How to Buy a House

Home ownership is still very much a part of the American dream but one that mandates homework, legwork and considerable effort on your part to ensure that the process goes as smoothly as possible. Here's how to make your dream a reality.

Instructions

1. Decide if it makes sense for you to buy a house or keep renting. If your job keeps you on the move, it may not be worth it. You may need to stay put for at least three years to recoup your closing costs. If your desire to own a home is based on wanting to create stability, keeping control over your living situation, building equity and investing in your future, go for it.

2. Strengthen your credit: Pay off credit cards, resolve any credit disputes or delinquencies, and cancel unused cards. Your credit rating takes into account both how you use the credit you have available and whether your available credit is too high for your income. Call a credit reporting agency and request a copy of your credit report, which may cost $10 to $15.

3. Decide what sort of home you want. A single-family home in good condition offers instant livability. While it's more work than a condominium, and likely more expensive up front (see How to Buy a Condominium), you don't have to share ownership. Or build equity quickly if you have the skills and ample time by purchasing a fixer-upper and making it livable (see How to Buy and Sell a Fixer-Upper). Spec homes (new homes constructed by a builder that don't have a buyer yet) can also be a good deal if the builder is eager to get its money out of the project. Duplexes can be an excellent way to generate income, by owning one half and renting the other. TIC units are another option (see How to Buy a Tenancy-In-Common Unit).

4. Simplify your search by defining the area you'd like to live in. Scout out what's available in the vicinity. Look at prices, home design, proximity to shopping, schools and other amenities.

5. Visit a few open houses to gauge what's on the market and to see firsthand what you want, such as overall layout, number of bedrooms and bathrooms, kitchen amenities, and storage.

6. Use a mortgage calculator (such as one at Quicken.com) to determine how much house you can afford, whether renting or buying is more advantageous for you right now, and how much you'll likely be able to borrow. However, take these figures with a grain of salt; some are inaccurate. Get prequalified to get the actual amount you can pay (see How to Shop for a Mortgage). Most lenders allow you to put up to 28 percent of your gross income or 36 percent of your net toward a house payment.

7. Be ready to hand over a substantial down payment. Most mortgages are based on the buyer putting down 10 to 20 percent of the purchase price. Putting down less up front often requires you to pay private mortgage insurance (PMI), which increases your monthly housing cost.

8. Shop for a home on your own only if you understand the tradeoffs. Most homes are listed with agents to ensure that other agents will have easy access to information about the home. (See How to Sell a House Without a Real Estate Agent.)

9. Shop for a real estate agent who will search for suitable properties, represent your interests and negotiate on your behalf. A buyer's representative can evaluate the properties you view, do a market analysis to determine its value in the marketplace, select an appropriate price to begin negotiations and advise you in writing the contract.

10. Go into exhaustive detail when describing to your agent what you want in a home: number of bathrooms and bedrooms, attached garage, land and anything else that may be important, like good light or a big enough yard for the kids. If your agent shows you homes that aren't what you want, find another one who listens more attentively.

11. Shop aggressively. Unless you're under the gun time-wise, look at as many homes as possible to get a sense of what's available. Don't rush into buying if you don't have to.

12. Look beyond the home to the neighborhood and the condition of nearby homes to make sure you aren't buying the only gem in sight. The area in which your home is located is sometimes a bigger consideration than the home itself, since it has a major impact on your home's resale value. Buying a fixer-upper in the right neighborhood can be a great investment, and being able to identify up-and-coming communities--where more people want to live--can lead you to a bargain property that will only appreciate in value.

13. Visit properties you're seriously interested in at various times of the day to check traffic and congestion, available parking, noise levels and general activities. What may seem like a peaceful neighborhood at lunch can become a loud shortcut during rush hour, and you'd never know it if you drove by only once.

14. Determine whether you need to sell your current home in order to afford a new one (see How to Sell a House). If so, any offer to buy that you make will be contingent on that sale. Contingent offers are more risky and less desirable for the seller, since the sale can't be completed until the buyer's house is sold. You may want to put your current house on the market first.

15. Try not to fall in love with one particular property. It's great to find exactly what you need, but if you get your heart set on one home, you may end up paying more than it's worth because you're emotionally invested. The deal may also fall apart.

16. Work with your agent to present an offer. In many areas multiple offers are commonplace; your agent should help you craft a competitive bid that makes the most of your financial assets. He or she can help you determine how close to the asking price you should be and, if your offer's turned down, how to counteroffer.

17. Make sure final acceptance is predicated on a suitable home inspection.

18. Include earnest money with your offer. Your agent can assist in arriving at a suitable amount--usually $1,000 to $5,000. Once you sign an offer, you are officially in escrow, which means you are committed to buy the house or lose your deposit, unless you do not get final mortgage approval. During escrow (typically 30 to 90 days), your lender arranges for purchase financing and finalizes your mortgage. This is also when all inspections must be completed.

19. Request the following surveys and reports: inspection, pests, dry rot, radon, hazardous materials, landslides, flood plains, earthquake faults and crime statistics.

20. Close escrow. This final step in buying a home, usually conducted in a title office, involves signing documents related to the property and your mortgage arrangements. The packet of papers includes the deed, proving you now own the house, and the title, which shows that no one else has any claim to it or lien against it. If any issues remain, money may be set aside in escrow until they are resolved, which acts as an incentive for the seller to quickly remedy any problem areas in order to receive all that is owed.

Tips & Warnings

• If you qualify, check out first-time buyers' programs, which often have much lower down payment requirements. These are offered by various states and local governments, such as nyhomes.org/ sony/sonyma.html in New York. You may also be able to access up to $10,000 from your 401(k) or Roth IRA without penalty. Ask your broker or employer's human resources department for specifics regarding borrowing against those assets.

• Find out your credit rating early on to assess how strong your mortgage application is. The higher your FICO score, which ranges from 300 to 800, the better rate you'll qualify for. Go to MyFICO.com and for a fee request a report, or request a complete credit report from a major credit reporting agency and ask that your FICO score be revealed on it.

• Get a firm estimate of how much you can expect to pay in closing costs (charges that the lender levies connected to the purchase of the house). These take in various charges that generally run between 3 to 6 percent of the money you're borrowing. Credit unions often offer lower closing costs to their members.

• Make sure to order a home inspection while you're in escrow. Those few hundred dollars are money in the bank when it comes to identifying potentially serious problems such as leaks, roof problems, drainage, radon, pest damage, structural issues and other potential problems.