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Whether you're looking for an older house or new construction, finding the right home for you can be a challenge. Before you can find the house you can afford, you need to know how much you can afford.
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Buying a Home -
Getting Started
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A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards.
For overall housing statistics, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builders association probably gets this report. If not, the housing research firm is located in Canton, Mich.; call (800) 755-6269 for information; the firm also maintains an Internet site. Finally, check with the U.S. Bureau of the Census in Washington, D.C., at (301) 495-4700.
Obligations to disclose information about a property vary from state to state. Under the strictest laws, the seller and the seller's broker, if there is one, are required to disclose all facts materially affecting the value or desirability of the property which are known or accessible only to him.
Items sellers often disclose include: homeowners association dues; whether or not work done on the house meets local building codes and permits requirements; the presence of any neighborhood nuisances or noises which a prospective buyer might not notice, such as a dog that barks every night or poor TV reception; any death within three years on the property and any restrictions on the use of the property, such as zoning ordinances or association rules.
It is wise to check your state's disclosure rules prior to a home purchase.
Home inspections, seller disclosure requirements and the agent's experience will also be useful. Disclosure laws vary by state, but in some states, the law requires the seller to complete a real estate transfer disclosure statement.
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Buying a Home -
Getting Started
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Obviously, when you buy a house you get the house and the property beneath it. If your home is not connected to a utility's water and sewage, you may get your own well and septic tank.
Who gets the furnishings when a home is sold?
Fixtures, any kind of personal property that is permanently attached to a house (such as drapery rods, built-in bookcases, tacked-down carpeting or a furnace), automatically stay with the house unless specified otherwise in the sales contract. But you can consider anything that is not nailed down negotiable. This most often involves appliances that are not built in (washer, dryer, refrigerator, for example), although some sellers will be interested in negotiating for other items, such as a piano.
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Buying a Home -
Getting Started
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A home is worth what someone will pay for it. Everything else is an estimate of value. To determine a property's value, most people turn to either an appraisal or a comparative market analysis.
An appraisal is a certified appraiser's estimate amenities, energy efficiency, the quality of the of the value of a home at a given point in time. To make their determination, appraisers consider square footage, construction quality, design, floor plan, neighborhood and availability of transportation, shopping and schools. Appraisers also take lot size, topography, view and landscaping into account.
The list price is the price tag put on a house in a real estate listing; it usually is only an estimate of what the seller would like to get for the property. The sales price is the amount a property actually sells for. It may be the same as the listing price, or higher or lower, depending on how accurately the property was originally priced and on market conditions.
A seller may need to adjust the listing price if there have been no offers within the first few months of the property's listing period.
The appraisal value is a certified appraiser's estimate of the worth of a property, and is based on comparable sales, the condition of the property and numerous other factors. Lenders require appraisals as part of the loan application process; fees range from $200 to $300. Appraisers use several factors when estimating value including historical records, property performance, condition of the home and indices that forecast future value. For detailed information on appraisal standards, contact the Appraisal Institute at
Appraisal Institute
550 W. Van Buren St, Suite 1000
Chicago, IL 60607
Phone: (312) 335-4100
Fax: (312) 335-4400
E-Mail:
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Market value is what price the house will bring at a given point in time. A comparative market analysis is an informal estimate of market value, based on sales of comparable properties, performed by a real estate agent or broker. Because brokers and agents are not state-certified appraisers, they may not perform appraisals in most states. Instead, they estimate the value of a property using a CMA.
You can do your own cost comparison by looking up recent sales of comparable properties in public records. These records are available at local recorder's or assessor's offices, through private companies or on the Internet. Neither of these services produce official appraisals. They also don't factor in market nuances or other issues a certified appraiser or real estate professional might in assessing the value of your home.
Other resources include:
- The Home Sales Line allows people to use their telephones to find the exact selling price of houses anywhere in the state 24 hours a day. Call 1-800-585-HOME.
- Dataquick Information Systems tracks home sales statewide and prepares reports for specific properties. Call 1-800-999-0152.
- Go to Web sites such as http://www.homeshark.com and http://www.dataquick.com.
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Buying a Home -
Getting Started
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A down payment is usually 20 percent of the purchase price of the property. If it's less, most banks require you to buy private mortgage insurance. PMI typically adds several hundred dollars to the cost of the loan, but you won't need PMI when you can prove that you have at least 20 percent equity in the property.
Equity is the value of the home minus the outstanding loan balance. But to remove the PMI, most lenders require that you obtain -- and pay for -- an appraisal.
Paying with gift money
An estimated one-third of first-time buyers purchase their home with a loan or a money gift from their parents. Lenders will ask for a gift letter stating that no repayment of the gift is expected. In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well.
Gifts -- with the proper documentation -- can be from relatives, friends, an employer, church, municipality, or nonprofit organization. Lenders often have stricter restrictions on gifts from friends and relatives other than parents. Also, if you put less than 20 percent down, some lenders may require that a portion of the down payment be your own cash, not a gift. If you want to use a gift as part of your down payment, check with individual lenders to learn the restrictions of specific private or government-insured mortgage programs.
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Buying a Home -
Getting Started
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"Know what you can afford" is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts.
Pre-qualification
It pays to check with several lenders before you start searching for a home. Most will be willing to roughly calculate what you can afford and pre-qualify you for a loan. A pre-qualification is an informal discussion between borrower and lender. It involves a simple calculation that considers several factors, but primarily your income. There are no guarantees with a pre-qualification, but it will be expected of you when you make an offer on a home.
The price you can afford to pay for a home will depend on six factors:
- gross income
- the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
- your outstanding debts
- your credit history
- the type of mortgage you select
- current interest rates
PITI
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance. This is known as the Principle, Interest, Taxes, and Insurance payment (or PITI). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range. Debt-to-income ratio
A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower's gross income and the mortgage payment, combined with all other debts, to 36 percent of the total. The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income. Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.
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