Nolo's Essential Guide to Buying Your First Home
Nolo's Essential Guide to Buying Your First Home
Alayna Schroeder, J.D.; Ilona Bray, J.D.; and Marcia Stewart
December 2014, 5th Edition
The number of homes for sale is on the rise and mortgage rates remain near historic lows. That makes now a great time to say goodbye to your landlord. With Nolo's Essential Guide to Buying Your First Home, you'll not only find the right house for you, you'll fun doing it.
Filled with interesting facts, real-life stories and insights, and common pitfalls to avoid, this book provides everything you need to select the right type of home for your family, the right mortgage, the right agent, the right inspections -- and much more. Get the inside scoop on:
- deciding between a house, condo, co-op or townhouse
- exploring your local market for the best value
- creating and managing a realistic homebuying budget
- qualifying for and securing a loan
- protecting yourself with inspections and insurance
- negotiating with sellers or new home builders
- successfully closing the deal
Read through the real-world experiences of over 20 first-time homebuyers, as well as valuable insights from a team of real estate professionals, including:
- real estate brokers
- attorneys who specialize in real estate
- a home inspector
- a neighborhood researcher
- a mortgage specialist
- and more!
Along with this step-by-step handbook, you'll receive online access to The Homebuyer's Toolkit, including dozens of forms and MP3s to help you find the right place, crunch the numbers, interview real estate professionals, and even borrow down payment money from your parents.
The brand new edition is fully updated to reflect the latest changes to the housing market, with emphasis on how to deal with competition from other buyers when making an offer.
Are you a California resident? Check out How to Buy a House in California
“Takes the guesswork out of home buying…two thumbs up.” -Elizabeth Weintraub, Home Buying & Selling Guide, About.com
“Nolo’s excellent guide for novice home buyers provides fresh, updated information about the whole process that even those in the know will find useful.”-Library Journal
“Coming from a gal that knows tools, this book is a must-have tool for any home buyer.” -Norma Valley, Host of "Toolbelt Diva" (Discovery Home Channel)
- Tools for Househunting
- Dream List Directions
- Dream List
- Questions for Talking With Locals
- Common Real Estate Abbreviations
- House Visit Checklist
- Questions for Seller Worksheet
- First-Look Home Inspection Checklist
- Condo/Co-op Worksheet
- Cobuyer Discussion Worksheet
- Homeowners’ Insurance Terminology
- Financial Tools
- Debt-to-Income Ratio Worksheet
- Financial Information for Lenders
- Gift Letter
- Private Loan Terms Worksheet
- HUD-1 Settlement Statement
- Tools for Choosing Professionals
- Real Estate Agent Interview Questionnaire
- Real Estate Agent Reference Questionnaire
- Mortgage Broker Interview Questionnaire
- Mortgage Broker Reference Questionnaire
- Attorney Interview Questionnaire
- Attorney Reference Questionnaire
- Home Inspector Interview Questionnaire
- Home Inspector Reference Questionnaire
- Tools for Evaluating a House’s Physical Condition
- Indiana Seller’s Residential Real Estate Disclosure
- California Real Estate Transfer Disclosure Statement
- California Natural Hazard Disclosure Statement
- Sample Home Inspection Report
- Final Walk-Through Checklist (Existing Home)
- Final Walk-Through Checklist (New Home)
1. What’s So Great About Buying a House?
- Investment Value: Get What You Pay For…And Then Some
- Tax Breaks: Benefits From Uncle Sam
- Personality and Pizzazz: Your Home Is Your Castle
- No More Mr. Roper: Say Goodbye to Renting
- You Can Do It…If You Want To
2. What Do You Want? Figuring Out Your Homebuying Needs
- Know Your Ideal Neighborhood: Why Location Matters
- Know Yourself: How Your Lifestyle, Plans, and Values Affect Your House Priorities
- Know Your Ideal House: Old Bungalows, New Condos, and More
- Would You Like Land With That? Single-Family Houses
- Sharing the Joy, Sharing the Pain: Common Interest Properties
- Factory-Made: Modular and Manufactured Homes
- Putting It All Together: Your Dream List
3. Does This Mean I Have to Balance My Checkbook? Figuring Out What You Can Afford
- Beyond the Purchase Price: The Costs of Buying and Owning a Home
- Spend Much? How Lenders Use Your Debt-to-Income Ratio
- Blasts From the Past: How Your Credit History Factors In
- What’s Your Monthly Budget? Understanding Your Finances
- Getting Creative: Tips for Overcoming Financial Roadblocks
- The Power of Paper: Getting Preapproved for a Loan
4. Stepping Out: What’s on the Market and at What Price
- What’s the Buzz? Checking Out Neighborhoods From Your Chair
- See for Yourself: Driving Through Neighborhoods
- On Foot: Talking to the Natives
- Sunrise, Sunset: Getting Day and Night Perspectives
- Got Houses? Finding Out What’s Locally Available
- How Much Did That One Go For? Researching “Comparable” Sales
- Hot or Cold? Take the Market’s Temp
- Just Looking: The Open House Tour
- Nothing to Look at Yet? Finding Your Dream Development
5. Select Your Players: Your Real Estate Team
- Your Team Captain: The Real Estate Agent
- Your Cash Cow: The Mortgage Broker or Banker
- Your Fine Print Reader: The Real Estate Attorney
- Your Sharp Eye: The Property Inspector
- Your Big Picture Planner: The Closing Agent
- Strength in Numbers: Other Team Members
6. Bring Home the Bacon: Getting a Mortgage
- Let’s Talk Terms: The Basics of Mortgage Financing
- Who’s Got the Cash? Where to Get a Mortgage
- Narrowing the Field: Which Type of Mortgage Is Best for You?
- Getting Your Cash Together: Common Down Payment and Financing Strategies
- Where Do I Look? Researching Mortgages
- I’ll Take That One! Applying for Your Loan
- New-Home Financing
- Unique Financial Considerations for Co-op Buyers
7. Mom and Dad? The Seller? Uncle Sam? Loan Alternatives
- No Wrapping Required: Gift Money From Relatives or Friends
- All in the Family: Loans From Relatives or Friends
- A One-Person Bank: Seller Financing
- Backed by Uncle Sam: Government-Assisted Loans
8. I Love It! It’s Perfect! Looking for the Right House
- How Your Agent Can Help
- The Rumor Mill: Getting House Tips From Friends
- Keeping Track of New Listings
- Planning Ahead for House Visits
- Come on In: What to Expect as You Enter
- Do We Have a Match? Using Your Dream List
- All the World’s Been Staged: Looking Past the Glitter
- Recent Remodels: What to Watch Out For
- Walk the Walk: Layout and Floorplan
- What Do They Know? Reviewing Seller Disclosure Reports
- Reviewing the Seller’s Inspection Reports (If Any)
- Poking Around: Doing Your Own Initial Inspection
- Hey, Nice Dirt Pile! Choosing a Not-Yet-Built House
- Buying a New or Old Condo or Co-op? Research the Community
9. Plan B: Fixer-Uppers, FSBOs, Foreclosures, and More
- Castoffs: Searching for Overlooked Houses
- Look What's Back on the Market?
- A Foot in the Door: Buying a Starter House
- Have It Your Way: Buying a Fixer-Upper or House You Can Add on To
- Share Your Space: Buying Jointly
- Subdivide Your Space: Renting Out a Room
- Hey, Where’s Their Agent? Looking for FSBOs (For Sale by Owners)
- Buying a Short Sale Property
- Buying a Foreclosure Property
- Buying a House in Probate
10. Show Them the Money: From Offer to Purchase Agreement
- Start to Finish: Negotiating and Forming a Contract
- More Than Words: What’s in the Standard Purchase Contract
- Too Much? Not Enough? How Much to Offer
- Keeping Your Exit Routes Open: Contingencies
- Putting Your Money Where Your Mouth Is: The Earnest Money Deposit
- Divvy It Up: Who Pays What Fees
- Deal or No Deal: Picking an Expiration Date
- Think Ahead: Closing Date
- Strategies in a Cold Market: What to Ask For
- Strategies in a Hot Market: Making Your Offer Stand Out
- Contracting to Buy a Brand-New Home
11. Toward the Finish Line: Tasks Before Closing
- Wrappin’ It Up: Removing Contingencies
- Will It Really Be Yours? Getting Title Insurance
- Yours, Mine, or Ours? What to Say on the Deed
- Get Ready, ’Cause Here I Come: Preparing to Move
12. Send in the Big Guns: Professional Property Inspectors
- Home Inspection Overview: What, When, and at What Cost?
- House Calls: Your General Inspection
- Tagging Along at Your General Home Inspection
- Say What? Understanding Your General Home Inspection Report
- Termite or Pest Inspections
- When to Get Other, Specialized Inspections
- Trouble in Paradise: Inspecting Newly Built Homes
13. Who’s Got Your Back? Homeowners’ Insurance and Home Warranties
- Coverage for Your House
- Damage Your Homeowners' Insurance Won't Cover
- Protection for Other’s Injuries: Liability Insurance
- Your Out-of-Pocket: Homeowners’ Insurance Costs
- Insurance Deductibles
- Shopping Around for Homeowners' Insurance Costs
- Types of Insurance Companies
- Jointly Owned, Jointly Insured: What Your Community Association Pays For
- Home Warranties for Preowned Houses
- Home Warranties for Newly Built Houses
14. Seal the Deal: Finalizing Your Homebuying Dreams
- Preview of Coming Attractions: What Your Closing Will Involve
- Is It Really Empty? Final Walk-Through of an Existing House
- Is It Really Finished? Final Walk-Through of a New House
- Your Last Tasks Before the Closing
- The Drum Roll, Please: Attending the Closing
- Closing Documents Related to Your Mortgage Loan
- Closing Documents Related to Transferring the Property
- Can I Move In? Taking Possession
15. Settling Into Your New Home
- Tell the World You’ve Moved
- Home, Hearth, and Hors d’Oeuvres: Settle in Socially
- The Safest Home in Town: Yours
- Cozy Up … Without Breaking the Bank
- There’s a Place for It: Organize Your Records
- Back to the Future: Get Your Finances on Track
A. Appendix: Using the Interactive Forms
- Editing RTFs
- List of Forms
What’s So Great About Buying a House?
Investment Value: Get What You Pay For … And Then Some....... 8
Equity, Baby................................................................................. 9
It Beats Paying Rent.................................................................... 9
You Can Live in Your Investment.............................................. 10
You Can Borrow on Your Investment........................................ 10
My, You’re Looking Creditworthy!.............................................. 10
That House Is Yours.................................................................. 11
Tax Breaks: Benefits From Uncle Sam.......................................... 11
Tax Credits................................................................................. 11
Mortgage Interest....................................................................... 12
Other Tax-Deductible Expenses................................................ 12
Itemizing Your Deductions......................................................... 13
Capital Gains Tax Relief When You Sell................................... 14
Personality and Pizzazz: Your Home Is Your Castle..................... 14
No More Landlord: Say Goodbye to Renting................................. 15
You Can Do It … If You Want To................................................... 16
“But…I Like Renting”.................................................................. 16
“But…I Can’t Afford It”................................................................ 17
“But…I’m Single”........................................................................ 18
“But…It’s Too Much Responsibility!”.......................................... 19
“But…Maybe Prices Will Go Down!”.......................................... 20
“But…I’m Still Scared! ”.............................................................. 20
Picking up a book on homebuying for some light reading? We’re guessing not. If you’re reading this, you’re probably seriously interested in buying a house. But before we launch into how, let’s explore why—just in case you’ve got any lingering doubts about whether it’s a good idea. This chapter will preview some of the primary financial and personal benefits to buying a home (and you’ll find details on many of the subjects covered, such as tax benefits, in later chapters). Then we’ll talk about some common myths and fears, and how to get over them.
Buy my first home. Although Leah was happy with her rental place, she says, “I wanted a place that I could call my own, with a backyard for my cats, and space for an office so I could work at home full time. After three weeks of looking, I found it! And after a year, some of the best parts of homeownership are things I wasn’t even expecting—like having already gotten to know more neighbors than I did during a whole six years in my apartment. Plus, although I’ve never thought of myself as domestic, I’ve had a surge of interest in decorating—I put up Roman blinds, have been picking out paint colors, and just bought my first Christmas tree!”
Get What You Pay For … And Then Some
You’ve probably heard people talk about real estate as a great investment. But what exactly do you get out of the deal? Well, a few things: You’ll build equity instead of spending cash on rent, you gain immediate benefits (a place to live!), and you’ll eventually have full ownership of an asset that—at least over the long term—has a good chance of appreciating in value.
Buying a home is one of those rare instances where you can control a very large and potentially appreciating asset with a comparatively small initial cash investment (your down payment). Better yet, notes adviser Daniel Stea, “You’re using the proverbial ‘OPM’ (other people’s money) for the balance of the investment, and that money is being lent to you at comparatively low cost given the historically low interest rates we’ve experienced these past few years. Yet you get to enjoy the appreciation on the full value of the investment, not just your cash component. It almost doesn’t seem right!”
Over time, as you patiently pay your mortgage, two things may start happening—your principal loan balance will go down, and the house’s market value may go up. Both of these mean that you’re accruing equity. Equity is the difference between the market value of a house (what it’s currently worth) and the claims against it (what you have left to pay on any mortgages or loans you’ve taken out against it). You’d be hard-pressed to find another investment where you can borrow a large amount of money, pay a modest interest rate, and reap every bit of the gain yourself.
Example: Hugo buys a home for $300,000 with a $60,000 down payment (20%) and a $240,000 mortgage. If the market value of the house is $300,000, Hugo’s current equity in the home is $60,000 (market value minus mortgage debt). A few years later, Hugo has reduced the principal on the mortgage by $5,000, to $235,000. Meanwhile, the house’s value has risen to $310,000. Hugo now has $75,000 in equity: ($310,000 minus $235,000). That’s $15,000 more than he originally invested.
Of course recent history has shown that the value of a property doesn’t always increase: It can also decrease, sometimes dramatically. Fortunately, houses rarely drop in value permanently. And after some precipitous value drops in the early 2000s, home appreciation in 2013 was running at an average of around 12%, according to the S&P/Case Shiller Home Price indexes.
It Beats Paying Rent
A good chunk of the money you’ll use to finance your home is money you’re already spending anyway, on rent. When you buy a house, that cash is actually going into your investment.
You Can Live in Your Investment
Some people like to call a mortgage a forced savings plan, because it makes you sock a little cash away every month in the form of a mortgage payment—money you will, with any luck, get back when you sell the place. On the other hand, you might call it a smart investment plan, because it gives you both a roof over your head and a way to convert your cash into a potentially appreciating asset.
You Can Borrow on Your Investment
Eventually, as your equity in your home builds, you can borrow against it at relatively low interest rates, using a home equity loan or a HELOC (home equity line of credit). These are also commonly referred to as “second mortgages.”
The interest rates on these tend to be higher than on primary mortgages, but lower than on the typical credit card. The money borrowed can be used for any number of purposes, such as home improvements, college tuition, or a car. Better yet, if you use the money for home improvements, the interest is tax deductible, up to $1 million.
Of course, there are risks—if you default and your house goes into foreclosure, the lender is second in line to be paid from the proceeds of the sale of your house, after the primary mortgage holder.
My, You’re Looking Creditworthy!
We hear so much about people who ruined their credit score by getting foreclosed on that it’s hard to remember the reverse side of the picture: A mortgage is seen as “good debt.” When you successfully pay it down, credit-reporting companies view that as a sign that you’re responsible and able to handle a large loan.
“This can do wonders for your credit rating,” says adviser Daniel Stea. “It makes you a much better credit risk (statistically speaking), which becomes especially useful if you decide to apply for an auto loan, small-business loan, student loan for your kid’s college tuition, and so on.”
That House Is Yours
One benefit to buying a house is kind of obvious ... you’re becoming a homeowner, and when the loan is paid off, you won’t have to pay for a place to live. You could keep renting the same place you’re in now for 50 years, and at the end of that time you’ll still have to pay monthly rent checks to your landlord.
Tax Breaks: Benefits From Uncle Sam
You’ll get to claim various federal tax deductions and credits for home-related expenses. These can add up to some serious savings.
Tax Deductions Versus Tax Credits
Be careful not to confuse a tax deduction with its more valuable cousin, a tax credit. A tax deduction is an amount you subtract from your gross income (all the money you earned during the year) to figure out how much of your income is subject to tax. For example, if your gross income is $80,000, and you have a $2,000 tax deduction, your taxable income is reduced to $78,000.
A tax credit, by contrast, is a dollar-for-dollar reduction in your tax liability. If your taxable income is $80,000, and you qualify for a $2,000 tax credit, your taxable income is still $80,000, but you get to reduce the amount of tax you ultimately owe by $2,000.
As a new homeowner, you may be entitled to certain tax credits.
Tax credit for first-time homebuyers. At the time this book went to print, all the tax credits for first-time homebuyers had expired—but keep an eye on the news and www.irs.gov for anything new that might come along.
Tax credits for energy-efficiency. A tax credit good through 2016 lets you claim 30% of the cost of installing geothermal heat pumps, small wind turbines, fuel cells, or solar energy systems. For more information, visit www.energystar.gov (search for “tax credit”).
One of the biggest deductions will be the interest you pay on your home mortgage (available for mortgages of up to $1 million for individuals and married couples filing jointly and $500,000 for marrieds filing separately). This one’s particularly advantageous during the first few years of a fixed rate mortgage, when most of your payment will be put toward interest.
Other Tax-Deductible Expenses
You can also deduct certain other expenses, such as:
Property taxes. While the amount varies between states and localities, most people pay around 1% of the home’s value each year in state property tax. This amount is deductible from your federal taxes if you itemize.
Points. Points are additional and usually optional fees paid when you buy your mortgage (you get a reduced interest rate in return). They’re tax-deductible in the year you pay them.
Interest on a home improvement loan. If you take out a loan to make improvements that increase your home’s value, prolong its life, or adapt its use—for example, by adding a deck or a new bathroom—you can deduct the interest on that loan, with no limit. But you can’t deduct interest on loans used to make normal repairs, such as repainting the kitchen or fixing a broken window.
Interest on home equity debt. Sometimes you can deduct interest on a home equity loan even if the money isn’t used to buy, build, or improve your home—for example, if you use it toward a child’s college tuition or family medical bills. The deduction is limited to a maximum loan amount or the total fair market value of the home less other mortgages. The maximum loan amount is $100,000 for an individual or married couple filing jointly and $50,000 if married but filing separately.
Home office expenses. If you use part of your home exclusively and regularly for a home-based business, you may be able to deduct a portion of the related expenses—including the costs of some home repairs, or even things like landscaping if your home’s appearance will be important to visiting clients.
Moving costs. If you move because of a new job that’s more than 50 miles from your current residence, you may be able to deduct your moving expenses.
Prepayment penalties. Although we advise against getting a mortgage with a prepayment penalty (as discussed in Chapter 6), if you do, and then you make a prepayment, the penalty you pay will be tax-deductible.
Itemizing Your Deductions
To take advantage of house-related tax deductions, you’ll need to itemize your tax deductions, rather than take the standard deduction (for 2014 tax returns, $6,200 for individuals and $12,400 for marrieds filing jointly). The true tax savings comes in the difference between your tax liability when you take the standard deduction and your tax liability when you itemize. Itemizing involves a step up from the good old 1040EZ, but it’s not all that complicated. To make it worthwhile, your itemized deductions should exceed the standard deduction. With the high price of real estate, it’s not usually too hard to outpace the standard deduction with deductible homeowner costs, not to mention other deductible expenses like donations to your favorite charity.
Example: Let’s say you get a $200,000 fixed rate loan at 4% interest in 2014. You’re looking at paying nearly $8,000 the first year in interest alone. That doesn’t count property taxes, points on the mortgage, or any other tax-deductible expenses.
If you’re single, the standard deduction is $6,200. But if you itemize your deductions, you could deduct the $8,000 in interest payments instead. By itemizing even this one deduction, almost $2,000 less of your income will be taxed.
Keep good records. You’ll be able to reap the benefits of itemizing your deductions only if you know about them and are prepared to prove them to the IRS—all of them, not just the house-related ones. Keep a file of receipts for the more common deductions, such as unreimbursed business expenses (office equipment and travel); educational expenses (tuition and books); charitable contributions; and unreimbursed medical expenses. Consider getting help from a tax professional—even your meeting might be tax-deductible!
Check it Out
Go straight to the source. See IRS Publication 530, Tax Information for Homeowners, available at www.irs.gov. This publication will give you more detailed information about the tax benefits of buying a home.
Capital Gains Tax Relief When You Sell
While it may be too soon for you to imagine selling your first home, another important benefit is available if and when you do. Thanks to the Taxpayer Relief Act of 1997, you don’t pay capital gains tax (usually 15%) on the first $250,000 you make on the place. Double that to $500,000 if you’re married and filing jointly, or to $250,000 per person if you co-own the place.
To qualify, you must (with a few exceptions) have lived in the home two out of the previous five years before selling. Many first-time buyers use this tax break to move from modest starter homes to roomier homes that cost more.
Personality and Pizzazz:
Your Home Is Your Castle
If you’ve always been a renter, you know the drill: Things stay the way they were when you moved in. White walls stay white, ugly carpeting stays ugly, and the funky bathroom light fixture stays funky.
When it’s your home, you get to make your mark. There’s just no way to quantify the psychological advantage of personalizing your space. Even people who’ve never taken an interest in home decorating, repair, or gardening find themselves hooked on the creativity and self-expression possible with home projects.
No More Landlord:
Say Goodbye to Renting
Expressing your personality isn’t the only advantage to leaving rental living behind. Say goodbye to things like waiting around for things to get fixed, wondering whether the landlord will raise your rent or kick you out anytime soon, and being surprised by landlords who stop by at their own convenience.
Even reasonable landlords who make prompt and thorough repairs and never raise the rent can pull surprises or sell the property. Owning your own house reduces the stress and uncertainty of renting. You’re in charge of when you move on, who comes in the front door and when, and what gets done to the place. While that means you’ve got some extra responsibilities, you’ve definitely got some extra security and benefits, too.
Make monthly payments to myself, not the landlord.
At age 25, Talia had only toyed with the idea of buying a house—she’d thought that, despite her full-time job, it was financially impossible. But then her landlord raised the rent. Talia says, “I looked into loan options—and to my surprise, I qualified. Within two months, I bought a converted first-floor apartment with a little patio, in a safe neighborhood. I love not having to share a washer and dryer with other people anymore. But even better is the feeling of independence of having my own place: Because I’m building equity, I like to think I’m making those mortgage checks to myself—and they’re not that much higher than my rent checks were, plus I can claim some significant tax deductions.”
You Can Do It … If You Want To
Are you still on the fence about homebuying? Some people just don’t feel ready to take the plunge. Below are a list of common “I can’t do it because …” excuses. Don’t get us wrong: Not every excuse is a bad excuse. You just need to know whether yours are based on solid facts rather than plain old fear.
“But…I Like Renting”
Maybe you’re thinking, I really love my apartment or, I’m getting such a good deal. But even if your current rent seems cheap, cheap is never as good as free. Yes, we’re aware that buying a house isn’t free. But at some point, you won’t be paying a mortgage anymore. That will never be true if you rent.
Check it Out
Run your own numbers. These calculators compare the costs of renting and buying:
• www.nytimes.com (search for “Is it better to buy or rent?”)
• www.nolo.com/legal-calculators (click “Should I rent or buy?”).
While you’ll need to guess how much you’ll spend on a home to use these calculators, the result will at least give you a rough comparison. Revisit the calculators after you’ve looked at Chapters 3 and 6 (covering the financial details of buying a house).
All that being said, renting might be best in the following situations:
You plan on moving from the area within the next few years. Buying is a long-term strategy, with significant up-front costs. Plus, it’s easier to move out of a rental than a home you own—selling is almost as complicated as buying.
You need flexibility. Buying is best for people whose lives are fairly stable. If your first priority is being able to quit your job any time a friend proposes a round-the-world sailing trip, maybe homeownership will feel more like a trap than a positive step. (Then again, we’ve met travelers who’ve sublet their house and supported their travels with the rent payments!)
You expect your income to decrease soon. If you’re planning to return to school or quit your 9 to 5 to pursue an acting career, you might not want to lock yourself into a mortgage. Still, you may be a potential homebuyer if you can afford something more modest within your anticipated future income or can pay the mortgage by co-owning the property or taking in renters.
It will cost you far more to buy than to rent. Run those numbers, using calculators like the ones listed above. In a few markets, you can still rent for less than you can buy—even after you factor in tax deductions and inflation. If that’s the case, you might be better off renting and investing elsewhere—or simply renting a bigger and better place than you could hope to buy.
“But…I Can’t Afford It”
Maybe your main reservation about buying a home is that you simply can’t afford one. Scraping together a 20% down payment can be no small task when you’ve already got your plate full with your current bills. Or perhaps you’re afraid you won’t qualify for the gigantic loan you’ll need or won’t be able to pay it once you get it.
Focus on the spaghetti. Caryn and her husband Alec were stretching to their financial limits to buy a house, and Caryn says, “We were nervous, but our agent told us, ‘You’ll just need to eat spaghetti for about a year, and then things will even out.’ For some reason, that image stuck in my head, and I thought, okay, I can handle eating spaghetti for a while. In fact, that’s about the way it worked. The first year, we depleted our savings, not only with the house closing but with repainting and buying furniture. Now we’ve settled in, and owning a home doesn’t feel like such a big load on our shoulders anymore.”
If you’re trying to get a down payment together and finding your efforts frustrated, don’t lose heart. There are alternatives: For example, you may be able to augment your down payment with a loan from a family member, or even enter into a cobuying arrangement with a friend.
As for the mortgage payment, people who think they can’t afford it often focus only on the big number—the five-, six-, or even seven-digit figure that says what a house is going to cost. But a mortgage allows you to spread that number out over a big portion of your life.
Finally, let’s not forget that the first home you buy isn’t necessarily going to be the one you’ll live in forever. By remaining flexible, and starting with a not-quite-perfect house, you can break into the housing market. That’s why they call it a “starter” house—it’s only the beginning. The equity that you accrue may very well help you get into that next place.
Some people are reluctant to buy a house because they’re single now, but hope to be part of a couple before long. But did you know that nearly one-fifth of homebuyers today are single women? Obviously they have figured out that there’s no secret rule that says only couples get to buy houses.
Invest in my present as well as my future. Real estate agent Joanna knows about not wanting to buy a house as a single woman—she’s seen it in many of her clients. But, says Joanna, “The problem with waiting to do something the traditional way is, what do you lose during that waiting period? I was in my early 30s and ready to have a place of my own. Plus, it makes sense to spend the money and get a tax write-off rather than pour it into rent. This isn’t to say that buying alone wasn’t stressful—I stretched financially to make it work. But since buying, my house has gone up in value.”
Maybe you’re worried that you’ll have to move as soon as you meet Mr. or Ms. Right. While that admittedly is possible, it’s also possible that in the meantime, the increased value of your place will help, not hinder, your happily-ever-after. If the value of your home increases and you pay down the mortgage, the two of you will have equity you can use to buy a place together. Besides—a house that’s perfect for one may accommodate two just fine.
Combine our homes. Hannah says, “I was a young professional and very single when I bought a condo. Two years later, I met Chad, who also owned a small home. Before I knew it, we were married and living in the house, renting out the condo. Then we had kids, and the house was just too small. We sold my place and Chad’s, using the equity to buy a house big enough to accommodate our kids. It’s nice to have a place that we chose together, with our family in mind.”
“But…It’s Too Much Responsibility!”
For some, the idea of owning a home just seems like too much to handle. Admittedly, renting is much simpler than owning. You write a rent check, and you’re covered for the month. And in many rental arrangements, you can leave with just a month’s notice—perfect for those with wanderlust.
Telling yourself that renting doesn’t involve responsibility isn’t really true, though. After all, what happens if you don’t pay the rent? You get evicted—and then where do you go? Back to Mom and Dad’s? Most people would rather do whatever it takes to make that monthly payment happen.
So if you’ve already lived away from home, you’re familiar with what’s needed to make monthly payments and handle monthly finances. Of course, when you buy you’ll have other responsibilities, like taking care of your yard or doing repairs, but you’re in charge of prioritizing what happens when. If you decide you don’t want to repair the creaky stairwell until you’ve redone your kitchen cabinets, that’s up to you.
“But…Maybe Prices Will Go Down!”
Trying to time the real estate market? Timing is definitely important, but it’s not easy to get in to the market at the perfect moment. Even experienced real estate pundits get it wrong. If prices look to be stable and you’re just waiting until you can afford to get in, that’s one thing. But if you’re trying to out-clever the real estate market, you’re likely to find that by the time you notice a trend everyone else will have, too; and prices may jump up before you know it.
So if you’ve watched your local market and economic news carefully, and have a solid sense of what’s ahead, perhaps waiting for a price drop makes sense. But don’t put your life on hold. That’s particularly true if you’re getting married, having a baby, moving into a retirement home, or doing something else that comes with its own timing demands.
“But…I’m Still Scared!”
Buying a home may seem overwhelming, even if you’ve always wanted to do it. The process is unfamiliar, there’s a lot of money at stake, and you may fear getting swept up into buying a place you don’t even like or that will drop in value. But fear shouldn’t stop you from realizing your homebuying dreams. To help calm the butterflies, take constructive steps such as these:
Know your strengths and weaknesses going in. Then find ways to address them, for example with self-education or by hiring professionals.
Learn what you can expect from professionals. Understand what real estate agents, mortgage brokers, home inspectors, and other professionals do, and put them to work for you, saving time and money.
Observe your local real estate market. We’ll show you how to research the trends in your area, in order to reassure yourself that you’re not buying an asset that may drop in value, and has long-term appreciation potential.
Understand the process. Read up on all steps of the homebuying process now, so that you won’t be confused—or need to do any late-night remedial study—when the process kicks into high gear.
Get organized. Use all the worksheets and checklists in the Homebuyer’s Toolkit on the Nolo website to stay on top of key tasks, such as choosing a real estate agent or inspector or pulling together financial papers for the lender.
This book will help you accomplish all those goals. It will tell you where you are at every step, so that you can breathe, get your bearings, and proceed with confidence. Get the facts, and you’ll be ready.
Once you’ve decided you’re ready to buy, it’s time to figure out what’s important to you. In the next chapter, we’ll discuss how to examine and settle on your priorities regarding types of houses and neighborhoods.
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DOWNLOAD FORMS - All forms in this book are accessible online. After purchase, you can find a link to the URL in Appendix A.
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