YOUR STEP BY STEP GUIDE TO BUYING A HOME
Published by Authorify Publishing Copyright © 2020 Authorify Publishing
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Table Of Contents
You Hold The Power
Advantages Of Buying Vs. Renting
Get An Agent On Your Side
Timing Is Everything
What You Need Vs. What You Want
A Guide To Searching For The Right Home 50
Common Buyer Mistakes
Home-Buying Horror Stories
A 12-Step Guide To Buying A Home
10. Loan Shopping 101
11. Negotiation Dos And Don’ts
12. Home Inspections: Check It Twice
13. Doubts? You Can Walk Away
14. Home Buyer Programs
15. Ready, Set, Close!
16. Organizing Your Move
CHAPTER 1 You Hold The Power YOU'RE READY TO BUY YOUR FIRST HOME
You’ve saved enough for a down payment, you’ve secured the financing you need, you’ve researched the cities, areas, and neighborhoods to which you’d like to move, and you’ve got a good idea of what’s out there and what to expect. Now it’s just a matter of researching specific homes in your price range, hiring a real estate agent, attending a few open houses, and making a bunch of offers on the homes that strike your fancy or meet most of your criteria, with fingers crossed that the seller accepts your offer and you don’t end up in a bidding war. Right? Well, not exactly. Many buyers assume they are at the mercy of sellers. After all, the seller is looking for the right buyer, the seller wants to score the best deal, and the seller ultimately determines whether to accept or reject your offer. So, the ball must be in their court, right? Let me put this to you in simple terms: You hold the power. That’s right, you — the buyer. This book, the ultimate guide to buying a home, will explain what that means, show you how to increase your buyer’s advantage, and provide insider secrets that will help you gain the upper hand and get the best deal on your home purchase. Sellers are out to impress buyers. Everything a seller does to increase their advantage in selling their home is to impress you, the buyer. It doesn’t matter if it’s a seller’s market, in which the number of people looking for a home to purchase exceeds the number of homes available, or a buyer’s market, in which there are
more homes available for sale than buyers. A major mistake both sellers and buyers make in the real estate market is assuming that a seller’s market is to the seller’s advantage and the buyer’s market is to the buyer’s advantage. Forget the market for now. The seller’s ultimate goal is to get you to buy their home, period. Keep the ball in your court — with a trusted, professional real estate agent to guide you through the process — and you’ll have a less stressful and more satisfying and successful home-buying experience. If you have done your research, if you are fully prepared for the process, and you’ve hired a top-notch buyer’s agent, you are well on your way. For example, if you come in confident, with a strong offer and a mortgage pre-approval letter in hand, you’ll already stand out from all the other buyers interested in the same home and vying for the seller’s attention.
YOUR POWER IN A BUYER'S MARKET
Of course, it’s naturally easier to gain the upper hand in a buyer’s market, in which there are more homes available for sale than there are people looking for homes to buy. In this case the housing market is more favorable to buyers. Buyers gain ultimate negotiating power and can be much more selective about which home they choose to purchase in the end.
YOUR POWER IN A SELLER'S MARKET
Things get a bit trickier in a seller’s market, in which there are more people searching for homes than there are homes available for sale. This type of housing market is generally more favorable to sellers, as they tend to receive multiple offers, sometimes above their asking price, and buyers can end up in bidding wars. But this doesn’t have to work to your disadvantage. There are many tips and tricks you can use to not only find the home you want, but get
a great deal on it, too.
One of the key tricks to holding the upper hand in a seller’s market is knowing the best times to buy; this process will be covered more in-depth in Chapter 3. Another must-have when buying a home in a seller’s market is hiring a real estate agent to guide you through every step and stage of the home-buying process. You’ll want to hire a professional who knows the ins and outs of buying a home, someone who knows how to negotiate well on your behalf, and someone who has access to properties and property details before they even hit the market. This alone could be the ticket to getting you the home you want at a price you can afford.
Regardless of the market, it’s imperative to be well-informed before going into the home-buying process. In this book, we’ll cover the following:
• The home-search process (Part 1) • The home-buying process (Part 2) • The final steps for closing the deal (Part 3)
Along the way, I’ll show you all the different ways — the insider secrets — that you can use to gain an advantage over your competition (other buyers) and get the upper hand over the sellers of the homes in which you’re interested and the one you’ll eventually purchase. Remember: You hold the power. Keep this locked into your memory as you continue reading this book, and you’ll be well on your way to not only finding and purchasing the perfect home for you, but also getting the best deal possible.
CHAPTER 2 Advantages of Buying vs. Renting
Should you buy or rent a home? There is no “right” answer, and what works for one person or family might not be appropriate, doable, or even desirable for another. There are certainly pros and cons for both, and much of it depends on your situation, life circumstances, lifestyle, finances, and dreams. Owning a home has for decades been considered one of the defining characteristics of the “American Dream,” demonstrating a certain level of priorities, accomplishment, success, status, security, and hard work. Not everyone owns a home and not everyone wants to — but many who don’t wish they did, or are working toward getting that piece of the Dream. Today, about two-thirds of Americans own their own home, and many more are working toward their dream of homeownership, or wish they could get there one day. Lifestyle and age are two of the biggest factors in the buy-vs-rent decision. Home buying is usually driven by household formation; for example, when couples get married, they often begin with renting but start saving to buy their first home before deciding to start a family. Other families who rent choose to buy a home when their family expands and more children (or pets) join the family. Millennials have also reported that the primary reason for buying a home is owning a dog, as many rental properties won’t allow pets — especially dogs. Age is another factor; in general, the older you are, the more likely you are to own your own home. Currently, fewer than 40% of people younger than 35 own homes, but about 60% of people 35 6
and older are homeowners, and more than 80% of people 65 years and up own homes, although nowadays, more and more people nearing or past retirement think about downsizing and selling their homes to rent instead in their golden years, to avoid the physical demands, maintenance, and obligations that come with homeownership. Young people fresh out of college and beginning their careers often choose to rent so they can save up for a down payment and, in the meantime, enjoy lifestyle flexibility, particularly if they need to move for their job, enjoy travel, and are single, with no children or pets. Which is best — buying or renting? Each has its advantages and benefits, as well as disadvantages and risks, and as I’ve mentioned, the decision will depend on your particular situation.
Before you decide, you need to ask yourself some questions:
HOW LONG DO YOU PLAN TO STAY IN THE HOME
This question isn’t always considered when making the decision to buy or rent, but it’s an important one. Do you move a lot? Do you travel a lot? Have you found the city, area, and neighborhood in which you’d like to stay? What about appreciation? Typically, it takes about four to seven years to “break even” on a home purchase (this means that there’s been enough appreciation to pay back the cost of the transaction and ownership). So, for example, if you’re thinking about buying a home and selling it within one to three years, it won’t be worth it. You’re better off renting until you know you’ll be staying put for a while longer.
ARE YOU FINANCIALLY PREPARED?
Homeownership is a significant financial commitment for which
buyers must be prepared. You’ll need to consider the overall price of the home, the down payment, closing costs, mortgage payments, maintenance costs, property taxes, homeowners’ association fees, and more. You can’t simply compare a month’s rent to a month’s mortgage payment. You must be prepared for all the costs of homeownership. • Down payment: The down payment refers to the lump- sum payment that funds your equity in the property. The amount varies, but in the U.S., 20% of the purchase price of the home is generally the norm, the preferred amount, and what will get you the best rate. • Mortgage payments: A monthly mortgage payment includes both interest as well as loan principal, and generally, any homeowner’s insurance and prorated property taxes. Some monthly mortgage payments are fixed; others are variable, depending on the type and terms of the mortgage loan.
DO YOU NEED YOUR HOME AS A RETIREMENT PLAN INVESTMENT?
A 2015 Gallup poll reported that, for the second year in a row, Americans named real estate as the best long-term investment, more than savings accounts, stocks, and bonds. Homeownership allows you to build equity that you can liquidate in retirement for downsizing. It’s important to pay close attention to the housing market: prices can rise and fall, and the value of your home can change.
ARE YOU EMOTIONALLY PREPARED?
Homeownership has many advantages over renting, but it can cause stress, and you need to be emotionally prepared to handle it. Stress that’s related to owning a home can include a change 8
in financial state, a change in living conditions, and a change in residence. Other elements of stress related to homeownership include life changes, such as switching careers, getting married, and having children. If your life is constantly changing and in flux, and you’re experiencing a lot of stress, it might be wise to postpone owning a home until things are more stable for you and your situation.
ARE YOU READY FOR COMMITMENT?
Yes, owning a home is a major commitment, and you must be ready for it! You’ll need to have the confidence to make plenty of big decisions, from choosing a real estate agent and the right neighborhood that meets your needs to picking the right home and all the “little” decisions that come along with that — furniture, appliances, paint colors, décor, etc. Commitment also means devoting time and energy to the maintenance of both your home and yard. If you are prepared, then you’ll find that this commitment — taking care of your important investment — is most satisfying. If you think you might be ready to take the plunge into homeownership, it’s important to understand the advantages and disadvantages of both buying and renting your home.
ADVANTAGES OF BUYING YOUR HOME
1. Building equity. Every time you make a mortgage payment, you put down dollars toward equity — which means actual ownership of your home. Part of the payment goes toward interest from the loan, part toward homeowner’s insurance and property taxes, and part toward the loan principal, which represents the equity. The other way homeownership builds equity is that, generally, your property should appreciate in value each year, giving you the option for selling it for considerably more than you paid for it, assuming you keep up with maintenance, improvements, etc.,
and sell at the right time. Typically, U.S. home prices appreciate nationally at an average annual rate of between 3 and 5%. Renter disadvantage: Renting does not offer any equity-building advantage. Your rent payments go to the landlord and not toward your property ownership, regardless of how long you live there. 2. Increasing your home’s value. As I touched on, your home’s value will increase through natural appreciation every year, but you can increase your home’s value by not only maintaining your home, but also improving upon it, such as small renovations, finishing a basement or adding a bathroom, improving the home’s curb appeal, and making small improvements around the home (newer appliances, a fresh coat of paint, new curtains, etc.). Renter disadvantage: If you rent your home, you will likely have limits on what you can do to improve the look of your home; in fact, you might not have permission from the landlord to make any changes. Further, any changes you might make won’t increase the value for you, but rather for the property owner. 3. Controlling housing expenses. When homeowners select a fixed-rate 15-, 20-, 25-, or 30-year mortgage, they have the assurance that monthly mortgage payments and overall housing costs will not increase over that period. Renter disadvantage: With renting, property owners are known to increase the amount of monthly rent and other expenses you must pay annually, and sometimes randomly, without much notice. You don’t have control over this. 4. Tax advantages of homeownership. As a homeowner, you qualify for major tax benefits when you buy a house, both at the time of purchase and for the duration that you own the home. Homestead exemption is one example; many states exempt all owner-occupied homes (“homesteads”) from a portion of the property tax that would normally accrue over time.
Further, homeownership entitles you to certain federal tax deductions, such as claiming your property taxes and mortgage interest paid, offsetting your annual income tax burden. You can also claim any mortgage discount points on the loan; these points are equal to 1% of your mortgage and involve prepaid interest. They are tax deductible and can reduce your total mortgage payment. Renter disadvantage: If you rent your home, you might be able to claim the rent you paid for the year on your income tax, but the tax benefits end there. Renters aren’t eligible for housing-related federal tax credits or deductions. 5. Lower mortgage rates. Currently, in today’s market, interest rates have fallen and are on the lower side, making it easier to purchase and own your own home than it was years ago. Bear in mind that interest rates are variable and rise and fall, so as part of your home-search process and getting approved for a mortgage, keep an eye out for low rates and try to lock that in with a fixed rate. Renter disadvantage: With renting, landlords set the price, which often increase annually. You don’t have the option of locking in a fixed rate for the duration of your mortgage. In fact, in many states, average mortgage monthly payments can be lower than typical rent amounts. 6. Creative freedom. One major advantage to owning your home is that you have creative license to make almost any kinds of changes or improvements that you’d like, provided they don’t violate codes or bylaws. Change the colors of the walls with fresh paint, finish a basement, add a closet, expand your bathroom, build a deck, renovate your background — you have the freedom to make your home truly yours with homeownership.
Renter disadvantage: Renting a home puts many more limitations on what you can do — if anything — to change or improve the look of your home. Structural and even decorative improvement decisions belong to the property owner and you’ll need to obtain special permission to make any changes, even painting. 7. Community and roots. Homeowners generally stay in their homes longer than renters do (many tend to think of homeownership as more permanent and renting as temporary), and are therefore more likely to get to know their neighbors, feel a part of a community, join associations or committees, host get- togethers, and volunteer. Renter disadvantage: Renters are much less likely to do these things, as they often view their situation as temporary.
DISADVANTAGES OF BUYING A HOME
Yes, there are downsides to homeownership — some that buyers aren’t aware of, or don’t think of, and others that can scare people away from making the plunge into homeownership. 1. Maintenance. Perhaps the homeowner’s biggest disadvantage is the renter’s biggest advantage: maintenance. Of course, if you purchase a home, it generally includes homeowner’s insurance, which includes disasters, flooding, and protection against theft. But generally, your everyday maintenance items come out of your pocket as a homeowner. Maintenance and repair can be as simple as redoing your baseboards or replacing a window, or as extensive (and expensive) as replacing a plumbing system or furnace. The expense will vary from home to home, and from year to year; however, generally, you can expect to pay about 1% of the value of your home annually toward these expenses. Don’t forget about your property too — basic gardening, lawn care, landscaping, spring and fall
cleanup, and snow removal all need to be taken care of by you.
Renter advantage: If you rent, you don’t need to worry about any of these maintenance- and repair-related expenses. Admittedly, this is a major advantage over owning a home. These obligations belong to the property owner/landlord, whether an appliance shuts down or your sink is leaking. Also, you won’t have any lawn or grounds care obligations. However, be prepared to wait for something to be fixed. Even if you don’t have to foot the bill, there’s a chance that there’s a waiting list of repairs that need to be made for other tenants first. 2. Upfront and closing costs. Buying a home involves many upfront and closing costs, including earnest money, down payment, home inspection and appraisal, first year’s homeowner’s insurance, property taxes, real estate agent commission, attorney’s fees; the list goes on. Some buyers think only about the purchase price, down payment, and monthly mortgage payments and forget about these other important fees. Renter advantage: Renters don’t need to worry about upfront and closing costs; they just need to go through the application and approval process and be able to pay their monthly rent. 3. Relocation Inflexibility: Once you’ve purchased a home, it becomes trickier (and a lengthier, more complicated process) to sell and move than it is to break a rental lease. You need to prepare your home for showings, remove all your clutter and start packing, find a new place to live while putting your home on the market for a hopefully quick sale, and deal with potential issues like paying the mortgage while waiting for your home to sell. Renter advantage: Depending on the situation and contract you have with the landlord, moving — whether for work, travel, or family obligations — simply requires giving sufficient notice so you won’t be penalized. If you need to relocate before your lease
is up, you also have the option of subletting to another tenant to cover your rent and offset that cost. Selling a home within a short time frame is usually much more complicated, time-consuming, and risky. 4. Potential financial loss. I’ve mentioned before that homeownership builds equity over time; however, equity doesn’t necessarily equal profit. Some homes do depreciate in value over time, putting you at risk of a loss when you sell your home. Renter advantage: As a renter, you don’t need to worry about the housing market and whether home values in your area are fluctuating, remaining stagnant, or decreasing. It’s not your problem, but for a homeowner who’s trying to sell, it is. Now that you have read and understand the main advantages and disadvantages of buying vs. renting a home, you are better equipped to make a decision. There is much to consider when deciding to buy a home. But where to start? I suggest that you start by making a pros and cons list of buying vs. renting, a list that’s unique to your own personal needs and situation. Seeing the advantages and disadvantages, the benefits and risks written down right in front of you can help you to really gauge the situation, see what the best course of action is, and what to do going forward. Many renters are nervous about the home-buying process, and because it seems too overwhelming and daunting, they choose to avoid the “risk” and stick with the familiar and keep renting. After all, choosing to purchase a home is a big decision, and a major investment, and likely to be the most significant purchase of your life. However, this doesn’t need to scare you away. All you need is to make sure you’re ready. Switching from renting to
homeownership comes with challenges, but also many, many rewards. It’s an exciting and amazing decision, one that you won’t regret, but one that requires significant preparation. If you don’t think you’re quite ready to buy your first home, start by figuring out what you can do to get yourself there. A little preparation goes a long way! There are several steps you can take to get you started on your journey to purchasing a home. • Improve your credit score. • Start saving up for a down payment and closing costs. • Build up your savings account. • Research recent home sales in your area/neighborhood, and see what options are available as well as what you might be able to afford. Note: If you currently own a home, consider upgrades that could net you a positive return on investment when you do decide to sell your home.
STEP 1: IMPROVE YOUR CREDIT SCORE
First, you must improve your credit score if you hope to get a mortgage loan to purchase your home. The higher your credit score rating, the better deals you’ll be able to grab. With a credit score of “below 660 or 680, you’re either going to have pay sizable fees or a higher down payment,” says Barry Zigas, director of housing policy for the Consumer Federation of America, as reported on Bankrate.com. A credit rating of 750 and higher will give you the best rates on the market, but 700 and up will still help you find a good deal.
Access your credit report to see where you’re at. Settle any
outstanding debts. Research what you can to improve your score. Don’t apply for any new credit for a full year before you decide to apply for a mortgage.
STEP 2: SAVE FOR A DOWN PAYMENT (AND CLOSING COSTS)
Once you’ve started working on improving your credit score, you need to start saving for a down payment, as well as closing costs, which some buyers forget about. According to Bankrate.com, you’ll need to save between 3 and 20% of the total purchase price for a down payment. Your credit history and loan terms determine how much you’ll need. Twenty percent is standard, but an FHA (Federal Housing Administration) loan can be as low as 3.5%, with a minimum credit score of 580. Further, Department of Veterans Affairs loans require zero down payment. As for closing costs, according to Bankrate’s latest survey, the national average for closing costs for a $200,000 mortgage is $2,084. Expect to save at least 10% of your mortgage for these fees. Don’t let these numbers get you down. Start saving and do some research, because you can find down payment assistance online, and it’s more readily available for first-time home buyers. If you’re searching for your first home in a buyer’s market, you can also likely have the seller pay a portion of the closing costs as part of your negotiations.
STEP 3: BUILD UP YOUR SAVINGS ACCOUNT
Don’t forget to build up your regular savings account — not just for a down payment, but for a little “cushion.” This will not only improve your chances of being approved for a loan — lenders like to see that you have money set aside and aren’t just living from
paycheck to paycheck — but will also ensure that you can pay your mortgage in case of job loss or major unexpected expense. A savings account can also help with maintenance and repair costs on your home. According to Bankrate.com, “a good rule of thumb is to assume that you’ll spend 2.5 to 3% of your home’s value each year on upkeep and repairs. If you buy a $250,000 home, aim to save $520 to $625 per month.
STEP 4: RESEARCH HOME SALES AND WHAT YOU CAN AFFORD
Do some research into recent home sales in the area in which you’re interested in buying a home. Find the average price, the highest prices, and the lowest prices. Look into how long they’ve been on the market. Determine what you want in a home (e.g., number of bedrooms/bathrooms, a garage, a yard, a basement, etc.) and what you can afford. You can figure out how much you can afford using online calculators that consider many different variables. In general, when it comes to conventional loans, expenses related to your home should never exceed 28% of your gross monthly income, says Susan Tiffany, a retired director of Personal Finance Publications for Adults for CUNA (Credit Union National Association). (source: Bankrate.com).
HOW TO GAIN AN ADVANTAGE:
While there are many benefits to renting a place over buying your own home, the advantages of owning outweigh the advantages of renting. Renting is sometimes the necessary choice, depending on your situation and needs, but it’s generally considered a short- term housing solution.
The bottom line is that in the long run, owning your home has more advantages than renting one. It’s in your best interest to take the plunge and begin the home-buying process, as daunting as it may seem at first. I promise it will be worth it; there’s an intangible satisfaction that comes with owning your own home, a sense of accomplishment and independence, and with the right real estate agent at your side, you can be sure you will find the best home for you at a great price. The key is to be prepared, and if you’re not, then figure out what you need to do to get there. Hopefully this chapter helped you to get an idea of the benefits of homeownership and how you need to prepare. Keep on reading to discover more insider secrets to buying a home and making the experience as smooth and successful as possible.
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