Buying a House FAQ
Can I afford to buy a house?
This is really a two-pronged question. Your first consideration is whether a bank or other lender thinks your existing income and level of debt leave room for you to take on a home mortgage. (We're assuming you haven't saved up enough cash for the entire house purchase, but will need to take out a loan.) For information on what criteria institutional lenders use, see Nolo's article Qualifying for a Mortgage.
An important second consideration is whether, regardless of what the lender says, the expenses of a home loan not to mention other costs like buying furniture, dealing with home repairs and maintenance, and paying the property taxesn insurance, and utility bills will fit comfortably within your budget. Run your own numbers to find out, and get help from Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).
In the end, many people find that buying a home is a financial stretch but that the tax deductions that come with home ownership offset the expenses to a greater extent than they'd expected. For more information, see Nolo's article Rent or Buy a House?
Should I line up a real estate agent first, or just start shopping for a house?
There's no harm in getting to know the market a bit by yourself, perhaps by visiting weekend open houses. In fact, it's a good idea to look at houses of all sizes and price ranges in and around your area to educate yourself about home values.
But this is different than actually shopping. (Try not to fall in love with a place that you visit during this phase!) You really should have your own real estate agent by your side for the offer and negotiation phase of buying a home. It normally doesn't cost you anything by tradition, the seller pays the commission and it's far better to have your own agent than to ask the agent selling the home to represent you along with the sellers. Such "dual agency" relationships often lead to conflicts of interest. For example, the agent might feel duty-bound to clue the sellers into the fact that you're actually willing to go higher on price.
Before you start seriously shopping for a house, give yourself time to ask friends and colleagues to recommend a real estate agent. Interview at least three agents, and choose one you feel will vigorously and professionally represent your interests. For more advice on this part of the process, see Nolo's article Choosing Your Real Estate Agent.
If I decide to buy a house, how much money will I need up front?
Good question. Fortunately, you won't need to pay the entire purchase price out of pocket but you will need to come up with some serious cash early on in the home buying process.
First, you'll probably be expected to include a modest "earnest money deposit" with your offer, to show that you're serious. (You forfeit the money if the seller accepts your offer and you back out for no good reason or at least, no reason that's recognized under your contract.)
Next, plan on making a 20% down payment. (Before the burst of the real estate bubble, lower down payments were commonly accepted by lenders, but no more although you can still get a loan with less money down, you'll have to pay more interest for it. You'll also face extra scrutiny from the sellers, who will worry that you won't be able to close the deal with so little cash.)
You'll also need to pay closing costs the various fees, mortgage points, and other upfront payments associated with finalizing the purchase. These alone can run into the thousands of dollars.
What's the "earnest money deposit" on a home purchase?
To show that an offer is serious and made in good faith, it's traditional for the prospective home buyer to accompany it with a check for a modest amount often a small percentage of the purchase price known as an "earnest money deposit." The amount of the earnest money deposit varies by state, but is typically in the range of 1-2% of the purchase price.
The seller can't rush out and cash this check right away in fact, the check should be made out to the escrow company, not the seller. But the seller may get to keep the money if you pull out of the deal for a reason that wasn't allowed under the purchase contract for example, if you simply change your mind, or perhaps get lazy about taking steps to finalize your loan, as opposed to legitimately refusing to remove the inspection contingency after inspections revealed dry rot.
Having a deposit on hold acts as a disincentive against buyers who file frivolous offers, and ultimately compensates a seller who has to put a house back on the market. As a practical matter (and under the terms of the standard real estate contract), however, the escrow company can't turn the money over to the seller without both the buyer and seller agreeing to allow that. Take a look at your contract before you sign it to make sure you're satisfied with how it disposes of the earnest money in the event of a dispute.
If the deal goes ahead as planned, the earnest money is normally applied toward your down payment.
What are closing costs on a home purchase?
On the day your home purchase wraps up, as the buyer you'll be expected to pony up cash for various closing costs. These include transaction costs like loan setup fees, property inspections, the escrow or title company's fees, and more sometimes in the thousands of dollars. See www.bankrate.com for a state-by-state analysis of the loan portion of buyers' closing costs.
Closing costs also include what you owe for homeowners' insurance, mortgage insurance (or PMI, typically charged if you're putting less than 20% down), your share of that year's property taxes, and more. The total is usually around 2-3% of the house price, depending on what state you live in, what kind of mortgage you get, and more.
What exactly is the "closing" part of the home buying process?
The so-called "closing" is the final transfer of the house from the seller to the buyer. It occurs after both sides have met all the terms of the contract and the deed has been recorded. Closing also refers to the time when the transfer will occur, such as "the closing on my house will happen on January 27 at 10:00 a.m."
The event referred to as the closing frequently takes place at the office of the professional who handles the transaction such as a title officer or real estate lawyer. However, the buyer and seller don't always have to be there at the same time. It usually involves a lot of document signing.
You might expect that the closing would be the date on which you'd pay the seller all that's owed on the down payment and indeed that's the deadline for doing so. As a practical matter, however, your escrow or title company will probably recommend that you take care of all the money transfers a couple of days in advance, to make sure all goes smoothly.
If I find a house I like, should I bid under the list price?
How much you should bid on a house depends completely on the local market and how well the seller did in setting a realistic list price. After the recent bursting of the real estate bubble, many sellers overpriced their houses, unable to believe that the widely reported drops in home values included their house, too! In such a situation, you could safely underbid.
However, in a hot market or even in a hot neighborhood in the middle of a cold market (they do exist) the list price might be just a starting point, and you'll be expected to offer a higher price if you want to beat out the competition. Underbidding in such a situation would be a complete waste of your (and your real estate agent's) time, and the seller would be unlikely to make you a counteroffer.
The key is to develop a good understanding of the market and how much a particular house is really worth, using the advice in Nolo's article Making an Offer to Buy a House.
I've heard that I should buy as much house as I can afford. Is that true?
That depends on how much you can realistically afford. In the days when homes were appreciating by tens of thousands of dollars every year, stretching to buy a house was safe advice, given your ability to sell it or take loans out against it if temporary financial trouble struck.
With the market having flattened, however, you really do need to be able to afford the monthly payments into the foreseeable future, without taking potential increases in home value into account. The best reason to make a financial stretch in this situation is because you realize you'll be living in this home for a good long time and that if and when you sell, you want it to be a home that buyers get excited about.
After I offer to buy a house, how long before it becomes mine?
The first thing that's likely to happen after you put in an offer on a house is that the seller will counteroffer, perhaps asking for a higher price, or requesting other changes to the terms of your offer (maybe that you drop your contingency to sell your own house first, or that you add a contingency allowing the seller to close on another house before closing on and moving out of yours). You might counter the counteroffer, and so forth, and this may go on for a number of days.
After this part of the process is wrapped up and you've entered into a purchase contract, how long things will take depends on your contract, which should specify a closing date or number of days before closing. Within four to ten weeks is typical, although it varies from state to state.
You, the seller, the escrow agent, and pretty much everyone involved in the transaction will probably be working their hardest to make the closing happen on time. If it gets delayed, however, it's usually not the end of the deal you and the seller can simply agree to put it off by a few days. Unfortunately, extra demands by buyers' lenders are currently a common source of closing delays.
If I buy a house, will the seller leave behind things like the curtains and the refrigerator?
That depends. The seller is expected to leave behind all "fixtures" that is, all items that are permanently affixed and integral to the house and property. Classic examples of fixtures are ceiling lights, wall-to-wall carpeting, custom window shades and curtain rods (but not necessarily the curtains, depending on local tradition), built-in appliances, and any trees, plants, or shrubs with their roots in the ground as opposed to in pots. (Picture moving into the house and discovering that any of these had been ripped out before the seller left, and you'll get the idea of why they're considered fixtures.)
Within the disclosure or other documents prepared by the sellers, however, they may indicate plans to leave certain items and not others. You can always negotiate over these, particularly in a slow market. If you can't imagine the house without the beautiful urns on either side of the front door, ask for them. The seller might throw them in, or at least agree to sell them to you separately.
For More Information
To learn everything about home-buying from mortgages, agents, inspections and more, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder and Marcia Stewart (Nolo).