Nolo's Essential Guide To Buying Your First Home

Nolo's Essential Guide To Buying Your First Home
Bu y i n g Yo u r
Home
Nolos Essential Guide to
Negotiate a great price
Get a low mortgage rate
Make the most of today’s
market
5TH EDITION
Ilona Bray, J.D.
Alayna Schroeder, J.D.
& Marcia Stewart
Free Legal Updates at Nolo.com
Nolo’s excellent guide for novice home buyers provides
fresh, updated information about the whole process that
even those in the know will find useful.”
LIBRARY JOURNAL
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With
e most complete home-buying book you will nddoesn’t leave out any
of the essentials. On my scale of one to 10, this superb new book rates an o-
the-chart 12.
—Robert Bruss, syndicated real estate columnist
Coming from a gal that knows tools, this book is a must-have tool for any
home buyer. It oers so much essential information, purchasing a home
without it would be like trying to drive a nail without a hammer!”
—Norma Vally, host of Toolbelt Diva (Discovery Home) and
author of Chix Can Fix: 100 Home Improvement Projects and
True Tales From the Diva of Do-It-Yourself
Any rst-time homebuyer owes it to him or herself to get this book. It’s
packed with information you won’t nd anywhere else, yet is remarkably
accessible, even when covering complex nancial issues.
—Elisabeth DeMarse, CEO, Creditcards.com,
former CEO, Bankrate.com
Enthusiasm, hints and tips all rolled into a great read for rst-timers.
—Pat Lashinsky, President of ZipRealty
Provides in-depth insight and helpful advice that is easy to understand
and use.
—Rob Paterkiewicz, CAE, IOM,
Executive Director, American Society of Home Inspectors
“Like having over a dozen real estate experts over for dinner.
Steve Kropper, President, Bank on Real Estate,
founder of Domania.com
“Nolo’s excellent guide for novice home buyers provides fresh, updated
information about the whole process that even those in the know will nd
useful.”
—Library Journal
5th Edition
Nolo’s Essential Guide to
Buying Your
First Home
Ilona Bray, J.D.,
Alayna Schroeder, J.D.,
& Marcia Stewart
LAW for ALL
FIFTH EDITION JANUARY 2015
Editor ILONA BRAY
Cover Design SUSAN WIGHT
Book Design SUSAN PUTNEY
Proofreading ROBERT WELLS
Index SONGBIRD INDEXING SERVICES
Printing BANG PRINTING
Bray, Ilona M., 1962-
Nolo’s essential guide to buying your rst home / by Ilona Bray, Alayna Schroeder & Marcia
Stewart. -- 5th edition.
pages cm
Includes index.
ISBN 978-1-4133-2118-0 (pbk.) -- ISBN 978-1-4133-2119-7 (epub ebook)
1. House buying. I. Schroeder, Alayna, 1975- II. Stewart, Marcia. III. Title.
HD1390.5.B734 2014
643'.120973--dc23
2014019577
is book covers only United States law, unless it specically states otherwise.
Copyright © 2007, 2009, 2011, 2012, and 2015 by Nolo. All rights reserved. e NOLO
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Please note
We believe accurate, plain-English legal information should help you solve many of
your own legal problems. But this text is not a substitute for personalized advice
from a knowledgeable lawyer. If you want the help of a trained professional—and
we’ll always point out situations in which we think that’s a good idea—consult an
attorney licensed to practice in your state.
Acknowledgments
is book was a 100% team eort and couldn’t have been written without
the advice, stories, and ideas of real estate experts and homebuyers from
around the United States. First and foremost, we thank the members of our
advisory board, who spent countless hours reviewing chapters, explaining
local practices, and sharing the best and worst memories from their
professional experiences.
Special thanks to the late Broderick Perkins, a real estate journalist
based in San Jose, California, who reviewed and contributed to every
chapter of this books early editions.
Our other invaluable sages included:
• Nancy Atwood, real estate broker with ZipRealty in Framingham,
Massachusetts (www.ziprealty.com)
• Amy Bach, J.D., consumer advocate and Executive Director and
cofounder of United Policyholders, a national nonprot (www.
uphelp.org), based in San Francisco, California
• Timothy Burke, founder and CEO of National Family Mortgage
(www.nationalfamilymortgage.com), based in Waltham,
Massachusetts
• Alicia Champagne, real estate attorney (www.champagneand
marchand.com), short sale negotiator, and Realtor education
teacher in Wilmington, Massachusetts
• Marjo Diehl, Mortgage Adviser at RPM Mortgage in Alamo,
California (www.rpm-mtg.com)
• Sandy Gadow, expert on real estate closing and escrow, and best-
selling author of e Complete Guide to Your Real Estate Closing
(www.escrowhelp.com)
• Kenneth Goldstein, Boston-area attorney with the law rm of Goldstein
& Herndon, LLP (www.brooklinelaw.com), and Chairman of the
Board of Selectman of the Town of Brookline, Massachusetts
• Paul Grucza, Director of Education and Client Engagement for
e CWD Group, Inc. AAMC
®
in Seattle, Washington (www.
cwdgroup.com)
• Richard Leshnower, New York-based real estate attorney
• Paul A. Rude, professional inspector and owner of Summer Street
Inspections, in Berkeley, California (www.summerinspect.com)
• Bert Sperling, city and neighborhood expert and author in Portland,
Oregon, and founder of www.bestplaces.net
• Daniel Stea, broker/owner/attorney at Stea Realty Group in Berkeley,
California (www.stearealtygroup.com)
• Fred Steingold, attorney and author in Ann Arbor, Michigan (many
of his books on small business and other legal matters can be found
on www.nolo.com)
• Russell Straub, founder, President, and Chief Executive Ocer of
LoanBright, a mortgage marketing service based in Evergreen, Colorado
(see www.loanbright.com and www.compareinterestrates.com)
• Tara Waggoner, MBA, real estate broker and Market Manager at
Redn in Houston, Texas (www.redn.com).
A number of other experts provided additional advice—youll see many
of them quoted in this book. ey include Neil Binder, New York real
estate investment expert (www.bellmarc.com); Elisabeth DeMarse, CEO
and president at eStreet, Inc., and New York-based real estate industry
expert (www.demarseco.com); Kartar Diamond (www.fengshuisolutions.
net); Debbie Ostrow Essex, child and family therapist based in Berkeley,
California; Stephen Fishman, attorney and Nolo author; Joanna Hirsch,
real estate agent with Pacic Union in Oakland, California (jhirsch@
pacunion.com); Joel Kinney, attorney with Fort Point Legal in Boston,
Massachusetts (fortpoint.me); Annemarie Devine Kurpinsky, associate with
George Devine, Realtor
®
; Pat Lashinsky, former President, ZipRealty; Je
Lipes, Vice President at Rockville Bank in Hartford, Connecticut; Maxine
Mackle, Connecticut Realtor
®
(www.halstead.com); Paul MacLean, retired
home inspector in Austin, Texas; Mark Nash, Associate Broker with
Coldwell Banker, who serves the Chicago, Evanston, Skokie, and Wilmette
areas of Illinois (www.marknashrealtor.com), and author of 1001 Tips for
Buying & Selling a Home; Carol Neil, independent broker and Realtor
®
in
Berkeley, California (www.pacicunion.com); Fiore Pignataro, Realtor
®
with Windermere Realty in Seattle, Washington (www.windermere.com);
Lorri Lee Ragan, formerly of the American Land Title Association (www.
alta.org); Mary Randolph, attorney and author; Frank Rathbun, Vice
President of Communications, Community Associations Institute (www.
caionline.org); Ira Serkes, Berkeley Realtor
®
with Pacic Union (www.
berkeleyhomes.com); Viviane M. Shammas, attorney and real estate broker
in Ann Arbor, Michigan (www.vivianeshammas.com); Debbie Stevens,
Oregon real estate agent (www.ramsayrealty.com); Rich Stim, attorney and
Nolo author; Craig Venezia, real estate author (www.craigvenezia.com);
and Loretta Worters, Vice President of Communications for the Insurance
Information Institute.
No amount of advice can substitute for a personal story, so we’d also
like to thank the many homebuyers who shared the good, the bad, and the
ugly of their own experiences or told us what they’d like from this book,
including Amy Blumenberg, Laurie Briggs, Dave and Danielle Burge, Karen
Cabot, Linda Chou, Jennifer Cleary, Jaleh Doane, Phil Esra, Lisa Guerin,
Gabrielle Hecht, Pat Jenkins, Ellie Kania, Justin and Tamara Kennerly, Chris
and Libby Kurz, Talia Leyva, Willow Liro, Meggan O’Connell, Evan and
Tammy Ohs, Leny and Frank Riebli, Leah Scheibe, Diane Sherman, Bruce
Sievers, Luan Stauss, Tom and Heather Tewksbury, Catherine Topping, Josh
and Gillian Viers, Julie and Malachi Weng-Gutierrez, and Kyung Yu.
Within Nolo, we got huge amounts of help from our talented
colleagues. Rich Stim did an excellent job with the audio interviews.
Other colleagues who lent a hand, researching everything from 50-state
legal matters to fun facts, included Cathy Caputo, Lexi Elmore, Jessica
Gillespie, Stan Jacobsen, Terry McGinley, Kathleen Michon, Stephen
Stine, Leah Tuisavalalo, Charles Walmann, and Jo Warner. Sandy Coury
and Sigrid Metson helped line up advisory board members. Particularly
heartfelt thanks go to the late Steve Elias, whose energy and expertise on
foreclosure matters are sorely missed by everyone at Nolo.
Big thanks to our colleagues in the editorial department, who supported
us through the (long) process of writing this comprehensive (and yet fun!)
text. Kudos to Susan Putney in Nolos Production Department who took
a challenging compilation of information and turned it into a beautifully
designed book.
anks also to Nolo founder Jake Warner, who championed this book
idea for many years.
Our basements may be cluttered, our gardens may need weeding, and
our oors may need a good scrubbing—but we love our homes. anks
to the people who helped us get there—professionals (some who taught
us what to do, others who taught us what not to do!) and our families,
who share the joy of homeownership with us.
About the Authors
Ilona Bray is an attorney, author, and legal editor at Nolo. Her other real
estate books include e Essential Guide for First-Time Homeowners and
Selling Your Home: Nolo’s Essential Guide. Her working background
includes solo practice, nonprot, and corporate stints. She sold her rst
home at a protdespite being in the middle of a real estate downturn—
and bought a larger home. Her fantasy house would be a Greene &
Greene mansion of the same style (like the Gamble House in Pasadena),
with a large sun porch and lots of surrounding trees.
Alayna Schroeder is an attorney whose legal experience has included
everything from work at a corporate law rm to editing and writing
to a stint in the Peace Corps. According to Sacramento Magazine, her
rst home, which she shared with her husband, twin babies, and a
Bolivian-born dog, Luna, was in one of the Sacramento area’s ten Great
Neighborhoods—a fact Alayna tried to remember as she redid the aging
plaster and desperately searched for adequate closet space into which to
stu modern-day baby gear. Alayna’s idea of a fantasy house is always
changing, but she’d settle for an A-frame in the woods with a lake view, big
deck, and gourmet kitchen.
Marcia Stewart is the author or editor of many Nolo real estate books,
including the best-selling Every Landlord’s Legal Guide. Years ago, she
found the perfect “starter” house in one of her favorite neighborhoods.
As her family started to grow, so did the house, with a new second story
and deck. Most recently she (nally!) remodelled her 1950s kitchen. Her
fantasy house would be a Queen Anne Victorian with a home theater and
a beautiful garden and pool.
Your Homebuying Companion ...........................................................................1
1
Whats So Great About Buying a House? .................................................5
Investment Value: Get What You Pay For … And en Some ......................8
Tax Breaks: Benefits From Uncle Sam .........................................................................11
Personality and Pizzazz: Your Home Is Your Castle ...........................................14
No More Landlord: Say Goodbye to Renting .........................................................15
You Can Do It If You Want To ..................................................................................16
2
What Do You Want? Figuring Out Your
Homebuying Needs ......................................................................................................23
Know Your Ideal Neighborhood: Why Location Matters ..............................26
Know Yourself: How Your Lifestyle, Plans, and Values Affect
Your House Priorities .........................................................................................................28
Know Your Ideal House: Old Bungalows, New Condos, and More .........30
Would You Like Land With at? Single-Family Houses ................................30
Sharing the Joy, Sharing the Pain: Condos and Other
Common Interest Properties........................................................................................33
Factory Made: Modular and Manufactured Homes ......................................... 37
Putting It All Together: Your Dream List ..................................................................38
3
Does is Mean I Have to Balance My Checkbook?
Figuring Out What You Can Afford ............................................................47
Beyond the Purchase Price: e Costs of Buying and Owning a Home
........51
Spend Much? How Lenders Use Your Debt-to-Income Ratio ..................... 57
Blasts From the Past: How Your Credit History Factors In ............................59
What’s Your Monthly Budget? Understanding Your Finances ...................65
Table of Contents
Getting Creative: Tips for Overcoming Financial Roadblocks .....................67
e Power of Paper: Getting Preapproved for a Loan ...................................... 68
4
Stepping Out: Whats on the Market and at What Price ....... 73
What’s the Buzz? Checking Out Neighborhoods From Your Chair ........76
See for Yourself: Driving rough Neighborhoods ............................................85
On Foot: Talking to the Natives......................................................................................86
Sunrise, Sunset: Getting Day and Night Perspectives ....................................... 87
Got Houses? Finding Out Whats Locally Available ...........................................88
How Much Did at One Go For? Researching “Comparable” Sales .....90
Hot or Cold? Take the Market’s Temp ........................................................................92
Just Looking: e Open House Tour ...........................................................................94
Nothing to Look at Yet? Finding Your Dream Development .....................95
5
Select Your Players: e Real Estate Team .......................................... 97
Your Team Captain: e Real Estate Agent .........................................................100
Your Cash Cow: e Mortgage Broker or Banker .............................................114
Your Fine Print Reader: e Real Estate Attorney ............................................120
Your Sharp Eye: e Property Inspector ................................................................ 128
Your Big Picture Planner: e Closing Agent .......................................................132
Strength in Numbers: Other Team Members .................................................... 136
6
Bring Home the Bacon: Getting a Mortgage ..................................137
Lets Talk Terms: e Basics of Mortgage Financing ....................................... 140
Who’s Got the Cash? Where to Get a Mortgage .............................................. 146
Narrowing the Field: Which Type of Mortgage Is Best for You? ............. 146
Getting Your Cash Together:
Common Down Payment
and Financing Strategies .............................................................................................................. 153
Where Do I Look? Researching Mortgages ............................................................ 155
I’ll Take at One! Applying for Your Loan .......................................................... 156
New-Home Financing ........................................................................................................ 162
Unique Financial Considerations for Co-op Buyers ........................................164
7
Mom and Dad? e Seller? Uncle Sam?
Loan Alternatives ......................................................................................................... 165
No Wrapping Required: Gift Money From Relatives or Friends ............ 168
All in the Family: Loans From Relatives or Friends ......................................... 172
A One-Person Bank: Seller Financing ....................................................................... 182
Backed by Uncle Sam: Government-Assisted Loans ....................................... 185
8
I Love It! Its Perfect! Looking for the Right House...................191
How Your Agent Can Help ............................................................................................. 194
e Rumor Mill: Getting House Tips From Friends ........................................ 197
Keeping Track of New Listings ...................................................................................... 197
Planning Ahead for House Visits ................................................................................. 198
Come on In: What to Expect as You Enter ........................................................... 199
Do We Have a Match? Using Your Dream List ................................................... 203
All the World’s Been Staged: Looking Past the Glitter ................................ 203
Recent Remodels: What to Watch Out For ......................................................... 204
Walk the Walk: Layout and Floor Plan ....................................................................205
What Do ey Know? Reviewing Seller Disclosure Reports ......................206
Reviewing the Seller’s Inspection Reports (If Any) ...........................................211
Poking Around: Doing Your Own Initial Inspection .......................................215
Hey, Nice Dirt Pile! Choosing a Not-Yet-Built House .......................................215
Buying a New or Old Condo or Co-op? Research the Community .......219
9
Plan B:
Fixer-Uppers, FSBOs, Foreclosures, and More ................. 225
Castoffs: Searching for Overlooked Houses ......................................................... 228
Look What’s Back on the Market! ..............................................................................230
A Foot in the Door: Buying a Starter House ........................................................ 231
Have It Your Way:
Buying a Fixer-Upper or House You Can Add on To ....... 232
Share Your Space: Buying Jointly ................................................................................ 235
Subdivide Your Space: Renting Out a Room ....................................................... 238
Hey, Where’s eir Agent? Looking for FSBOs (For Sale by Owners) ...... 239
Buying a Short Sale Property ..........................................................................................242
Buying a Foreclosure Property ..................................................................................... 246
Buying a House in Probate .............................................................................................. 252
10
Show em the Money: From Offer to Purchase
Agreement........................................................................................................................... 255
Start to Finish: Negotiating and Forming a Contract .................................... 259
More an Words: What’s in the Standard Purchase Contract .............264
Too Much? Not Enough? How Much to Offer ...................................................268
Keeping Your Exit Routes Open: Contingencies .............................................. 273
Putting Your Money Where Your Mouth Is: e Earnest
Money Deposit ................................................................................................................... 278
Divvy It Up: Who Pays What Fees ..............................................................................280
Deal or No Deal: Picking an Expiration Date .......................................................280
ink Ahead: Closing Date ............................................................................................. 281
Strategies in a Cold Market: What to Ask For ....................................................282
Strategies in a Hot Market: Making Your Offer Stand Out ...................... 283
Contracting to Buy a Brand-New Home................................................................284
11
Toward the Finish Line: Tasks Before Closing ...............................287
Wrappin’ It Up: Removing Contingencies ............................................................. 291
Will It Really Be Yours? Getting Title Insurance.................................................301
Yours, Mine, or Ours? What to Say on the Deed ..............................................306
Get Ready, ‘Cause Here I Come: Preparing to Move .......................................310
12
Send in the Big Guns: Professional Property Inspectors .......317
Home Inspection Overview: What, When, and at What Cost? ............... 320
House Calls: Your General Home Inspection ...................................................... 322
Tagging Along at Your General Home Inspection ........................................... 325
Say What? Understanding Your General Home Inspection Report ..........327
Termite or Pest Inspections ............................................................................................ 329
When to Get Other, Specialized Inspections .......................................................331
Trouble in Paradise: Inspecting Newly Built Homes ....................................... 333
13
Whos Got Your Back?
Homeowners’ Insurance
and Home Warranties ..........................................................................................................337
Coverage for Your House .................................................................................................340
Damage Your Homeowners’ Insurance Wont Cover .................................... 345
Protection for Others’ Injuries: Liability Insurance .......................................... 347
Your Out-of-Pocket: Homeowners’ Insurance Costs...................................... 350
Insurance Deductibles ........................................................................................................351
Shopping Around for Homeowners’ Insurance ................................................. 354
Types of Insurance Companies......................................................................................355
Jointly Owned, Jointly Insured: What Your Community
Association Pays For ...................................................................................................... 356
Home Warranties for Preowned Houses ............................................................... 357
Home Warranties for Newly Built Houses ............................................................ 358
14
Seal the Deal: Finalizing Your Homebuying Dreams ............. 361
Preview of Coming Attractions: What Your Closing Will Involve ..........364
Is It Really Empty? Final Walk-rough of an Existing House ....................369
Is It Really Finished? Final Walk-rough of a New House .......................... 372
Your Last Tasks Before the Closing .............................................................................375
e Drum Roll, Please: Attending the Closing ..................................................382
Closing Documents Related to Your Mortgage Loan .................................... 383
Closing Documents Related to Transferring the Property ......................... 385
Can I Move In? Taking Possession...............................................................................386
15
Settling Into Your New Home ........................................................................389
Tell the World You’ve Moved ........................................................................................392
Home, Hearth, and Hors d’Oeuvres: Settle in Socially ..................................394
e Safest Home in Town: Yours ................................................................................ 396
Cozy Up Without Breaking the Bank .................................................................. 397
ere’s a Place for It: Organize Your Records ......................................................403
Back to the Future: Get Your Finances on Track ..............................................407
A
Using the Interactive Forms ............................................... 409
Editing RTFs ............................................................................................................................... 410
List of Forms ..............................................................................................................................411
Index............................................................................................................................................413
Your Homebuying Companion
B
uying your rst house may be one of the rst certiably grown-
up things you ever do. And no matter how ready you feel,
taking a major step like this—particularly one where there
are so many zeros on the price tagcan make you want to just close
your eyes and get it over with.
But if youre going to invest your time and money, you want to
make sure you dont nd just any house—you nd the right house, at
the right price, with the right loan. A house youre happy to stay in for
a long time, no matter what the market does. To do that, you need a
lot of information.
is book is full of nuts-and-bolts information about the homebuy-
ing process. But it’s also got anecdotes and advice that we hope will
remind you to enjoy this exciting, if sometimes frustrating or nerve-
wracking process. Keep in mind what youre aiming for: your own
home, where youre free to pound nails in the wall, get a cat, or paint
your bedroom any color you want, without asking the landlord!
By the time youve read the key information here (dont worry,
you wont have to read every chapter or every section), youll truly be
ready. We’ll show you how to:
• choose the appropriate house in the best possible neighborhood,
whether it’s an old bungalow on a tree-lined street, a condo in
the city center, or a custom-built home in a new development
• narrow in on a realistic price range based on your budget, and
strategize ways to aord more
• select from a variety of nancing options, from a 30-year xed
rate mortgage (like the one Mom and Dad got) to a private loan
from a relative or friend
• pick a great real estate agent, mortgage broker, home inspector,
and other professionals
• negotiate and sign an agreement to buy a house (nd out what’s
important in all that ne print)
2
|
NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
• wrap up your nancing, get inspections, and take care of other last
tasks, and nally
• close the deal, arrange your move, and settle into your new home.
Youre going to benet from the expertise of a team of 14 advisers from
around the country who have reviewed this book and added the kinds
of insights you usually get only in personal conversations. For instance,
youll meet a mortgage broker who explains why you should avoid oral
loan preapprovals; a real estate agent who cautions against dressing too
well at open houses (it can hurt your negotiating position); a closing
expert with straightforward advice on why you should care about things
like “easements” and title insurance; and a lawyer who suggests how to
save on attorney’s fees.
With this book comes special access to electronic materials on Nolo’s
website. ere youll nd a Homebuyers Toolkit with over two dozen
forms, checklists, and letters to help keep you organized and on track
during every stage of the process. Whether it’s a “Dream List” that prompts
you to set out your priorities, checklists to carry when you tour a house or
condo, or a set of interview questions for potential real estate agents, youll
nd it there. And as a bonus, it includes MP3s with interviews of several of
our advisers, plus this books authors, who share their insights.
CHAPTER 1
Learn the
benefits
CHAPTER 2
Decide what
you want
CHAPTER 4
Check out
the market
CHAPTER 5
Choose
professionals
CHAPTER 3
Make a budget
START
Navigating the path to
YOUR FIRST HOME
CHAPTER 1 | YOUR HOMEBUYING COMPANION | 3
e three authors of this book, Ilona, Alayna, and Marcia, bring not
only years of legal and real estate expertise, but also dierent rst-time
homebuying perspectives of our own. One of us bought with a 15-year
mortgage, (since paid o) so she had no house payments when it came time
to pay her sons college tuition. Another bought with the help of family
members and now has probably the lowest mortgage payment on the block
in one of the citys up-and-coming neighborhoods. And the third bought
a modest starter home with a hybrid adjustable rate mortgage, xed it up,
and managed to ride out the down market until she could sell.
Our varied experiences help us understand that everyone has dierent
objectives when buying and special challenges when buying for the rst
time. You may just be looking for a placeany place—to get started, you
may want the challenge of a xer-upper, or you might need the convenience
of a low-maintenance condo. We know that you might be doing this alone,
with your spouse or partner, or even with a friend. No matter who you are
or what your goals and objectives may be, we hope you recognize yourself
in some of the stories and experiences reected in this book.
So hang on tight—to this book, that is. It will be your companion,
providing advice, information, and inspiration all along the path to your
new front door.
CHAPTERS 6/7
Get a
mortgage
CHAPTERS 8/9
Find your house
CHAPTER 10
Negotiate
the deal
CHAPTERS 11/12 /13
Inspect, insure, prepare
to move
CHAPTER 14
Seal the deal
CHAPTER 15
Settle in! You’re
HOME
4
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Get Updates, Worksheets, and More at is Book’s
Companion Page on Nolo.com
When there are important changes to the information in this book,
we’ll post updates online, on a dedicated page:
www.nolo.com/back-of-book/HTBH.html
And if you notice a useful sample form in this book, such as a letter
or checklist, you’ll have access to a digital version via the same
companion page. You‘ll find other useful information on that page,
too, such as podcast interviews with the authors and some of the
advisers you’ll get to know in this book. See the appendix for a full list
of forms and podcasts on Nolo’s website.
Investment Value: Get What You Pay For … And en Some ...............................8
Leverage .................................................................................................................................................... 8
Equity, Baby ............................................................................................................................................ 9
It Beats Paying Rent ............................................................................................................................9
You Can Live in Your Investment .............................................................................................10
You Can Borrow on Your Investment ....................................................................................10
My, You’re Looking Creditworthy! ...........................................................................................10
at House Is Yours ..........................................................................................................................11
Tax Breaks: Benefits From Uncle Sam .................................................................................... 11
Tax Credits ............................................................................................................................................11
Mortgage Interest .............................................................................................................................12
Other Tax-Deductible Expenses ................................................................................................12
Itemizing Your Deductions ..........................................................................................................13
Capital Gains Tax Relief When You Sell.................................................................................14
Personality and Pizzazz: Your Home Is Your Castle.....................................................14
No More Landlord: Say Goodbye to Renting ....................................................................15
You Can Do It If You Want To ..............................................................................................16
“But I Like Renting” ......................................................................................................................16
“But I Can’t Afford It” .................................................................................................................17
“But I’m Single” ..............................................................................................................................18
“But It’s Too Much Responsibility! .....................................................................................19
“But…Maybe Prices Will Go Down! .....................................................................................20
“But I’m Still Scared! ..................................................................................................................20
CHAPTER
1
What’s So Great About Buying a House?
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Meet Your Adviser
Daniel Stea, broker/owner/attorney at Stea Realty Group,
in Berkeley, California (www.stearealtygroup.com).
What he does “I spend a great deal of my day simply talking with buyers and
sellers, as well as evaluating properties for them. We‘re always
running ‘comps.’ Prospective buyers want to make sure they’re
not paying too much; sellers want to make sure they’re not
asking too little. We’re always looking at what other properties
recently sold for, since that’s a key indication of where the
market is currently at. Sure, many websites will give you real
estate ‘comparables,’ but these are generally based on the
average price per square foot of other properties that have
recently sold. But it takes a human who has actually walked
through all of those properties to start adding and subtracting
for various attributes such as location, condition, schools, and
so on. at’s one of the values of what brokers bring to the table
and why their services will always be in demand.
First house
“It was an adorable English Tudor in the Oakland hills, which I
bought for $190,000. Built in 1927, it was full of character—and had a
$90,000 pest report and leaked like a sieve. e original roof was still
there, with multiple subsequent roofs layered right over it. It was a
memorable home! I lived there for five years, completely rehabilitated
it, and then sold it when Oakland real estate was finally coming
around and moved to a home closer to my office in Berkeley.”
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 7
Fantasy house “I’m not sure it exists! Like most of our clients, I’d love to have a
place that’s highly walkable to everything urban. But I’d also like a
view of the San Francisco Bay, which is tough to get unless you’re
a considerable distance up the hills. Only a few homes exist in
that sweet spot in between. And they obtain multiple offers and
sell for a premium price in the current market. Style-wise, I see
something to appreciate in almost every type of house: from the
old ones that need a lot of work to the modern ones with walls of
glass and high ceilings, many of which have more character than
they are given credit for.”
Likes best
about his work
“Finding that we can bring clarity to people’s confusion.
Homebuyers show up full of questions, wondering things like,
‘What is the process?’ and ‘How much should we offer?’ We
educate them about the market and the process and give them
the tools they need to feel empowered. Once they feel confident,
we’re ready to begin shopping.
Top tip for
first-time
homebuyers
“Be patient. A lot of people come to us in a panic, saying, for
example, ‘We just got into town, we don’t want to waste our
precious money on these exorbitant rents, and we need to buy
something right away.’ But the process will go much smoother if
you give yourself some time—ideally, six months to a year—to get
to know the market, walk the neighborhoods, and learn about
the homebuying process. In fact, if youre relocating here from
Washington, DC, New York, or Boston, like many of our clients have,
I’d say rent first! It’s very difficult to come into a new city for a month
and know where you want to live. Begin working with a Realtor
®
long before you’re ready to make your first purchase offer. We earn
the same commission whether our buyers purchase now or in a
year—and it’s important for them to be pleased with the home they
select so that they’ll refer us to their family, friends and coworkers.”
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
P
icking up a book on homebuying for some light reading? We’re
guessing not. If youre reading this, youre probably seriously
interested in buying a house. But before we launch into how, let’s
explore why—just in case youve got any lingering doubts about whether
it’s a good idea. is chapter will preview some of the primary nancial
and personal benets to buying a home (and youll nd details on many
of the subjects covered, such as tax benets, in later chapters). en we’ll
talk about some common myths and fears, and how to get over them.
ever did
est thing I
B
Buy my first home. Although Leah was happy with her
rental place, she says, “I wanted a place that I could call
my own, with a backyard for my cats, and space for an office so I could work at
home full time. After three weeks of looking, I found it! And after a year, some of
the best parts of homeownership are things I wasnt even expecting—like having
already gotten to know more neighbors than I did during a whole six years in
my apartment. Plus, although I’ve never thought of myself as domestic, I’ve had
a surge of interest in decorating—I put up Roman blinds, have been picking out
paint colors, and just bought my first Christmas tree!”
Investment Value:
Get What You Pay For … And en Some
Youve probably heard people talk about real estate as a great investment.
But what exactly do you get out of the deal? Well, a few things: Youll build
equity instead of spending cash on rent, you gain immediate benets (a
place to live!), and youll eventually have full ownership of an asset that—at
least over the long term—has a good chance of appreciating in value.
Leverage
Buying a home is one of those rare instances where you can control a
very large and potentially appreciating asset with a comparatively small
initial cash investment (your down payment). Better yet, notes adviser
Daniel Stea, “Youre using the proverbial ‘OPM’ (other people’s money)
for the balance of the investment, and that money is being lent to you
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 9
at comparatively low cost given the historically low interest rates we’ve
experienced these past few years. Yet you get to enjoy the appreciation on
the full value of the investment, not just your cash component. It almost
doesnt seem right!”
Equity, Baby
Over time, as you patiently pay your mortgage, two things may start
happening—your principal loan balance will go down, and the house’s
market value may go up. Both of these mean that youre accruing equity.
Equity is the dierence between the market value of a house (what its
currently worth) and the claims against it (what you have left to pay on
any mortgages or loans youve taken out against it). You’d be hard-pressed
to nd another investment where you can borrow a large amount of
money, pay a modest interest rate, and reap every bit of the gain yourself.
EXAMPLE: Hugo buys a home for $300,000 with a $60,000 down
payment (20%) and a $240,000 mortgage. If the market value of the
house is $300,000, Hugos current equity in the home is $60,000
(market value minus mortgage debt). A few years later, Hugo has
reduced the principal on the mortgage by $5,000, to $235,000.
Meanwhile, the houses value has risen to $310,000. Hugo now has
$75,000 in equity: ($310,000 minus $235,000). at’s $15,000 more
than he originally invested.
Of course recent history has shown that the value of a property
doesnt always increase: It can also decrease, sometimes dramatically.
Fortunately, houses rarely drop in value permanently. And after some
precipitous value drops in the early 2000s, home appreciation in 2013
was running at an average of around 12%, according to the S&P/Case
Shiller Home Price indexes.
It Beats Paying Rent
A good chunk of the money you’ll use to nance your home is money
youre already spending anyway, on rent. When you buy a house, that
cash is actually going into your investment.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
You Can Live in Your Investment
Some people like to call a mortgage a forced savings plan, because it
makes you sock a little cash away every month in the form of a mortgage
payment—money you will, with any luck, get back when you sell the
place. On the other hand, you might call it a smart investment plan,
because it gives you both a roof over your head and a way to convert your
cash into a potentially appreciating asset.
You Can Borrow on Your Investment
Eventually, as your equity in your home builds, you can borrow against
it at relatively low interest rates, using a home equity loan or a HELOC
(home equity line of credit). ese are also commonly referred to as
second mortgages.
e interest rates on these tend to be higher than on primary mortgages,
but lower than on the typical credit card. e money borrowed can be used
for any number of purposes, such as home improvements, college tuition,
or a car. Better yet, if you use the money for home improvements, the
interest is tax deductible, up to $1 million.
Of course, there are risks—if you default and your house goes into
foreclosure, the lender is second in line to be paid from the proceeds of
the sale of your house, after the primary mortgage holder.
My, You’re Looking Creditworthy!
We hear so much about people who ruined their credit score by getting
foreclosed on that its hard to remember the reverse side of the picture:
A mortgage is seen as “good debt.” When you successfully pay it down,
credit-reporting companies view that as a sign that youre responsible and
able to handle a large loan.
“is can do wonders for your credit rating,” says adviser Daniel Stea.
“It makes you a much better credit risk (statistically speaking), which
becomes especially useful if you decide to apply for an auto loan, small-
business loan, student loan for your kid’s college tuition, and so on.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 11
at House Is Yours
One benet to buying a house is kind of obvious ... youre becoming a
homeowner, and when the loan is paid o, you wont have to pay for a
place to live. You could keep renting the same place youre in now for 50
years, and at the end of that time youll still have to pay monthly rent
checks to your landlord.
Tax Breaks: Benefits From Uncle Sam
You’ll get to claim various federal tax deductions and credits for home-
related expenses. ese can add up to some serious savings.
Tax Deductions Versus Tax Credits
Be careful not to confuse a tax deduction with its more valuable cousin,
a tax credit. A tax deduction is an amount you subtract from your gross
income (all the money you earned during the year) to figure out how
much of your income is subject to tax. For example, if your gross income
is $80,000, and you have a $2,000 tax deduction, your taxable income is
reduced to $78,000.
A tax credit, by contrast, is a dollar-for-dollar reduction in your tax
liability. If your taxable income is $80,000, and you qualify for a $2,000
tax credit, your taxable income is still $80,000, but you get to reduce the
amount of tax you ultimately owe by $2,000.
Tax Credits
As a new homeowner, you may be entitled to certain tax credits.
• Tax credit for first-time homebuyers. At the time this book went to
print, all the tax credits for rst-time homebuyers had expired—but
keep an eye on the news and www.irs.gov for anything new that
might come along.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
• Tax credits for energy-efficiency. A tax credit good through 2016 lets
you claim 30% of the cost of installing geothermal heat pumps,
small wind turbines, fuel cells, or solar energy systems. For more
information, visit www.energystar.gov (search for “tax credit”).
Mortgage Interest
One of the biggest deductions will be the interest you pay on your home
mortgage (available for mortgages of up to $1 million for individuals and
married couples ling jointly and $500,000 for marrieds ling separately).
is one’s particularly advantageous during the rst few years of a xed rate
mortgage, when most of your payment will be put toward interest.
Other Tax-Deductible Expenses
You can also deduct certain other expenses, such as:
• Property taxes. While the amount varies between states and localities,
most people pay around 1% of the home’s value each year in state
property tax. is amount is deductible from your federal taxes if
you itemize.
• Points. Points are additional and usually optional fees paid when
you buy your mortgage (you get a reduced interest rate in return).
ey’re tax-deductible in the year you pay them.
• Interest on a home improvement loan. If you take out a loan to make
improvements that increase your home’s value, prolong its life, or
adapt its use—for example, by adding a deck or a new bathroom—
you can deduct the interest on that loan, with no limit. But you
cant deduct interest on loans used to make normal repairs, such as
repainting the kitchen or xing a broken window.
• Interest on home equity debt. Sometimes you can deduct interest
on a home equity loan even if the money isnt used to buy, build,
or improve your home—for example, if you use it toward a child’s
college tuition or family medical bills. e deduction is limited to a
maximum loan amount or the total fair market value of the home
less other mortgages. e maximum loan amount is $100,000
for an individual or married couple ling jointly and $50,000 if
married but ling separately.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 13
• Home office expenses. If you use part of your home exclusively and
regularly for a home-based business, you may be able to deduct a
portion of the related expenses—including the costs of some home
repairs, or even things like landscaping if your home’s appearance
will be important to visiting clients.
• Moving costs. If you move because of a new job that’s more than 50
miles from your current residence, you may be able to deduct your
moving expenses.
• Prepayment penalties. Although we advise against getting a mortgage
with a prepayment penalty (as discussed in Chapter 6), if you do,
and then you make a prepayment, the penalty you pay will be tax-
deductible.
Itemizing Your Deductions
To take advantage of house-related tax deductions, you’ll need to itemize
your tax deductions, rather than take the standard deduction (for 2014 tax
returns, $6,200 for individuals and $12,400 for marrieds ling jointly).
e true tax savings comes in the dierence between your tax liability
when you take the standard deduction and your tax liability when you
itemize. Itemizing involves a step up from the good old 1040EZ, but it’s
not all that complicated. To make it worthwhile, your itemized deductions
should exceed the standard deduction. With the high price of real estate,
it’s not usually too hard to outpace the standard deduction with deductible
homeowner costs, not to mention other deductible expenses like donations
to your favorite charity.
EXAMPLE: Lets say you get a $200,000 xed rate loan at 4% interest
in 2014. Youre looking at paying nearly $8,000 the rst year in inter-
est alone. at doesnt count property taxes, points on the mortgage,
or any other tax-deductible expenses.
If youre single, the standard deduction is $6,200. But if you itemize
your deductions, you could deduct the $8,000 in interest payments
instead. By itemizing even this one deduction, almost $2,000 less of
your income will be taxed.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
TIP
Keep good records. You’ll be able to reap the benefits of itemizing
your deductions only if you know about them and are prepared to prove them
to the IRS—all of them, not just the house-related ones. Keep a file of receipts for
the more common deductions, such as unreimbursed business expenses (office
equipment and travel); educational expenses (tuition and books); charitable
contributions; and unreimbursed medical expenses. Consider getting help from a
tax professional—even your meeting might be tax-deductible!
CHECK IT OUT
Go straight to the source. See IRS Publication 530, Tax Information
for Homeowners, available at www.irs.gov. is publication will give you more
detailed information about the tax benefits of buying a home.
Capital Gains Tax Relief When You Sell
While it may be too soon for you to imagine selling your rst home,
another important benet is available if and when you do. anks to the
Taxpayer Relief Act of 1997, you don’t pay capital gains tax (usually 15%)
on the rst $250,000 you make on the place. Double that to $500,000 if
youre married and ling jointly, or to $250,000 per person if you co-own
the place.
To qualify, you must (with a few exceptions) have lived in the home
two out of the previous ve years before selling. Many rst-time buyers
use this tax break to move from modest starter homes to roomier homes
that cost more.
Personality and Pizzazz:
Your Home Is Your Castle
If youve always been a renter, you know the drill: ings stay the way
they were when you moved in. White walls stay white, ugly carpeting
stays ugly, and the funky bathroom light xture stays funky.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 15
When it’s your home, you get to make your mark. ere’s just no
way to quantify the psychological advantage of personalizing your space.
Even people whove never taken an interest in home decorating, repair,
or gardening nd themselves hooked on the creativity and self-expression
possible with home projects.
No More Landlord:
Say Goodbye to Renting
Expressing your personality isnt the only advantage to leaving rental
living behind. Say goodbye to things like waiting around for things to
get xed, wondering whether the landlord will raise your rent or kick you
out anytime soon, and being
surprised by landlords who stop
by at their own convenience.
Even reasonable landlords
who make prompt and thorough
repairs and never raise the rent
can pull surprises or sell the
property. Owning your own house
reduces the stress and uncertainty
of renting. Youre in charge of
when you move on, who comes
in the front door and when,
and what gets done to the place. While that means youve got some extra
responsibilities, youve denitely got some extra security and benets, too.
ever did
est thing I
B
Make monthly payments to myself, not the landlord.
At age 25, Talia had only toyed with the idea of buying a
house—she’d thought that, despite her full-time job, it was financially impossible.
But then her landlord raised the rent. Talia says, “I looked into loan options—and
to my surprise, I qualified. Within two months, I bought a converted first-floor
apartment with a little patio, in a safe neighborhood. I love not having to share
a washer and dryer with other people anymore. But even better is the feeling of
independence of having my own place: Because I’m building equity, I like to think
The Future’s So Expensive!
If you pay $1,000 in monthly rent now,
approximately how much will you be paying
in 40 years, assuming average inflation
(4% per year) and no rent control?
a. $2,500 b. $3,400 c. $4,800
d. None of the above,
because I’ll own a home.
Answer: c or d.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
I’m making those mortgage checks to myself—and they’re not that much higher
than my rent checks were, plus I can claim some significant tax deductions.
You Can Do It If You Want To
Are you still on the fence about homebuying? Some people just dont
feel ready to take the plunge. Below are a list of common “I cant do
it because ” excuses. Dont get us wrong: Not every excuse is a bad
excuse. You just need to know whether yours are based on solid facts
rather than plain old fear.
“But I Like Renting
Maybe youre thinking, I really love my apartment or, I’m getting such a
good deal. But even if your current rent seems cheap, cheap is never as
good as free. Yes, we’re aware that buying a house isnt free. But at some
point, you wont be paying a mortgage anymore. at will never be true if
you rent.
CHECK IT OUT
Run your own numbers. ese calculators compare the costs of
renting and buying:
• www.nytimes.com(searchfor“Isitbettertobuyorrent?”)
• www.nolo.com/legal-calculators(click“ShouldIrentorbuy?”).
While you’ll need to guess how much you’ll spend on a home to use these
calculators, the result will at least give you a rough comparison. Revisit the
calculators after you’ve looked at Chapters 3 and 6 (covering the financial details
of buying a house).
All that being said, renting might be best in the following situations:
• You plan on moving from the area within the next few years. Buying is
a long-term strategy, with signicant up-front costs. Plus, its easier
to move out of a rental than a home you own—selling is almost as
complicated as buying.
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 17
• You need flexibility. Buying is best for people whose lives are fairly
stable. If your rst priority is being able to quit your job any time a
friend proposes a round-the-world sailing trip, maybe homeowner-
ship will feel more like a trap than a positive step. (en again, we’ve
met travelers who’ve sublet their house and supported their travels
with the rent payments!)
• You expect your income to decrease soon. If youre planning to
return to school or quit your 9 to 5 to pursue an acting career, you
might not want to lock yourself into a mortgage. Still, you may be
a potential homebuyer if you can aord something more modest
within your anticipated future income or can pay the mortgage by
co-owning the property or taking in renters.
• It will cost you far more to buy than to rent. Run those numbers,
using calculators like the ones listed above. In a few markets, you
can still rent for less than you can buy—even after you factor in tax
deductions and ination. If thats the case, you might be better o
renting and investing elsewhere—or simply renting a bigger and
better place than you could hope to buy.
“But I Cant Afford It
Maybe your main reservation about buying a home is that you simply
cant aord one. Scraping together a 20% down payment can be no small
task when youve already got your plate full with your current bills. Or
perhaps youre afraid you wont qualify for the gigantic loan youll need or
wont be able to pay it once you get it.
we ever did
est thing
B
Focus on the spaghetti. Caryn and her husband Alec
were stretching to their financial limits to buy a house,
and Caryn says, “We were nervous, but our agent told us, ‘You’ll just need to eat
spaghetti for about a year, and then things will even out.’ For some reason, that
image stuck in my head, and I thought, okay, I can handle eating spaghetti for
a while. In fact, that’s about the way it worked. e first year, we depleted our
savings, not only with the house closing but with repainting and buying furniture.
Now we’ve settled in, and owning a home doesnt feel like such a big load on our
shoulders anymore.
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If youre trying to get a down payment together and nding your
eorts frustrated, dont lose heart. ere are alternatives: For example, you
may be able to augment your down payment with a loan from a family
member, or even enter into a cobuying arrangement with a friend.
As for the mortgage payment, people who think they cant aord it
often focus only on the big number—the ve-, six-, or even seven-digit
gure that says what a house is
going to cost. But a mortgage
allows you to spread that
number out over a big portion of
your life.
Finally, let’s not forget that
the rst home you buy isnt
necessarily going to be the
one youll live in forever. By
remaining exible, and starting
with a not-quite-perfect house,
you can break into the housing
market. at’s why they call it a “starter” house—its only the beginning.
e equity that you accrue may very well help you get into that next place.
“But I’m Single”
Some people are reluctant to buy a house because theyre single now, but
hope to be part of a couple before long. But did you know that nearly one-
fth of homebuyers today are single women? Obviously they have gured
out that there’s no secret rule that says only couples get to buy houses.
ever did
est thing I
B
Invest in my present as well as my future. Real estate
agent Joanna knows about not wanting to buy a house
as a single woman—she’s seen it in many of her clients. But, says Joanna, “e
problem with waiting to do something the traditional way is, what do you lose
during that waiting period? I was in my early 30s and ready to have a place of my
own. Plus, it makes sense to spend the money and get a tax write-off rather than
Small Can Be Beautiful
If you think living in a small space means
you’ll be cramped, uncomfortable, and
aesthetically disappointed, check out
www.apartmenttherapy.com. Under
“Tours,” your secret voyeur can look at tiny
spaces other people have transformed into
fabulous homes. Be inspired!
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 19
pour it into rent. is isnt to say that buying alone wasn’t stressful—I stretched
financially to make it work. But since buying, my house has gone up in value.
Maybe youre worried that youll have to move as soon as you meet Mr.
or Ms. Right. While that admittedly is possible, it’s also possible that in
the meantime, the increased value of your place will help, not hinder, your
happily-ever-after. If the value of your home increases and you pay down the
mortgage, the two of you will have equity you can use to buy a place together.
Besides—a house that’s perfect for one may accommodate two just ne.
we ever did
est thing
B
Combine our homes. Hannah says, “I was a young profes-
sional and very single when I bought a condo. Two years later,
I
met Chad, who also owned a small home. Before I knew it, we were married and
living in the house, renting out the condo. en we had kids, and the house was just
too small. We sold my place and Chad’s, using the equity to buy a house big enough
to accommodate our kids. It’s nice to have a place that we chose together, with our
family in mind.
“But Its Too Much Responsibility!”
For some, the idea of owning a home just seems like too much to handle.
Admittedly, renting is much simpler than owning. You write a rent check,
and youre covered for the month. And in many rental arrangements, you
can leave with just a months noticeperfect for those with wanderlust.
Telling yourself that renting doesn’t involve responsibility isn’t really
true, though. After all, what happens if you dont pay the rent? You get
evicted—and then where do you go? Back to Mom and Dad’s? Most people
would rather do whatever it takes to make that monthly payment happen.
So if youve already lived away from home, youre familiar with what’s
needed to make monthly payments and handle monthly nances. Of
course, when you buy you’ll have other responsibilities, like taking care
of your yard or doing repairs, but youre in charge of prioritizing what
happens when. If you decide you dont want to repair the creaky stairwell
until youve redone your kitchen cabinets, that’s up to you.
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“But…Maybe Prices Will Go Down!”
Trying to time the real estate market? Timing is denitely important,
but it’s not easy to get in to the market at the perfect moment. Even
experienced real estate pundits get it wrong. If prices look to be stable and
youre just waiting until you can aord to get in, that’s one thing. But if
youre trying to out-clever the real estate market, youre likely to nd that
by the time you notice a trend everyone else will have, too; and prices
may jump up before you know it.
So if youve watched your local market and economic news carefully,
and have a solid sense of what’s ahead, perhaps waiting for a price drop
makes sense. But dont put your life on hold. at’s particularly true if
youre getting married, having a baby, moving into a retirement home, or
doing something else that comes with its own timing demands.
“But I’m Still Scared!”
Buying a home may seem overwhelming, even if youve always wanted to
do it. e process is unfamiliar, there’s a lot of money at stake, and you may
fear getting swept up into buying a place you dont even like or that will
drop in value. But fear shouldn’t stop you from realizing your homebuying
dreams. To help calm the butteries, take constructive steps such as these:
• Know your strengths and weaknesses going in. en nd ways to address
them, for example with self-education or by hiring professionals.
• Learn what you can expect from professionals. Understand what real estate
agents, mortgage brokers, home inspectors, and other professionals do,
and put them to work for you, saving time and money.
• Observe your local real estate market. We’ll show you how to research
the trends in your area, in order to reassure yourself that youre
not buying an asset that may drop in value, and has long-term
appreciation potential.
• Understand the process. Read up on all steps of the homebuying
process now, so that you wont be confusedor need to do any
late-night remedial study—when the process kicks into high gear.
• Get organized. Use all the worksheets and checklists in the
Homebuyer’s Toolkit on the Nolo website to stay on top of key
CHAPTER 1 | WHAT’S SO GREAT ABOUT BUYING A HOUSE? | 21
What’s Next?
Once you’ve decided you’re ready to buy, it’s time to figure out what’s important
to you. In the next chapter, we’ll discuss how to examine and settle on your
priorities regarding types of houses and neighborhoods.
tasks, such as choosing a real estate agent or inspector or pulling
together nancial papers for the lender.
is book will help you accomplish all those goals. It will tell you
where you are at every step, so that you can breathe, get your bearings,
and proceed with condence. Get the facts, and youll be ready.
Know Your Ideal Neighborhood: Why Location Matters ........................................26
Neighborhood Features for Daily Living ...............................................................................26
Neighborhood Features at Boost Resale Value ...........................................................28
Know Yourself: How Your Lifestyle, Plans, and Values Affect
Your House Priorities .........................................................................................................................28
Know Your Ideal House: Old Bungalows, New Condos, and More ...................30
Would You Like Land With at? Single-Family Houses ..........................................30
Old (or Not-So-New) Houses: Benefits and Drawbacks ...............................................31
Newly Built Houses: Benefits and Drawbacks .................................................................... 32
Sharing the Joy, Sharing the Pain: Condos and Other Common
Interest Properties ...............................................................................................................................33
Condominiums: Benefits and Drawbacks ............................................................................34
Townhouses and Duplexes: Benefits and Drawbacks ....................................................36
Co-ops: Benefits and Drawbacks ..............................................................................................37
Factory Made: Modular and Manufactured Homes ...................................................37
Putting It All Together: Your Dream List .............................................................................38
Dream List Directions .....................................................................................................................45
CHAPTER
2
What Do You Want?
Figuring Out Your Homebuying Needs
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Meet Your Adviser
Paul Grucza, CMCA, AMS, PCAM, a community
association expert and educator, author, and association
strategist located in Seattle, Washington.
What he does With 30-plus years of real estate-related experience (including as
a licensed real estate salesperson and property manager), Paul is
now an active lecturer and consultant, and faculty member for
(and past President of) the Community Associations Institute
(CAI, at www.caionline.org). CAI provides nationwide training,
guidance, and resources to the volunteer homeowners who
govern community associations. Paul received CAI’s 19992000
“Educator of the Year” award. He established and hosted an
award-winning community association issues television program
for the Dallas-Fort Worth market which is viewed by well over
one million people per week. He’s also the Director of Education
and Client Engagement for e CWD Group, Inc. AAMC
®
in
Seattle, Washington (www.cwdgroup.com), which provides
professional management and consultant services for a variety of
condominiums and planned communities.
First house “It was an absolutely rundown but gorgeous Mission-style bungalow
built around 1922, in one of the first incorporated subdivisions
outside Buffalo, New York. e house was the builder’s model for
that subdivision, so it had all the features, including inlaid floors,
woodwork, and leaded glass. I spent the next 11 or so years lovingly
restoring it—regrouting the bathroom tile, refinishing the woodwork,
rebronzing the heat duct covers, replacing the modernized light
fixtures through a restoration company, and much more. It turned
out to be the most beautiful home I’ve ever owned.”
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 25
Fantasy house
My true fantasy house would be a comfortably sized home
situated on a bluff that overlooks Puget Sound and the mountains.
Living in Seattle affords the opportunity to evaluate lots of
wonderful properties, but since working with an architect, my
fantasy will become a ‘fantasy retirement home,’ one that meets
the need for view and accessibility. A redo of a midcentury rambler
would be nice, but a built-from-the-ground-up is not bad, either.”
Likes best
about his work
My daily interaction with a wide variety of people. Solving
homeowner issues. Training and speaking to a variety of groups.
ey include homeowners, developers, service professionals,
managers, and board members. is brings me more joy than
anything—and after nearly 33 years, I’d better enjoy my work!”
Top tip for
first-time
homebuyers
“Regardless of the type of property you’re looking for—whether
a house, a condo, a cabin, a doublewide, or whatever—leave
your emotions at home. Look at the property and its practical
application in your life, and at what it will cost to turn it into
your home.”
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Y
ou know youre ready to buy but are probably wondering, “Where
do I start?” ere’s a lot to think about, like what kind of home or
neighborhood you want, and what features you cant possibly live
without. is chapter will help you:
• identify neighborhood characteristics that t your personality and
that maximize house-resale value
• understand how your lifestyle and plans should play into your
choice of house
• learn the benets and drawbacks of dierent types of properties
(single-family houses, condominiums, or co-ops, plus new or old
places), and nally
• create a Dream List, describing and organizing your priorities, to
use when house shopping.
Later chapters will teach you how to do the looking, how to gure out
whether you can aord what you want, and what to do once youve found
a place. For now, focus on organizing your thoughts and priorities.
Know Your Ideal Neighborhood:
Why Location Matters
If youre a lifetime renter, youve probably always thought about location
in the short term, knowing you could move at the end of your lease.
Buying is dierent: Youre committing yourself to a location for at
least a few years. And youll probably feel a sense of investment in your
community that you didnt before. So get serious about identifying your
location preferences, then make sure these preferences wont mean buying
a house with low resale prospects.
Neighborhood Features for Daily Living
Not everyone wants the same features in a neighborhood, and youre the
one whos got to live there. Before letting anyone else tell you what the best
neighborhoods are, consider your preferences and priorities regarding:
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 27
• Character and community. For some, the uniformity of well-planned
developments is pleasing; others enjoy the variety of older, one-of-a-
kind homes. Visualize your ideal neighborhood, whether it features
trees and parks or
restaurants and bars.
• Safety. While most
everyone prefers less
crime, safety often
comes with a trade-o.
For example, a rural
neighborhood might
be safe, but a city’s
resources and nightlife
will be very far away.
• Resources and
accessibility.ink where
the important places and
resources in your life
are, like your workplace,
child’s school or day
care, grocery stores, health care providers, public transportation or
major roadways, cultural amenities, and more. How much time are
you willing to spend traveling to those places?
• Schools. If youre planning on sending children to public schools, the
quality of nearby schools will be important.
• Zoning and other restrictions on owners. If you want the freedom to
remodel your home, youll have to be in an area that allows that.
Or, if you appreciate community uniformity, you’ll like living
somewhere that limits the changes owners can make to their houses
or property.
is isnt a complete list, and you should think about features that are
unique to your needs. For example, adviser Bert Sperling notes, “If youre
lucky enough to be a stay-at-home parent, you may nd yourself lonely
during the day if you have to travel a considerable distance to nd some
community for you and your youngsters.
They Call That a House?
You won’t believe what people live in!
Here are a few creative houses:
• eGoldenPyramidHouseinWadsworth,
Illinois: e largest 24-karat gold-plated
object ever created.
• eShoeHouseinHellam,Pennsylvania:
Just what it sounds like—in the shape of a
work boot, made of light-colored stucco
and featuring shoe-themed stained-glass
windows in every room.
• Alive-inwatertowerinSunsetBeach,
California: from the 1940s, converted to a
three-story house.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Neighborhood Features at Boost Resale Value
When it comes to the long-term value of your home, location really does
matter. If you have a desirable piece of property thats also in a desirable
location, more people will want to buy it. at keeps its value relatively
high compared to nearby homes in less sought-after locations (which
people may buy partly because they cant aord anything else).
Not surprisingly, many of the features that attract rst-time
homebuyers boost resale value, like high-quality schools, low crime rates,
convenient amenities, and neighborhood character and community.
Another major factor aecting resale value is conformity. Buying a
house that’s much bigger than the houses around it is usually a bad idea.
at house will appreciate at a slower rate, because buyers drawn to a
neighborhood of smaller homes wont be able to aord the larger home,
and buyers drawn to larger homes wont be drawn to that neighborhood.
And if a house is just too uniquebecause the owner has customized it
too much—it’s going to stick out like a sore thumb.
Finally, try to get an idea of whether a neighborhood is up and
coming. You can tell by looking at whether there seems to be a lot of
remodeling, new landscaping, or trendy-looking shops. Bert Sperling
adds, “If you read the signs correctly, you could get in on the ground
oor of the next hot new neighborhood.
Know Yourself: How Your Lifestyle, Plans,
and Values Affect Your House Priorities
Later in this chapter, we’ll show you how to prepare a Dream List to help
you nd the right house. Before making your list, reect on what you want
the house for. (To live in, duh, we got that.) Although it may be hard to
imagine where your life will be in a few years, do your best to consider:
• Who is going to live in the home? You may be on your own now, but
in the future, might you bring in a roommate, signicant other,
child, elderly parent, or pet? If so, factor this into your priorities
for things like number of bedrooms, quality of the school district,
number of oors, or availability of outdoor space.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 29
• What do you plan to do in the home? If you plan to work at home, spend
a lot of time in the kitchen, or entertain frequently, plan adequate
space for that. Conversely, consider whether you really need to spend
extra for a huge gourmet kitchen if you eat takeout every night.
• What does your lifestyle require? If you travel for business, you might
want the convenience of a condo with easy airport access. Or if
youre into nightlife, you might want to be able to stroll home and
crash at 2 a.m.
• How do you like to spend your time at home? Do you love the idea
of remodeling an old home or creating a beautiful garden? Are
you scared to death of anything that hints at the word “handy”? If
you’d rather be throwing a cocktail party than mowing the lawn,
the big house in the suburbs may not really be right for you.
ever did
est thing I
B
Look for a house with scope for my artistic side.
A graphic designer and yoga teacher, Diane had wanted
to buy a house for years—but knew it would be a financial challenge. She says,
“I scraped together enough to buy a small cottage, with a disastrous backyard—
and I turned it into my art project. I painted those white walls celery green, brick
red, and tan. I spent all winter pulling weeds, then put in flagstone and flowers.
And eventually I sold it for a large profit—enough to buy a duplex, so now I’m a
property investor!”
“Where Could I Be in Five Years?”
Instead of planning where you think you’ll be in five years, why not play
“Where could I be in five years?” Try it with a friend or partner over a glass of
wine, or while walking in the park. You’ll have to be a little realistic—do you
really think you’ll win the lottery?—but optimistic, too. You may see yourself
finding a better job in another city, or having your first baby. Imagining the
possibilities can help you not only define your housebuying objectives, but
see how those goals fit into your life’s priorities.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Know Your Ideal House:
Old Bungalows, New Condos, and More
You probably have a vision in your mind of the house you want, whether
it’s a cozy cottage with fruit trees; an elegant brick townhouse with no
yard; or a modern, glass-enclosed loft with views of the city. For an
overview of your options, read on. (And when
youre reading the bios of our advisers in this
book, take a peek at their fantasy houses!)
Of course, where you live will play a huge role
in what you can buy. For example, in Chicago or
New York City, you may be looking at apartments
in high-rise buildings, while in less urban areas,
most of the homes may be single-story ranch houses or newly built homes
within developments.
Would You Like Land With at?
Single-Family Houses
You wouldnt think we’d have to dene “house,” would you? But since
a number of dierent house types are available, let’s be clear about what
each one is. Technically speaking, a “house” is a detached, single-family
dwelling. When you own a house, you own both the structure and the
property that it sits on, all by yourself. Your house wont be attached
to the next one, and you won’t be cursing an upstairs neighbor for
stumbling across the oor at 3 a.m.
Even if you know you want a house, however, an important question
remains—new or previously lived in? Each has its own benets and
headaches.
CHECK IT OUT
Interested in house styles? To decide whether you prefer a “Colonial,
a “Victorian,” or an “Italian Renaissance,” look online at sites such as:
• www.architecture.about.com(click“HomeStyles”)
Isnt my house classic?
e columns date all
the way back to 1972.
Cher, Clueless
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 31
• www.oldhouses.com(click“OldHouseStyleGuide”)
• www.wikipedia.org(searchfor“Listofhousestyles”).
Old (or Not-So-New) Houses: Benefits and Drawbacks
If youre in an uber-urban area or your price range dictates it, older houses
may be all that are available to you. Or you may just prefer a touch of
historical charm. Either way, youll get all these benets:
• Affordability. Older homes tend to cost less to purchase than new,
customized homes. (ough this isnt a universal rule—in large
cities, where the majority of new building is far outside the city, it
can be the reverse.)
• Established neighborhood. Instead of looking at mounds of dirt
while perusing architectural drawings, youll be able to get a feel for
the neighborhood by taking a stroll.
• Established landscaping. Youre not likely to nd a tree-lined street,
or a wisteria arbor over your front gate, in a new development.
• Construction. Older homes are often built with high-quality materials
such as thick beams, solid-wood doors, and heavy xtures.
• Character. Crown molding and built-in cabinetry are just a few of
the fun features found in older homes—but rarely in newer homes.
ere are also drawbacks to previously loved homes, including:
• Lower resale value. Older homes, on average, sell for less than their
newer counterparts.
• Replacement costs. e years take a toll on appliances, water heaters,
and roofs—and replacing them isnt cheap.
• Efficiency. Older houses tend to be less energy ecient than newer
ones.
• Style. Although you can probably switch out the former owners
unique style choices (like magenta bathroom tile), it may require a
fair amount of sweat equity (meaning your sweat builds equity).
• Layout. Older houses were built for another era … an era before
plasma screen TVs and home oces. Rooms may be smaller and
laid out dierently than youd like, with too few electrical outlets.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Of course, not every used home is old. If you buy one that was built
only a few years ago, some of the drawbacks described above will be
eliminated. Likewise, youll lose some of the benets.
Newly Built Houses: Benefits and Drawbacks
Well over half a million new homes are built in the United States each
year, often in planned communities or developments. (Of course, you
can always buy a piece of land and build a custom home—but that’s a
dierent book, with its own unique set of issues.) No surprisebuying a
new home has unique benets, including:
• Its mine! Its new! A new house is a blank slate, clean and virtually
untouched.
• It’s custom-built. Although most builders oer a limited choice
of oor plans, you usually get to dene details like paint colors,
ooring, and xtures (though good taste comes at a price).
• Suited to modern tastes and needs. New houses are built for today’s
lifestyles and trends, so youll be able to nd features like induction
cooktops, a mud room, and lots of natural light. Also, you shouldn’t
have to worry about replacing a water heater or roof anytime soon.
• Livin’ green. New houses tend to be more energy ecient than older
homes, so per square foot, youll probably spend less money on
things like heating and cooling costs. And with some searching,
you might nd a “green builder” who uses environmentally friendly
building techniques and materials (see the U.S. Green Building
Councils website at www.usgbc.org).
• Community uniformity and planning. Many new homes are built
in planned unit developments (PUDs). Like condominiums,
PUDs often have rules to maintain neighborhood aesthetics, and
amenities like swimming pools and community centers.
But buying new also has these drawbacks:
• It costs HOW much? New houses are generally worth more, but
their cost mounts quickly as you customize them to your wishes.
Developers often oer unique nancing alternatives (discussed in
Chapter 7), which may make a new house purchase more aordable.
• Who’s this guy?! You might have to deal with the developers
salesperson or representative, without the benet of your own real
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 33
estate agent to protect you. If you hope to use an agent, be sure to
bring him or her along on your rst visit—otherwise, you may lose
your chance.
• Not time-tested. While it’s exciting to get a brand-new home, youll
be the rst to discover whether all the lights work, the dishwasher
runs, the water heater heats, and more.
• It will be done when?! Developers dont always nish houses when
they expect to, and often dont compensate purchasers for the
delay. Instead, the ne print may release them of liability. Worse
yet, nancially unstable builders have been known to go bankrupt
before the houses are nished at all, or before adding amenities
such as a golf course or swimming pool.
• More rules? As we’ll discuss when we get to condos, some PUDs
require all owners to live by a set of written rules. Short of selling,
there’s often little you can do to get out of these rules if you don’t
like them.
Sharing the Joy, Sharing the Pain: Condos
and Other Common Interest Properties
Maybe a traditional house isnt for you—perhaps its out of your price
range, youre looking to avoid all the maintenance, or you want to live in
an area that just doesn’t have many regular houses. In that case, you may
want to consider an alternative, like a condominium (“condo”) or co-op.
ese types of properties are often referred to as common interest
developments (CIDs), because they involve shared ownership or responsi-
bility for common areas like hallways, recreation rooms, or playgrounds.
How a place looks physically doesnt really make a dierence—any of
these three might look like an apartment, at, loft, or townhouse; old or
new; in the city or the country. (Detached houses in PUDs count too, but
since we’ve already covered those, we won’t include them in this section.)
Are you picturing yourself out on the roof with a hammer, doing your
share for the common good? Dont worry, you won’t likely be asked to
perform repairs or x elevators. But you will have to become a member of
a community association, which makes sure those things are done. Your
monthly membership fee (formally called a “maintenance assessment” or
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
regular assessment”) will help keep common areas in good shape and
provide a cash reserve for unanticipated or larger projects like replacing a
roof. If you want to actively participate in the association, you can attend
meetings and voice your opinionor even get yourself elected to the
board of directors. If you dont, you just write the check and hope the
more active owners are like-minded.
ere are three types of community associations: planned community
associations (for PUDs, detached family homes, and townhouses),
condominium associations, and co-op associations. We’ll point out any
signicant dierences among them as we go.
TIP
What the association leaders do. ough every CID homeowner must
join the community association, the board of directors handles the day-to-day
work and decision making, such as coordinating repairs and collective services like
trash pickup; managing amenities such as swimming pools, playgrounds, and tennis
courts; preparing annual budgets; and conducting meetings.
Condominiums: Benefits and Drawbacks
When you buy a condo, you buy the interior space of your home. Your
walls, ceiling, and oors dene your boundaries instead of fences and
sidewalks. Everything in the common spacebe it stairwells, swimming
pools, sidewalks, or gardens—the whole community owns together and is
nancially responsible for. Some of the benets of condo life include:
• Affordability. A condo often costs less to buy than a house (although
in major metropolitan or resort areas, the opposite is sometimes
true). Maintaining a condo can also be less expensive, since costs
that otherwise might be duplicated—like landscaping, roong, and
some insuranceare shared.
• Convenience. If you arent into maintenance, youll appreciate that
the condo association—particularly in a larger community
is likely to hire a management company to take care of the
landscaping and common areas. You may also get valuable on-site
amenities like a gym or pool.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 35
• Community. Because youre all part of the same community
association, you’ll get the opportunity to know your neighbors,
whether you wish to or not.
Every rose has its thorns. Some of the drawbacks to condo living include:
• Rules, rules, rules. Youll be subject to a document called the master
deed or Declaration of Covenants, Conditions, and Restrictions
(CC&Rs). is sets forth not only rules for the community
association board to follow, but rules governing all owners. Youll
be told what you can do in the common space, and even what you
can do with or in your own unit from the color of your curtains or
blinds to the type of owers you can plant.
• Buy for less, sell for less. Condos generally appreciate at a slower rate
than houses. And some have gotten into serious nancial trouble in
recent years, leaving homeowners unable to sell at all.
• Privacy. Since youll be sharing common areas and usually walls
or ceilings, too, youll be giving up some privacy. Also, if having a
large outdoor space to garden, entertain, or keep a pet is important,
you might be frustrated by the outdoor spaces, which are usually
either miniscule or communal.
Diet-Time for Fido?
What kinds of things do CC&Rs limit? Common examples are:
• whetheryoucanhaveapet,andifso,itsmaximumheightorweight
• whetheryou’llgetaparkingspace,orwhetheryourguestscanparkin
the lot
• whetheryoucanchangethecolorofyourcurtainsorpainttheoutside
of your unit
• thelocationorappearanceofthingslikeyourmailbox,clothesline,
satellite dish, flags, and wreaths
• howlongvisitorscanstaywithyou
• whetheryoucanrentyourunittosomeoneelse,and
• whetheryoucansmokeinyourunit.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
• You share all costs, whether you want to or not. It may be frustrating to
see your monthly membership dues spent on things you never use,
like the swimming pool. And if youre the kind of person who can
live without a repair until you have spare cash, tough luck—you’ll
be forced to pay your share on the association’s schedule, sometimes
in excess of your regular fees. If you get behind on paying your
assessments, your condo association may have the power to foreclose
on you (even if youre up to date on your mortgage)!
• It can cost more than you expect. In addition to your monthly mem-
bership or maintenance assessments (which can themselves be several
hundred dollars), you may have to pay additional fees called “special
assessments.” ese are one-time fees collected for major purchases
the association cant aord to make with its current reserves (for ex-
ample, to replace the roof). Do your research: In recent years, with
many new buildings not fully occupied, the few owners in some
CIDs have found their special assessments very high.
TIP
Size matters in condo developments. Your experience will be a lot
different in a Boca Raton megaplex than in a Brooklyn brownstone. In a building
with fewer units, you may find the rules less constricting—but you may also be
more responsible for day-to-day operations and costs.
Townhouses and Duplexes: Benefits and Drawbacks
One compromise between a single-family dwelling and a traditional
condo is a townhouse. Townhouses are usually built in rows and share
at least one common wall (also called “row houses”). Like single-family
houses, each townhouse owner has title to the building and the land it sits
on. Like condos, townhouses may share some common areas, governed by
a community association (but unlike condos, the community association
usually owns the common area).
Just be sure, when you start househunting, to nd out for sure what
type of property youre looking at. If a careless ad or agent calls a property
a townhouse, but it’s really a condo, youd own a little less personally
(because the land isnt yours, nor is the outside of your unit) and should
pay less accordingly.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 37
Co-ops: Benefits and Drawbacks
Co-ops sound so glamorous, dont they? But what are they, other than
swanky apartments in New York City for the rich and famous?
Like condos, co-ops (short for housing cooperatives) are dened by
their ownership structure. When you own a house or condo, you own
a piece of physical property. When you own a co-op, however, you own
shares in a corporation. e corporation,
in turn, owns the building you live in,
and you get a proprietary lease to live in
a specic unit within the building. e
lease allows you to live there as long as
you own your shares and spells out any
restrictions on your use of the unit.
As with any corporation, your shares
also give you voting rights. Shareholders
elect the board of directors, who make
most of the decisions and manage
daily operations or hire sta to do so. e shareholders pay a monthly
maintenance fee” to cover these and other costs. Usually, the more
desirable the unit a shareholder has, the higher the maintenance fee.
Because of your limited ownership and other nancial issues
(discussed in Chapter 6), co-ops are sometimes dicult for the average
rst-time homebuyer to aord. e limitations also mean that co-ops
tend to be quite slow to appreciate in value.
Factory Made:
Modular and Manufactured Homes
Buying a prefabricated home no longer means living in an insubstantial-
looking box. In fact, it’s a creative possibility and a growing trend.
Modern, multistory dwellings, now known as “modular homes,” are built
in blocks in factories and transported to properties, where they’re fully
assembled to comply with local building codes. If you decide to buy a
property and build a home on it, a modular home might be a relatively
low-cost option.
Celebrities Who’ve
Owned Co-ops
Among the big names who’ve
made a co-op home (or maybe
one of their homes) are Glenn
Close, Jimmy Fallon, Chloe
Sevigny, Sean Combs (a.k.a.
Diddy), Matthew Perry, and Kelis.
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
However, youll have to consider additional expenses like transporting
the home; getting the proper permits and access to utilities and sewer
lines; hiring professionals for installations; and adding features like
landscaping, driveways, or fences. A local contractor may be able to give
you a brief overview of the costs, players, and timeline.
CHECK IT OUT
Check out modular homes styles, from the traditional to the ultra-
modern, at:
• www.modularcenter.com
• www.houseplans.com
• www.linwoodhomes.com.
Another low-cost option is the manufactured house, once commonly
referred to as a mobile home. ese too have come a long way.
Manufactured homes comply with federal
building standards but arent constricted
by local or state building codes.
Manufactured homes are typically
transported to communities of other, similar
homes, and the owners lease the land the
homes sit on. If the lease is terminated or the
land is sold, the owners can be required to
leave and take their homes with them. Since
a lot of the value of a home is in the land,
these homes tend to lose value over time, and moving one may cost more
than it’s worth. Manufactured homes are often more dicult to nance,
too. e bottom line is that they’re low-cost options to more permanent
properties but dont usually oer the same equity-building advantages.
Putting It All Together: Your Dream List
Now it’s time to ll out what we call your “Dream List.” is is a handy
worksheet where youll write down your “must haves,” such as number
of bedrooms, size or type of house, neighborhood, maximum price, and
Million-Dollar
Mobile Homes?
Yes, you’ll find them in Malibu:
Even the rich and famous
(like Minnie Driver) sometimes
retreat to manufactured home
communities.
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 39
anything else you consider a minimum requirement in a home, such as
a garden. eres also space for you to note your “would likes,” features
you’d prefer but could live without or possibly add later (such as a deck).
Of course, expressing your preferences
doesnt mean youll get all of them. But later,
when youre out househunting, carrying a
copy of your Dream List will help make sure
you keep your priorities straight.
e Dream List also includes a section for
things you absolutely won’t accept, under any
condition, such as a dark kitchen with few
windows. You might need this reminder one day, when you nd a house
thats perfect in every other respect.
TIP
Check in with your partner. If you’re buying the house with another
person, make sure you assess your priorities and complete the Dream List
together. It wont help to make a list of priorities, only to find out theyre in direct
conflict with your fellow buyer’s.
ever did
est thing I
B
Put my practical needs as a single woman first. Hope
thought she was looking for a cute Craftsman with
wainscoting, high ceilings, and a yard. “In fact,” she says, “I almost bought a house
that fit my supposed ideal. But at the last minute, I realized it wasn’t going to work.
My work hours don’t leave time for home maintenance, and my safety was an
issue in that neighborhood. So I switched gears and bought a late ’80s townhouse
with a drive-in garage with direct access to the house, in a nicer neighborhood. It’s
architecturally boring, but I’m comfortable there, the homeowners’ association
deals with most of the maintenance, and I haven’t had a moment’s regret.
ONLINE TOOLKIT
e “Dream List” can be found in the Homebuyer’s Toolkit on the
Nolo website. (See the appendix for the link.) A filled-in sample is shown below.
Ooh! I forgot about the
washer and dryer! I’ve been
dreaming about that my
whole New York life!
Carrie, Sex and the City
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Dream List
Address: 43 Belvedere Road, Oakland, CA Date visited: March 3, 20xx
Contact: Tom Macht, Hills Realty, 510-555-3479
General Features Must Have Would Like
is House
Type (house,
condo, etc.) or
Style (Colonial,
loft, etc.)
Single-family
house in good
shape with few
stairs from the
street
Ranch style
or layout with
bedroom on 1st
floor, accessible for
elderly parents
80 years old, but
seemingly in great
shape. Two-story. Den
on first floor could be
used as guest room.
Upper price limit $900,000 $ 750,000 $ 850,000 list price
Age above/below Less than 75
years old
Less than 50 years
old
80 years old
Min. square footage
1,500 2,000 1,750
Min. lot size
2,500 square ft.
3,500 square
ft.
3,000 square
ft.
Number of
bedrooms
3 4 3 (plus den that could
double as guest room)
Number of
bathrooms
2 full baths 3 full baths 2.5 (half-bath off of
kitchen and full bath
in master bedroom)
car garage 1-car garage Large attached
2-car garage
No garage
Parking Driveway
parking, not on
an incline
Same Driveway parking
close to house, level
surface
Fireplace
Not a deal breaker
A gas fireplace Nonworking fireplace
Flooring Hardwood, at
least in living
room and dining
room
Hardwood floors
in good shape, in
entire house
Hardwood floors in
living room and dining
room, but covered by
wall-to-wall carpet.
Floors need refinishing.
Other Good separation
from neighbors’
houses
Lots of privacy,
especially in
backyard
Houses are fairly close,
but trees provide
some privacy on 1st
floor
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 41
Dream List, continued
Floor Plan Must Have Would Like
is House
Formal living/
dining
Separate living
and dining rooms
Large living room
for entertaining.
Small living and dining
rooms, open on to
each other
Great room Don’t care Don’t care No
Number of floors 2 1
2 (short flight of stairs)
Basement/attic
Clean, dry base-
ment for storage;
no flooding
problems
Large finished
basement for kids’
playroom plus
storage, half-bath
Basement in good
shape; could be
divided into kids’ play
space and storage
area. No bathroom.
Other
Kitchen Must Have Would Like
is House
e basics Large sunny
kitchen, lots of
counter space
and storage
Gourmet kitchen
with beautiful
cabinets, walk-in
pantry, natural
lighting plus
recessed lighting,
hardwood floors
Decent-size kitchen,
good light, adequate
storage. Cabinets need
resurfacing. Linoleum
floor will need
replacing. Lighting
fixtures outdated.
Dishwasher
Built-in
dishwasher
Same Only portable
dishwasher, but could
add a built-in one
Other appliances Gas stove, large
refrigerator in
good shape
New stainless
steel appliances,
including
commercial stove
Refrigerator and oven
don’t match, but are
only a few years old.
Eat-in
Space for small
table for four, or
breakfast counter
Breakfast nook
opening on to
deck
Breakfast nook! Now
to add the deck …
Other
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Dream List, continued
Other Rooms Must Have Would Like
is House
Laundry Washing
machine and
dryer
Separate laundry
room on 1st floor,
with space to hang
clothes and iron
Washing machine and
dryer in basement.
Bare bones.
Family Space for kids
to hang out,
separate from
living room
Large finished
playroom in
basement
No separate play-
room, but kids’ rooms
are large, and extra
space in basement.
Den/study
A room suited for
office, with space
for two desks,
bookcases, and
file cabinets
Two separate
offices with built-in
bookcases would
be fantastic!
Den on first floor could
double as guest room/
office. Master bedroom
nook could be made
into small office.
Other
Outside Must Have Would Like
is House
Deck/patio Sunny deck off of
kitchen or ability
to easily add one
Large deck plus
patio in garden
Small deck off of
second floor master
bedroom; would be
easy to build deck off
kitchen.
Garden
Sunny yard for
garden
Established
garden, fruit
trees, good soil,
underground
watering system.
Mainly sunny, with
a few shade trees.
Back yard needs work.
A few rose bushes
and succulents, but
potential. Completely
open (no shade). No
drip system.
Fenced yard Yes—need for
dog
Beautiful
hardwood fence
and large secure
backyard
Fence in bad shape.
Will need to replace, or
fill in some areas with
holes.
Pool/hot tub
Not necessary
Not necessary
No
Other
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 43
Dream List, continued
Structure Must Have Would Like
is House
Central heat/air Central heat
Central heat and AC
Central heat
Insulation roughout
house and attic
roughout house
and attic
Only attic is insulated
Upgraded
plumbing
A must
Copper plumbing
Not sure about the
material, but plumbing,
water pressure, etc.
seem fine.
Other
Storage Must Have Would Like
is House
e basics
Good storage a
must in entry-
way, bedrooms,
kitchen, base-
ment, bathrooms,
and other rooms.
Custom built-
in closets in all
rooms, lots of
shelves, drawers,
cupboards (espe-
cially in kitchen)
Adequate coat
closet in entryway.
All closets need
updating, except for
large walk-in closet in
master bedroom.
Linen closet
Linen closet near
bathroom
2 large linen
closets, 1 near
bedrooms, other
bath
Small linen closet
on 2nd floor only,
outside of bathroom
Other
Convenience Must Have Would Like
is House
Work within
miles/minutes
1 hour tops by
car
15 minutes by car
(one can dream)
30-minute drive to
City (45-60 minutes
in rush hour).
Alternative = good
public transport
Church/place of
worship within
miles/minutes
N/A N/A N/A
Other
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
Dream List, continued
Neighborhood Must Have Would Like
is House
Quiet street Residential area;
no speeding cars,
walking distance
to grocery, other
shops.
Same Street a little noisy
(dog next door),
basically okay. Only a
few blocks to lake and
great shopping area!
Safe neighborhood A must! Same Seems safe; need to
talk with neighbors,
check crime stats.
Good schools A must! Lake Hills school
district, schools
within walking
distance
Lake Hills school
district! Elementary
school is short
(15-minute) walk
from home.
Rules/restrictions N/A (we don’t
want to live
in community
association)
N/A N/A
Community
association fees
N/A N/A N/A
Accessible public
transport
Short walk or
drive to BART,
and close bus stop
Short walk or
drive to BART.
Bus stop at corner
10-minute drive to
BART, bus stop a
5-minute walk
Other
Absolute No Ways Under Any Condition
Bad schools, high-crime area, fixer-upper.
Notes
is house is definitely a possibility—especially because of schools and location. We
may be able to get it for less than list price—enough to cover some changes we’d like,
such as refinishing/replacing floors, resurfacing kitchen cabinets, adding a built-in
dishwasher, repairing backyard fence. May even be able to swing adding a deck off
the kitchen!
CHAPTER 2 | WHAT DO YOU WANT? FIGURING OUT YOUR HOMEBUYING NEEDS | 45
What’s Next?
Now that you know what features you’re looking for, it’s time to figure out
whether you can afford them all. In Chapter 3, we’ll explain how a lender is going
to evaluate your finances and what you should do to evaluate them yourself.
Dream List Directions
is Dream List includes the more common features found in many
homes, but you can add others to this list (perhaps a must-have hillside
location with a view) or delete some features. Add as many details as you
want in the left-hand column (General Features”). At the end of the
Dream List, there’s a section for those things you absolutely will not accept,
under any condition. ere’s also a section at the end for notes, such as
comments about a particular house or neighborhoodsomething you want
to be sure to remember, such as a quiet location at the end of a cul de sac.
Fill in the “Must Have” column with your minimum requirements
and the “Would Like” column with features youd prefer but could live
without. For example, for the “Number of Bedrooms” feature, you might
write “3” in the “Must Have” column and “4” in the “Would Like”
column. In some cases, youll add additional information: For example,
you might put a checkmark indicating that a house meets your upper
price limit, and then note the actual price of the house. If a “Must Have”
can be added when you move in, such as a deck or second bathroom, you
can also note this.
If you ll out the left columns of the Dream List now and print more
copies, you can use this sheet over and over again. Each time you visit a
house, simply write in the address and note how it compares in the right-
hand column (“is House”). Save copies for homes that seem like good
possibilities.
Beyond the Purchase Price: e Costs of Buying and Owning a Home ......... 51
Down Payment ...................................................................................................................................51
Principal, Interest, Taxes, and Insurance ...............................................................................54
Up-Front Costs ...................................................................................................................................55
Recurring Costs ..................................................................................................................................56
Spend Much? How Lenders Use Your Debt-to-Income Ratio ...............................57
Maximum Acceptable Ratios: e 28% and 36% Rules ................................................ 57
Calculating Your Own Debt-to-Income Ratios .................................................................58
Blasts From the Past: How Your Credit History Factors In ..................................... 59
How Lenders Use Credit Scores .................................................................................................60
Getting Your Own Credit Report and Score ......................................................................60
What Your Credit Score Means ................................................................................................. 61
Understanding Your Credit Report ........................................................................................ 62
Correcting Credit Errors ................................................................................................................63
Repairing Your Credit ..................................................................................................................... 64
What’s Your Monthly Budget? Understanding Your Finances ............................. 65
Getting Creative: Tips for Overcoming Financial Roadblocks .............................67
e Power of Paper: Getting Preapproved for a Loan ................................................68
Why Preapproval Is Better an Prequalification............................................................69
What You Need to Show for Preapproval ............................................................................70
Where to Go for Preapproval .....................................................................................................71
CHAPTER
3
Does is Mean I Have to Balance
My Checkbook? Figuring Out
What You Can Afford
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Meet Your Adviser
Russell Straub, a former mortgage broker and founder,
President, and Chief Executive Officer of LoanBright,
a mortgage marketing service based in Evergreen,
Colorado, whose services involve two websites, www.
loanbright.com and www.compareinterestrates.com.
What he does Helps LoanBright serve its goal of giving homeowners a
convenient way to find the right mortgage company as well as
a loan with favorable terms. Homebuyers visit the companys
website, compare interestrates.com, enter some basic
information, receive a list of lenders or brokers and available loan
terms, and consent to being contacted. At the other end of the
transaction, LoanBright helps mortgage brokers (particularly sole
proprietors or independent ones) meet these potential clients.
First house “It was a condo in Boston, a 350-square-foot studio—big enough
for me, by myself. I bought it during a run-up in real estate prices—
at the peak, as it turned out! I was working as a manufacturing
engineer and didnt know a thing about real estate. I chose my
mortgage broker because she lived two floors up from me in my
apartment building, but she managed to shepherd me through.
Although the 1980s real estate crash hit not long afterward, I
held onto the place. In fact, even though I now live in Colorado,
I still own the condo and rent it out, and it has since tripled or
quadrupled in value.”
Fantasy house “Right on the ski slopes at Vail. I already spend some time there, but
not enough. If you’ve been there, you know the style I’d like—wood,
European looking, with a wood-shake tile roof, ski in/ski out.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 49
Likes best
about his work
My short commute from home is great. Also, I like how each of us
at LoanBright brings something different to the table, with varying
interests and viewpoints, which we can combine into something new.
I’m also conscious of the fact that we have the ability to change the
lives of the solo or small-business mortgage and loan brokers whom
we consider our primary customers. Many of them are honestly
struggling—some are single moms—and it’s a competitive business,
with more people doing the jobs than there are transactions. We’re
trying to do the right thing for them. It’s also satisfying to be able
to help homebuyers get competitive loan quotes, potentially saving
them thousands of dollars on their new mortgage.
Top tip for
first-time
homebuyers
“Do your homework. Read about the process, ask your questions,
and talk to more than one broker and lender. It can take a while to
get the hang of it. But I read a survey recently saying that consumers
booking a hotel room online spend an average of one hour or more
selecting a hotel. If homebuyers would spend a proportionate
amount of time researching their prospective purchase and
mortgage, they’d come out way ahead. But I’ve met many who
spent less than an hour getting educated about buying a home!”
ONLINE TOOLKIT
For more tips from Russell Straub, check out his audio interview on
the Nolo website. (See the appendix for the link.)
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
U
p to this point, we’ve been able to focus on the fun stu
nding out all the great reasons to buy a house and imagining
what the new place will look like. Now it’s time to take a step
into the world of nances—nothing that will require an accounting
degree, fortunately. You may be wondering why we’re even bringing up
boring nancial stu before youve started seriously househunting. at’s
what a mortgage broker is for, isn’t it?
But wouldnt it be horrible to put an oer on a house and begin
shopping for a loan, only to discover that you couldnt qualify for the
amount you needed or the terms you expected? Even worse, what if you
were able to get a loan, but discovered after moving into your new home
that you’d borrowed more than you could handle—at least, without
moonlighting?
Don’t Play the Multiplication Game
You may have heard of a formula where you multiply your household’s
gross annual income by two and a half to find out how much you can afford
to spend. is may be fun and easy, but it wont help you draw realistic
conclusions. It fails to factor in important things like how much debt you
currently have, the terms of your mortgage, or how much you already have
saved for a down payment. If you really want to guess how much you can
spend before reading this chapter, you’re better off using a reliable online
affordability calculator like the one at www.nolo.com/legal-calculators.
Getting familiar with your nances before there’s a prospective
property in sight—even if you just sit down for an hour or two—will
show you how much you can realistically aord to spend and prepare you
to choose the best possible loan. is chapter will help you by:
• explaining the costs of purchasing a house
• demystifying the process mortgage lenders use to decide how much
you can borrow
• providing simple ways to calculate what you can really aord based
on your lifestyle and nances
• showing you how to boost your nancial prole, and
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 51
• explaining what it means to get preapproved for a loan and why
you should do so.
If youve already found a place and are trying to gure out how to pay
for it, dont skip this chapter. A quick look at your nances will still help
you decide whether your prospective home’s cost is within your budget
and whether youre likely to get the loan terms youre counting on.
Beyond the Purchase Price:
e Costs of Buying and Owning a Home
Buying a house means some new expenses beyond the purchase price. A
rst-time homebuyer should plan to drop some cash for:
• the down payment
• the loan principal, loan interest, taxes, and insurance
• up-front costs, mostly to close the deal, and
• recurring ownership costs.
e exact amounts of these expenses depend on you, the house you
buy and where you buy it, and the type of mortgage you get. But even if
you can’t predict exact amounts, understanding these expenses and what
drives them will save you some sticker shock.
Do We Have to Talk About Money?
We know, all this talk about numbers makes watching a a file download
seem fascinating. But if you pay just half a percent more than you could have
if you’d done some research—say, 4.5% instead of 4.0%, on a 30-year, fixed-
rate mortgage for $200,000—you could end up paying almost $21,000 more
in interest over the life of the loan.
Down Payment
You may be plunking down a hefty chunk of change, in the form of a
down payment, to buy your home. Down payments are traditionally
calculated as a percentage of the purchase price. Although most lenders
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NOLO’S ESSENTIAL GUIDE TO BUYING YOUR FIRST HOME
tightened lending practices after the 2007/2008 nancial crisis and began
requiring down payments of 20%, many are relaxing standards once
again. If you have excellent credit, you should be able to qualify for a
mortgage with between 5% and
10% down.
Nevertheless, there are many
benets to making a large down
payment:
• No PMI. If you pay 20% of your
purchase price, you don’t have to pay
private mortgage insurance, or PMI,
which lenders routinely require of
homebuyers who borrow more than
80% of the home’s value, to protect the lender if you default.
• Smaller monthly mortgage payments. If you borrow less money, youll
have less to pay back, leaving you more cash for other things.
• Less interest overall. If you borrow less, youll owe less in total
interest. For example, if you got a 30-year, xed rate loan for
$200,000 and paid 4.0% interest, youd pay approximately
$143,735 in interest over the life of the loan. But you’d pay only
about $114,989 over the life of a $160,000 loan with the same terms.
e bank would get over $28,746 more in interest just because you
didn’t put $40,000 down at the beginning.
• Its like money in the bank. No matter what the market does, putting
cash into your home is a low-risk way to use it.
• Lower interest rate. Borrowers who take out mortgages for more than a
certain amount ($417,000 in most places in 2014, but higher in high-
cost areas such as Alaska and Hawaii—up to $625,500 in 2014and
can change annually) get what are called “jumbo” loans, with higher
interest rates. If making a down payment will lower your loan to below
that amount, your interest rate will probably drop, too. Likewise, if
youre a borrower with poor credit, you might be able to obtain better
loan terms if you fork over more cash at the beginning—the lender
gures youve got more incentive to keep paying if you stand to lose
your down payment when the lender forecloses.
Tick, Tick, Tick
Finding the house you want to buy might
not take as long as you think. According
to a 2008 survey by the National
Association of Realtors
®
, the typical
homebuyer spent 12 weeks searching
before settling on a house.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 53
Where Will I Get Down Payment Money?
If you’re interested in making a down payment but havent saved the cash,
here are some alternative sources:
• Agiftorloanfromfamilyorfriends. If you have a loved one with
available cash, you may be able to get a low-interest loan, or even a gift.
Nearly one third of first-time homebuyers get help from friends and
family—either as a gift or a loan—for the down payment. However,
you’ll need to keep an eye on your lenders rules regarding the source of
your down payment. Adviser Russell Straub notes, “If one gets an FHA
mortgage, there are no restrictions on the amount or percentage of the
gift so long as it comes from a blood relative. If one gets a conventional
mortgage and the gift is for less than 20% of the purchase price, however,
the borrower(s) must make at least 5% of the down payment from their
own funds, and the gift(s) must be from a blood relative.
• WithdrawalfromyourIRA.You can withdraw up to $10,000, penalty-
free, from an individual retirement account (IRA) to purchase (or
build) your first home. Your spouse or cobuyer can do the same.
For more information, see IRS Publication 590, Individual Retirement
Arrangements (IRAs), available at www.irs.gov.
• Borrowfromyour401(k).Check with your employer or plan adminis-
trator about whether you can borrow from your 401(k) plan. Also ask
how much you can borrow (usually, $50,000 at most). But be warned:
Lenders will factor the monthly 401(k) loan repayment amount into
your mortgage qualification ratio. For more information, see IRS Publi-
cation 575, Pension and Annuity Income, available at www.irs.gov.
• Currentassets.If you have other investments, like stocks or bonds, con-
sider cashing them out—but be sure to factor in the taxes you’ll owe. You
may be also able to sell an asset like a car or valuable musical instrument.
• Don’thaveabigwedding!Okay, we’re half joking here. But you
wouldn’t believe the number of couples we’ve met who said that,
in retrospect, they wish theyd kept the wedding small and put that
money toward a house.
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ever did
est thing we
B
Makea30%downpayment. According to Nigel, “When
Olivia and I decided to buy a house together, we were
earning nonprofit salaries (low). But our parents were excited to see us settle
down and gave us generous gifts. Between that and emptying our savings
account, we had about 30% to put down—which convinced the seller to choose
our bid from among the many others, because we’d obviously have no trouble
financing the rest. Now we have absurdly low monthly payments—less than
we’d be paying in rent—and the house has appreciated in value. Also, we’re in a
position to help our parents out financially, if they need it.
Principal, Interest, Taxes, and Insurance
Ever heard of PITI (pronounced “pity”)? It stands for principal, interest,
taxes, and insurance, all of which must be factored into your homebuying
plans. Here’s the breakdown on these expense items:
• Principal. e amount you borrow from the lender and must pay
back, month by month.
• Interest. A percentage of the overall borrowed amount that the
lender charges you to use its money. e exact rate varies widely.
• Property taxes. Taxes vary by state and sometimes by local area, but
expect to pay somewhere around 1% of the house purchase price
each year, if the place you live ts the national average.
• Insurance. Coverage for theft, re, and other damage to the
property (required by your lender) and usually for your liability to
people injured on your property or by you.
Average rates run upwards of $600 per
year, and over $1,000 annually in many
locations. Private mortgage insurance or
PMI also factors in here. If a homebuyer
puts down less than 20%, the annual PMI
cost can range from ½% to 1.5% of the
loan amount.
It makes sense that these four items have
their own acronym, PITI, because for some homebuyers (usually those
whose down payment is less than 20%), all four must be paid straight to
Worst states for
property taxes?
e five with highest rates
nationwide are: #1: New Jersey,
#2 Illinois, #3 New Hampshire,
#4 Wisconsin, and #5 Texas.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 55
the mortgage lender each month. e lender turns around and pays the
appropriate party. e lender’s rationale is that if you dont pay these bills
(or your mortgage) and the lender gets the property, it doesnt want to get
stuck with your tax or insurance bill, too.
TIP
PITI is paid differently when you buy a condo or co-op. Instead of
paying the lender, you may have to pay your community association or co-op board
for your portion of the mortgage and real estate taxes (on a co-op), or for insurance
on the jointly owned parts of the property (on either a condo or a co-op).
Added together, your total PITI may come to a lot more than your
current monthly rent. at makes owning a home look like an expensive
proposition. But it’s not an apples-to-apples comparison. First, remember
that your mortgage payments typically reduce your loan principal, so
your payment is building equity, not just going into a black hole. Second,
your interest payments and property taxes are tax-deductible.
EXAMPLE: Mieko and Lyle buy a house for $250,000, putting down
$25,000 and nancing the remainder with a 30-year xed rate mort-
gage at 4%. Not only are their monthly mortgage payments $1,074
a month, but the mortgage lender also collects $450 each month to
pay their homeowners’ insurance and annual property taxes, for a total
monthly payment of $1,524. e money for the tax and insurance
bills is held in an escrow account, which the lender draws on to pay
the bills when due. At the end of the rst year, Mieko and Lyle will be
able to deduct about $11,328 from their taxable income: $2,400 for
property taxes and about $8,928 for interest paid on the mortgage.
Up-Front Costs
Until now, we’ve been talking about costs associated with the house itself.
But youll also have to spend some pretty serious cash at the beginning
to make the sale happen. (Sort of like paying rst and last months rent.)
Particularly if youre trying to save up for a decent-sized down payment,
youll need to plan for the following additional up-front costs:
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• Closing costs. An array of miscellaneous and sometimes aggravating
charges—for everything from couriers to loan points (discussed
below) to insurance premiums—are lumped into a category called
closing costs.” ese vary across the country, but are usually 2% to
5% of the house purchase price.
• Points. Borrowers sometimes agree to pay a “loan origination fee”
or “points” to obtain a specic loan. Each point is 1% of the loan
principal (so one point on a $100,000 loan is $1,000). Paying points
can lower your interest rate, so you pay less in the long term. But
youll probably need to pay the cash up front (although with some
FHA loans, points can be amortized into your loan—meaning
added on, with interest accruing).
• Moving costs. How high these will go depends on how far youre
moving, how much stu you have, and whether you use a
professional moving company.
• Service setup costs. You may have to pay fees to set up cable, a
security system, high-speed Internet, and similar services in your
new home.
• Emergency fund. Its a good idea (and sometimes a lender
requirement) to have a couple months’ worth of PITI payments
saved, in case something goes unexpectedly awry.
• Remodeling costs. If you buy a xer-upper or a planned remodel,
you might need thousands of dollars in cash early on, just to make
the place livable. Estimate high for these expensesthey’re almost
always more than anyone expected.
Recurring Costs
Yes, there’s more. Whether new or old, your house will need regular
maintenancegutters cleaned and trees trimmed regularly, a paint job
every few years, new appliances when the old ones die, and so on. If you
buy in a common interest development, your own maintenance costs
may go down, but youll have to pay monthly dues and sometimes spe-
cial assessments for unanticipated projects like resurfacing a damaged
parking lot. While not part of your PITI, all of these expenses will aect
your monthly cash ow.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 57
TIP
Adjust your deductions. Once you know the details of your mortgage,
work with a financial professional to change your withholdings to account for your
lower tax liability, freeing up more money for other expenses.
Spend Much?
How Lenders Use Your Debt-to-Income Ratio
Once you understand what youll be paying for, and that youll probably
need a mortgage to make it happen, the obvious question is, how much
can you borrow? To know that, you need to understand how lenders
think. Just as youre trying to get the best loan, lenders are looking for the
best borrowers.
Without knowing you personally, lenders need some criteria to gure
out how risky it is to lend you money. If you make your payments, they’ll
turn a prot, either in interest or by selling your loan on the secondary
market (more on that in Chapter 6). If you dont, they’ll have to chase
you down for the cash or sell the property to try to get it.
One of the criteria that lenders use is the comparison between your
income and your debt load, called your “debt-to-income” ratio. ey
also look at your track record for paying previous debts, or your credit
history, discussed below.
e concept of “debt-to-income ratio” isnt as complicated as it sounds.
e lender simply looks at your households gross monthly income, then
makes sure that your combined minimum debt payments—for your PITI
(including any community association fees), credit card, car, student loan,
personal loan, 401(k) loan, and othersdon’t eat up more than a certain
percentage of that amount. e idea is to make sure you have enough
cash left over for your mortgage payment.
MaximumAcceptableRatios:e28%and36%Rules
How high can your debt-to-income ratio go? Traditionally, lenders have
said that your PITI payment shouldnt exceed 28% of your gross monthly
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income. is is sometimes called the “front-end” ratio. Also, your overall
debt shouldn’t exceed 36% of your gross income (also called the “back-
end” ratio). (Your gross monthly income means the amount you earn
before taxes and other monthly withdrawals, plus income from all other
sources, like royalties, interest, alimony, or investments.)
EXAMPLE: Fernando and Luz have a gross annual income of $90,000
($7,500 per month) and a moderate amount of existing debt. If they
plan to spend 28% of their gross monthly income on PITI, they’ll
pay $2,100 each month. Assuming they spend about $300 of that on
taxes and insurance, they can borrow about $375,000 using a 30-year,
xed rate loan at 4% interest.
Khanh and May also have a gross annual income of $90,000,
but theyre debt-free. So, depending on the size of their down pay-
ment, they may qualify for a loan using slightly more than 28% of
their gross monthly income on PITI. In an extreme case, they could
qualify to allocate up to 36% of their gross monthly income on PITI.
Spending the same on taxes and insurance, they can borrow about
$500,000 using a 30-year, xed rate loan at 4% interest. With the
same income but a higher debt-to-income ratio, Khanh and May can
spend a lot more money on a house than Fernando and Luz.
CHECK IT OUT
Ready to run some numbers? Online affordability calculators show
how a traditional lender will use your debt-to-income ratio to set your maximum
monthly mortgage payment. Find such calculators at www.nolo.com/legal-
calculators, www.hsh.com, www.bankrate.com, and www.interest.com. Make
sure any calculator you use factors in the amount of your down payment, your
income and your debts, and your estimated taxes and insurance.
Calculating Your Own Debt-to-Income Ratios
All you need to gure out your own debt-to-income ratios is your
combined gross monthly income gure plus that of anyone buying with
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 59
you. is will tell you approximately what a lender will say you can aord
to spend each month on a mortgage payment. See the sample Debt-to-
Income Ratio Worksheet below.
ONLINE TOOLKIT
You’ll find a blank version of the “Debt-to-Income Ratio Worksheet”
in the Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.)
Sample Debt-to-Income Ratio Worksheet
Gross monthly income: $2,000
Gross monthly income × 0.28 $560 Maximum monthly PITI payment
Gross monthly income × 0.36 $720 Maximum monthly debt overall
Blasts From the Past:
How Your Credit History Factors In
Aside from your available income, your lender’s main preoccupation will
be with your credit history. Most lenders want to know whom they’ll be
competing with to get your monthly dollars, how much youre borrowing
from those various
sources, and how good
you’ve been about
paying money back
in the past. Youve
probably undergone
credit history checks
before, like when you
applied for a car loan or
rented a new apartment.
Credit reporting bureaus exist to keep track of your borrowing habits.
e three major companies are Equifax (www.equifax.com), Experian
Managing Your Money Is So Easy!
You just use your credit cards! You pay your American
Express with your Discover, your Discover with your Visa,
your Visa with your MasterCard. Before they catch up
with you, youre buried in a glorious crypt in Bel-Air!
Camilla, character on TV series e Naked Truth
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(www.experian.com), and TransUnion (www.transunion.com). ey use a
formula compiled by the Fair Isaac Corporation to calculate your “FICO”
score (which we’ll call your “credit score”; but beware when you see this
term other places, because anyone can compile a number and call it a
credit” score).
In 2012, FICO introduced something called the FICO Mortgage
Score. Some lenders may use this instead of, or in addition to, your
regular FICO score. e goal of the FICO Mortgage Score is to capture
more information than does the regular FICO score, such as your history
of child support payments, rental payments, and more (all gleaned from
public records).
How Lenders Use Credit Scores
Lenders use your credit score to decide whether to lend you money and, if
so, how much and on what terms. If youll be nancing your home jointly
with others, the lender will look at each persons credit score. Unfortunately,
that means that if one of you has a low score, it will probably aect the
terms of the loan oered to all of you. If any of you has serious skeletons in
the nancial closet, either clear out the closet, reconsider the joint purchase,
or get creative with your nancing strategies.
Getting Your Own Credit Report and Score
e best way to know exactly what prospective lenders will be looking at
is to look at it yourself rst. Federal law requires each of the three major
consumer reporting companies (named above) to provide you with a free
copy of your credit report once every 12 months.
CHECK IT OUT
e only authorized source for free credit reports: Go to www.
annualcreditreport.com. Other websites may advertise a “free report” but try to
sell you something in the process. is site also links you directly to the websites
for the big three reporting bureaus.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 61
the hard way
L
essons learned
Being financially responsible left me with no credit
history! When Willow decided to buy her first house, she
didn’t expect her lack of debt to create a problem. Willow explains, “I’d worked
my way through school and taken out a student loan that I’d paid off almost
immediately. And I’d always used a debit card instead of a credit card. As a result,
I had to jump through all sorts of extra hoops, providing a letter from my old
landlord showing that I paid the rent on time; showing records of my payments
of phone bills, cable bills; and even having my parents add my name to their
credit card account. (at last strategy worked faster than I expected—within
one month, my credit score was the same as theirs.) Here I thought I’d been so
good at controlling my finances, yet I discovered I’d been completely naïve when
it came to creating a record of debt payments.
It’s a good idea to ask all three agencies for your credit report. ey
sometimes have dierent information, and your lender may be looking at all
three reports. You can do this simultaneously, but it means that you wont
be able to get another free report from any of them for another full year.
Federal law doesnt require the agencies to give you your credit score,
which is dierent from your report. Youll probably have to pay extra to
get the score (unless you live in a state like California that requires that
consumers be given their scores for free when getting a mortgage). You
can get your credit score either from the individual consumer reporting
company websites or by going to www.myco.com.
What Your Credit Score Means
When you get your credit score, it will be a number somewhere between
300 and 850the higher the better. If your score is above 720, it’s
considered pretty strong. Most people are in the 600s or 700s. A higher
number tells the lender you pay your debts on time, have limited
sources of revolving credit, and have an established record of using
credit prudently, making you a good credit risk. A lower number (below
around 620 for conventional mortgages and 580 for FHA mortgages)
means you look more risky—perhaps because you have enough revolving
credit that if you maxed it all out you couldnt pay all your bills plus a
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mortgage; youve missed payments in the past; or youve never used any
credit source, so the lender doesnt know what to make of you.
A low score will make it dicult to nd a willing lender. And any
lender you do nd will expect you to pay more for that privilege of bor-
rowing, probably in the form of higher interest. (If your credit is less than
perfect, you may be able to clean it up, as we’ll discuss below.)
CHECK IT OUT
What makes up a FICO score? It includes your payment history
(35% of the score), how much you currently owe (30%), how long you’ve been
a borrower (15%), whether you have any new credit accounts (10%), and the
types of credit you use (10%). To learn more, go to www.myfico.com, a Fair Isaac
website for consumers.
Understanding Your Credit Report
Get ready: Your credit report may go on for literally pages and pages.
Focus on making sure the most critical information is mistake-free,
particularly these bits of data:
• Name, Social Security Number, and addresses. Especially if your name
is a common one, you may have multiple aliases. And an address
you dont recognize may mean someone with the same name is
incorrectly listed on your report.
What Makes Up Your Credit Score
Payment history
Amounts owed
Length of credit history
New credit
Types of credit used
35%
15%
10%
10%
30%
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 63
• Creditors. Make sure you actually borrowed money from the
creditors that appear, and that the amounts borrowed are accurate.
Keep in mind that some types of loans, like student loans, can be
sold or transferred. In that case, all creditors that have held the
loan will appear, but the pretransferred or sold accounts should no
longer be designated “open.
• Open credit lines. Make sure any lines of credit youve closed are no
longer shown as open. Dierent reporting companies use dierent
terminology, so if youre not sure, call to clarify.
• Collections and judgments. Make sure any collections actions or
judgments are reected accurately.
• Late payments. ese notations will usually indicate a late payment
of 30, 60, or 90 days. Make sure they’re accurate.
Correcting Credit Errors
Credit reporting mistakes happen frequently. Inaccuracies in the report
aect your score, and if your score drops, so does the likelihood of you
getting the best possible loan. Youll want to spot and correct any errors
before a lender sees your report, not after you’ve applied for a loan and
been rejected.
All manner of mistakes are possible—from bits of credit history that
arent yours to a false claim that you paid a bill late. To correct such
errors, contact the reporting agency in writing. If all three agencies
misreported the information, youll have to contact all three. Each
agency may have a dierent procedure and forms to use for disputing the
report. When you discuss issues over the phone, make sure to document
conversations, including the date and name of the person you spoke with.
Finally, if you have any documentation that supports your claim, send a
copy with an explanatory cover letter.
e credit reporting agency has 30 days to investigate your complaint
and give you its ndings. If it cant verify that its version of events is
correct, the agency is supposed to remove the information from your le.
If it wont, you have the right to place a statement in your le giving your
version of what happened.
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Sometimes you can also work directly with your current and former
creditors to correct inaccuracies or solve problems. If youre willing to
pay the disputed amount, or the creditor is willing to settle for a lesser
amount—which it sometimes is—the creditor may also agree to clear the
item from your credit history. Likewise if you have proof of an error, it
may be faster to go directly through the creditor than to correct it through
the reporting bureau.
CHECK IT OUT
Need help patching up your credit? See Credit Repair, by Attorney
Margaret Reiter and Robin Leonard, J.D. (Nolo). It offers plain-English explanations
and over 30 forms and letters to help you negotiate with creditors, get positive
information added to your credit record, and build a financial cushion. Also, the Debt
Management section of Nolo.com includes dozens of useful articles on credit repair.
Repairing Your Credit
Rome wasnt built in a day, and credit history cant be repaired in one,
either. If you or a coborrower have a poor credit history, Fair Isaac
suggests you start cleaning it up six to 12 months before applying for a
loan. If your credit history is really messy, it may take even longer.
But here’s some good news: Even if you have a long, ugly credit
history, your score will be weighted in favor of your latest performance.
Turn over a new leaf by following these strategies:
• Pay on time from now on. Dont miss due dates for credit cards and
other bills. Setting up automatic payment plans can help, and your
lender may reduce your interest rate in return.
• Pay the worst first. Start by paying o high-interest debt, like on
credit cards. Also, keep your balances low on revolving lines of
credit. Dont just move the debt around—that wont fool the credit
scorers, nor will it free up cash for a mortgage payment.
• Don’t cancel credit cards. Paying a balance down to zero but keeping
the card active is typically much better for your credit score than
actually cancelling the card.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 65
TIP
Check out FHA-backed loans. Some low down payment federal loan
programs are less strict about credit background. See Chapter 7 for details.
Whats Your Monthly Budget?
Understanding Your Finances
Now that youve seen what lenders look at to decide how much you can
spend, it’s time to think about what you believe you can spend. e point
is to avoid taking on so much debt that you lose sleep or have to give up
sushi for ramen noodles.
the hard way
L
essons learned
Should’ve budgeted for furniture! According to adviser
and real estate broker Tara Waggoner (whom you’ll meet
in Chapter 15), “I know a couple who, for the first nine months living in their first
home, literally had almost no furniture beyond a card table and a futon. eyd
rented a much smaller place before. In working out their budget, they forgot
to take into account that they’d have to furnish all the rooms that they were so
excited about in their new home: a media room, an office, and five bedrooms
(they had kids). ey laugh about it now.
In fact, if you look closer at that debt-to-income ratio, youll realize
that it has a built-in problem. It’s based on your gross incomethe
amount you theoretically make before your paycheck gets eaten by taxes
and other withdrawals. Your mortgage payment could, depending on
your lifestyle, end up exceeding what actually remains.
e easiest way to understand your current spending and savings
pattern is to do a budget worksheet. You can do this using either special
budgeting software, a spreadsheet like Excel, or with old-fashioned
pencil and paper. List all your expenses, including food, entertainment,
clothing, transportation and car-related expenses, health and dental care,
child and pet care, student loans, and utilities. Hold onto your receipts,
and if you use an ATM card or make electronic payments, look at your
bank statement to see where it’s all going each month. Include automatic
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monthly withdrawals on your budget worksheet—for your DSL line,
online DVD rentals, or gym membership. Of course, you can leave your
current rent and any rental-related expenses out of your calculations.
CHECK IT OUT
ese websites have free budget worksheets you can print and fill
out, or budgeting software to purchase:
• www.mint.com
• www.vertex42.com
• www.planabudget.com
• www.quicken.intuit.com.
Next, compare your monthly expense total to your monthly net income
—what comes home, not what you make before taxes and the rest. e
dierence between that take-home pay and your expenses is the amount of
disposable income that you can use for new-house-related expenses.
CAUTION
Self-employed? Expect some frustration in qualifying for a loan.
Lenders typically require you to have been self-employed for at least two years,
and calculate self-employment income based on an average of the most recent 24
months. So, for example, if you’ve been self-employed for only 14 months, your
income—no matter how high—may be excluded for loan qualification purposes.
Similarly, if your first 12 months’ self-employment income was only $12,000 but
the next 12 months yielded $120,000, your 24-month average would be only
$5,500 per month.
Most people try to modify their spending habits if their disposable
income isnt enough to cover the PITI. Having all your expenses in front
of you helps you decide where to make such cuts. It also prepares you to
draw the line if a lender or mortgage broker encourages you to pay more
than your true budget allows. Remember, the lender mainly cares that you
can pay back the money you borrow—not that you do it while living the
life you want. If Pilates classes or Friday happy hours are important to you,
then stick by your own budget and plan.
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 67
CAUTION
Not to scare you, but Fred Steingold, an attorney-adviser whom
you’ll meet in Chapter 5, thought you should know just how deeply a lender can
dip into your finances if you ultimately fail to make payments on your mortgage.
“e U.S. is divided into ‘recourse states’ (the majority) and ‘nonrecourse states,
explains Steingold. “In a recourse state, if the value of the home drops and you
stop making mortgage payments, the lender may not only sell the home in a
foreclosure sale, but also hit you with a deficiency judgment for the remainder of
the mortgage debt.” In other words, the lender can go after assets of yours other
than the house securing the mortgage. To find out your state’s law on this, go to
www.nolo.com and search for, “State Foreclosure Laws.
Getting Creative:
Tips for Overcoming Financial Roadblocks
After running the numbers, you may feel that you cant aord a decent
house, or maybe any house. But no matter your nancial woes, there are
steps you can take to ease them, including:
• Reduce your debt.is will free up cash for monthly house
payments and reduce your debt-to-income ratio.
• Make a new budget. Revise your monthly budget, keeping your
homebuying goals in mind. If you have targets, youre more likely
to control your spending habits to meet them.
• Reduce spending. You may be able to get a roommate until you’re
ready to buy a place, apply an expected work bonus toward your
fund, go back to basic cable, or shop more at thrift shops. Check
out local freecycle groups (www.freecycle.org) for free items.
• Borrow from a nontraditional source. Consider dierent and creative
options for borrowing money, from your family to the seller of the
house you buy. For details, see Chapter 7.
• Get a buying partner. Perhaps you know someone who has cash and
would be interested in jointly owning a property. Keep in mind
that owning together doesnt have to mean living together, or even
owning equal shares.
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• Cash out other investments. Consider cashing out money invested in
stocks, bonds, mutual funds, or other property to come up with a
down payment, thus also reducing your monthly payment.
• Sell an asset to raise down payment cash or reduce monthly spending.
Adviser Russell Straub explains, “I’ve frequently encountered
homebuyers with high-end cars and huge car-loan payments. ey
often either had equity in the car or were paying so much per
month on the car loan that it made their back-end ratio (the 36%
ratio) too high. By selling the car (and maybe replacing it with a
more modest vehicle or using public transport, car-sharing with a
service like Zipcar, or ride-sharing with Uber or Lyft), they were
able to qualify for a bigger house payment.
• Consider other home types, sizes, conditions, or locations. Remember
that condominiums are often cheaper than houses and old houses
are generally cheaper than new.
• Wait. If you expect prices and interest rates to remain stable, your
income to increase, and to save more money, you might delay your
house purchase. With increased income, you may be able to borrow
more; with an increased down payment, you may not need more.
e Power of Paper:
Getting Preapproved for a Loan
Knowing what house-related costs will be laid at your feet, roughly how
much a lender will let you borrow, and how much you’ll really want to
spend based on your income, lifestyle, and other factors, you can think
about getting preapproved for a loan. Preapproval means you get a letter
from a bank or lender committing to lend you a certain amount. It’s often
expressed as a monthly amount, because interest rates may vary, but the
amount you can aord to pay each month does not.
CAUTION
Preapproval is not a guarantee. e bank hasn’t really fully processed
your request, and will place several conditions on your final approval. In fact,
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 69
you’ll need to comply with a host of requests for information. Lenders have
become more prone to declining final approval than ever before, so be prepared.
But it still helps you….
Preapproval does two important things: It gives you some certainty
that you can aord the houses youre considering, and it makes you more
attractive to sellers. You’ll know exactly how much you can borrow, and
sellers will know that if youve put an oer on their place, you can actually
(subject to the banks nal approval) come through with the cash.
TIP
You don’t need to use the lender that preapproves you. It would
make matters easier if you did, but there’s no need to feel bound. You (or your
mortgage broker) might find a better deal by the time you’ve chosen a house.
Why Preapproval Is Better an Prequalification
You may have heard of loan prequalication, but dont confuse it with
preapproval. When you get prequalied, you give a lender some basic
information about your income and debts, and the lender estimates what
youll likely be able to borrow. But the lender doesnt commit to lending
you that money, so prequalication mainly helps you ballpark the price
range you should be looking at and readjust your expectations if need be.
Prequalication certainly wont wow any sellers. On the plus side, prequal-
ication is free and easy to do (in person, over the phone, or on the Internet).
Preapproval is a dierent story. It will actually cost you a little money (in
the $30$40 range), because the lender will check your credit history. (is
cost may be negotiable.) But preapproval will also give you morea written
commitment to lend you money. Dont accept a verbal preapproval.
Of course, the lender will attach a few conditions to that commitment.
If, for example, you lose your job, the bargain is o. And make sure your
preapproval letter doesnt contain too many conditions. For example, if
the letter conditions the loan on a credit check, it means the lender hasn’t
really done its homework, and youre not really preapproved.
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What You Need to Show for Preapproval
To get preapproved, youll need to provide the lender with some nancial
data. is is actually a blessing in disguiseit’s all stu youll need to dig up
to get a loan anyway, and it’s about the last thing youll want to be thinking
about later, when youve found a place to buy and are juggling other tasks.
Here’s what youll need to pull together and photocopy. If youre
buying with someone else, both of you will need to give the lender every
item on the list.
• pay stubs for the last 30 days
• two years’ W-2s and potentially two years of personal and business
tax returns
• proof of other income
• proof of other assets (such as stocks or pension funds)
• three months of bank records (all pages) for every account you have
• source of your down payment (for example, bank records from you
and anyone gifting you money)
• names, addresses, and phone numbers of employers for the last
two years
• names, addresses, and phone numbers of landlords for the last two
years
• information about your current debts, including account numbers,
monthly payment amounts, and so on
• other records and documents.
ONLINE TOOLKIT
Use the “Financial Information for Lenders” checklist in the
Homebuyers Toolkit Nolo website. (See the appendix for the link.) It will
help you keep track of all the items listed above, which you’ll need for loan
preapproval (and later, final loan approval).
You’ll also need to ll out an application—if youre working with a
mortgage broker, you’ll probably get help with it, and can draw much of
the information straight from the documents listed above. e lender will
ask you for additional information once youve selected a property—that
CHAPTER 3 | FIGURING OUT WHAT YOU CAN AFFORD | 71
is, if you use that lender. If you switch lenders, you’ll have to give the new
one the whole works. e additional material includes:
• a property appraisal (youll have to pay for that, usually about
$300$400the lender will set it up once youve selected a
property), and
• proof that you’ve obtained homeowners’ insurance.
Where to Go for Preapproval
Your options for getting preapproved include working with a mortgage bro-
ker, going directly to a local bank or institutional lender, or using an Internet
aggregator—a website that compiles loan information from a lot of dierent
lenders into one place. For more on how to research mortgages, see Chapter 6.
If you havent yet found a mortgage broker, theres no harm in going
straight to a lender for preapproval. First, make sure the lender is willing to
do two things: give you the up-front letter stating that youre preapproved
up to a certain amount, and then give you another letter later, when you
actually bid on a home. is second letter will reect a preapproval amount
equal to the amount you’re oering to pay for the property. e second
letter is important because when you give a preapproval to a seller, the
seller doesnt need to know that you can aord to pay more. at kind of
revelation can hurt your bargaining position.
Preapproval is usually a quick process. If documents are transmitted
electronically, you could be preapproved within hours. At its longest, it
should take only a few days.
CAUTION
If you change plans and, instead of a single-family home, decide to
buy a condo, townhouse, or other home within an association, tell your lender
A S A P. As adviser Paul Grucza explains, “I’ve seen people lose their ability to get
a mortgage because either the lender forgot to factor in the regular and special
assessments owing on this type of property, or the buyer forgot to mention them.
is can be enough to push buyers right over the margin, so that they no longer
qualify for a mortgage in the amount they were preapproved for.
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What’s Next?
Confident that you’re not going to break your personal bank or end up without
a home loan, you can now start checking out the housing market. We’ll show
you how in Chapter 4.
CHAPTER
4
Stepping Out:
What’s on the Market and at What Price
What’s the Buzz? Checking Out Neighborhoods From Your Chair ..................76
Where Do You Begin? .....................................................................................................................77
What’s the Neighborhood Like? ................................................................................................77
How Safe Is It? ......................................................................................................................................79
Will the Services You Need Be Nearby? ................................................................................80
Is It Zoned for How You Want to Use It? ............................................................................81
Is It a Planned Community, With Restrictions on Homeowners? ...........................84
How Good Are the Local Schools? ...........................................................................................84
See for Yourself: Driving rough Neighborhoods ......................................................85
On Foot: Talking to the Natives .................................................................................................86
Sunrise, Sunset: Getting Day and Night Perspectives ................................................87
Got Houses? Finding Out What’s Locally Available .....................................................88
How Much Did at One Go For? Researching “Comparable” Sales .............. 90
Hot or Cold? Take the Market’s Temp ...................................................................................92
Just Looking: e Open House Tour .......................................................................................94
Nothing to Look at Yet? Finding Your Dream Development ...............................95
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Meet Your Adviser
Bert Sperling, a city and neighborhood expert based in
Portland, Oregon. Hes the founder of www.bestplaces.
net and author of Cities Ranked & Rated (Wiley) and
e Best Places to Raise Your Family (Wiley). e New
York Times wrote a profile about Bert titled simply (and
accurately) “e Guy Who Picks the Best Places To Live.
What he does For nearly 30 years, Bert has been helping people find their own
best place to live, work, play, and retire. As the foremost creator
of popular best-places studies, he’s in constant contact with the
national media, and regularly publishes his latest findings. His
creative yet useful research topics cover everything from the best
cities for dating to the worst ones for migraine headaches.
First house “It was a 1920s Craftsman bungalow in Portland, Oregon. My
wife found the house and said, ‘We’re buying it’—and she was
absolutely right, it was a wonderful deal and a great place to raise
our two sons. Affording it was a stretch, especially because interest
rates were high, but we were tired of renting and were able to
assume the sellers mortgage. We loved the neighborhood—only
five minutes from downtown and close to shops, restaurants, and
bus lines. Im a big fan of urban neighborhoods.
Fantasy house Weve already found it! It’s a cedar-shingled, Northwest coastal
style place in Depot Bay, Oregon. e house is right on the rocks
overlooking the ocean—a wonderful getaway, though ocean
living is a bigger challenge than many people realize. We’re under
constant assault by the weather, with winds over 100 miles per
hour. One of our requirements was high-speed Internet service so
we can stay at the beach house for extended time periods and still
keep up on our writing and research.
Brett Patterson
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 75
Likes best
about his work
“I tell people I’ve got the best job in the world. It’s wonderful to
see all the differences in where people live and establish homes,
and to be able to share their stories with others. I really believe
there’s no worst place to live. Every place is someone’s home and
has things that mean a lot to them, even though some aspects of
living there might be challenging.”
Top tip for
first-time
homebuyers
“Start by figuring out what type of homebuyer you are. For
example, are you a ‘money is no object, because I’ll live here
forever’; an ‘I don’t care about resale, I just want to find a good fit
for my family’; or an ‘Ive got to find a fixer-upper if this is going
to work’ type? Most of us have to watch how much we spend, so
think about the long term, don’t get in over your head, and don’t
buy the best place on the block.”
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V
isualizing your perfect nest, and calculating what your budget
will allow, was important. But now it’s time to step out and
see what the market really has to oer—before you turn into
a serious house shopper, and possibly even before you nd a real estate
agent. is background work may take only a few weeks. Or, says adviser
Bert Sperling, such research “can be so much fun that youll want to take
a year or more exploring new places and seeing how they might t your
lifestyle.” In any case, your eorts will be so worth it, helping you to
know when to leap at a house and what price to oer. Youll want to:
• get a feel for the communities where you might want to live (if you
dont already know)
• look at the houses already on the market, possibly including houses
in developments, still under construction
• research the prices other sellers have recently paid for houses like
the one you want, and
• gauge whether the local market is kinder to buyers or to sellers.
TIP
Eager to skip all this and just start shopping? It’s possible to check
out the market and keep your eye out for your dream house simultaneously—
but it’s harder. Without a sense of the market, you may waste your time, for
example rushing to turn in a too-low bid in a hot market. Or you might waste
your money, for example by bidding too high in a cool market. Give yourself time
to explore and be open to changing your mind about what you want.
Whats the Buzz? Checking Out
Neighborhoods From Your Chair
Use the tips below to help you either nd the right neighborhood for
you, conrm your feelings about one youve already chosen, or open your
mind to new possibilities. We’ll start with the tasks you can accomplish
online or by phone, then discuss visiting in person in a later section.
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 77
Where Do You Begin?
Most people have a good idea of where they want to live, sometimes
right down to the street. But if youre moving from far away, you may
not know your new towns uptown from its downtown, much less the
names of the neighborhoods. And even if youre already a local, there are
probably places on your map you havent explored.
Starting with a blank slate lets you play tourist in your new
hometown- (or neighborhood)-to-be and begin making friends and
contacts. Here are some eective strategies:
• Talk to friends, colleagues, and relatives about where they live. Ask
what they like best and least about the area—youre sure to uncover
some surprises.
• Out-of-towners: Start with whatever or whoever drew you to that
town. If it’s a new job, ask your employer for sta contacts whod
be willing to share their experiences. e best people to talk to are
those whove moved from far away themselves.
• Look into where like-minded folks congregate. Perhaps you have
a particular interest or hobby, such as knitting, photography,
cooking, or music. Contact some related shops or businesses (or
like” on Facebook) to nd out about the local scene. eir owners
or employees can share insights on where things are happening and
how to join in.
• Check websites of local real estate agents. Many include detailed
community and neighborhood information. Even if you havent
hired an agent yet, you can call one and ask for information—
the agent will probably jump at the chance to display knowledge
to a potential client. Most agents know a lot about dierent
neighborhoods, or at least about one neighborhood, since many of
them specialize.
Whats the Neighborhood Like?
One of your biggest questions will be the character of your prospective
neighborhood. Is it a place where you walk to get tapas or drive to pick
up cheeseburgers? Will the local hotspot be a sports bar or a blues bar?
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TIP
What about your neighbor’s beliefs? Adviser Bert Sperling notes,
“Perhaps the two biggest definers of local feel are things we’ve been told to avoid
in polite conversation—religion and politics. Variety may be the spice of life,
but you’re going to find it very difficult to feel comfortable in your new town or
neighborhood if you’re the only person with a particular point of view. Do some
research to find out which way a place is leaning.
Community character is one of the hardest issues to research (especially
if youre completely new to the area), but these resources will get you started:
• www.streetadvisor.com. Search based on various lters (prices,
personality, things to do, and so on) or enter a street address and
see how the locals describe their area, whether it’s seeing racoons at
night or getting heckled by crackheads. You can also ask questions.
• Official website of the city or county where you are house-hunting.
ese typically provide welcoming information for new residents,
such as demographics, crime statistics, and contact information for
police departments, post oces, public libraries, hospitals, parks
and recreation centers, and more.
• Sperling’s Best Places.is website, at www.bestplaces.net, is known
for its “best of” lists. Its studies will tell you the best and worst
towns for everything from aordable housing to getting a good
night’s sleep. e site also gives statistical information, by zip
code. You can nd out the percentage of your neighbors who vote
Democrat or Republican or are aliated with a particular religion,
the cost of living, climate, local home characteristics, and more.
• www.neighborhoodscout.com. is relatively new site’s search tool
provides reports on neighborhood residents’ ethnicity, wealth,
educational background, and other characteristics.
• City-data.com.is site compiles scads of information about specic
cities and neighborhoods (cost of living, home prices, and local
transportation and amenities, attractions, history of natural disasters,
and news stories). Photos, too!
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 79
• Foursquare.com and Yelp.com. Even if you check out only the
reviews on restaurants or nightlife, youll start getting a good sense
of the neighborhood. But there’s much more to be found, including
neighborhood reviews on Yelp.
• Neighborhood-specific Facebook pages, Twitter accounts, or websites.
ese are usually set up to alert locals to events happening nearby.
• Wikipedia. Dont forget this popular site, which may oer
interesting information on a city’s or locality’s history, geography,
demographics, arts, education, and resources.
• your own, custom search. One of the best tactics is to use an Internet
search engine (like Google, Yahoo, or Bing). Says Bert Sperling,
“Here’s your chance to play detective and sift through all the clues
to nd your perfect new home. Just enter the name of any place
(such as ‘Oak Park, Chicago’) and stand back as the search engine
presents page after page of incredibly useful insights, opinions, and
facts that you wont nd any other way. ere are blogs, message
boards, forums, and specialized websites, all curated and cataloged
by the search engines, which would be nearly impossible to discover
by any other means.
How Safe Is It?
If youre planning to live in your new home for a long time, make sure
you feel secure there. Bert Sperling notes, “Smaller cities tend to have
lower crime rates than large ones; that’s part of the tradeo you make
for being part of a vibrant urban scene. Still, crime in large cities is often
centered in certain areas, which you can avoid.” Crime statistics for cities
are available at www.city-data.com. For an estimate of neighborhood
crime risk, check out www.bestplaces.net, which oers crime-risk indices
down to the zip code level.
e most accurate source for neighborhood crime stats is from the
local police department. Most larger cities put local crime reports online,
often on a city map. “Pay attention to the categories of the reported
crimes,” advises Bert Sperling. “An occasional car break-in may be
tolerable, but not gunre.
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ever did
est thing I
B
Not assume an okay-looking neighborhood had low crime.
Before buying her first house, Talia says, “I came close to buying
a place in another neighborhood. It had looked fine when I was driving around.
But my agent suggested I contact the local police station. I did and discovered that
because this neighborhood was surrounded by areas where crime was much higher,
it actually got its own share of break-ins and assaults. e crime rate was too high
for me to feel comfortable living alone. I
shifted focus to another area, where I now
live and feel safe.
One crime issue that’s easier to
research online concerns registered
sex oenders. Nearly every state
has passed a law, usually called
Megans Law” (after a young
victim of abduction and sexual
assault), requiring state governments
to distribute information about
sex oenders living in dierent
communities. Many states have
websites giving oenders’ addresses
(an easy way to access these is via
www.parentsformeganslaw.org).
Search for “Megans Law” and the
name of your state. But take the information you nd with a grain of
salt—not all of these websites are regularly updated, and some contain
inaccuracies or misleading information.
Will the Services You Need Be Nearby?
e existence or proximity of schools, parks, shopping, and more could
make or break your neighborhood decision. Fortunately, nding these is a
relatively straightforward research task, with such websites as:
• www.walkscore.com. Shows the proximity of local restaurants,
shops, schools, and other amenities and calculates the time it takes
to get there by walking, biking, or using mass transit. Also delivers
a “Walk Score” for each neighborhood or city.
Safest Cities in the U.S.
ese cities had the fewest violent
crimes per capita, according to
Business Insider:
1. Irvine, California
2. Fremont, California
3. Plano, Texas
4. Madison, Wisconsin
5. Irving, Texas
6. Scottsdale, Arizona
7. Boise, Idaho
8. Henderson, Nevada
9. Chandler, Arizona
10. Chula Vista, California
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 81
• www.google.com. To estimate your commute time and distance, go
to Google Maps, enter your work address and an address from the
neighborhood where you might live, and receive an estimate for
various commuting options.
• www.yelp.com. Use Yelp to nd nearby restaurants and businesses,
and check out their reviews.
• www.usnews.com/best-hospitals.is is an annual report called
America’s Best Hospitals,” supported by U.S. News & World
Report. Also check out “Hospital Compare,” with fact and statistics
about all U.S. hospitals, presented by Medicare.gov.
Is It Zoned for How You Want to Use It?
After liberating yourself from your landlord’s rules, you might be less
than excited to discover that the home business you’d always dreamed
of starting is prohibited, or that you cant turn the garage into an in-
law cottage or add a second story.
Local zoning rules or other city
regulations (even criminal laws) are
usually to blame. It’s also worth
knowing what general uses the
neighbors are allowed.
First, nd out from the
municipal planning and building
department what zoning category
each neighborhood youre interested
in falls into. A classication called
single-family residential is the
norm. But some neighborhoods
with ordinary houses might
actually be zoned for multifamily
residential, transitional, or a mixed use such as residential plus
commercial. One of these other classications might be good for you.
For example if a home business is in your plans, mixed commercial and
residential might be perfect. But these alternate classications can also
be a problem, particularly when it comes to your neighbors’ future plans.
It’s the Law!?
ere’s probably a story behind these:
• UniversityCity,Missouri:You’renot
allowed to have a garage sale in your
front yard.
• InBoston,youcan’tpermitmanurein
your home. It’s okay in your stable, but
“no more than two (2) cords” of it at a
time. (Let’s hope Bostonians know how
much a “cord” is.)
• Boulder,Colorado:Youcan’tputindoor
furniture outdoors in your yard.
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Multifamily zoning, for example, might mean the house next door could
be replaced with an apartment building.
Also realize that zoning ordinances usually deal with more than how the
property can be used. ey typically dictate the allowable square footage of
a home and sometimes how tall it can be and where it can be placed on the
property. A home may have to be set back a certain distance from the street
and be a certain distance away from neighboring homes. is can aect
your plans to add an extra room or deck.
Research the zoning and other municipal rules further—ideally with the
help of your real estate agent or attorney—if any of the following are true:
• You intend to operate a home business. In an area zoned residential,
take a careful look at the local rules—they dont always give a clear
thumbs up or down. Some, for example, prohibit home businesses
in general but allow exceptions, such as for writers, artists,
accountants, consultants, and other businesses that are unlikely to
cause noise or trac problems. Even then, a city ordinance may
prohibit you from employing anyone on-site who doesnt actually
live in your home. To nd out local rules that may apply to your
business, contact the planning or zoning department for the city
or county you plan to live. Finally, If youre buying a condo, co-
op, or similar property, be sure to check any restrictions on home
businesses. Also talk to other local home-business owners about the
restrictions, and whether their neighbors have raised any fuss.
RESOURCE
Planning on starting a home business? Check out the articles on
home businesses in the Business Formation and Taxes sections of Nolo.com. And
for detailed information, including more tips on zoning, see the Nolo books Legal
Guide for Starting & Running a Small Business, by Fred Steingold (or the Women’s
Small Business Start-Up Kit, by Peri Pakroo). Also check out Home Business Tax
Deductions: Keep What You Earn, by Stephen Fishman (Nolo), which discusses
issues like when you can deduct general home maintenance.
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 83
• You plan to remodel the house or garage or add other structures (even
a fence, pool, or child’s tree house). Rules for changing an existing
house can be notoriously sticky and require permits. Local view
ordinances may restrict your ability to add a second story. You
might talk to a local architect in advance—they’re used to dealing
with, or getting around, the rules.
• You plan to park a boat, RV, or large vehicle in your driveway. Some city
planners have decided this doesnt look so good.
• e house has historic landmark status, or looks like it should. Once
a house is so designated, any remodelingeven basic things like
a new paint job—may be subject to rules on style and color. Still,
owning a historic home can be personally satisfying and oer high
resale value if you restore it.
• You plan to cut down a large tree. Yes, your landscaping may be a
topic of separate regulation, excluding shrubs and owers.
• You have any other special plans for the property. Local rules
are limited only by the imagination of the local government.
Bizarre ones sometimes pop up in response to one homeowner’s
inappropriate actions, like having put
up too many holiday lights.
• Vacant lots are widespread in the
neighborhood, or you see a lot of new
construction. Youll want to know
what might legally be built there.
• You plan on keeping any farm animals
such as roosters or a goat. ey may
well be prohibited.
If youre thinking of raising
chickens in your backyard, check out
BackYardChickens.com, which includes everything from links to local
laws to reviews of dierent types of breeds. Citychicken.com also collects
local laws. Or, If youre planning on becoming an amateur beekeeper,
know that some cities prohibit bees, while others allow them if immediate
neighbors provide written permission. One place to start your search is
the Apiary Inspectors of America website, www.apiaryinspectors.org.
Which celebrities keep
chickens?
e likes of Barbra Streisand,
Tori Spelling, John Cleese, Reese
Witherspoon, Jennifer Aniston,
and Rachel Weisz are reported
to share their properties with
feathered, egg-laying friends.
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Is It a Planned Community, With Restrictions
on Homeowners?
If you move into a community interest development (CID), you may nd
your choice of house paint colors limited to white, white, or white—and
thats just for starters. e homeowners’ associations that oversee such
communities often regulate how individual homeowners are expected to treat
and use their property (such as fence style in a detached house or curtain
color in a condo or co-op). A home located in a traditional subdivision
consisting of lots may also be controlled by subdivision restrictions.
For now, just realize that these sorts of restrictions exist, and plan to
research them further if you look at a CID.
How Good Are the Local Schools?
If you have children, or plan to, then the quality of the local school
district is probably high on your list. But even if you don’t plan on
children, you should be concerned with school quality, because the next
family that buys your home might want children. And they’ll pay more
if the local schools are great.
To get statistical information about how schools perform in your state,
check your department of education website, usually accessible from your
state’s main Web page. Other good online resources include:
• www.greatschools.org, a national, independent nonprot organization,
it helps parents choose schools and support their childrens education,
and provides ratings and comments by parents.
• www.education.com. Presenting information and statistics about
local schools, with ratings and parent reviews.
ever did
est thing I
B
Visit local public schools. Violet says of her family’s
move from Connecticut to Pennsylvania, “Our criteria
for choosing a neighborhood were: school district, school district, and school
district. Wed heard there were two excellent districts close to my husband’s
new job. So I took my son and daughter to visit the principals and teachers and
watch classrooms in action. e school in one of the neighborhoods had great
classroom morale, lots of activities, and ethnic diversity. Wouldnt you know it,
CHAPTER 4 | STEPPING OUT: WHAT’S ON THE MARKET AND AT WHAT PRICE | 85
the houses in that neighborhood were mostly million-dollar-plus McMansions.
But we found a fixer-upper we could afford. It was worth the hard work to make
it livable—the kids love their school.
See for Yourself:
Driving rough Neighborhoods
You can tell a lot about an area by cruising through it, most likely by car.
When you get a real estate agent, he or she will also drive you around,
but it’s good to go on your own rst, free to explore the seedier spots. You
may nd yourself thinking, “I could live here,” or “Get me out, fast.
First, open an online map, and locate the areas where you might like
to live. Do yourself a favor and print out some of the maps, so they’re
easier to consult while youre driving around. And, you can make notes
for later reference. Pay special attention to places on the map youve
never been that are close to or within your highlighted area. en