Buying a house, a quick overview. home buying, house shopping, open house, real estate, real estate agent, escrow, mortgage Buying a House : A Quick Overview Buying a House Owning a home is part of the American dream. But before owning a home, you must first buy a home. This guide will give you some background information to hopefully make your home buying experience pleasurable.

Make sure you are not in a hurry to buy your home, especially if it's your first home. There is a lot to learn and you are a lot likely to not make a mistake if you take your time. Figure on looking at 50-100 homes for sale over the course of a few months before purchasing.

How Much Can You Afford?

Unless you are one of the few people that can afford to buy a home with cash, you will need to explore mortgage loans to finance your home. It is very important to have a good and clean credit history, though if you have some blemishes, it doesn't preclude you.

You will need to pay the down payment and possibly the closing costs out of your own pocket. If you can afford it, it is best to put a down payment of 20% of the purchase price. However, these days, it is easy to find lenders that will let you borrow up to 95% or even 100% of the purchase price, so your down payment can be limited.

The mortgage loan will pay for the portion of the house not covered by your down payment. A good rule of thumb is that with good credit, the lender will want the sum of all your fixed payments to not exceed 40% of your gross income. This includes car loans, car insurance, home insurance, property taxes, homeowner association fees, etc. For the purposes of a rough calculation, you can figure 1.5% of the home price for taxes and insurance (assuming your state charges property tax.) If you think you will by a property in an area that will have a homeowner's association, count on spending $200 per month for the fees, although that varies greatly.

The purpose of doing the initial calculations is not to get the exact right values, because that is impossible at this point. It is to do a sanity check on what type of home is affordable to you at this point.

Feel free to consult with a mortgage consultant at this time to help you calculate what you can afford, but refrain from applying for a loan just yet. You will want to comparison shop before deciding on a mortgage broker.

What Type of Property do You Need?

You should try to narrow down the type of property you want based on what you can afford. Must it be a single family home, or would you consider condominiums and/or town houses?

The best way to go about narrowing your options is to look at existing homes for sales. Take a couple of Sundays to go visit numerous types of open homes in the area where you want to buy. When you speak to the real estate agents at the open houses, collect their cards and tell them that you will be interviewing agents at a later time.

Interview Realtors

Interview at least three realtors or strata managers if you are in Australia. Select candidates from referrals and those that you met during open houses. The realtor's commission is paid by the seller, so it is important that they have the patience to work with you rather than just try to make a quick purchase for you while spending the least amount of time.

Ask them the following questions:

Ask prospective agents for several references of buyers in a similar situation as yours, and call them to see if their referrals match the answers your agent gave you.

Compare the answers the agents give you and make sure you get along with them. Make sure they don't dodge your questions and that you like their style of communicating. You will spend a lot of time with them, so it has to be a good match.

Interview Mortgage Brokers

It is recommended that you pick a mortgage broker after you already have an agent.

Consumers can often get the best rates online rather than dealing with mortgage brokers, but that is a bit risky when buying a home. You will enter into a purchase contract and will need responsiveness from the lender to fulfill your terms of the contract. Dealing with an online lender in such a situation is tricky. For this reason, online lenders are best for refinancing a loan once you already have a house. Check Bankrate for the best rates in your area so you can compare with what you get from the local mortgage brokers.

Start with your real estate agent. Say that you are looking for someone that will work well with her, and also will give you an excellent deal. Also, check your local bank branch as they might treat you well if you are a long time customer. Lastly, check with neighbors, friends, and co-workers for referrals.

Before meeting with the mortgage broker, make sure you understand the basics of mortgages. You should be familiar with the following terms:

ARM

Adjustable rate mortgage. This means your payments fluctuate when interest rates rise or fall. Many of these have fixed payments for an initial period (1, 3, 5, or 7 years) and then fluctuate subsequently.

Fixed Rate Mortgage

You lock in the interest rate at the time you buy your house and your payments don't fluctuate for the term of the loan.

Points

These are fees you pay in order to get a better interest rate from the bank. A loan with 1 point means that you pay 1% of the amount of the loan as a fee.

Interest Only

This means you don't pay any of the principal of the loan for a period of time and your payments cover only interest. This can be a good idea, but it can also be risky. Be sure to understand the ramifications.

Closing Costs

Other costs other than points that you pay. These could include title costs, escrow costs, underwriting fee, origination fee, etc.

If you plan on owning your new house a long time, and current interest rates are low, it is a good idea to get a fixed rate mortgage and possibly even pay points to get a lower rate. If current interest rates are high, or you plan to live in your house just a short time and then sell it, then it is worth examining ARM's and possibly interest only products. It is generally a bad idea, however, to get an interest only mortgage or ARM simply because they are more affordable.

The mortgage brokers you meet should provide you with a Good Faith Estimate which outlines the costs of borrowing a mortgage. Ask them to explain all the items in the GFE and take notes. This will help you make valid comparisons between different loans proposed by different mortgage brokers since you will know the differences.

Choosing a mortgage broker (as well as buying a house) is not a process for the mathematically challenged. If you run away from numbers, invite a friend who doesn't and offer to cook them a nice dinner in exchange. It will more than pay for itself.

Ask the following questions:

As you did with the mortgage broker, it is a good idea to check references. Consider how the interviews went with the mortgage brokers and make a decision on the best match.

You don't pay the mortgage broker directly since they earn commissions on the loans you borrow. As a general rule of thumb, you can expect the mortgage broker to earn % of the price of the loan.

Find your House

Start viewing homes in your price range with your agent and going to open homes on weekends. Remember, be patient and don't get too attached to any one home. The more homes you see, the better you understand what you want.

Once you see the house you like, make an offer. Your agent should provide you with recent comporable sales that you can base your offer on. Have your agent contact the seller's agent to see if they can find out if there are other offers. Understand the details of the purchase contract other than the offer price. You will probably have to pay a deposit when you make an offer.

Most times when you buy existing homes, your offer will have contingencies based on inspections. Understand the timing of when you will remove those contingencies and your rights for refusing to purchase the house should anything come up during inpections.

The seller may accept, reject, or give you a counter offer with a different price or terms. If you get a counter offer, decide if the extra money is worth it.

Complete the Escrow Period

If you did your homework when making the offer, the escrow period should go smoothly. If the inspectors find problems with the house that you were not aware of before making an offer, it is reasonable to ask the sellers to pay for the repair. Use your agent for guidance.

Once escrow closes, the house is yours. Break out the champagne!

After buying the house, there is a lot to buy! One other helpful hint is to search for additional savings like a 6pm.com coupon code when you shop online.

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Luz De Palm, Loan Consultant for Holmgren Associates