How to Buy a House
Making Your Best Offer and Negotiating the Close
Bid smartly. There’s no rule of thumb for what your initial offer should be or how many times you should go back and forth with the seller. Most inexperienced buyers simply make a bid that’s a certain percentage—say, 10 or 15 percent—off the listing price, says Ilyce Glink, the author of Buy, Close, Move In! ($15, amazon.com). But that’s not a wise strategy. In this buyer’s market, you may end up overpaying. The smarter move: Ask your real estate agent for prices of com-parable homes in the area that have recently sold. Use those figures to determine the highest amount you’re willing to pay, then submit a bid that’s a tad lower. Next, start haggling.
Make clear demands. Be up-front about extras, such as curtains and light fixtures, that you want included with the house. Buyers currently have the upper hand, so it’s more likely that most of your requests will be met.
Use the closing date as a negotiating point. Be flexible if you can. “As long as you don’t need to relocate by a specific date, you’ll possibly get other concessions from the sellers that won’t cost you anything,” says Glink.
Ask the seller to buy you a home warranty. A good one will run him about $300 to $400 and can cover the cost of repairing or replacing appliances and major systems, such as plumbing, for a year after closing.
Getting a Mortgage
Ask for referrals. There’s no one easy way to find a lender, so it’s best to hit up friends and family for recommendations. (You want a provider that has good customer service.) Or ask your real estate agent for loan-officer suggestions. And make inquiries at local credit unions, whether you’re a current member or not. They often have rock-bottom rates if you qualify for membership, and it’s typically easy to join. (Go to ncua.gov to find one.)
Calculate your down payment. To avoid having to buy private mortgage insurance, you need to pay at least 20 percent of the purchase price before closing costs.
Obtain quotes from at lest three lenders. Consult both with mortgage bankers (who work in-house with big institutions, like J. P. Morgan Chase and Wells Fargo) and with mortgage brokers (who shop around with all lenders) to get the best interest rate. Ask each loan officer how much her institution charges for closing expenses, including the underwriting fee and the cost of faxing documents. (Charges vary; go to Bankrate.com to see the average for your state.) Make sure you borrow the money from someone who is accessible and willing to take the time to explain the loan-approval process. She is more likely to be honest about all the costs. And remember to ask the lender if putting more money down can land you a better rate.
Decide if you want to pay points to lower your rate. Sometimes a bank will let you buy prepaid interest (points, in finance-speak) in exchange for a reduced interest rate. Points aren’t cheap. Each one will cost you 1 percent of the loan amount. So if you’re buying a home that costs $273,000 (the national average) with 20 percent down, then you’ll have to pay $2,184 per point. Don’t have that much cash on hand? Ask about purchasing a half or even a quarter point. “If you’re going to stay in the house for at least nine years and you can afford to do so, it makes sense to shoulder the extra expense up front, as it will cost you less in the long run,” says Jack Guttentag, a professor emeritus of finance at the Wharton School of the University of Pennsylvania. Go to mtgprofessor.com to calculate if this is a good option for you.
Having the House Inspected and Addressing the Physical Defects
Find a qualified inspector. This is one situation in which you shouldn’t take a recommendation from your real estate agent, experts say. She could encourage you to go with someone who overlooks problems in order to make the deal go through as smoothly as possible. Instead, contact a professional organization (ashi.org, nahi.org, or nachi.org) to find an accredited, self-employed expert who has performed at least 1,000 inspections. In many states, there isn’t a licensing program, but these associations usually require their members to meet certain standards and participate in continuing education. Expect to pay about $300 to $750 for a general inspection.
Request a detailed inspection report in advance. Ask how much time the inspector typically needs to conduct an analysis (an average home should take one to three hours) and what the finished report will look like. You want it to be at least 10 pages in length, and it should include photographs of anything that’s wrong.
Consider additional assessments. Ask your real estate agent and primary inspector if they recommend scheduling additional inspections above and beyond the standard one. These might include analyses of the chimney, the sewer, and the oil tank and testing for mold and radon—with each of these tests costing $100 to $300. “What you need to do usually depends upon the age, condition, and style of the house,” says John Guy, a former president of the North Carolina chapter of the American Society of Home Inspectors, a professional organization. For example, radon is problematic in some basements, but if your house has only a crawl space, you probably don’t have to worry.
Attend the inspection. This is your opportunity to ask questions about the infrastructure of the house. Be sure to learn about the operation and the locations of the gas and water shut-off valves and the breaker box.
Tell the repairman to provide written estimates for all fixes. Your real estate agent will submit to the seller the anticipated costs for any problems found during the inspection.
Ask for a price credit. You can control the quality if you have the repairs done yourself, says Boni Bryant, a Los Angeles–based real estate agent for Sotheby’s International Realty. Request that the cost of any fixes, no matter how large or small, be deducted from the sale price and have the work done after the purchase is final.
Hiring an Appraiser and Buying Title Insurance
Have the property appraised. To determine its value, you need an appraiser. But generally you can’t hire one; your lender does this. You can, however, help the assessment go smoothly. “Ask the seller to be present so that any questions the appraiser has about the home can be answered,” says Bob Sicoli, the owner of RVS Appraisal Services, in Scotch Plains, New Jersey. He also should have a copy of the sales contract to verify exactly what is (and isn’t) being sold.
Tell your broker to provide a list of comparable properties. Point out where the home being appraised has been improved (like renovated bathrooms) and how that differs from other recent sales.
Comparison-shop for title insurance. You can choose the provider for this coverage, which protects you and your lender against liens. There’s no discernible difference in protection, so you can go with the cheapest option. Title insurance represents approximately 60 percent of your closing costs, and you should expect to pay around 0.5 percent of the home’s purchase price for it, says Timothy Dwyer, the founder and CEO of Entitle Direct Group, a title-insurance company in Stamford, Connecticut. To find the best rate, go to Closing.com. Take note: Your lender can veto your choice if the company isn’t highly rated, so ask the insurer for its rating.
Navigating the Closing Process
Consider hiring an attorney. In some states, lawyers are customarily not used for residential purchases. “But even in those areas, you should get a lawyer if your situation is complicated or if you’re buying a foreclosure or a short sale,” says Glink.
Lock in your interest rate. There is no need to do this more than 30 to 45 days before your close, as rates aren’t expected to rise significantly for at least the next year and a half.
Obtain a detailed list of closing costs from your lender. Besides the expenses tied to your loan, you may have additional fees, such as title services and transfer taxes. This information should be listed on your Good Faith Estimate form, which the lender provides when you lock in your rate.
Watch for bogus fees. Some lenders charge for preparing documents, messengering papers, or even printing e-mails. It’s worth asking for these items to be removed from your bill, says Glink.
Conducting the Final Walk-Through
Verify that all included appliances are in working order. Turn on the oven, the dishwasher, the stove, and the washer and dryer. Don’t forget to make sure the refrigerator works, too.
Turn on every faucet and flush toilets.
Plug something into each outlet. You’ll want an electrician to repair any broken ones right after you close on the house.
Check the smoke detectors. Light a match by each to verify that they’re in working order.
Test the heat and the air-conditioning. You don’t want to find out that the furnace or the A/C doesn’t work a few months down the road.
Look for water and mold on the ceilings. They could be a sign of ongoing leaks.
Examine for signs of vermin, including excrement (mice) and insect remnants.
Negotiate a closing credit. If you find anything broken or missing, have your broker or lawyer request financial compensation.
And finally the easy part: sign the contract, then move in.
Relax! Three Strategies to Ease Home-Buying Stress
You’re panicked. Are we going to run out of money? You can’t sleep at night. What if the neighbors are horrible? And you’re a wee bit on edge. My husband had better agree with these paint choices or I will lose my mind! If these are your symptoms, you have a classic case of House-Purchasing Anxiety. And no wonder: Obtaining a large mortgage is ranked as more stressful than having a child leave home or trouble with the boss, according to the Holmes and Rahe stress scale, which measures pressure-filled situations. “The stakes are extremely high, and you’re afraid of making an error that might jeopardize your purchase or be costly,” says Amanda Clayman, a financial therapist in New York City. So how can you find some peace of mind?
Don't get in over your head. Much of the worry felt by home buyers comes from buying a property that they can’t afford, says Stephen Habetz, a vice president of mortgage banking at Darien Roway-ton Bank, in Darien, Connecticut. To reassure yourself that you’re making a smart move, use the mortgage calculator at Bankrate.com.
Choose your real estate agent carefully. “It’s her job to help you process the anxiety and work through any surprises that come up,” says Eric Martell, an Orlando, Florida–based real estate agent who has a Ph.D. in psychology. To determine if a real estate agent will be a good match for you, ask these questions: How many people have you helped to buy a home? What do you do when a seller is difficult to work with? How will you keep me and my spouse calm through the process? If her personality doesn’t fit yours, find another agent.
Have a timeline. “Plotting out the steps to take—and when to take them—will decrease the chances that you’ll be surprised by how much work is involved in buying a house,” says Clayman.