Buying a Home? Home Buying Tips
These home buying questions and answers supplement the FAQ on this site. These are specific to mortgages and to home buying. Please also visit the Frequently Asked Questions and the linked pages here for more detailed discussions on the various topics.
Questions Home Buyers Ask
Some frequently asked questions
How much house should I buy? How much can I afford to pay when buying a home?
The
answer to this has a lot to do with your income and the amount of your
debt load. As a rough rule of thumb, most home buyers purchase houses
that cost between 1 1/2 and 2 1/2 times their annual income. For
example, a home buyer earning $ 40,000 per year would buy houses
costing between $ 60,000 and $ 100,000. There is, however, a degree of
variation due to the individual market prices of the area in which you
are interested. In some areas, there may not be houses available within
that range, so you may need to spend a bit more. In general, however,
your monthly mortgage payment cannot exceed approximately 28%-29% of
your gross monthly income. Your total debt payments (car payments,
credit card payments, etc. plus the monthly mortgage amount) cannot
exceed approximately 36%-40% of your gross monthly income. These ratios
will depend on the type of mortgage for which you are applying. For
more information on mortgages and to begin the application process, see
the section devoted to finding a mortgage.
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Do I really need to use an Agent to buy a house?
No.
Should you use an Agent to buy a house? Probably, for two reasons.
First, in virtually all situations, the buyer does not pay a
commission, so the services of an Agent working for you are paid for by
the seller. See important information on buying a house on your own or with an agent. Second, without an Agent, you may be missing valuable representation of your interests. See the Agency
page for more information. Many visitors to this Web Site skip the
information on the Agency page and may be leaving themselves
unrepresented.
How do I know if I am getting a good deal on a mortgage?
In
a word: Compare. There is a good deal of variation in the mortgage
market, not only from week to week, but from lender to lender. Many
newspapers list current mortgage rates for your local area in their
Real Estate sections, often on Saturday or Sunday. Our own interest rates section has up to the minute national average mortgage rates! Check the current mortgage rates here.
What First Time Buyer Programs are available?
There
are literally hundreds of different programs available, depending on
your location (city, state, or province) and the mortgage source that
you use. The requirements and benefits vary greatly from program to
program. Consult your Agent or your local housing authority for more
information.
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How much will my closing costs be?
The
amount of closing costs will depend on what items are customary for
buyers and sellers to pay for in your area. Traditions vary greatly
from one area of the country to another. In some areas, for example,
the buyer pays for title insurance. In other areas, it is the
responsibility of the seller. In still other areas, the cost is split
between buyer and seller. Your Agent can give you specific information
on the items that are customarily paid for by buyers in your area. In
addition, the amount of closing costs will depend on the amount of
points you will be paying with your mortgage loan, since these are
generally paid for up-front. (A point is 1% of your mortgage loan
amount). For a discussion on points, see the page on Points? and also see the excellent book by Randy Johnson: How To Save Thousands of Dollars on Your Home Mortgage. |
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How much should I offer for a house?
There is no simple answer to that question, since each property stands
on its own. A particular house may be overpriced (you should make an
offer BELOW the listing price), "on-the-money" (you should make an
offer at or just below the listing price) or under priced (you should
grab it before someone else does!) For more information, see the
section devoted to setting a value on a home. And see our section on Making An Offer.
What about foreclosures? Can you save a huge amount of money here?
Save
money, usually. A huge amount of money, occasionally. In many cases,
though, these will be homes that need work, so see our article devoted
to buying fixer-uppers.
Should I spend the money to have a home inspection?
Absolutely.
The $ 200 to $ 500 that a professional home inspection costs could be
the best money you ever spend on your house. Not only does the home
inspection seek out any defects (and gives you some peace of mind), the
home inspector will often give you tips on maintaining and repairing
your house. See the section on Home Inspections for tips on what to look for and how to choose a home inspector.
What is an appraisal? Will I need one?
An appraisal is an opinion of value of the home you want to purchase.
Virtually every lender will require some sort of appraisal before the
loan is approved. See more information in the article dealing with appraisals.
Mortgage Questions
Some of the most commonly asked questions about mortgages
What are the differences between mortgage prequalification, preapproval and final loan approval?
Prequalification is the process where the lender will look at a basic
copy of your credit report and use the information you supply to
determine how much mortgage you can afford based on your income. No
accounts or employment information is verified. Preapproval occurs when
all credit and employment is verified and the mortgage is approved,
subject to the appraisal of the property you have chosen to buy. Final
loan approval occurs when the property has been appraised, all
documentation is in the hands of the lender and all contingencies have
been met. For more information, see the section devoted to prequalification and preapproval.
What first-time buyer programs are available?
Many first-time buyer programs are locally developed and administered.
Your state, province or local community is much more likely to have a
program available than on a national level. Your Agent can generally
review with you the availability of programs in your area. For
information on selecting and choosing an Agent, see the section devoted to that subject.
There seem to be so many mortgage programs and offers available. How can I compare them?
This can be confusing! You will want to consult a mortgage broker, who will deal with several different lenders. Contact us to talk about your needs.
Can I use my IRA retirement funds for a down payment on a house?
For most first time buyers, you can use the funds in these retirement accounts without penalty.
According
to the IRS, If both husband and wife are first-time home buyers, they
each can withdraw up to $ 10,000 for qualified acquisition costs
penalty-free for a first home.
Qualified acquisition costs. Qualified acquisition costs include the following items.
- Costs of buying, building, or rebuilding a home.
- Any usual or reasonable settlement, financing, or other closing costs.
First-time home buyer.
A first-time home buyer is, generally, any individual (and his or her
spouse, if married) who had no present ownership interest in a main
home during the 2-year period ending on the date the individual
acquires the main home to which these rules apply.
Should I pay points?
Along with the interest rate, the number of points (up-front interest)
is an important consideration when comparing mortgages. See the Points? page, and the excellent book by Randy Johnson, How to Save Thousands of Dollars on Your Home Mortgage.
What mortgage options are there for those with poor credit?
There are lenders available for many of those with tarnished credit
records. One of the mistakes commonly made by home buyers involves
their credit report. Some buyers assume that their credit is worse than
it really is, and may well have been able to secure a more advantageous
mortgage. Other buyers are unaware of problems in their credit report
and need to scramble to get the problems handled. You can avoid many of
these hassles by getting a copy of your credit report up-front and
examining it both for errors that need to be corrected and accounts
that need to be handled. You can get a copy of your credit report here. Also, you will also find more information on the page All About Credit.
I hear about these different "ratios" when qualifying for a mortgage. What are front and back ratios?
Part of the mortgage application process will be the determination of
how much house you can afford based on your income. The two ratios that
will be computed are the front ratio and the back ratio.
- Front Ratio:
The total mortgage payment including principal, interest, taxes and
insurance (PITI) as well as any condominium or homeowner association
fees divided by your total GROSS income. Traditionally this ratio must
be below 28% Example: With a gross income of $ 3,700 per month, a total
mortgage payment (PITI) of $ 973, the front ratio would be 26%.
- Back Ratio:
The total mortgage payment PLUS any car payments, credit card and any
other loan payments divided by your total GROSS income. Traditionally
must be below 36%. Example: With a gross income of $ 3,700 per month, a
total mortgage payment of $ 973, a car payment of $ 212, 1 credit card
payment of $ 59 and 1 credit card payment of $ 43 for a total of $ 1,287
with a back ratio of 35%.
What options are there for buying a home with no money down and no cash for closing costs?
Although there are some new programs that allow buyers to purchase a
home with little or no cash, you will generally need some funds for
down payment, closing costs or both. Since a mortgage payment will take
a good percentage of your income, lenders will usually want you to be
"involved" (meaning having your money involved) from the very
beginning. There are options for low down payment (5% or less)
mortgages such as FHA mortgages and there is always the possibility
that the seller could absorb some of your closing costs (which are
usually 3-5% of the selling price) but to buy a home with no
cash down is a rare occurrence. If you have cash for closing costs,
though, and excellent credit, there are new options in the conventional
loan arena. See the article on buying a house with nothing down.
What is PMI (Private Mortgage Insurance? Do I have to pay it? See the complete discussion on PMI here.
Have a general home buying question? See the section devoted to that topic.
See our complete Home Buyers Guide at Buyers Place ! |
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