Personal Finance

Spring Home-Buying Guide: Six Ways to Do It Right
by Jeanne Sahadi
Thursday, May 10, 2007
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It's peak home-buying season. Even though buyers have a greater advantage than they've had in awhile, it's still easy to take a wrong, frustrating and costly turn. Here are six ways to make sure you don't.

1. Aim for pre-approval

What should come first: Affording a home goes beyond being able to pay the mortgage. You have to have enough money set aside for a down payment, closing costs, moving costs, and the initial costs of living in the home (e.g. new furniture and paint). So before you do anything, "take a hard look at your finances and figure out what you can afford," said John M. Robbins, chairman of the Mortgage Bankers Association.

As a general guideline, it's best not to spend more than 2-1/2 times your income on a home. Your total housing payments should not exceed 28% of your gross income. Total debt payments, meanwhile, should come in under 36%. That means payments on all loans, including your mortgage loan, school loans, auto loans and credit card debt.


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Next, shop around for pre-approval: Approach at least four to five lenders (or have your mortgage broker do so) to see what kind of loan you can get pre-approved for, Robbins suggested. Generally, you want to go with the lender that offers the best rate and the lowest loan costs.

A pre-approval letter makes you more attractive to sellers, since it's an indication a mortgage lender has investigated your finances and is willing to lend you a stated amount. Approval typically takes several days.

Pre-approval letters are usually good for 60 to 90 days, Robbins said. If you do make an offer during that time, the loan will be made to you contingent upon a number of factors, including a satisfactory appraisal of the house and the lender's satisfaction with your financial situation at the time of purchase.

What if you don't qualify for pre-approval: If your financial situation raises a red flag with lenders and they're not willing to pre-approve you for a loan, find out what you'll need to do to qualify for one and how long it will take, Robbins said.

If your credit score is an issue, one way to boost your score is to avoid making any big purchases on your credit card for 60 days prior to applying for a loan.

2. Find a good buyer's agent

What buyer's agents do: When you go to an open house and meet a real estate agent showing the property, that agent represents the seller's interests. So you might be better off using a buyer's agent whose job is to represent your interests. In addition to showing you homes that meet your criteria, a buyer's agent can help you negotiate a contract and may help you get a better deal on title insurance.

Ensure your interests come first: A buyer's agent typically shares the sales commission with the seller's agent. So keep in mind your agent may want to push some houses over others if they offer a higher commission or bonus on top of the commission to get a deal done. That's why Tom Early, spokesman for the National Association of Exclusive Buyer Agents, told Money Magazine that buyers should ask their agents to sign a contract before looking at houses that stipulates that any bonus being paid by a seller be used to pay closing costs.

Where to find one: To find a buyer's agent in your area, check with the National Association of Exclusive Buyer Agents.

3. Find a good real estate attorney

What they do: A lawyer can help you negotiate the real estate contract, and renegotiate it if a home inspection finds flaws or an appraisal deems the house less valuable than the sales price. A lawyer also represents your interests at the closing and does the lion's share of paperwork and coordination associated with it.

Why you might want one: Unlike most of the people involved in the purchase of a home, a real estate lawyer is dedicated to looking out for your interests at each stage. You don't need one technically, but the short-term savings of not hiring one may pale in comparison to the long-term costs of not negotiating the best deal or walking away from a bad one.

Where to find one: Ask for referrals from your local bar association, your real estate agent or your mortgage broker. Also, ask friends, colleagues and family whom they've had a good experience working with.

Cost: Varies by state and by amount of work required. Fee structures also vary (some lawyers charge by the hour, others by flat fee, some by both depending on the task) but a ballpark range for what a buyer may pay in total is $350 to $1,000, said Marjorie Bardwell, a real estate attorney at Chicago Title Insurance Company. In high-cost areas like New Jersey, you may pay as much as $1,500, said real estate attorney Stuart Lieberman.

4. Make an offer

Put your words into action: When you see a house you want, you'll make a verbal offer. If the seller is interested, your next step is to commit yourself in writing. The written offer, or contract, is usually drawn up by the seller's agent, but if you choose to use a buyer's agent and real estate lawyer, they can negotiate and review that contract on your behalf.

Mind the contingencies: Typically, contracts are offers to buy contingent upon several factors, most notably a satisfactory appraisal of the home, a satisfactory home inspection and your ability to obtain adequate financing. If the appraisal or inspection is unsatisfactory or you can't get mortgage, that's an opportunity for you to renegotiate the contract with the seller or back out of the deal.

If you're buying an older home, you might consider putting in a cost-of-repair contingency. That lets you back out if the estimated cost of repairs recommended by the home inspector exceeds a certain amount. So even if the seller agrees to pay for the repairs before you close, you can still walk away if you fear that the home will have too many structural problems down the road.

Here's a more detailed look at what is included in your written offer.

Put money where your mouth is: When the seller accepts your written offer, you pay what's called "earnest money" -- essentially a deposit that's usually up to 10 percent of the purchase price. If the deal falls through because the contingencies weren't met you get the money back. But if you just change your mind, the seller can keep the money.

5. Get the home inspected

Why you need one: No matter how good a house looks and no matter how much you love it, you want to be sure it's sound structurally and in every other way. If it's not, you want to know whether the seller will address the issue before you seal the deal. If not you have to decide whether you want to back out of the deal or take care of the repairs yourself.

When it needs to be done: Many states require that inspections be done within five days of the seller accepting your written offer; others may allow up to 10 days. Whenever it is, "go to the inspection. There's nothing more important you can do than that," said Frank Lesh, president of the American Society of Home Inspectors (ASHI). You'll learn a lot more about the home than you would otherwise and the inspector can give you good maintenance tips.

When to call: Given the relatively short time-frame you have to conduct an inspection, it's smart to call an inspector before the contract is signed (but when it seems likely that it will be) to make sure you lock in an appointment when you need it.

When the inspector recommends fixing something: Say the inspector finds something wrong such as mold or water damage. Talk to your real estate attorney to determine your next step: it might be to ask for a price reduction or to ask the seller to arrange and pay for repairs. If you choose the latter and the seller agrees, be sure to get a written receipt of all the work that was done. That will give you recourse in case less work was done than the seller agreed to do or the work done was shoddy (e.g., unsafe electrical wiring).

Cost: $350 to $1,000. "Generally speaking, the larger and older the home, the more you'll pay," said Frank Lesh, president of the American Society of Home Inspectors. Likewise, if you live in a high-cost area you'll pay on the higher end of the range.

Where to find an inspector: ASHI-certified home inspectors in your area can be found here. You also might ask neighbors and friends if they have used an inspector before whom they liked. Make sure the inspector you choose has experience working in your area and specializes in the type of residence you're buying (e.g., single-family home vs. multi-family building).

6. Get the home appraised

Why you need one: Your mortgage lender will require an appraisal (and hire its own appraiser) to make sure the value of the house you want to buy is worth at least as much as the sales price. The appraiser will consider, among other things, the quality of construction and comparable data from the sales of homes in the same neighborhood.

When the appraisal takes place: After the contract is signed.

When the appraised price is lower than the sales price: If the lender's appraiser deems the house worth less than the sales price you've negotiated with the seller, you need to renegotiate the contract with the seller. Either the seller will need to lower the price to satisfy the lender and hence, allow you to secure a mortgage. Or you can back out of the deal if you can't afford the home by paying for the difference between the appraised price and the sales price yourself.

If the appraised value comes in above the sales price, however, you needn't do anything but enjoy the fact that you got yourself a good deal.

Cost: Even though the lender orders the appraisal, you will have to pay for it. Typically appraisals run between $300 and $600 for a single-family home, depending where you live, said Donald Kelly, spokesman for the Appraisal Institute.

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