Introduction
Welcome (almost) to the world of home ownership! The fact that you’ve picked up this book and flipped it open to the Introduction says you’re serious about buying a home, and you’re looking for step-by-step guidance through the process—from finding the right home to signing the papers that make it yours. Either way, you’ve come to the right place.
Buying a home is a big step. In fact, it’s many big steps—to the first-time homebuyer, the process can seem long, complex, and more than a little confusing. This book takes the confusion out of buying a home, guiding you through each step of the process and offering tips and information along the way. And if you’ve bought property before, this book serves as a step-by-step refresher course with information on all the current real-estate practices. Neophyte or veteran, you’ll feel confident about one of the biggest decisions you’ll ever make.
Should You Rent or Buy?
Home ownership is a big step, and many people worry whether they’re ready to take it. If you currently rent your house, you may wonder if you can even afford to buy a home. Just looking at real estate listings online or in the Sunday paper can make you break out in a cold sweat. Yes, homes are expensive. But they’re also an investment—and for many homeowners, it’s one of the smartest investments they’ll make. Depending on how much you currently pay for rent, how expensive homes are in your area, what your credit score looks like, and how long you plan to live in the house (among other factors), buying a home is often less expensive than renting in the long run. After all, when you rent, you just pay for a roof over your head. When you buy, you become the owner of that roof—and everything beneath it.
Tip
To see whether renting or buying makes better financial sense for you, use myFICO’s “Am I better off renting?” calculator. You can find it at http://tinyurl.com/yagk6lr.
Renting does have its advantages. Here are some:
Renting offers more flexibility. If you like knowing that you can pack up and move at a moment’s (or a month’s) notice, it may make more sense to rent. Depending on the terms of your lease, you’re not tied to a residence for more than a year or two at most. When you own a home, on the other hand, you need to sell the property or find a suitable tenant before you can move—or else you’ll end up paying a mortgage on an empty house.
Tip
If you know you’re likely to move within three or four years, you’re probably better off renting than buying. That’s because you won’t have time to build up much equity in your house (its cash value as you pay off your mortgage’s principal) or break even on your closing costs. (Chapter 9 gives you an overview of the many costs associated with buying a home.)
Maintenance is someone else’s headache. When you rent, you call the landlord if a pipe bursts or the furnace quits. He sends someone to fix it—and takes care of the bill. When you own, all the maintenance—from keeping everything in good repair to mowing the lawn and shoveling snow—is your responsibility.
You can move in faster. Buying a house takes time. If you’re in a hurry to move to a new neighborhood, you might want to rent for a year and look for a place to buy during that time. Renters can usually move in soon after getting their rental application approved. Buying a home, on the other hand, takes months. You’ll be living in your new house for years, so you want to take your time finding just the right home. Then you may spend a couple of weeks negotiating with the seller before you agree on a price and conditions. And getting financing and preparing for the property transfer can take 30 days or longer.
Your move-in costs are lower. Renting a house usually involves no more up-front costs than two months’ rent and a security deposit. Buying a home is far more expensive. You need a down payment of anywhere from 3.5 to 20 percent—or more—of the home’s purchase price and thousands of dollars more for the fees and costs associated with getting a mortgage (Chapter 9 gives you a rundown of what those are).
You can keep your money in the bank. Being a first-time homeowner frequently means scraping together all the money you can find to afford a down payment and closing costs. Once you buy a house, your money is tied up in your home. After you built up some equity (cash value in the house as you make principal payments), you can tap into it with a home equity line of credit (Home equity line of credit (HELOC)). But if you want your money readily available (especially within the next few years), or if you want to invest in something other than real estate, it may make more sense for you to rent.
If you’re thinking about buying a home, you’re already aware that buying has its own advantages. Here are some major ones:
Say goodbye to your landlord. It irks some people to pay good money each month and not get anything more in return than the right to live under someone else’s roof. When you own your home, each mortgage payment builds up your equity in the house—not much at first, but it increases with time (The Pluses of Owning a Home explains how that works). Some landlords are great, but others are slow to make repairs—and quick to raise the rent. If you want to feel like your home is your own, you might be ready to buy.
Take advantage of tax breaks. You can deduct mortgage interest, property taxes, and some closing costs from your federal income taxes. (For the tax savings to make a difference, the deductible items must add up to more than the standard deduction—and you’ll have to itemize all deductions to claim this tax break.)
Beat inflation. As the cost of living goes up, the cost of rent goes right up with it. If you use a fixed-rate mortgage (Types of Mortgages) to buy a home, however, your principal and interest payments stay the same for as long as you live in the home. The longer you stay there, the more pronounced this benefit.
Build equity. Renting is pay-as-you-go; as long as you pay your rent and abide by the terms of your lease, you can live in your home. But if you buy, as you make mortgage payments and as home values rise, you gain equity in your home. You can treat your home’s equity like a savings account, cashing out when you sell the home and using the money for a down payment on your next home. Or you can borrow against it using a home equity line of credit (Home equity line of credit (HELOC)).
Have your own place. For many people, the main reason to buy a home is to have a place that’s truly their own. You’re not paying off the landlord’s mortgage—you’re investing in a home with your name on the deed. That’s a great feeling, whether you buy a one-bedroom manufactured home or a many-roomed mansion.
About This Book
You may have heard that now is a good time to buy a home. In many parts of the country, prices are down and the number of homes for sale is up, creating a buyer’s market. At the same time, news stories of foreclosures and other home-buying disasters may have you nervous about taking such a big step.
That’s where Buying a Home: The Missing Manual comes in. It takes the mystery and confusion out of buying a home. This book guides you through the process, from the moment you wonder whether home ownership is for you until the moment you walk through your new home’s front door. Along the way, you’ll get clear explanations, tips, and practical advice about finding the right home, evaluating neighborhoods, choosing the right professionals to work with, making an offer, selecting a mortgage and applying for financing, negotiating with the seller, getting a home inspection, and making sure closing goes smoothly. There’s a lot to cover, and this book will be with you every step of the way.
About the Outline
Buying a Home: The Missing Manual is divided into four parts. Each one corresponds to a phase of the home buying process and contains several chapters:
Part 1, Preparing for Home Ownership helps you get ready to set out on your journey. Before you start looking at homes, you should know whether home ownership is the right decision for you, and you should establish your target price range. Part 1 has two chapters:
The Benefits and Drawbacks of Home Ownership (Chapter 1) offers a clear-eyed look at the pluses and minuses of owning a home. For many people, it’s a cherished dream. To keep that dream from becoming a nightmare, make sure you understand the drawbacks of home ownership as well as the many advantages. This chapter fills you in.
How Much Home Can You Afford? (Chapter 2) helps you figure out how much money you can afford to invest in a home. If you’ve never drawn up a monthly budget that lays out your recurring income and expenses, this chapter’s for you. You’ll use that information to estimate what you can afford in monthly mortgage payments, taking into account related expenses like taxes, maintenance, and utilities. You’ll find out how lenders see your finances and decide whether you’re qualified to borrow. You’ll also get tips on raising your credit score and learn why it’s a good idea to get preapproved for a loan before you start house hunting.
Part 2, Finding Your Home, helps you clarify what you want in a home—and then shows you how to find it. This part has three chapters:
Choose Your Style of Home and Neighborhood (Chapter 3) describes different types of houses, from traditional single-family homes to duplexes to condos and co-ops. You’ll create a wish list of all the features you want in your home and identify the neighborhoods where you’ll concentrate your search.
Assemble Your Real Estate Team (Chapter 4) identifies the professionals who’ll help make your dreams of home ownership a reality. It describes the roles of your real estate agent, mortgage broker or loan officer, real estate attorney, and home inspector—and tells you how to interview each to find the best one.
Shop for Your Home (Chapter 5) gives you a strategy to make house hunting more effective and efficient. Use your wish list to focus on “must-haves” and “would-likes” as you tour and compare homes.
Part 3, Financing Your Home, looks at how and where you get the money to buy your house. Find your way through the financing maze with the help of these chapters:
Finance Your Down Payment (Chapter 6) is all about the biggest up-front expense you’ll face: the 3.5 to 20 percent you need to pay up front so a lender will finance the rest. When you’re thinking of buying a home that costs hundreds of thousands of dollars, coming up with the down payment can be daunting. This chapter explains how the size of your down payment affects your mortgage and suggests ways to come up with the money you need.
Compare Mortgages and Other Financing Options (Chapter 7) demystifies mortgages, explaining basic terms and showing you the wide variety of loans available. Learn the difference between fixed-rate, adjustable, hybrid, and balloon loans—to name a few—and decide which is best for you. Learn about how your loan’s repayment schedule affects how much you pay each month and over the life of your loan. And see whether creative financing, such as renting to own, may be a good option for you.
Choose and Apply for a Mortgage (Chapter 8) walks you through the part of the process that many homebuyers find most intimidating: getting a mortgage. Learn how to find the right lender, get the best interest rate, and gather the papers and information you need to apply for a loan. Familiarize yourself with the forms lenders must send you in return, such as the Good Faith Estimate, which shows you the total cost of the loan, and the HUD-1 form, which breaks down your closing costs.
Know Your Closing Costs (Chapter 9) reminds you that the down payment is only part of the up-front money you need to buy a house. This chapter outlines the other costs, including fees related to getting a mortgage, inspecting the house, and transferring the house’s title from the seller to you.
Part 4, Negotiating and Closing the Deal, is all about making your dream home yours, from making a formal offer to closing the sale—and the 1,001 tasks needed to make that happen:
Make an Offer (Chapter 10) tells you how to make a formal offer and negotiate with the seller. An offer is a promise to buy—backed up with an “earnest money” deposit—so you need to make sure that your offer is written in a way that protects you if you discover a problem with the home or can’t get financing.
Prepare for the Closing (Chapter 11) lists what you need to do between the time the seller accepts your offer and the time you transfer ownership: deal with contingencies you wrote into the purchase agreement, decide how you’ll hold title, buy insurance, get ready to move, and do the final walkthrough just before you make the deal official.
Inspect the Property (Chapter 12) goes over one of the most important tasks in buying a house: getting a professional inspection to make sure there aren’t any hidden structural or other defects that will cause you trouble (and cost you money) after you move in. See your home through the eyes of a professional home inspector—and find out what to do if there’s a problem.
Close the Deal (Chapter 13) takes you through the culmination of all your hard work: the closing, when the home finally becomes yours. There’s a lot more to a closing than getting a set of keys. You have to understand and sign a mountain of paperwork, some of it related to your loan, some of it related to transferring the property, some of it related to squaring payments with the seller. This chapter tells you what to expect.
About the Missing CD
This book helps you buy a house. As you read through it, you’ll find references to websites that offer property listings, real estate forms and calculators, current interest rates, and more. Each reference includes the site’s URL, but you can save yourself some typing by going to this book’s Missing CD page—it gives you clickable links to all the sites mentioned here. To get to the Missing CD page, go to the Missing Manuals home page (www.missingmanuals.com), click the Missing CD link, scroll down to Buying a Home: The Missing Manual, and then click the link labeled “Missing CD.”
While you’re on the Missing CD page, you can find updates to this book by clicking the link at the top of the page labeled “View errata for this book.” You’re invited and encouraged to submit corrections and updates. To do so, click the link, “Submit your own errata” on the same page.
To keep the book as up-to-date and accurate as possible, each time we print more copies, we’ll include any confirmed corrections you suggest. We’ll also note all the changes to the book on the Missing CD page, so you can mark important corrections in your own copy of the book, if you like.
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