SOYOUWANNA BUY A HOUSE?

It's the American dream: to win $50 million in the lottery, have your own entourage of supermodels satisfying your every whim, and inviting everybody back to your fantastic Playboy Mansion-esque house for a barbecue. Or perhaps your American dream is to become a movie star, lounging around your Beverly Hills home while taking a quick break to thank the Academy. Regardless of the dream, a big beautiful house is definitely in the picture (what, are you gonna dream about renting?). Well, we have news for you: buying your own house does not have to be a dream. Your house may not be a mansion, but follow our steps and you'll be on your way to legitimate home ownership. (And don't worry we don't recommend squatting except as a last resort.)

But before we even start you on the road to home ownership, you first have to be sure that you really want a house -- it's a big responsibility. Owning a house has many advantages, but depending on your personal situation, you may be much better off renting an apartment. Let's compare.

Benefits of buying a houseDrawbacks of buying a house

• With an apartment, you're limited to how much you can personalize your living space. With a house, you can do whatever your heart desires.

• With an apartment, you can move when the lease is up, but with a house, you have to sell it first.
  

• With a house, over time the mortgage balance decreases and equity builds. With an apartment, you gain nothing over time, except maybe a higher rent.

• With an apartment, the landlord is responsible for any repairs. With a house, you are the landlord. If it's broke, either you fix it or pay someone to fix it for you.

• With a house, there are homeowners exemptions you can take on your taxes. With an apartment there are tax exemptions too, but only for your landlord.
  
  

• With an apartment, you don't gain equity (the difference between the market value of the house and the outstanding mortgage balance), but you don't lose any either. With a house, equity can go up, down or stay as is.

But the biggest advantage to owning a house over renting an apartment is that your house belongs to you. It's your home, and that's pretty darn cool in itself.

1. MAKE SURE YOU CAN AFFORD TO BUY A HOUSE

Are you good at keeping to a budget? Is your credit in good standing? Do you have tremendous amounts of outstanding debt? If your answer to these questions is to stare at your feet in embarrassment, you may not be in the best financial shape to buy a house at this time. We're not asking these questions to make you feel guilty about any bad money habits you may have. That's just a fun little side effect. But before you start looking at houses, you first have to get your finances in order. Here's how to do it:

• Pay off any outstanding debts.
  
  
• Don't incur any new debts, like buying a new car or putting a trip to Europe on your credit card. Mortgages are based on "debt to income" ratios (what you spend monthly versus what you bring in). Taking on substantial new debt would throw the ratios out of your favor.
  
  
• You can get a rough idea of how much a mortgage will cost by consulting one of the many online mortgage calculators.
  
  
• If you really want a house, put yourself on a budget now. You might as well get used to it and doing it early will help you put a few extra dollars aside. Along with mortgage payments, you're going to have other costs like home repairs, home improvements, home insurance and general home maintenance that you didn't have when you were renting. You're going to need every extra penny you have.
  
  
• Along with whether you can afford a house, you should consider if now is a good time to buy. House prices have skyrocketed recently and interest rates have gone up. Prices may not go down any time soon. However, the real estate market moves in peaks and valleys, we currently seem to be entering into a buyer's market (housing demand is low and supply is high) rather than the seller's market (housing demand is up and supply is low) we just experienced. There's less chance of getting into the bidding wars buyers were suffering from in the past year or so.
  
  
• Different cities have different real estate trends. It's obviously much more difficult to find an affordable new house in an up-and-coming city than one that's on its way downhill. So if you don't care where you live, then check out different cities and see where you can find a good market. The Midwest is always a good place to begin such a search because the cost of living is lower than on the coasts.

Either way, you take a chance. If you feel you can afford it and you're ready to buy a house, then by all means, now is the time to find your new home. But if you're really lucky, the aforementioned entourage of supermodels will buy your house for you.

2. GET A MORTGAGE

Scary word, isn't it? "Mortgage." It sounds like the name of a diseaseand it kinda is. A mortgage is basically a fancy word for "house loan": instead of paying for the house all at once at the beginning, you pay a little bit every month. An agency covers you for what you haven't pain yet, and you continue to pay the mortgage until you finally own the house outright (say, 30 years later).

A monthly mortgage payment consists of:

1. Principal: repayment of the original amount borrowed.
2. Interest: the cost of borrowing the principal amount.
3. Taxes: real estate taxes.
4. Insurance: homeowners insurance.

Together, this is known as the PITI (Principal/Interest/Taxes/Insurance) payment. You may also think of it as the "Lord have PITI on my payment."

There are several factors involved in getting a mortgage:

Annual income
Prequalification and preapproval
Fixed mortgage vs. adjustable mortgage
Down payment
Points
Locating a mortgage agency

Annual income

According to the Home Buyer's Information Center, most buyers purchase houses that cost between 1.5 - 2.5 times their annual income. However, in some areas, there may not be houses available in that range, so you may need to spend a bit more. Keep in mind that your monthly mortgage payment should not exceed approximately 28% - 29% of your gross monthly income. That's because your total debt payments (car, credit cards, plus the monthly mortgage, whatever) should not exceed 36% - 40% of your gross monthly income. After all, you have to eat.

Prequalification and preapproval

With these ratios in mind, it's now time to get prequalified and preapproved for a mortgage. You may be thinking, "Why do I need a mortgage if I haven't even looked at any houses?" It evokes the chicken and egg scenario: Which comes first? The mortgage or the house? When it comes to buying a house, you get preapproved for the mortgage first because it will determine how much you can spend. And to get preapproved, you must get prequalified (that is, you have to qualify for preapproval).

To get prequalified, you'll need to provide your potential lender with the following information about yourself:

• Your current income. Gather W-2s and income tax returns from the last few years, copies of pay stubs, and bank statements from savings and checking.
  
  
• Your credit history. Credit agencies, like Trans Union, can be contacted online for a credit report. Cost averages around $8.00, though it's free in some cases.
  
  
• The amount of debt you're carrying. So gather your statements for credit cards, car payments, alimony, etc.

Fixed mortgage vs. adjustable mortgage

There are two types of mortgages: fixed and adjustable.

• On a fixed mortgage, there is a fixed term (for example, 15 to 30 years) and a fixed interest rate at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage. Taxes and insurance are not guaranteed.
  
  
• On an adjustable mortgage, also known as an ARM (Adjustable Rate Mortgage), the interest rates are adjusted up or down according to current interest rates, established by the Federal Government. The principal and interest payment goes up and down with these rate changes as well.

Down payment

Your mortgage will also depend on the amount of your down payment (that is, how much money you'll fork over up front). Most homebuyers make down payments of 5% - 15% of the total home price. However, you may qualify for a lower down payment because of the various types of homebuyer's loans that are available. There are all kinds of loans to consider: first-time homebuyers loans, Veteran's Administrations loans, HUD Loans, and FHA Loans. There may even be loans associated with the neighborhood you're buying in to encourage more people to move into that particular area. This is another topic of discussion to have with your mortgage lender.

Points

Yet another factor to consider is the amount of points you are willing to pay with your mortgage loan. A point is 1% of your mortgage loan amount. Points are usually paid for up-front. If you can (and are willing) to pay points, then it will bring down your interest rate and potentially, your closing costs.

Locating a mortgage agency

So how do you find a financial institution to approach for a mortgage?

• The main advice we can give here is to compare as many as you can.
  
  
• Check your local bank or credit union, mortgage brokers and internet sites.
  
  
• Check the current mortgage rates for your local area. These are usually listed in the Real Estate section of your local newspaper, often on Saturday or Sunday.
  
  
• Keep in mind, whomever you choose, once they're done prequalifying you, they'll want to preapprove you for the highest amount your income can afford - in other words, they want you to pay as much as you can possibly afford every month. Whatever you do, don't go out and buy a house for that amount. Buy something a bit lower. You'll need the extra income for possible unknown expenses like closing costs, repairs, moving costs, additional furniture, lawn tools, remodeling, etc. Also consider that your monthly expenses for utilities and maintenance may go up as well.

3. GET A REAL ESTATE AGENT

Now that you've been preapproved for a mortgage, you know exactly how much you can afford to spend on a house. The next step is to find an agent. But why even use an agent? The reason is because the seller almost always pays for the commission for the sale of a house. That means that you, the buyer, are able to utilize the services of a Real Estate Agent for FREE. Pretty neat, huh? So you might as well use one.

A real estate agent has the tools to help you find a house that fits you and your budget. This includes access to more listings, educating you on the types of home loans that you might qualify for, assisting you with escrow requirements and eventually preparing the final contract for your new home. Plus, it sure helps to have a pro by your side when you're dealing with something as expensive as buying a house.

Here's the biggest tip you can get regarding agents: make sure that you are talking to a buyer's agent and not a seller's agent. For example, if you see a house you are interested in, don't use the agent representing that property to make the deal for you (translation: don't call the name on the "for sale" sign). That agent represents the seller and will try to make sure the deal is to the seller's advantage, not yours.

Where do you find an agent?

• Look in the phone book under Real Estate. Duh.
  
  
• Check out Real Estate ads in newspapers and magazines. Double duh.
  
  
• Start with reputable agencies with names you're familiar with. That means talking to someone at RE/MAX or Century 21 before talking to someone at Bob's Realty R' Us.
  
  
• Check to see if the realtor you want to deal with has a presence in the area in which you're looking for a house.
  
  
• Ask someone who recently bought a house for the name of the agent they used. Then go out and compare.
  
  
• Talk to a few and feel them out. Ask them for references. See if you feel they're being honest with you. Though the real estate agents' reputations are even lower than used car salespeople, there are a few good ones out there.
  
  
• If an agent tries to pressure you into a house that you don't want, DROP THAT AGENT IMMEDIATELY. You don't have time for such silly reindeer games.
  
  
• Make sure the agent you choose has been licensed by the state in which you are looking for a home. This is no time to deal with amateurs. Stick with the pros!
  
  
• Hunting for a house can't be done in a hurry, so pick an agent you feel comfortable working with over an extended period of time.

4. FIND A HOUSE

How do you know if a house is good? Location, location, location (you knew that one was coming, didn't you). It's an old clich, but it still holds true. You want to move into a good neighborhood that's either on the rise or is well-established. You'll probably get a better deal if you find one that's an up and comer, but they're not always easy to spot. The best place to look for these diamonds in the rough is in the neighborhoods that are right on the edge of the more established neighborhoods. As the established neighborhood expands, you'll suddenly find yourself in 5 years living in a prime location.

Finding a good house involves two factors:

The neighborhood
The house itself

The neighborhood

A good neighborhood:

• Is close to thriving economic centers.
• Has good public schools.
• Has nearby shopping areas.
• Good public facilities like parks and community centers.
• Is an easy commute to major metro areas.
• Has well-maintained homes.
• Has low crime.
• Has high percentage of owner-occupants.
• Has a relatively low proportion of crackheads, ninjas, and feral midgets.

Finding out this information requires research. For crime statistics, call the local police precinct. For school scores, call the local city council. The rest of the information you can get simply by driving around the desired area and seeing what's out there. Talk to people in the neighborhood and see what they think. Also talk to people outside of the neighborhood and see why they don't live there.

You will also need to find out what the resale value of the neighborhood is. That is, if you want to sell your house, how long will it take you to unload it?

Here's how to figure it out:

• Ask your real estate agent how long "for sale" houses in your desired area have been on the market.
  
  
• If sales have been sluggish, find out if it's because the market is slow or if it's because the neighborhood has a problem (read above comments regarding feral midgets).
  
  
• However, if there's been an increase in buyers from other areas coming in and multiple offers on the homes for sale, then you know you've hit on a good neighborhood.
  
  
• Other signs of a good neighborhood are when residents remodeling their homes, when residents are buying bigger homes in the same neighborhood, and when there is a small number of renters.
  
  
• Finally, ask the people who live there. Read their local community papers and shop in their stores. In other words, spy on them. Don't worry, we won't blow your cover.

But even if you feel you have found the perfect neighborhood, there are still a couple of more things you should check out. One is to call city hall and make sure they aren't planning any major road construction through that area. The other is to drive to and from the neighborhood you're interested in from different directions and at different times of the day. You may have only seen the "scenic route" and not be aware that the neighborhood is right down the road from a Hell's Angels clubhouse. That's not good unless you're a member yourself.

The house itself

Whew! All this research and we still haven't even talked about houses.

It's helpful to make a list of what you need in a house as well as what you want. The need list is the one you're going to stick by, but you should naturally strive to get things on your want list too. Let's break it down:

Examples of needs:

• How much square footage you need to live comfortably
• How many bedrooms and bathrooms are right for you
• How much storage space there is
• How big a lot or yard you need for kids or pets

Examples of wants:

• The right color carpet
• Hardwood floors
• Built-in bookshelves
• A great view
• Mirrors over the bed

We're not asking you to sacrifice your wants completely, but you should consider your needs first and foremost. You can always add things from your want list onto your house later.

Now it's time to take all this information (the kind of neighborhood you're interested in, the type of house you need, and how much you can spend) and present it to your real estate agent. You've been working so hard up to this point educating yourself on what to look for, its about time you put someone else to work. The agent will take your specifications and see what's in the area that matches. Then the two of you will begin arranging times to get together to look. And look. And look some more. No matter how quickly you imagine you can find the right house, it always takes much longer. Soon all the houses will start to blur together. To avoid losing track, keep a scorecard on each one you look at. Make a list of your needs and how each house matched up to those needs. Then add comments to the bottom of your scorecard about what was good or bad about each house. Also, keep the flyers your agent gives you for each house. Many times it will have a picture of the house on it. Keeping a file of all this will help you keep track of what you've seen and ultimately help you narrow down your decision of which house you want to make an offer on.

One final note here: around the time you feel you are ready to make an offer on a house, you should ask your agent to help you find a reputable home inspector. A home inspection is part of the final closing on the house, but we're talking about a separate inspection that takes place before you sign a contract. It will cost you $200 - $500, and it's worth every penny. The home inspector will do a top-to-bottom inspection for any problems with the house that the seller either neglected to point out or maybe was not aware of (it happens). You will want to include in your offer that the deal is dependent on the seller either fixing or compensating for any of these problems before a sale goes through. Keep in mind that the inspection will not include cosmetic defects. Also, don't wait until you make the offer to find an inspector because there's usually a time limit in the contract as to how soon the inspection has to take place.

5. MAKE AN OFFER

When you find the house you want, you can't just hand over a crumpled wad of tens and move in. Instead, you have to make an offer on the house. To make a fair offer, ask your agent to provide you with a Comparable Market Analysis (also known as a CMA) of the house you want. A CMA will tell you what similar houses in that area sold for in recent months. Seeing how the house you want compares with others like it will help you determine if you are dealing with a motivated seller (someone who needs to sell fast) or someone who is just putting a ridiculously high price on their home to see who might go for it. Take note: EVERYBODY asks for more than they are willing to take. It's part of the game.

According to the Home Buyer's Information Center, items that should be addressed in your offer are:

• The price (your offer).
  
  
• Any concessions you want from the seller, such as installing a shower.
  
  
• Any financing contingencies that might affect your ability to pay your mortgage.
  
  
• Anything that found in the home inspection that needs repair, like a big gaping hole in the bedroom ceiling where the mirrors used to be.
  
  
• Being really clear about what is included in the sale (like appliances, light fixtures, etc.). You don't want to move in and find out the groovy chandeliers are gone.
  
  
• The deposit you're willing to put down with the offer.

Once you've given your offer, it's now up to the seller to accept it, reject it, or make a counteroffer. If the seller accepts it, then your offer essentially becomes a legally binding contract for you to buy to the house. However, if the seller rejects it or makes a counteroffer, then it's time to negotiate. The main thing to keep in mind during negotiation is to stay realistic about it and don't get caught up in the moment. If there are multiple offers on the house, you could find yourself part of a bidding war. Your first reaction may be to beat out the competition. However, once the dust has settled and you've "won" the house with the highest bid, you may find that you've grossly overpaid. On the other hand, if you bid too low, the seller may not take your bid seriously and decide not to deal with you. Tough, ain't it? A good real estate agent will help you through it.

Either way, you should always be prepared to walk away. If you can't make a good, reasonable deal on the house, then face it: you're getting ripped off. You have to feel you made the right deal. If you go into negotiations prepared, you should be able to make the deal you want.

6. CLOSE THE DEAL

You're now at the home stretch. Get it? "Home stretch?" Shut up. We're tired. Buying a house takes a lot out of you.

You and the seller have come to an agreement, so now you have to make it legal. Your real estate agent will draft a sales contract and you'll fill out a formal loan application with the lender who preapproved you for a mortgage earlier. Your sales contract will include legal descriptions of the house and its location, any mortgage contingencies, deposits, closing costs, termite inspection costs, warranties, home inspection contingencies, home insurance, and last (but certainly not least), the possession date.

After everybody signs on the dotted line, the next step is the final "walk through." If the seller was living in the house, this takes place once they are gone and the house is ready for you to move into. You will probably do the final walk through with your real estate agent and a home inspector. Bring your sales contract along to make sure everything that was supposed to be fixed did indeed get fixed. If it isn't, then now is the time to legally get the seller to take care of it. You can't close on the house until all of these details are taken care of.

Okay, so you've gotten your final mortgage application approved, the final walk through accomplished, all the house inspections satisfied, and the homeowner's insurance policy is in your pocket. Now, can you move in? No, intrepid home-buying pioneer! Now you sit down with a closing attorney for the closing. Who can act as the closing attorney varies somewhat from state to state. One thing that is consistent is that the closing attorney has to be approved by your lender. And for good measure, you should bring your real estate agent along (chances are the seller and his/her agent are going to be there as well). This is when everyone will sign the settlement statement and put the title of the house in your name. This is also when you will pay the closing costs. You'll have to present all the legal documents you have been gathering up to this point (your homeowner's insurance policy, your loan papers, whatever). Once everything has been signed and you've handed over your certified check, then -- and only then -- will you finally be presented with the keys to your new home. Congratulations, homeowner.

What comes next is a no-brainer. You move in. What, you didn't make any moving plans? May we suggest you take a look at "SoYouWanna move to a new city?" And now that you are in your new home, how about doing something about that lawn? You don't want to embarrass the neighbors already, do you? There'll be plenty of time for that later...