Kathleen S. Turner, SRES®, SFR® - COMPLETE GUIDE TO THE HOMEBUYING PROCESS.pdf

COMPLETE GUIDE TO THE HOMEBUYING PROCESS

Kathleen S. Turner, SRES®, SFR®

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. DISCLAIMER AND/OR LEGAL NOTICES: While all attempts have been made to verify information provided in this publication, neither the Author nor the Publisher assumes any responsibility for errors, inaccuracies, or omissions. Any slights of people or organizations are unintentional. This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/ or local laws or regulations. The reader of this publication assumes responsibility for the use of these materials and information. Adherence to all applicable laws and regulations, including advertising and all other aspects of doing business in the United States or any other jurisdiction is the sole responsibility of the reader. The Author and publisher assume no responsibility or liability whatsoever on behalf of any reader of these materials. If your property is currently listed with a Realtor, please disregard this notice. It is not our intention to solicit the offerings of other brokers. Printed in the United States of America

Table Of Contents

How Real Estate Agents Help Homebuyers

Owning Vs. Renting

Shopping For A Home Loan

Programs For Homebuyers

Buyers' Needs And Desires

Searching For The Right Home

Buying A House: Negotiation Dos And Don'ts 50

What To Know About Home Inspections

The Closing Process

10. Organizing Your Move

Gratitudes

First and foremost, I want to thank my parents, Edward and Star Holda, for the unconditional love and support they showed throughout my life. Even though they have both passed away, the advice they had given me over the years still resonates with me. I want to thank them for always believing in me and giving me a wonderful childhood where I felt safe, cared for and so deeply loved. I want to thank my sister Maria, who I love so deeply and who has cheered me on since I was a little child. She is one of the kindest and most giving people I have ever known. I don’t know what I would do without her. A very special thanks to my husband Bain for his love and support for more than 30 years. I feel so protected and loved by him. I love the spiritual man that he has become; I am blessed to be his wife. I want to thank him for being patient with me while spending many hours alone working on this book. I want to thank my dearest friend and Broker, Paula Bachman, for always believing in me. She is one of the most honest people I have ever met. I also want to thank her for the many hours she spent editing this book. It was important that the information was accurate; she made sure that happened. I want to thank my cousins, Bob and Dan Scinto, for being the brothers I never had and for encouraging me to get into real estate. They became my mentors along the way, even though they might never had realized it. Last but not least, I want to dedicate this book to my dear clients who put their trust in me over the years to help them find a

house they could call home. I did this book for them to make the homebuying process enjoyable and more successful.

Foreword Welcome. If you’ve received this book, it’s probably because you’re thinking about buying a home. And if you’re like most homebuyers, you may be nervous about the entire process. But that’s why I’m here! As you begin your journey looking for a place to call home, my job is to make your job as a buyer as easy and seamless as possible. I understand the decision to move or to invest in real estate can be challenging. My focus in this book is to help you make smart choices and guide you in the right direction. Being in business for more than 30 years, I pride myself in helping my clients make the best possible decisions. And now, you’ve got the information at your fingertips.

In this book, you’ll find:

• An overview of the buying process • How to determine your wants vs. needs in your next home • Information on securing a home loan • Common mistakes to avoid • A negotiation guide to save money on your purchase • Much, much more You can try to employ these strategies yourself, but you should know that it costs you absolutely nothing to hire a REALTOR®, hopefully me, to help you find your next home. Yes, buying a home can be stressful, but with this book, and my help, we can make the process as seamless as possible. As you spend time reading this book, I promise to be only a phone call away.

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CHAPTER 1

How Real Estate Agents Help Homebuyers

Buying a home is one of the most exciting journeys you can experience. I remember when I bought my first home. My husband and I were so excited that we slept on the floor in sleeping bags because our furniture wasn’t going to be delivered until the next day. Yes, I was much younger then, but I still remember the excitement. This book will give homebuyers the benefits of my experience as I offer insights I have gathered throughout my career buying/selling houses while orchestrating countless real estate transactions. Technology has changed the way homes are sought and bought today. In this “Information Era”, likely buyers are first introduced to the homebuying process via the internet. So, that means there’s no real need for a real estate agent, right? No. Today, you need a real estate agent more than ever before.

WHY HOMEBUYERS NEED A REAL ESTATE AGENT

The reasons to use a real estate agent today are as valid as yesterday: to help buyers make smart choices and guide them in the right direction. Even though you can search homes online, you will need a real estate agent to offer her expertise and experience. A qualified real estate agent is invaluable as she will share her education and experience, giving you access to:

• A variety of choices

• Neighborhood data • Price guidance

• Market conditions • Showing requests • Negotiation skills • Confidentiality • Paperwork/contract handling • Closing assistance • Support through each step • A relationship for the future • Much, much more

When you need help from other professionals, real estate agents can provide referrals to qualified home inspectors, movers, attorneys, and other experts. Amazingly, a buyer generally doesn’t directly pay a commission to a real estate agent on a house purchase. So, why wouldn’t you want a real estate agent’s help? On most home sales, there is a listing agent (the agent engaged by the seller to sell the property) and a selling agent (the agent who introduces the eventual buyer into the transaction). The selling agent is sometimes called the “buyer’s agent” because she is often working on the buyer’s behalf. There are some real estate agents who market themselves as “buyer’s agents,” “exclusive buyer’s agents,” or “buyer’s representatives.” These real estate agents have chosen to make a business of finding homes for prospective buyers, handling the negotiations and transactions having to do with the purchase. Those who market themselves as buyer’s agents indicate they’re only working for the buyer in a real estate transaction.

A buyer’s agent will track down homes that meet your criteria,

contact sellers’ agents, and secure appointments for viewing the homes. On their own, buyers have a more difficult time with these things. This is even more so the case when a buyer is moving due to relocation or employment opportunity and does not engage a buyer’s agent to handle matters. A buyer who goes directly to the listing agent and allows that agent to manage both sides of the transaction is dealing with a dual agent. This may inherently result in an agent who has conflicting responsibilities. Their job is to get a good price for the seller, and they might not as zealously represent the interests of the buyer. This by no means suggests that a dual agent can’t represent both the buyer and seller to bring about a mutually- beneficial transaction.

MORE ACCESS TO THE REAL ESTATE MARKET

A real estate agent will have better access to the market and a special knowledge of local conditions. The agent is a liaison between sellers and buyers. An agent will have ready access to other properties listed. Buyers’ and sellers’ agents know how to put a real estate transaction together.

NEGOTIATING IS HARDER ON YOUR OWN

A real estate agent will help keep the transaction at arm’s length, such that personalities and emotions do not become involved. Price negotiations take a special skill and understanding of the psychology of offering and counter offering. Agents keep the transaction dispassionate and rational. For example, a buyer (you) might like a home but despise its wood- paneled walls, shag carpet, and lurid orange kitchen. When you work with an agent, you can express your opinions on the current owner’s decorating skills and complain about how much it will cost to upgrade the home, without insulting the owner.

Your agent will translate that to the seller’s agent: you very much like the property but can see having to spend a certain amount in decorating costs, and thus will offer much less.

CONTRACTUALLY SPEAKING…

There are many contracts and documents involved in purchasing a house. The stack is more than an inch thick. Unless you’re a real estate attorney or title agent, these documents will be foreign to you. Yet, they require detailed and accurate completions. Buying a property is not necessarily a fill-in-the- blanks transaction. One mistake, let’s say in title work, could haunt the buyer well down the line after purchase. A real estate agent deals regularly with these contracts, conditions, and unexpected situations and is familiar with which conditions should be used, when they can safely be removed, and how to use the contract to protect you.

YOU WON'T NECESSARILY SAVE MONEY

The point of not using a real estate agent would be to save money, right? Otherwise, why would someone turn down professional assistance in finding a home? It’s unlikely that both the buyer and the seller will reap the benefits of not paying real estate agent commissions. It works like this: An owner selling his own FSBO (For Sale By Owner) will price the house based on the sale prices of other comparable properties in the area. Most of these properties will be sold with the help of an agent; therefore, the seller profits in getting to keep the percentage of the home’s sale price that might otherwise be paid to the real estate agent (usually 5% to 6%). Buyers looking to purchase a FSBO may believe they can save money on the home by not having an agent involved, and so

they look solely at FSBO houses. They might expect money to be saved and make an offer accordingly. Unless the buyer and seller agree to split the savings, they can’t both save the commission.

WHO IS A REAL ESTATE AGENT/REALTOR®?

It’s extremely important to know the ins and outs of real estate agents before you hire one to help in your search for a home, so you know what to expect and what will be expected of you. Simply put, a real estate agent is someone licensed to list and sell real estate, including homes, multi-family properties, commercial, and industrial buildings. A REALTOR®, however, is somewhat different. A REALTOR® is a member of the National Association of REALTORS® and is required to abide by the Code of Ethics. While a REALTOR® is always a real estate agent, a real estate agent isn’t always a REALTOR®.

Buyer’s Agent

As mentioned previously, real estate agents who work on behalf of the best interest of the buyer are commonly called buyer’s agents. Real estate agents who don’t have buyer-agency agreements with prospective buyers, even though they may show homes to those buyers, are construed as working on behalf of the seller and must obtain the best price they can for the seller. The law requires agents to explain whether they’ll be working for the buyer or the seller whenever they have substantive contact with a prospective client. If the agent doesn’t offer you a buyer’s agency agreement, that agent is representing the seller, not you. Agree to sign a buyer’s agency agreement after you have met with an agent. Some people sign an agency agreement after

attending a showing given by the agent. A buyer’s agent is legally required to maintain your confidentiality, disclose material facts to you, and maintain loyalty to you. Buyer’s agents have the legal duty to put the buyer’s needs ahead of their own. These are fiduciary duties.

Listing Agent

A listing agent represents the seller in a real estate transaction. The listing agent lists the home for sale and works on the seller’s behalf to sell the home at a price and under terms that are best for their client.

LOOK FOR PROPER CREDENTIALS

It’s easy to find real estate agents who can take the job, but finding agents with special credentials, those who have gone that extra step to take additional classes in certain specialties of real estate sales, is worth looking into. Here are just a few credentials within real estate that you should be on the lookout for: • Accredited Buyer’s Representative (ABR®): Completed additional education for the purpose of representing buyers in their transactions. • Certified Residential Specialist (CRS): Completed additional training for the purpose of handling the purchase/sale of residential real estate, such as houses and apartments. • Seniors Real Estate Specialist (SRES®): Completed training for the purpose of helping sellers and buyers 50+ years old. • Short Sale and Foreclosure Resource (SFR®): Completed

training for the purpose of helping buyers and sellers of distressed properties.

Similarly, if you choose to use a real estate agent who’s also a member of the National Association of REALTORS®, it will be a bonus. However, ensure they have credentials that are relevant to your need(s).

RESEARCH LICENSING

Your state will have a license board for all active REALTORS® and agents, which you can easily access. You will also be able to see their contact information, disciplinary actions, complaints, or any other information that you’ll need to help influence your decision, especially since most of the information is now posted online.

RESEARCH THEIR BUSINESS ACTIVITY

Knowing the type of market presence that a real estate agent has is the best way to learn about them. Ideally, you’re going to want an agent who specializes in one or two real estate markets, and who understands which types of homes and amenities are available within your price range. You can unearth this information by asking them or by asking the state licensing authority, if you’re not comfortable with asking the agent directly.

GOING THE BUYER'S AGENT ROUTE

So, you’re ready to take the plunge and look for a place to call “home.” To get the most out of it, use a buyer’s agent to avoid a flurry of paperwork, stampedes of buyers competing for the same property, and other challenges. Homebuying can be exciting and exhilarating, but it can also be complex and stressful, which is why having a professional by your side can 8

make an enormous difference.

As discussed, you’ve probably heard of buyer’s agents, seller’s agents, listing agents, and so on. You’re a buyer, so what’s a buyer’s agent? True to the name, buyer’s agents assist home buyers every step of the way; they can also save you both time and money on the road to homeownership. When you find the right one for you, these real estate agents will work day and night to ensure all your needs and requirements are met when it comes to finding the right home.

WHAT BUYER'S AGENTS DO FOR YOU

Your buyer’s agent will have a vast knowledge of the current real estate market for the area, which will include neighborhood amenities and conditions, price trends, and taxes. As with any professional, there are degrees of professionalism, dedication, and experience. A good buyer’s agent will want to know whether you’re preapproved for a loan by a lender, what kind, and the terms of the loan you’re getting. They should spend adequate time to discover what you’re looking for in a home. They should listen to your needs and wants and ask questions. During the shopping period, you’ll meet with your agent for tours of homes in which you might be interested. They will give you insight into the floor plans and the home’s pertinent selling points. They will also give you the rundown for local activities, restaurants, shopping centers, and schools nearby. The agent will provide some insight on the current conditions of the market and explain what you should expect while shopping for a home. A good buyer’s agent will provide a homebuying education. The listing agent will point out all the features of a home; a good buyer’s agent will point to the faults or advise when they can be

overlooked. A good buyer’s agent will show you all listings or properties on the market that meet your requirements and not only listings that are handled in-house or listed by their office. Competent buyer’s agents help their buyers to think clearly as the homebuying process unfolds. For example, if a house is a good buy, a buyer’s agent might suggest looking past the dated bathroom and kitchen and look at the space above the garage that will make the perfect art studio or home office you desire. Likewise, a cute house with all the amenities but with knob-and- tube wiring or a 40-year-old roof might not be worth the asking price. If you decide to buy with the intention of building an addition, the agent should advise you to check the local building authorities before making an offer. Once the seller has accepted your offer, you must schedule inspections of the home. They also coordinate attorneys, lenders, and all other professionals involved with the purchase of the home. If negotiations need to be made over the price, you won’t have to negotiate yourself. Your buyer’s agent will do that for you. A good buyer’s agent will be with you from start to finish and beyond.

DUAL AGENCY: THE BASICS

A “dual agency” relationship occurs when a buyer is being represented by a brokerage firm that controls the listing. Once an agent represents both the seller and the buyer within the same transaction, the situation is known as “dual agency.” In multiple states, this is illegal because of the conflicts of interest that can arise regarding the broker. All agents hold the same responsibility, which is to inform their clients of all potential risks that could arise due to conflicts of interest. Legally, agents are not allowed to work on both sides of any transaction without consent from the clients.

If you’re selling your home and you don’t want your agent to also work with the buyer of your home, it’s your right to say so in the listing agreement. This is also true for buyers. A buyer can get out of an agreement with an agent if they are interested in purchasing a home their agent is listing. When it comes to dual agency, there are some advantages for the seller. • Trust has already been gained with your listing agent, so representation for the buyer has been established. • Your listing agent will have already covered and researched your neighborhood’s market to gain buyer inquiries, which means your agent will be working from all sides of the transaction to sell your house faster, and with more incentive. • Your agent may work with corporate relocation buyers who need to find a house quickly. There are also cons for the seller when it comes to dual agency, and they are: • You can’t be advised by your agent as thoroughly when they must act as a dual agent because impartial facilitation is required. • Your listing agent is not allowed to negotiate the best or highest price for you if also negotiating the best terms for the buyer. Buyers and sellers can avoid surprises or missteps in a dual agency sale by ensuring they have clarified important details with their agents ahead of time. Do this by using an exclusive buyer agency agreement, or a listing agreement. 11

HOW REAL ESTATE AGENTS ARE PAID

Real estate agents, unlike professionals in different categories who bill by hourly rates or earn a salary, get paid through a transaction (commission) at the end of each sale. For example, if an agent has worked with a seller or a buyer for months, they don’t get paid for the time spent if there is no transaction during that period. Agents receive a commission once the transaction goes through to settlement (closes) based on the selling price of the home. At that point, the commission is earned. The commission itself is negotiated, in most cases, between the seller and the listing agent. Typically, an agent will earn a commission between 5% and 6% of the sale price, which will be split between the listing agent and the buyer’s agent. Even though some agents are associate brokers, or brokers in general, all commission payments are instructed to go through to the broker who’s managing the brokerage where the agent is working. From there, the commission is then split to the agent and the broker, according to the agreement that’s been made. The split will vary; sometimes, newer agents will earn a small portion of the commission compared to the experienced or successful agents who generally have higher earnings.

PAYING THE COMMISSION ITSELF

The overall commission is paid for at the settlement period by the seller. The fee is taken from the proceeds of the sale of the home or the property. However, it could be said that the buyers pay the commission because they’re literally paying the price to purchase the house, while the sellers take the commission for the agent into account during the process of determining the price for the listing.

From there, the commission is then divided during the settlement process between the buyer’s agent brokerage and the listing agent’s brokerage. Afterward, the agents who made the real estate sale are further paid by their brokers.

CHAPTER 2

Owning vs. Renting Owning your own home might be one of the defining qualities of the “American Dream”: the set of ideals that includes opportunity for prosperity and success and an upward social mobility for the family and children, achieved through hard work. Homeownership is surely ingrained as one of the strongest representations of that vision; 66% of Americans own their own home and more hope they will or wish they did. Something about homeownership plucks a strong chord with Americans. Financial security, permanency, status, and pride are values many of us seek. Lifestyle plays a big role in the decision to own versus rent. Homebuying is most often driven by household formation, such as marriage and growing a family. The U.S. homeownership rate has fluctuated between 62% and 70% since the 1950s. Most young people begin their independent lives renting an apartment, maximizing lifestyle flexibility and minimizing the hefty upfront costs associated with purchasing a home. As they build careers, save money, and start families, many choose to buy a home, recognizing that homeownership, as opposed to rental living, is more appropriate for their growing family’s needs. At the other end of the age spectrum are homeowners nearing retirement who may desire to sell their homes, downsize, avoid the maintenance and other obligations, and go back to renting.

WHICH IS BEST?

Is it better to rent or buy a home? Most adults ask themselves this at some point as they form their goals and plan for the years ahead. Owning and renting each have their advantages, but what’s best for you depends on your circumstances. Before you answer the question of rent or buy, here are some things to ask yourself. How long will you stay in the home? Each situation is different, and whether the time you plan to spend in the house warrants its purchase is nearly impossible to predict. In general terms, it takes four to seven years to break even on a home, i.e., where there has been enough appreciation to pay back the cost of the transaction and cost of ownership. If you’re thinking about buying a home and selling it in two years, it is unlikely that buying will be less expensive than renting. Do you think of or need your house as an investment in your retirement plan? Americans are used to their homes being a store for wealth to liquidate in retirement when downsizing their lifestyle. Long-term investing means accepting a certain amount of risk in the pursuit of higher rewards. This generally means equity-type investments, like stocks and real estate. They tend to be the best long-term investments because of their potential for capital appreciation. Although the value of your home may rise, as a cautionary note know that the value of your home can fall as well. Are you financially ready? Owning a home is a financial commitment that requires planning on how homeownership fits into your future. Determine your budget to see if either buying or renting best fits your finances. Crunch all the numbers. A frequent mistake of first-time homebuyers is comparing a month’s rent to a month’s mortgage payment. Many people don’t have all the numbers. There are many additional fees necessary to include to make a fair comparison: principal, interest, property taxes, property insurance, homeowners’ association

(HOA) fees, and ongoing maintenance.

Are you prepared for the down payment? This is the lump sum payment needed at closing to fund your equity in the property (how much of the property you actually own). Down payments vary; 20% is preferred and gets the best interest rates. There are some loans that allow down payments as low as 3%. Sometimes relatives help with the down payment. If you have a choice, take a gift rather than a loan because lenders will add the loan debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio. Can you afford the monthly mortgage and its components? Generally, a mortgage payment includes loan principal and interest, both amortized over the life of the loan, plus homeowner’s insurance, and property taxes. These items can affect the monthly payment by several hundred dollars. Are you emotionally ready? Can you handle the stress? A big factor to consider when buying a home is stress. The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life. Four events are specifically home related: change in financial state (No. 16), large mortgage or loan (No. 20), change in living conditions (No. 28), and change in residence (No. 32). If someone has recently made other life changes, such as marriage (No. 7), switching careers (No. 18), or having a child (No. 14), it might be wise to postpone buying a home. Stress overload can lead to missed payments, which can result in destroyed credit or even losing the home. It’s better to rent if your life is in flux and then buy when your stress levels are lower. Are you ready for commitment? Are you ready to make lots of decisions, from picking a real estate agent to picking paint colors? Are you confident enough to choose a neighborhood

where you believe home values will continue to appreciate and that will serve your needs, e.g., proximity to schools, shopping, recreation, etc.? Are you ready for devoting the time and attention to maintaining a home, e.g., leaf-raking, grass-cutting, appliance maintenance and repair, etc.? Taking care of your biggest investment can be gratifying but only if you’re ready.

ADVANTAGES OF BUYING YOUR HOME

Control over housing expense. By selecting a fixed-rate 15-, 20-, 25-, or 30-year mortgage, the homeowner has assurance that the mortgage payment won’t increase, and, in fact, will be eliminated at the end of the term (subject to refinancing). Homeowner's insurance and real estate taxes normally will increase. You build equity. Some of each monthly mortgage payment goes toward the loan’s interest. Other portions may go to homeowner’s insurance and real estate taxes. The remainder pays down the loan principal. Every dollar put toward your loan’s principal represents a dollar of equity, actual ownership of the property. The property should appreciate in value each year, further adding to its equity (what the house could be sold for versus what is owed on it). Discounting certain blip periods, such as the 2008 housing bubble burst, home prices in the U.S. appreciate nationally at an average annual rate between 3% and 5%. Homeownership won't make you rich overnight, but by renting, you're paying someone else's mortgage. In effect, you're making someone else rich. Remember, though, home value appreciation in different metro areas can increase at markedly different rates than the national average. Improvements increase your home’s value. A homeowner can also increase a home’s value through home improvements, thus making your home more comfortable and enjoyable while growing its loan-to-value (LTV) ratio. For instance, adding a

bathroom or finishing a basement substantially increases the property’s functionality and appeal, while potentially boosting its value. Tax advantages of homeownership. There are significant tax benefits associated with buying a house, both at the time of purchase and for the duration of time you own the home: • Homestead exemption. Many states exempt owner- occupied homes (homesteads) from a portion of the property tax amount that would normally accrue. For instance, Louisiana exempts the first $75,000 of a home’s value from property tax assessments, so a $200,000 home in New Orleans is taxed as if it were worth $125,000. • Federal tax deductions. When you’re looking to purchase a home, it’s important to understand what can and can't be deducted on your tax return. Real estate taxes and interest paid on your mortgage can be deducted if you itemize your federal income taxes, which can reduce your income tax burden. Many homebuyers, unfortunately, overlook the effect of mortgage interest on their federal income tax payments. Mortgage interest can be a powerful financial planning tool. Calculate the amount of mortgage interest deductions you are eligible for and include that in your annual financial planning. Then, make a point of checking Internal Revenue Service (IRS) Form 1098, which you’ll receive from your lender at the end of the year. This form shows the amount of mortgage interest that you’ve paid. (Please consult with your tax accountant.) Mortgage rates. Interest rates vary through the years. Several years ago, interest rates were higher, and it was more expensive 18

to obtain a mortgage. Since these costs have been reduced, it’s now easier and less expensive to own a house. Ownership rights and creative freedom. Your decorating and home-improvement choices are just that, yours, provided they don’t break building codes or violate homeowners’ association rules. You can paint walls any which way, add fixtures, update or finish your basement, or build a patio or deck. Changing your environment to suit whims is a freeing aspect of homeownership. A sense of belonging to the community. Homeowners tend to stay in homes longer than renters and are more likely to grow roots. They might join a neighborhood association, volunteer at a nearby community center, join a school group, or align with a business improvement district. Renters might not do any of those things, particularly if they know their lease is up in a year and they might move. There’s an intangible pleasant feeling attached to owning your own home, a sense of freedom and independence. The home you live in belongs to you, and you can do what you want with it. You aren’t daunted about increases in rent or losing the lease. You’re free to make improvements and changes. Also, owning your home gives your children the guarantee of attending the schools in the area on a more permanent basis. You never need to worry about a notice from the landlord to vacate your rented house or apartment.

ADVANTAGES OF RENTING

It seems a shorter list, but one man’s pro is another man’s con, and there certainly are advantages to renting that you should factor into your buy-or-rent decision. No responsibility for maintenance. Admittedly, this is a big one. As a renter, you’re not responsible for home maintenance or repair costs. If a toilet backs up, a pipe bursts, or an appliance

stops working, you don’t have to call an expensive repair person, you just call your landlord or superintendent. Renters in condos, townhouses, or apartments don’t have lawn and grounds care obligations. Relocating is easier. When renting, relocating for work is easier. Though a sudden move may require you to break your lease, you can partially offset the cost by subletting your apartment or talking with your landlord. On the other hand, selling a home takes time and effort. If you have a short timeline to sell your home, you may be forced to accept a lower price and lose some of your investment. No real estate market exposure. Home values fluctuate and can decline over time. If you’re a renter, that’s not your problem. If you’re an owner trying to sell, it is.

DISADVANTAGES OF OWNING

Maintenance. The renter’s largest advantage might just be the homeowner’s major disadvantage. While insurance might be available to protect against expenses from major catastrophes, maintenance items are on the homeowners’ dime. Maintenance and repair can be as simple as repainting the baseboards and can also be as extensive and expensive as replacing a HVAC system or sewer pipe. The expense will vary from year to year; however, you can expect to pay about 1% of the value of your home annually toward these expenses. If you live in a $200,000 home for 10 years, that’s $20,000 over the period, and perhaps more if you must replace a costly, long-lived mechanical item, such as a furnace. Keep in mind the usual homeowner’s chores of lawn care, snow removal, gutter cleaning, and other regular home maintenance needs. Upfront and closing costs. Buying a home entails numerous upfront costs. Some are paid out-of-pocket after the seller

accepts your purchase offer, while others are paid at closing. These include earnest money, down payment, typically ranging from 3.5% for FHA loans to more than 20% of the purchase price, home appraisal, home inspection, real estate taxes, and first year’s homeowner’s insurance. Loss of relocation flexibility. It’s much easier to break a lease and move out of town than to arrange for the sale of a residence. Selling the home from out of town involves special logistics and financial matters, such dealing with the mortgage while the home is on the market. Financial loss potential. Homeownership builds equity over time; however, equity doesn’t always equal profit. If home values in your area go down or remain stagnant during your time as a homeowner, the appraised value of your home could decrease, putting you at risk of a financial loss when you sell.

DISADVANTAGES OF RENTING

No equity building. The monthly rent you pay goes to the landlord. It represents the fee you pay for using the property. You gain no ownership in the property, no matter how long you live there. No tax benefits. While homeowners can deduct real estate taxes and mortgage interest on their tax returns, renters aren’t eligible for housing-related federal tax credits or deductions. Home improvements go to the landlord. Any structural and affixed decorative home improvements that renters make belong to the building owner and will have to stay behind when you move. Additionally, you would need approval for any desired remodeling.

After all is said and done, the decision to buy or rent depends on

the prospective homebuyer’s circumstances. There’s no denying, though, that a home of your own can be a good financial and a great emotional investment. An investment in a home can also mean an investment in your future. There is much to consider when deciding to buy a home. Switching from renting to homeownership is highly challenging but an exciting and amazing decision!

CHAPTER 3

Shopping for a Home Loan The decision to buy a home puts you into a realm full of things you have not dealt with prior, especially if you used to rent your home. Owning a house brings a whole new experience. The first task you should work on before you begin looking for a house is organizing your credit issues. It’s important to ensure your credit is in order, because making any mistakes at this juncture can take months to correct and might even end up sinking your chances of owning a home. Go online and get your credit report. The purpose of getting your credit report is not just to give you a chance of getting the best bargaining terms, but it will help you know where you stand. It’s important because you might find that you aren’t creditworthy and that will torpedo the chance to buy. If you find yourself in that situation, it might be a good idea to use a credit repair company. Search for a reputable credit repair company. Some credit repair companies are either not good enough or charge too much. The company will help you repair your credit, as well as assist in correcting any mistakes that might be on the credit report. A powerful piece of information many homebuyers overlook is the effect of mortgage interest on their federal income tax payments. It’s important to understand what can be deducted and what can’t. For example, consider taxes and mortgage interests. Mortgage interest is deductible and a powerful financial planning tool. Calculate the amount of mortgage

interest deduction and include that in your annual financial planning. Then, make a point of checking Internal Revenue Service (IRS) Form 1098 that you will receive from your lender at the end of each year. This form shows the amount of mortgage interest you’ve paid. Some of the nondeductible items include home repairs, general closing costs, homeowners’ association dues, as well as property insurance premiums. Getting a loan to purchase a home can be a tricky business, and there are terms one might find hard to understand, e.g., the term “mortgage points,” which refers to the interest that’s been prepaid. It’s possible to lower your mortgage loan’s interest rate by “buying points.” Mortgage points, or discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” and will decrease your monthly mortgage payments. One point costs 1% of your mortgage amount (or $1,000 for every $100,000). Essentially, you pay some interest upfront in exchange for a lower interest rate over the life of your loan. In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan. The interest you’ll save by buying the points depends on the number of points you buy. But you’ll owe more at closing. For instance, if your mortgage is $200,000 and you buy two points, you will owe $4,000 more at closing. However, if you’re going to buy a home and your down payment is less than 20%, you’re going to need private mortgage insurance (PMI). That will add to your monthly payment amount. Further related to taxes and property ownership is that once you own a home, you’re a property owner, with the attendant obligation to pay real estate taxes. The usual method of paying

real estate taxes is to escrow the amount of annual taxes within the mortgage payment. The mortgage servicer will pay the taxes as they are due. People have been known to spend months looking for the best possible home and eventually find a good one. However, many fail to understand the importance of finding a good loan. In the end, the new homeowner has a nice home, but a bad deal when it comes to the mortgage. Not many people have the ability to buy a house for cash; most people will require a mortgage. Therefore, you not only need to go shopping for a house, you also should go shopping for the best loan deal. There are different types of loans, and it’s best to check several and then compare them, e.g., 30-year fixed-rate, 15-year fixed-rate, adjustable-rate, FHA, VA, USDA, jumbo, and interest-only. That way, you’ll have a better chance of securing a mortgage that won’t be a burden in the future. It also means you’ll have an opportunity to save some money at the end of each month. Shopping for the best loan on your own can be a daunting experience, and it might be a difficult task to accomplish by yourself. To overcome that hurdle, it’s recommended that you hire a mortgage professional for many of the same reasons you should engage a real estate professional. If possible, you should engage the professional before you even start searching for a house. To find the best mortgage professional to guide you through the process of buying a home, seek advice from real estate agents, colleagues, or friends. Banks are generally known for having the fewest mortgage options because their products are tailor-made to suit the bank’s interests. However, they can also be more flexible, as they are the ones lending the money. If the buyer owns other substantial assets, making a deal with a bank will not

be a complicated process.

Mortgage brokers are known to offer the largest number of options. Working independently and with several financial outlets, brokers can find the best loan for the buyer from different lenders. Now that you’ve identified the house that you want to buy, and you have a professional mortgage advisor, how do you get the best mortgage deal? The first step is a comparison of different interest rates. It’s easy to get quotes from companies, since most of these companies offer these services online. However, you, as the buyer, should be careful to not just compare interest rates. The best option is to compare the interest rates, as well as all the fees, including origination fees, points, and any other fees that the lender might include in the deal. Any loan regarded as a no-fee loan means that all the fees have been included in the rates, and you should make a point of noting that. You have the responsibility of ensuring you understand every aspect of the mortgage deal. Therefore, it’s up to the buyer to get these details from the person handling the loan. As a new homeowner, it would be wise to remember that monthly mortgage payments aren’t the only expenses you’ll be paying. You will be paying real estate taxes, homeowner’s insurance, and maintenance costs. Therefore, you should ensure you have budgeted for all these items. Understand that once you have the house, it will become the focal point of your life. That means when you purchase the house, you’ll be investing in the surrounding community, as well. You’ll be commuting to work from that house; your kids will be going to school in that community and any other activities that your family will be involved in will revolve around

that community. All these considerations should be in your mind before closing the deal.

CHAPTER 4

Programs For Homebuyers According to the Census Bureau, 67% of Americans own their homes. That still leaves a huge number of people who cannot buy their own house, often because they can’t afford the closing costs, or they can’t meet the down payment requirements.

GRANTS FOR FIRST-TIME HOMEBUYERS

The U.S. Department of Housing and Urban Development (HUD) provides billions of dollars every year to housing grants, turning the dream of homeownership into reality. If you’re buying a home for the first time, you can file for a buyer’s grant. There are national, state, and local programs and grants available to first-time homebuyers. These programs and subsidies can help cover portions of acquisition costs, including the down payment. Grants can be just as important as loans when buying your first house. First-time grants for homebuyers can be a significant source of funding, and unlike a loan or a debt, a grant won’t have to be repaid. Often, these programs are aligned in areas where the government wants to capitalize on the revitalization of a community. This makes “urban homesteading” a viable and less expensive option for the first-time buyer. These grants are a boon for both homebuyers and the community. Given the lower requirements for down payment, Federal Housing Administration (FHA) loans are a natural, if not a perfect fit for the many down payment assistance programs

available to help you on your way to buying a home. Most federal grants are targeted to the first-time homebuyer and are intended to help those individuals get started toward homeownership. These grants help with down payments or the costs of closing. However, they shouldn’t be expected to cover a large percentage of the new home’s cost. Most cover less than 10% of the home’s value. For example, a down payment with an FHA loan is 3.5% of the cost of the home. Current FHA loan guidelines allow for the down payment portion of your home loan to come from several places: a gift, personal savings, tax returns, and down payment assistance programs. Down payment assistance programs are funded at the city, county, and state levels; due to this funding, the assistance programs are ever-changing. Each program operates on its own budget and operates with its own set of requirements. Credit score, income levels, and other criteria will factor into your eligibility for down payment assistance programs. According to the U.S. Department of Housing and Urban Development, grants won’t be given to anyone who doesn’t qualify for a mortgage. Do your research, and check what grants are available in the community you’re planning to move to. There are steps to follow when applying for a buyer grant. First, find a homebuyer grant that fits you. Then, check the requirements of that grant program. Finally, find an approved lender and fill out all the application forms. There are also programs that provide funds for other purposes in the process of buying a house. Many of these programs offer loans that don’t have to be repaid, a very helpful thing for someone who has all the elements of a successful homebuyer.

The HUD website is a great resource for buying a home, whether it’s your first or your tenth! (https://hud.gov)

PENALTY-FREE IRA WITHDRAWALS FOR FIRST TIMERS

First-time homebuyers are eligible to withdraw $10,000 during their lifetime from their Individual Retirement Accounts (IRAs) without paying the 10% penalty for withdrawal before the age of 59½, assuming certain requirements are met. The biggest requirement is that the money must be used to buy or build a primary residence (not a vacation home). If you have a traditional IRA, you’ll have to pay income tax on the money withdrawn. Roth IRA accounts, however, aren’t subject to additional taxes, as they are funded with money that has already been taxed. The $10,000 lifetime amount that can be withdrawn penalty-free from an IRA is per each individual; this means a couple could withdraw $20,000 combined to pay for their first home. The person withdrawing also doesn’t have to be the future homeowner. A person under the age of 59½ can qualify for the tax exemption if they are helping a child, grandchild, parent, or another immediate family member purchase their first home. The money withdrawn from either a traditional or Roth IRA must be used within 120 days or it becomes subject to a penalty, so be sure to plan ahead. Depleting your retirement savings is also risky business, as it might, over time, be more cost effective to keep the money earning interest rather than applying it to your down payment. Speak to a financial advisor for help with your specific situation.

OTHER HOMEOWNER TAX BREAKS:

• The Mortgage Interest Deduction. This is one of the most beneficial tax breaks that homebuyers can take advantage 32

of, whether they are first-time buyers or otherwise. The IRS allows you to deduct, from your taxable income, the interest you pay your lender. Home mortgage interest is one of the largest deductions for those who itemize. Lenders will report your mortgage interest on a 1098 form, sent out annually. The Mortgage Interest Deduction (MID) is valid for mortgage debt up to $750,000 or mortgage debt up to $375,000 if you are married but filing separately. Homebuyers can receive a large benefit in the first years after buying, as the first repayments have the highest interest. To claim the MID benefit, homebuyers will have to file an itemized tax return. Check with your professional tax preparer for up-to-date information. • Mortgage Points. Discount points (also known as mortgage points) are fees paid directly to the lender at closing in exchange for a reduced interest rate. The cost of discount points is equivalent to 1% of your mortgage ($1,000 for every $100,000). Discount points involve prepaid interest and can reduce your total mortgage payment. The interest rate on your mortgage typically lowers by 0.25% with each point you buy. If you elect to do this, the fee for the points is tax deductible for the year in which you paid them, assuming the loan you obtained is for your full-time, year-round home (as opposed to a second home or a vacation home). • Mortgage Credit Certification. The Mortgage Credit Certification (MCC) is another program that helps thousands of homebuyers secure a tax credit, increasing payment affordability. This IRS-based program is aimed at helping lower-income groups afford their first home.

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