homes in most neighborhoods. We suggest taking a look at selling prices in the last year and comparing those to selling prices four or five years in the past. The two sets of prices should give a clear picture of the four year price trends.

(Price information is not available to the public in Texas and a few other states, but real estate agents can get this information for prospective buyers)

Not the analytical type? Price trend can be estimated by the factors that drive value. Prices move up in neighborhoods with lots of jobs, quality schools, low crime rates, stability and lots of amenities.

Jobs
Nothing kills property value as fast as a forest of "for sale" signs driven by lay-offs and plant closings. Look for towns with lots of jobs in the Sunday employment section. Also be cautious of towns with a single big employer. Home values can fall fast if the dominant employer cuts back or closes plants.

Stability
Any major construction can alter the value of homes close by. Check with the local planning board or your real estate agent to make sure an eight lane highway is not about to come through the quiet neighborhood where you are about to make an offer.

Amenities
Great views of a lake, ocean, mountain, park or woodlands, all help to hold up property values. So do tree-lined streets and easy access to golf and tennis clubs.

Shopping
Will you have to travel miles to pick up groceries, or is the prospective home convenient to a shopping center? Will living near a shopping center create unwanted traffic congestion?

Traffic
Heavy traffic on neighborhood roads creates safety hazards for children plus noise and air pollution. Heavy traffic may also be a sign of poor county planning which could lead to other problems.

Garbage collection
If your town does not provide garbage collection, you will have to either make regular trips to the town dump or pay a private garbage collector. The cost can be anywhere from $20 to $50 a month.

Sewers
Septic tanks work just fine and in rural areas you don’t have much choice. Most cities provide sewers, and in the suburbs, you may find both sewers and septic tanks. In general, sewers are more reliable and less expensive.

Water
If your property uses well water, is the water pure and plentiful? If you use city water, is it free (included in your property tax bill), or do you pay the city separately for the water you use?

Road service
If you buy in the northern snow-belt, how well will your streets be plowed in winter? You can ask your real estate agent, but asking the neighbors might provide more reliable information.

Fire department
Is the fire department staffed by full time employees or volunteers? How well are they equipped and how is the equipment paid for? Is equipment paid for by taxes or by contributions?

Library services
How large is the library system? Can books be borrowed from other branches? Are there:

• Special collections?

• A children's department?

• Library activities?

Check the library bulletin boards. A bulletin board full of notices indicates a lively community.

Social services
Does the town sponsor programs for senior citizens, teenagers, and children?

Recreation
Keep resale value in mind. You want a town with parks, clubs, theaters, and lots of community groups.

Accessibility to work
Most folks are unwilling to go beyond a one-hour commute. Towns surrounding major corporate headquarters rank high in desirability, and so do towns along major interstate highways.

Neighborhood checklist:
Audrie's checklist to compare neighborhoods can be found on the next page or on the web at: www.homebuyingtips.net/Location_chklist.htm

Audrie's Neighborhood check list

Name of neighborhood:________________________________________
Address of prospective home:___________________________________
Seller's Name:_______________________________________________
Seller's Phone:_______________________________________________

Real estate agent: _____________________________________________

Most buyers want to look at homes... they shop for a mortgage loan only after they've fallen in love with a house. Arguing against that approach is like shoveling water with a sieve but we keep trying because all the logic is on the side of shopping for a mortgage loan before you shop for a house.

For starters, you can find your dream house then see it get sold to another buyer while you wait for mortgage loan approval. Sellers may refuse to consider your offer because without a pre-approved mortgage loan you can't prove you have the financial resources to purchase a home. Worst of all, you can end up paying through the nose for a mortgage loan you could have gotten for thousands of dollars less if you had taken the time to shop.

Definitions:

Pre-Approved - A lending institution has processed your loan application and approved a specific mortgage amount. Be prepared to pay $150 to $400 as an application fee when applying to a mortgage lender.

Pre-Qualified - An unofficial estimate of the home you can afford. A "pre-qualified buyer" is one who should be able to get a mortgage loan big enough to purchase the home he or she wants to buy.

Audrie's Advice:
Get pre-approved for a mortgage loan before beginning your search for a home. If you don’t have the time to apply for a mortgage loan, at least pre-qualify yourself with Audrie's calculator at: www.homebuyingtips.net/Mortgage_size.htm
Or link to the calculator from: www.homebuyingtips.net/Mortgage_shopping.htm

Do your homework:

• Get familiar with mortgage terms.
• Take a hard look at your personal credit.
• Find Mortgage Lenders on the Internet.
• Find local Mortgage Brokers who meet the best rates offered on the Internet

When we say basic we really mean basic....
See our web page at: www.homebuyingtips.net/Mortgage_basics.htm

Definition
The word mortgage is often used improperly to refer to a mortgage loan. The mortgage is actually a piece of paper, like an IOU. It is the document you sign and hand over to the lender in exchange for a mortgage loan. The document called a mortgage, gives the lender the right to take possession of your property if you default on repayment of the mortgage loan.

Mortgage loans are used to pay the difference between the purchase price and the cash you have for a down payment.

A person with $15,000 in cash ------------- ------- $15,000
needs a $85,000 mortgage loan ------------------+ 85,000
to buy a hundred thousand dollar home --------$100,000

Mortgage lenders charge for the use of their money. The biggest fee is the interest, expressed as an annual percent of the loan and typically falls in a range between a low of 4% and a high of 12%.

Interest rates are rightly the most important thing about a loan, but because it is charged over the entire life of the loan, interest rate might not have as big an immediate impact as loan origination fees which must be paid in cash on closing day.

Mortgage loan origination fees consist of:

• Application fees
• Credit report fees
• Appraisal fees, and
• The mysterious points.

Application fees
Most mortgage lenders charge $150 to $400 as an application fee.

• Partly, this is to discourage applications from people who just want to find out how much they can borrow.
• Mainly, it is to cover the lender's costs and keep them from losing money on applications that don't become loans.

Credit report fees
Expect to pay between $25 and $75 for the lender to obtain copies of your credit report. Have you paid your bills on time? Your mortgage loan will not be approved if you have a poor payment history. This includes those annoying book clubs that kept sending you dunning letters for books you returned. No matter how unfair, any blemish on your credit report can cause the mortgage lender to refuse your loan request, or charge an outrageously high interest rate.

Before you apply for a mortgage:
Get a copy of your credit report and correct any errors before you apply for a mortgage. Experian (888-397-3742) and Equifax (800-685-1111) will both provide a copy of your credit report for under $10. You are entitled to a free copy of your credit report from any lender who refused you credit based on information in the credit report.

Appraisal fees:
Home appraisal fees range from $200 to $500 depending on the size and value of the property. For this fee the appraiser inspects the property and the neighborhood and gives his professional estimate of the property's market value. Why an appraisal ?

· To confirm that the house you are buying is worth the purchase price you have agreed to pay.

· The mortgage lender does not want to get stuck with a house worth less that what was loaned.

Points:
Mortgage lenders charge points as a way of getting paid for the work and expense of processing and approving a mortgage loan. Quoted as a percent of the loan, points are a form of interest that must be paid up-front at the time that you complete the purchase of your house (at the closing). One point is equal to 1% of the loan amount. One point on a $85,000 mortgage loan would be (.01 x $85,000) or $850. Two points would be $1,700.

Points are connected to the on-going interest rate for the mortgage loan.

• Higher points should mean a lower interest rate for the life of a fixed rate mortgage loan. If you have the cash to pay more points, the lender should give you a lower on-going interest rate.
• Lower points usually means a higher interest rate for the life of the loan.
• Beware of "no-point" loans. Zero points usually mean a higher overall interest rate.

To compare mortgage loans, one needs to combine interest rate and origination fees. This is what the annual percentage rate (APR) was created to do. The APR combines the base interest rates with the points and all other loan fees to produce a single interest rate. The APR is always higher than the base interest rate for loans that have points or fees.

Because they can’t see into the future, mortgage lenders believe they take greater risk when they accept a fixed interest rate for a long period. When we compared $85,000 mortgage loans at terms of 30 and 15 years, we assumed for simplicity that both loans were available at a 7.5% interest rate. In the real world, if a 30 year loan is available at 7.5%, a 15 year loan might carry an interest rate closer to 7.25%. In general, the shorter the term, the lower the interest rate, with the lowest rates available for one to three year loans.

Mortgage lenders charge lower interest rates for short-term loans because common financial instruments (such as Treasury Bills) provide easy means to forecast short-term interest rates, or at least protect against fluctuations in short-term rates.

Adjustable Rate Mortgage Loans (ARMs) take advantage of lower short-term interest rates by guaranteeing the interest rate for only the first few years. As you might expect, adjustable rate mortgage loans start out with an interest rate lower than a fixed-rate mortgage loan for the same amount. The catch is, as the word adjustable implies, the interest rate may change as often as every six months.

Few borrowers would accept a loan with interest rates that could increase without limit, so the Adjustable Rate Mortgage will usually specify limits called "caps" on how much the interest rate can increase.

• The annual cap sets a limit on how much the interest rate can increase in a single year.
• The life-time cap sets a maximum on how much the interest rate can increase over the life of the mortgage loan.
• Actual increases are based on changes in short-term interest rates (treasury bills or CD's) but cannot exceed the cap.

Lets take a look at how this would work for a 30 year Adjustable Rate Mortgage for $85,000 with an initial interest rate of 6.25%, an annual cap of 2% and a life-time cap of 7%

For the first two years the interest rate is locked in at 6.25% and the monthly payment fixed at $523. In the third year the interest rate is allowed to rise to 8.25% while the monthly payments rises to $638. However, and this is a big however, the interest rate on this loan will not increase beyond the initial 6.25% if interest rates on Treasury Bills and CD’s fall or remain the same as they were at the start of the loan.

Adjustable Rate Mortgage Loans have two big attractions for the average home-buyer:

• Lower monthly payments, and
• Larger loan amounts

Lower Monthly Payments
A buyer on a budget too tight to handle the $594 monthly mortgage payment required by a $85,000 fixed term loan, might be enticed to squeeze in the $523 initial monthly payments on a $85,000 adjustable rate loan. This buyer could be in big trouble if the monthly payments shoot up to $638 in the third year.

Larger Mortgage Loan Amount
Because mortgage lenders feel protected by an adjustable interest rate, many are willing to grant larger amounts on adjustable rate loans than they would make available on fixed term loans. For instance, a lender who offers a maximum fixed term loan of $85,000 to Jane Doe on a $120,000 house, might offer Jane Doe a $100,000 adjustable rate mortgage loan on the same house. The adjustable rate mortgage makes it possible for Mrs. Doe to purchase a house that an objective observer might say is beyond her means… which could be financially dangerous.

Consider an adjustable rate mortgage loan only if you:

• Understand how rising interest rates might impact your financial security.
• Have a good idea of how long you will be in this house or hold this mortgage loan.

How would rising interest rates impact your financial security?
The low initial monthly payments make adjustable rate mortgage loans especially attractive to first-time homebuyers, usually on a tight budget, but also to buyers who want to buy a more expensive home than they could otherwise afford. Unfortunately, some real estate agents and mortgage brokers encourage this type of over-borrowing.

Unless you are among the independently wealthy, don’t consider an adjustable rate mortgage loan unless you can answer the following questions with a resounding “yes!” 

• Can you afford higher mortgage payments, pay your other bills, and still save for retirement?

• Can you pay the highest monthly payment allowed on the adjustable rate mortgage loan for a full year? This is the payment you would have to make if the interest rate on your loan went to the lifetime interest rate cap allowed on the loan. Ask your mortgage lender or broker for this number.

• Is your job or profession rock solid, with high probability of increased income in the next few years?

• Will the next four years be free of new financial obligations such as children or taking care of aging parents?

How long do you expect to be in this house or hold this mortgage loan?
Our grand parents might have lived in the same house for their entire lives, but in today’s mobile society, the average American change homes every eight years. If you plan to be in your home for less than eight years, an adjustable rate mortgage loan might be the cheapest form of financing.

Why? Because the interest on an adjustable rate mortgage loan (ARM) is guaranteed at a low rate for the first two or three years. This initial low interest rate plus the cap on annual increases means that for the first five or six years, an adjustable rate mortgage loan is usually cheaper than a fixed rate loan of the same amount.  If you plan to hold onto your home for much more than seven years, a fixed-rate mortgage loan probably makes more sense, especially if you have trouble with fluctuating monthly payments.

Hybrid Mortgage Loans:
Hybrid loans address some of our concerns about adjustable rate loans.

A hybrid loan is a type of adjustable rate mortgage loan that has an initial period of three to five years rather than the two years standard in most adjustable rate mortgage loans. Because of this longer initial period, the hybrid loan has a higher initial interest rate than a standard ARM, but still lower than the interest on a fixed term mortgage loan.

If a $85,000, 30 year fixed term loan has an interest rate of 7.5%, a standard adjustable rate loan for $85,000 might have a initial interest rate of 6.5%, while the hybrid loan might carry an interest rate of 6.75%, somewhere between the fixed rate loan and the standard adjustable loan, but closer to the adjustable. If you plan to own your home for less than eight years, a hybrid mortgage loan will probably be cheaper than a fixed rate loan, and safer than a standard adjustable rate mortgage loan.

If you hate shopping, we sympathize, but unless you get a thrill from throwing away money, you need to shop …and shop for a Lender or risk paying tens of thousands more than you need to pay. At 7.5%, a 30 year $100,000 fixed rate loan costs almost $16,000 more than a similar loan at 7.0%. "Up-front" costs in points and fees can vary by thousands of dollars between lenders.

Our grandparents might have applied for a mortgage loan at the local Savings and Loan bank, but the mortgage industry has changed drastically as Savings and Loans have gone bankrupt or been absorbed into larger commercial banks.

Today, most mortgage loans are provided by mortgage banks, which are not really banks in the sense that they don't accept deposits and they don't offer checking accounts. Thousands of these mortgage banks compete for every mortgage loan, which (because they don’t have deposits, or any other huge pool of cash) they promptly sell to replenish their capital.

Apply for a mortgage loan at your neighborhood big-name bank and the loan officer will most likely offer you a loan from a mortgage bank. Almost all these mortgage banks use Fannie Mae (FNMA: the Federal National Mortgage Association) loan-evaluation criteria that aim to keep the borrower’s monthly "housing expense" below 33% of his or her monthly before-tax income. People with the same before-tax income tend to get the same mortgage loan amounts, but interest rates and up-front points and fees can vary widely.

Use Audrie's two step shopping method

• Find the best mortgage loan on the Internet
• Ask local mortgage brokers to match the best Internet rate

Step One: Find the best mortgage loan on the Internet

You can find out how much you can borrow at www.iown.com/index.htm or you can use Audrie's calculator at www.homebuyingtips.net/Mortgage_size.htm. You can shop for a mortgage loan at www.iown.com/index.htm or at the E-Loan web site at: www.eloan.com/  These sites will:

• Display their best rates for your situation

• Let you apply for a mortgage online

Get a list of mortgage lenders at MonsterMoving. www.monstermoving.com/Mortgage_and_Finance/Quotes/

Phone MonsterMoving lenders who offer the lowest annual percentage rates (APR), a number that combines the base interest rate with the points and all other loan fees to produce a single interest rate for comparison purposes.

Check the real estate section of Sunday newspapers for tables of mortgage lenders and their current interest rates. These tables might not include the lowest available rates, but newspapers are still a good and easy place to start even if you have access to more complete information on Internet sites.

Check with HSH Associates:
At 800-873-2837 or www.hsh.com/ , …HSH Associates publishes lists of mortgage lenders and current interest rates for most metropolitan areas. They charge $20 for their basic package, which comes with a booklet explaining pretty much everything a buyer needs to know about comparing mortgage loans.

Find a local Mortgage broker and ask him or her to match the best interest rate you found on the Internet. Finding a local mortgage broker:

• Ask friends who have recently bought homes.
• Get a referral from your real estate agent.
• Not working with a realtor? Call a local agent and ask for a referral.

If none of the above turns up local mortgage brokers, find some in the local telephone directory.

Mortgage Brokers
A good mortgage broker will dot the i's, cross all the t's and make sure your mortgage money arrives in time for the closing. A good broker also knows which lenders will be sympathetic to buyers with credit problems. For her services, the mortgage broker earns between .7% and 2% of the loan amount ($700 to $2000 on a $100,000 loan)

A mortgage broker is a must for people with:

• Credit problems (which must be explained).
• Less than 10% of the purchase price for a down payment (most lenders avoid loans over 90% of the property value).
• No time to shop for a mortgage loan.

What if you can’t find a local mortgage broker?
It’s okay. Most Internet mortgage lenders are reliable, and a good real estate agent can provide local input and makes sure the check for your mortgage loan arrives in time for the closing.

Items on this list might drive you to ask if your constitutional right to privacy is being invaded. Don’t bother, the list has met and conquered all legal challenges. The good news is that the entire list most likely does not apply to you, not unless you are simultaneously getting a divorce, completing bankruptcy papers,  and being relocated by your employer. The bad news is that the list of items that applies to you is still long and very personal.

We might not like giving up copies of our bank statements, pay stubs, and tax returns, but lenders need these to decide if we are dependable, good risks for a mortgage loan.

Required documents:

• Sales contract on the home you want to purchase

• Sales contract on your current home, if applicable

• Name and address of residences for the last 2 years

• Name, phone number and address of current landlord

• Pay stubs showing your name, year-to-date earnings and Social Security #

• Last 2 Years W-2's, showing annual income

• Complete tax returns for last two years

• If self-employed; Year-to-Date Profit and Loss Statement

• Divorce or separation agreement if you pay or receive child support or alimony

• Most recent statements on outstanding loans and credit cards

• Bank statements for last 3 months on all accounts

• IRA/Keogh/401 K/Profit sharing statements for last 3 months Employee’s relocation agreement if you are being transferred into the area

• Bankruptcy papers if applicable

Permissions to inspect your finances
Before offering a loan, mortgage lenders often ask for your written permission to talk to your employer, banks and stock brokers. This request usually means you have been approved for a loan pending confirmation of what you already told them.

If turned down for a mortgage loan
It might be a good thing if the reason was excess debt such as on credit cards. Look at the rejection as a wake up call. Credit card debt with horrific interest rates approaching 20%, is a serious drag on any one’s ability to ever purchase a home.

Pay off the credit card debt, and consider asking Mom and Dad to cosign your loan. You might also choose to set your sights lower. You might actually qualify for a mortgage loan to buy a less expensive home.

Strolling through homes is the fun part, so much so that we often loose track of our purpose. Be sure to take a notebook and for starters, record the address, price, number of bedrooms and owner's phone number. A plan that works well is a two pass approach where you eliminate homes on the first viewing then go back for a second look at the two or three homes you like best. A half hour should be enough time to view a home on the first pass.

If you stumble onto a house you love, ...Strangle your emotions! Unless you want to pay more than you have to, don't let the Seller know you would "die" to have her kitchen.

Try to evaluate your future home in terms of what will work for you, your family and even your pets.  Things to look for:

Basements:
Basements should be dry. Spend your viewing time looking for signs of moisture on the walls or ceiling. Windows, even tiny ones as long as they let in sunlight, are a plus. Also look for a direct exit to the outdoors. A full-size vertical door is best but stairs leading to a horizontal or slanted door is fine.

Bedrooms:
The master bedroom is a major selling point, but be sure to examine each of the smaller bedrooms. Look for closet space, wall space for furniture arrangement, and easy access to a bathroom.

Attic additions and basement bedrooms are a plus if they provide five bedrooms in a four bedroom price range. If the fourth bedroom is an attic addition with sloping ceilings, or located in the basement, the home should sell for less than homes with four regular bedrooms.

Closets:
Everyone loves walk-in closets especially in the master bedroom, but don’t forget to check for the following features:

• A front hall closet where you can hang a guest’s coat

• A hallway closet for sheets and blankets and another in the bathroom for towels

• A broom closet near the kitchen

• A pantry in the kitchen

• A coat closet near the back door or near the entrance from the garage

Dining Rooms:
If there is a formal dining room, it should have a direct doorway to the kitchen and another to the foyer or the living room. Subtract from your offering price if the dining room is separated from the kitchen by stairs or a hallway.

Direction:
Is the house facing North or South. A southern exposure might lower heating bills. Note which rooms will fill with afternoon sun, which will get morning light, and which might remain dark all day.

Driveways:
Concrete driveways add to resale value; so does a black top surface. Crushed bluestone is less acceptable, but better than a plain gravel driveway. Bluestone and gravel are muddy in wet weather and difficult to clear in the winter.

Entranceways:
The front entranceway creates the first impression and is an important factor in the salability of a house, but after the first few weeks most buyers use the back door or garage entrance almost exclusively.

In northern states, the "ideal" back door opens into a mud room, a back hallway, or cubicle where there is space to hang coats and remove wet boots. In the sunny South, back doors often open directly into the kitchen, which is better than opening into a carpeted family room.

Fireplace:
Fireplaces are a plus even in the South and South-West where owners might never light a fire.

Garages:
An attached two-car garage is the best bet, and even better if it has a few extra feet of width for storing garden equipment and bicycles. A garage located under the house is less desirable because it means climbing a flight of stairs to get into the house, this can be a pain when unloading groceries from the car.

Heating:
The main heating consideration is fuel type. Ask the owner or real estate agent if the house is heated with electricity, gas, or oil.

• Electric heat might be the most convenient, but it is also the most expensive.

• Gas heat combines convenience with low cost but is not available in some areas.

• Oil heat requires periodic truck delivery and might not make it to your home in extreme weather.

The second consideration is heating method (heat pump, steam radiators, circulating hot water, forced air, and baseboard).

• Circulating hot water delivers a moist heat, which is better for those with allergies.

• Forced air delivers heat fastest, within ten minutes of flipping a switch.

• Radiators take longer to heat up a room but they are cheap to operate.

• Heat pumps are fine in the South, but often don’t deliver enough heat to keep Northerners warm in the winter.

In House Traffic Patterns:
Getting from one room to the next should be easy and logical. No one should be trapped in their bedroom because the only way out is through another bedroom, or a dining room full of strangers. Only the kitchen, and maybe the family room are acceptable walk-through rooms. All other walk-through rooms are a detriment to resale. Check the following before making an offer on a house:

• How do you get from the backyard or porch to the kitchen? Anyone on the deck or in a lawn chairs will want to get to the refrigerator easily, preferable through a door directly into the kitchen.
  

• What is the path from the kitchen or family room to the most often used bathroom? A bathroom off the foyer is convenient for guests but not for muddy children who must walk through the dining room to wash up.
  

• How do you bring groceries and other items into the house? Is it directly into the kitchen from the garage, or up a long stairway?
  

• Is the master bedroom and bath on one side of the house with the children and guest bedrooms on the other side? This works well for couples with older children, and is a must for unrelated single buyers, but couples with toddlers might prefer bedrooms closer to their own.

Kitchens:
You don’t need us to tell you that eat-in kitchens are big pluses, that center islands are popular, or that slate and tile countertops are preferred over Formica. What you might forget is to look for a broom closet, or ask where mops, buckets and, brooms will be kept. If there is a door to the outside or to the garage, is there a coat closet or a place to put wet shoes?

Laundry Facilities:
A basement washer and dryer is better than no laundry facility, but no one loves carrying laundry up and down cellar steps. A separate laundry room near the kitchen adds the most value to a home, especially if there is enough space for an ironing board. Some Buyers prefer a laundry room on the same floor as the bedrooms, but jeans in a dryer can be awfully loud at night.

Many builders place a washer and dryer in the kitchen, behind folding doors. This does not usually hurt resale value, but if you don't like having dirty laundry in the kitchen, lower your bid on this type house.

Pool:
Buyers in northern states will not want to maintain an above-ground pool that can only be used a few weeks a year. In warm weather areas, a pool is a big plus except for buyers with small children who sometimes worry about safety.

Windows:
Self-insulating, or storm windows can save big dollars on heating bills during northern winters. Don’t worry if you can’t tell a self-insulating window from a sun screen, ASK the owner or real estate agent about the windows and their insulating properties. Screen windows without insulation are okay in the sunny South, except for oceanfront properties where hurricane shutters are a big plus.

On each viewing look for the following problems and make notes

• Water pressure: Turn on faucets on the top floor. Make sure water flow is adequate.
• Heating and Air: If summer, is it cool on the top floor? If winter, is it warm on the ground floor?
• Moisture: water stains on ceilings, damp basement walls or musty odors are all signs of possible water damage.
• Cracks in plaster walls might mean nothing, but all cracks should be investigated by a professional, especially cracks around fireplaces or in foundation walls.
• Uneven floors: floors that are not level could mean the house is sinking. It might have done all its settling in the first year and has been stable since, but have it checked anyway.
• Loose doors: Look for light coming in around and under exterior doors. These might need insulation or refitting.
• Alignment: Pay attention to doors not perfectly vertical. If you can see more space between a door and its frame at one end than at the other, the door is installed improperly and will eventually stick or fail to lock.
• Sticky doors & windows: Hard to open windows are not a serious problem, but it's a good negotiation point. Ask for a few hundred dollars off the price or some other concession from the seller.
• Tilted stairways: Like uneven floors, tilted stairways indicate movement in the foundation. Make a note and discuss with your inspector.

The above defects are out in the open for attentive buyers to see. These can be used to eliminate homes from consideration but remember that some defects are hidden behind the walls, on the roof or out of site inside the furnace. A professional inspector is required to spot signs of hidden defects.

Some people only consider new homes. They don't buy used cars so they're not interested in pre-owned homes.  Here are some good reasons to prefer new homes:

• No asbestos, lead-based paints, formaldehyde or other common building products recently found to be hazardous.

• Cheaper to maintain due to the latest in energy efficient heating, cooling and insulation technology.

• Zero first-year maintenance for roofing, heating, cooling and major appliances covered by warranties.

• Sufficient wall and floor outlets to accommodate high tech goodies: from DVDs and espresso machines to microwaves and DSL lines.

A new home should be inspected before the walls are closed up, while structural problems are out in the open.

Before making an offer on a new house built by XYZ Homes visit an older development built by XYZ Homes and ask owners if they would buy from XYZ Homes again.  Okay, you're shy, but your home is the biggest investment of your life! Drive slowly and stop where someone appears to be home. You'll be surprised at how helpful strangers can be. If XYZ Homes had to be sued and forced by courts to keep their promises, owners will gladly tell.

New homes can be great but they also have their the down side:

• The professionally decorated, beautifully landscaped model home that you see is not what you get. Aside from the decorator furniture your home is without the appliances and quality carpets that are "extras" not included in the price.

• Prices are less negotiable. The developer can't give you a deal because that would undercut appraisals on other homes in the development. Negotiations are effectively limited to "upgrades" on things like flooring and appliances.

• Hidden operating costs: Homeowners are usually charged association dues for maintenance of amenities such as pools, tennis courts and health clubs.

• Lost leader: A bare bones home is priced attractively low, but basic "upgrades" such as good carpets, wood floors, and ceramic tiles are more expensive than if purchased from Home Depot or similar home supply stores.

• Price per square foot is relatively high. For the same money you can get a larger pre-owned home.

The best homes in America are pre-owned, but you don't have to live in the White House to find big advantages in older homes.

• Lower purchase price: prices are not only more negotiable, they start lower than prices for new homes of similar size.

• Established neighborhoods: schools, transportation, shopping and entertainment can be examined right now.

• Builder errors have been detected and resolved: no need to guess how an old home will age.

• Cheaper to move into: window shades and blinds are in place, landscaping, patios and fences are complete.

• Style and craftsmanship: plaster walls, parquet floors, wood paneling and 12 foot ceilings are prohibitively expensive in a new house

• More expensive to operate: Major appliances, plumbing and heating systems will need some maintenance during the first year.

• Lack of modern insulation materials means bigger gas and electricity bills to heat and cool.

• Not enough bathrooms and electrical outlets.

• Beware of charming old homes located in not-so-charming neighborhoods: these can be almost impossible to sell.

Buy Homes that can be Sold at a Profit:
Unless like the Queen of England, you are certain to live in the same house for the rest of your days on Earth, you need to buy a house that you can sell at a profit. Sure, you might have no plans to ever move, but you could get a job offer in sunny Arizona that is too good to turn down, and even if you don’t the odds are you will keep your current house no more than eight years.

Like most of us, your home is likely to be your single biggest source of wealth, so the idea of picking a home that can be sold at a profit should be close to the top of your selection criteria. Yes, you want a house that fits your family’s life style, but before making an offer to buy a house, consider this: Will the things you love about this house make it easy to sell ?

For instance:

• Your gourmet husband loves the commercial six-burner stove.

• Your kids love the cement basketball court that covers the lawn.

• You love the light coming through the big bathroom windows.

Will the average buyer want these things when you are ready to sell? Don't buy this house if the honest answer is no.

Homes outside the prevailing norms of a neighborhood are hard to sell. Don't buy:

• The only brand new house in the middle of a tract of old homes

• A house bigger than all the others on the block

• The best maintained home in the middle of a dilapidated block

• A three story home that towers over its single floor neighbors

• A single family home in the midst of multi family rental units

• A luxury condo on the fringes of a ghetto.

Avoid neighborhoods and blocks filled with "for sale" signs, especially when sales are driven by plant closings or lay-offs. If you love the house, take the time to walk through the neighborhood, …on foot!

Good real estate agents are good teachers: they explain the home-buying process step by step. He or she knows your target neighborhoods and can:

• Find a house that meets your needs
• Tell you what the house is worth
• Recommend mortgage brokers and home inspectors
• Coordinate the closing

The best real estate agents work full time and they specialize. They restrict themselves by neighborhood and type of property, so they get to know each block or sub-division. A good agent is a key asset in finding the right home but always remember that agents work hard to make a living and they don't get a dime until a home is sold:

• They can't afford to spend time with people who just love looking at homes.
• They need clients who are ready and able to buy.

Clients who know what they want get the best service. Clients with pre-approved mortgage loans get the best service of all.

Finding a good agent:
Audrie found her first agent by responding to a newspaper ad for a three bedroom house near Emory University in Atlanta. The agent who placed the ad became a friend but knew little about real estate, ...this is the Russian Roulette method of choosing an agent.

Get referrals for agents working in the areas where you want to live (you want to interview at least two good agents). Sources of referrals:

• Anyone who has recently purchased a house in your target neighborhoods. Ask why they liked their agent.
• People in related fields: ask your lawyer, tax accountant and insurance broker about real estate agents they know.
• The agent who sold you your current house: she might know a top agent in your target neighborhood.
• Your church, synagogue or mosque: ask members who have recently purchased a home.
• Your employer or fellow employees who live in your target neighborhoods.

Not enough referrals?
Find agents on the Internet at www.homegain.com/ under “find and compare Realtors,” or at www.realtor.com/ under “find a Realtor.”

Questions to ask prospective agents:
How long have you been a full time agent? There are many good part-time agents, but full time agents tend to know more about neighborhoods, prices, and good sources of mortgage loans.

Will you work with me personally or will I have to work with an assistant or associate ? Even the best agents can have idiot assistants.

Will you be representing me, the seller, or both ? A few states have experimented with “Buyer’s Agents,” but in most cases you will be dealing with an agent who legally represents the Seller. This is not a bad thing as long as you understand that the agent is obligated to get the highest possible price for the property and cannot press the Seller to reduce his or her price. The agent can compare the Seller’s asking price to recent selling prices of similar homes, but don’t look to your agent for advice as to how low the Seller might drop his price.

How many homes have you sold in my target neighborhoods ? Agents who have sold homes in your target area can give better advice about prices and other things about the neighborhood.

How many clients are you currently representing ? The best agents have the most clients, but you don’t want an agent who has little time to consider your needs.

How familiar are you with searching for homes on the Internet ? The Internet is an increasingly important source of information about homes for sale. Agents not familiar with the Internet might be “out of touch” and unable to provide the most current information.

Select an agent who:

• Is a successful full time agent.
• Has sold homes in your target neighborhoods.
• Is comfortable searching for homes on the Internet.
• Communicates with you clearly
• Has a personality you enjoy

"Playing the field" and using several agents can be counter productive:

• Agents exert minimum effort when they know the commissions could easily go to another agent.
• Agents work their butts off when finding the right house means getting a paycheck.

How to work with real estate agents

Buyer's who know what they want get the best service because:

• Real estate agents don't get a dime until a house is sold.
• They have families to feed and can't afford to spend hours with people who just want to look at houses.

Do your homework:
In Section one, (page 5) you should have nailed down how much you can spend to purchase a home, and perhaps gotten pre-approved for a mortgage loan. If you did not have time to get pre-approved, you can pre-qualify yourself with Audrie's calculator at: www.homebuyingtips.net/Mortgage_size.htm

In section two, (page 15) you should have selected the neighborhoods where you want to live and done a reality check by searching Internet sites such as Realtor.com to make sure homes in your price range can be found in the selected neighborhoods.

Prepare a written list of your requirements for a home. If you really want a second full bath or a finished basement be sure to tell the agent. Below are some items to consider for your personal list.

Style 		     	Colonial, contemporary, ranch, split level

Age		        New, since 2000, since 1950…

Construction 	        Frame, brick, brick front, masonry…

Interior square feet    150, 2000, 3000, 4000…

Property size in acres  1/3, 1/2, 2/3, 1.0, 2 & up…

Bedrooms 		2, 3, 4, 5, 6…

Full baths 		1, 2, 3, 4…

Half baths 		1, 2, 3…

Garage 			1 car, two car, three car…

Extras 		        Deck, finished basement, security system, 

Air conditioning 	Central, none, window

Heating 		Gas, oil, electricity, radiators, forced air…

Sewage 			Municipal sewers, septic tank…

Water 			Municipal supply, well…

Elementary school 	Walking distance, on bus route…

High school 		On bus route, within 15 min. driving

Grocery shopping 	Within 5 minutes drive, 10 minutes

Fast food 		Within 10 minutes drive…

Major shopping mall 	Within 20 minutes drive..

        

Most real estate agents have computer access to the local Multiple Listing Service (MLS), a comprehensive list of homes for sale, which they can search on criteria such as:

• Price range
• Age and locations
• Minimum number of bedrooms and bathrooms
• Garage requirements

Ask your agent about school quality and crime statistics for any neighborhood he or she recommends. Push your agent by having him take you to see homes you find on the Internet and in newspapers.

Have a plan:
Limit yourself to viewing no more than four or five properties in one day and avoid starting on one side of town then crossing to the other side and back again. Try to concentrate your hunt to a single neighborhood in one day. That way you can focus and get a good idea of comparative value.

Whenever possible have the agent drive you around in his or her car. That way you are free to view the neighborhood, take notes and ask questions while the agent drives.

Found a house you like ? Ask your agent to: 

• Provide a comparable market analysis (CMA) to evaluate the Seller's asking price. You can see a sample CMA on page 47 or on the web at: www.homebuyingtips.net/Comparble_CMA.htm
• Recommend local mortgage brokers who might get you a lower rate or bigger loan.
• Estimate closing costs.
• Recommend a lawyer in states where it is appropriate.
• Recommend a professional home inspector.
• Provide you with forms to make a formal offer to purchase.

Please notice that we did not suggest asking your agent’s opinion on what price to offer for the house. A good agent works hard on the Buyer’s behalf, he carts you around in his car, answers your questions and becomes a partner in your search for a house, but he or she legally works for the Seller. Except for the tiny number of Buyer’s agents, real estate agents are legally obligated to get the highest price for the Seller.

Do not …ever …count on your agent to fight to get you a lower price. Negotiating price is the Buyer’s job, your job.

Home Buying Inspections

The time to discover expensive defects is before you buy the home so hiring a professional inspector has become a common practice. Sellers and real-estate agents might not be eager for professional inspections but they assume that you will want the home inspected.

Bring in a professional inspector only after you have made an offer to buy and your offer has been accepted. On average, a professional home inspection should cost about $250, but could rise to $500 in localities with very large and expensive homes. This might seem expensive, but even $500 is cheap if it keeps you from investing $100,000 or more in defective property.

The inspector’s main job is to point out potential disasters and major repair requirements. You might still buy a house that needs a new roof, but the inspector’s report gives you a basis to negotiate a lower price or ask the seller to make repairs.

Even brand new homes often have major construction flaws.
The best builders are expert coordinators who choreograph teams of carpenters, plumbers, roofers and painters. Unfortunately, when rushed to meet deadlines carpenters sometimes fail to wait for plumbers. Plumbers are forced to cut through structural beams to lay their pipes... heating & air people do the same for vents.

• A new home should be inspected before the walls are closed up, while structural problems are out in the open.

Finding and hiring a good Inspector:
The Home Inspector Locator at www.homeinspectorlocator.com can help in finding a local inspector. You can also find inspectors at the American Society of Home Inspectors at www.ashi.com/find/ and the National Institute of Building Inspectors at www.nibi.com/members/members.htm

• Interview local inspectors and look for those who will explain his or her findings in plain English, including written descriptions of the property’s structural and mechanical condition.
  
• Ask to see a sample report and eliminate those that are just checklists. You want an inspector that explains his findings in plain English.
  
• A full time professional inspector is best but not necessary if he or she has good credentials, such as experience in construction, engineering, plumbing or insurance-claim adjusting.
  

• You want an inspector who does most of his or her work in the area where you want property inspected: i.e. someone familiar with local zoning rules and local problems such as mud-slides or floods.
  

• Your inspector should agree to at least a two hour inspection where you accompany him and he answers all your questions.

The Buyer should personally manage the professional home inspection.
Why? Because real estate agents don’t want to hear deal-breaking news. Even the best intentioned agent is motivated to close a deal so he or she can get paid. The Buyer should:

• Walk through the home with the inspector and ask questions.
• Get informal price estimates for repairing problems.

Working with your home inspector will help you become acquainted with the property. If you have never seen a home heating plant and have no idea how one works, this is a good opportunity to ask questions and learn.

Words you might find in your inspector's report:

• Bleedout. Sewage from a septic system is rising to the surface rather than draining into the earth.
• Bridging. Crisscrossed pieces of wood wedged between supporting beams to distribute stress and reinforce the beams.
• Circular Pump. The pump on a hot-water furnace boiler that moves the water through the heating pipes and radiators.
• Eave. The extension of a roof beyond the walls of a house.
• Efflorescence. White, fuzz-like powder that forms on basement walls when moisture is present behind the walls.
• Effluent. Treated sewage from a septic tank. This is mainly bad smelling water, the same stuff referred to under "bleedout."
• Flashing. Material used at roof angle changes or joints (such as where the chimney protrudes through the roof) to prevent leaking.
• Flue. The passageway in the chimney through which smoke rises to the outside air.
• Joists. Beams that rest on the outer foundation or walls to support the boards of a floor or ceiling.
• Lolly Column. A steel column filled with concrete that supports a girder or some-times other floor beams.
• Leader. A downspout or vertical pipe that drains water from a roof.
• Riser. The vertical part of a step.
• Sash. The framework in which panes of glass are set in a window.
• Sheetrock. Plasterboard or drywall.
• Splashblock. Stone or concrete formations under the downspouts that take water away from the foundation.
• Sump. A pit in the basement floor or crawl space that collects water to be pumped out.
• Tread. The horizontal part of a stair that you step on.
• Vent Pipes. Pipes that allow air to be vented outdoors from the plumbing system.
• Window Well. An excavation around a cellar window.

Negotiating a Price

Okay ! You found a house you love in your target neighborhood. Now what? Let's assume some numbers so we can discuss the situation:

You found a 4 bedroom house at 134 Harbor Pl., 10 years old and 20 minutes from your job. · The asking price is $155,000. · You have $33,000 cash in the bank. · You've been pre-approved for a $120,000 mortgage loan. · You've done your homework and set your price range at $130,00 to $150,000 At $155,00 the asking price is $5,000 above your price range but you really want the house. You could offer your top price of $150,000, but what do you do if the Seller refuses that offer ?

The first step is to ask your real-estate agent to prepare a Comparable Market Analysis (CMA) with recent selling prices of homes comparable to the one you want to buy. Why? Because the most effective tool to bring the sellers' price down is knowledge of how the Seller's asking price compares to the selling price of similar homes in the same neighborhood.

Sample Comparable Market Analysis (CMA): Our target home at 134 Harbor Place is listed at the top followed by five similar homes recently sold in the same neighborhood. (This example can be found at: www.homebuyingtips.net/Comparable_CMA.htm)         

www.homebuyingtips.net/Location_pricetrends.htm. (Domainia.com and Realtor.com are not much help for Buyers in Texas and the few states that have followed the Texas lead and denied real estate selling-price information to the public. In Texas and its imitators, only real estate brokers or agents can get selling-price information.)

Okay, you know what price you're willing to offer.
- Negotiating Tips -

Be flexible.
Set limits, but do not be so rigid that you cannot respond to a reasonable counter offer. Avoid take-it-or-leave-it attitudes that can cause you to lose a property that you really want over a few dollars a month, which is what financing an extra $600 in sales price would cost you.

Keep the amount you are willing to pay absolutely secret.
Your initial offer will be rejected if the Seller knows or even suspects you are willing to pay more. Tell no one, and especially not your agent the real maximum amount you are willing to pay for a particular house.

Make your desire clear.
The Seller needs to know that you are not making bids on other homes, so make sure he understands that you want his house. The seller must see you as a serious bidder who wants to own his house, but at a fairer, more affordable price.

Ask for concessions.
For each increase in your offering price, ask the Seller to throw in something. Ask for anything that makes sense, a lawn mower or refrigerator, or ask him to paint the garage or pay for your professional home inspector. The Seller may reject your bid but agree to let you have the lawn mower at their higher price. Buyers who gradually increased their bids in $400, $750 or $1,000 increments got the best results, especially when they asked for small concessions with each bid.

Consider the value of time.
If you have been pre-approved by a mortgage lender, point out to the Seller that you can close quickly. This is an especially strong point when the Seller is under pressure to sell quickly. If the Seller is in negotiations for another home or has to relocate for a new job he won't want to wait a month or more to find out if another Buyer can qualify for a mortgage loan.

Evaluating the Asking Price
Our Sample House at 134 Harbor Pl is 10 years old. If our sample house was brand new we would have zero to little room to negotiate price. The reason is simple. Most new homes are pre-appraised and the builder's financing is tied to those appraisal values. A builder with fifty homes cannot reduce his price on one home without risking the appraised value of the other forty-nine homes in his development.

Individual homeowners seldom have a home appraised before putting it on the market, instead, prices are set based on the purchase price originally paid by the Seller, plus improvements he has made and how much cash he needs for his next home.

True market value is determined by what buyers are paying right now for similar homes in the same neighborhood, so the first step is to get the prices of similar homes recently sold in the target neighborhood. As mentioned above, the best source of comparable selling prices is a Comparable Market Analysis (CMA) prepared by your real estate agent.

Before you start negotiating make sure you have:

• A list of estimated closing costs as explained on our web site at: www.homebuyingtips.net/Closing_Costs.htm. Property inspections for a $155,000 home can cost $200 to $250, title insurance can cost $50 to $100, and mortgage related closing costs easily top $3,000. For most buyers, getting the seller to pay $400 in closing costs is well worth an additional $1,000 in purchase price (because the $1,000 is financed over 30 years at a cost of a few dollars per month, while the $400 must come out of the buyer's cash-depleted pocket).
  
• Your concession list: a written list of items on the property that need or will soon need repair. For each increase in your bid ask the seller to repair an item on this list, or pay for one of the above closing cost items. When the seller says your bid is too low, mention some (but not all) of these items.
  
• A list of features that might narrow the number of potential buyers for the property (even if the feature makes the home ideal for you). For example, the home is located across the street from a school or near an industrial complex. These are discussion items. You want to point out that while you might love the house, a noisy school-yard can mean lower resale values. As a chemical engineer, you love the easy commute to the nearby plant, but most buyers will want to avoid a potentially toxic industrial complex.
  
• An accurate estimate of how many dollars in monthly payments it will cost you to increase your bid by $500 or $1,000 (you can get this from our mortgage calculator at: www.homebuyingtips.net/Calculator_monthly_incre.htm).When the seller makes an attractive counter-offer you should be able to accept on the spot and get his or her signature on a contract. If you have to go home to your calculator or sleep on it, the buyer might change his mind or sell to another bidder.
  
• A negotiating diary: any notebook will do

Some additional negotiating tips...

Size up your Seller by finding out his reasons for selling.
Some reasons for selling put more pressure on the Seller than others. For instance, a seller who has accepted a job transfer to another state might not have time to wait for another buyer. If the owner has died, his or her heirs might not feel like quibbling over details. Homeowners going through a divorce might also be anxious to sell.

Find out if your Seller has signed a contract to purchase another house.
…or even better, has he already purchased another house? A Seller that has committed to another house is more likely to concede to the Buyer's demands.

Don't waste time with Sellers who won't negotiate price.
A Seller who won't discuss his asking price in relation to similar homes in the neighborhood is not a serious Seller. At best he is ambivalent about selling, or just wants to find out how much he can get for his property.

The Seller is not the enemy.
Engage him in negotiations. Talk to him! If his Counter Offer is $10,000 above your offering price, get an explanation. Has the Seller checked neighborhood selling prices ? Is there a major disagreement about the condition of the property ? (Might your inspector be wrong about the property needing a new roof?)

Don't waste time making low-ball Offers.
An Offering Price at the low end of selling prices for the neighborhood is okay. Anything much below the range of neighborhood selling prices tags the Buyer as "just fishing."

Preparing your Offer to Purchase

On the next 10 pages we review in detail an Offer to Purchase Agreement and a Seller’s Counter Offer. In filling out your own Offer to Purchase, remember that while most Sellers are emotionally committed to their asking price, they give less thought to closing costs and repair costs.

Getting the Seller to pay Closing costs and Repair costs can be worth more money than any reasonable reduction on the price of the home. If you are short on cash, paying an extra $1,000 in purchase price (which will be financed over 30 years at under $10 per month) might be better than paying $495 in cash right now for closing costs.

Your initial offer should assign all closing costs to the Seller.

Closing Costs associated with a mortgage loan:
By tradition in most states, the Seller pays the Buyer's costs in obtaining a mortgage loan. These range between 2% and 3% of the purchase price. Make sure your Offer charges these costs to the Seller.

Typical mortgage loan costs for a $155,000 house        

      Appraisal Fee       $310

      Credit reports       240

      Loan points        2,450

      Underwriting Fee     300

        Total:            $3,300

Other Closing Costs:
"Other" closing costs range between .5% and 1.5% of the purchase price and include items such as fees for the Attorney, Home inspector, and Title-search company.

Your initial Offer should assign these costs to the Seller. There is no tradition for the seller to pay these costs, but it can’t hurt to ask.

Other closing costs for a $155,000 house:

        

     Attorney Fees             $450 (zero in California)

     Property inspections       220

     Title Search               155

     Title Insurance             75

     Document Preparation        45

     Total:                    $945

        ($495 in California)

Counter Offer

Closing the Deal

As the days dwindle down towards closing there are a host of events for the Buyer to manage. This is when the time you put into selecting a good real estate agent really pays off. The best agents can explain and lead you by the hand, and even do some of these chores for you.

The Events:
Appraisal: The Mortgage lender will send a real estate appraiser to determine the value of the home. If the appraised value is below the agreed sale price, the lender will not provide a mortgage loan.

Property Inspections: Get your inspections done early so that seller will have time to make any needed repairs. This includes inspections for termites, a roof inspection and a general inspection of appliances, air conditioning, heating, electrical system, and plumbing. For a new house, inspections should be done before all the walls are closed, and again when walls are up and appliances are installed. If Buyer and Seller/Developer are unable to agree on repairs, the deal is off.

Seller's repairs: Make sure the Seller has made all agreed repairs, and that the work is of acceptable quality. The Seller must either make the repairs or pay for repairs to be made by the Buyer. Any incomplete repair should be accounted for on the Settlement Statement by a credit to the Buyer.

Final mortgage loan approval: The Buyer should follow up with the mortgage lender or broker and make sure a check for the mortgage loan will be available at the closing. Mortgage documents and check should be delivered to the Closing Attorney, Escrow Agent or Title Company officer prior to closing day or the deal is off. If mortgage loan approval is late, the Buyer must get the Seller’s agreement to a postponement of the closing.

Get Warranties and Instruction Manuals: Remind the Seller to gather all warranties and instruction books for the home’s appliances and systems. If you don’t get these documents before or at the closing, you will probably never get them.

Notify Utilities: If you want to have heat and electricity, be sure to notify electricity, telephone, water, trash and other services that you will be moving in on the closing day (or whatever other date you and the Seller have agreed) and you want all utilities transferred from the Seller’s name to yours.

Get a copy of the settlement statement: The settlement statement is summary of all monies paid and received by the Buyer and the Seller. Review it with your real estate agent and question anything you don't understand. Pay special attention to amounts "Paid from Borrower's Funds." (The settlement Statement refers to the Buyer as the "Borrower" because the Buyer is borrowing the mortgage loan amount.)

The Closing

Closing day is typically 30 to 45 days from when the Seller and Buyer agreed to terms and signed a final Purchase Agreement. In most eastern states the closing is held in the offices of the Seller's attorney. The mortgage lender's attorney is more often the host in south eastern states, while many western states have Escrow Agents or Title Company officers performing the tasks of the closing attorney.

On closing day, the Closing Attorney or Escrow Agent will Collect all moneys paid by or on behalf of the Buyer; this includes the down payment, the cash deposit, and most importantly the Buyer’s mortgage loan. The Closing Attorney pays off any balance on the Seller's mortgage loan, pays all outstanding taxes, utility bills, and all other closing fees including his own. He then gives the remaining money to the Seller and transfers the deed to the Buyer.

The Settlement Statement is the main focus of attention on Closing day. The only way to avoid being in a fog during the closing is to get a copy of the Settlement Statement at least a day before the closing. Review each item with the help of your real estate agent and demand changes if items the Seller should pay have been charged to the Buyer.

On the next page we present a sample Settlement Statement. To review the document it is helpful to remember that the main objective of a Settlement Statement is to summarize moneys received and moneys paid out.

Moneys Received.

• Lending institution's check for the new mortgage amount
• Buyer's check for the down payment
• Buyer's binder or earnest money deposit

Together, the above should at least equal the agreed selling price.

Moneys Paid out.

• Outstanding balance on the Seller's current mortgage
• Fees to real estate agents, if any
• Closing costs (see Settlement Statement).
• Cash to the Seller.

Real Estate Settlement Page One