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The Basics

You don't pay cash when you buy a home. If you had to do that then nobody could afford to buy a house. Instead you make a small down payment (3 to 20% of the sale price) and get a loan from a bank to cover the rest. This loan is called a mortgage. You make payments on this loan every month for 15 to 30 years, and then you get to stop making payments.

In most cases it makes more financial sense to buy instead of rent, and to buy as soon as you can afford to do so. Most people think the benefit in buying is to "throw your money away on rent," but in fact the equity you build from buying is offset by the new expenses of taxes, insurance, and maintenance, which renters don't pay. The real benefit from buying is that you freeze your monthly payment for 15 to 30 years, and then you stop paying it altogether.

What kind of home can I afford?

In general you can afford a home worth about three times your annual household income. If your combined income is $50,000, you could afford a $150,000 house.

Here are factors that could allow you to buy a home worth more or less than that.

your buying power

your buying power

No debt

Debt, esp. big debt

Large down payment

Small down payment

Good credit

Bad credit

Duplex where you can get rental income

Single-family home, no bedrooms rented out

If it looks like you can't afford a home then consider buying a duplex or a bigger house and getting a house mate to pay rent. A two-bedroom home might cost you $1200/mo. But a duplex, each with two bedrooms, might run only $1900/mo. If you rent out one side for $800, then your monthly obligation for your side drops to $1100/mo.

How much a home costs

The median price for a home was $225,000 in U.S. metro areas in late 2006. (Nat. Assoc. of Realtors) Of course the price varies according to the part of town, and even the state you're in. Homes in California cost lots more than homes in West Virginia and Arkansas. And naturally if the median (middle) price is $225,000, there are houses available for much less. In 2004 I bought two houses on the same lot for $86,000 total, or $43,000 per house.

How much will my monthly payments be?

    Your monthly payments will probably be 0.75% to 1.15% of the purchase price. On a $150,000 home that's $1125 to $1725/mo. This includes taxes and insurance. We'll cover how to estimate your monthly payment more accurately on the next page. The bigger your down payment, the lower the monthly payments. The lower the interest rate, the lower the monthly payments. The longer the loan, the lower your monthly payments. But it's better to get a shorter loan so you pay it off quicker and save on interest, if you can afford the higher payments. You can make a home more affordable by buying a duplex and renting out the other side, or renting out a room in a single-family house, at least until you can afford not to. You might not be able to afford $1500/mo. for a $150,000 house. But if you get a $200,000 duplex with payments of $2000 a month and rent one side out for $800/mo., your burden is only $1200/mo. Plus you'll get big tax deductions by having rental property.

To afford a house you'll need the up-front money as well as money for the monthly payments

Here's a summary:

Money you need up front

• Down Payment
• Closing Costs
• Misc. Costs


Monthly costs

• Mortgage Payment
  (inc. taxes & insurance)

Money you'll need up front

    3 to 20% of the purchase price for a down payment. The actual amount depends on what kind of loan you get and how good your credit is.

    1 to 8% of the purchase price for closing costs. You might not have to pay this up front. The bank might be willing to add it to your mortgage. (Do this if you need the cash, but pay the closing costs up front if you don't.) The actual amount of closing costs depends on how good a deal your lender is willing to give you, and the price of the house. The more expensive the home, the less the closing costs are as a percentage of the total price.

    $250 to $800 in Miscellaneous Costs. These are things like the application fee for the loan, the fee for the bank to run your credit report, professional inspection of the home, and an appraisal (if you can't get the appraisal added to the closing costs).

    Putting these three things together, on a $150,000 house you'll need
      $4500 to $30,000 for the down payment $0 to $12,000 for the closing costs $250 to $800 for miscellaneous costs

    Total: $4750 to $42,800. Yes, that's quite a difference. You'll learn more about estimating the costs for your own situation as you go through this guide

    How to get a mortgage

You generally need four things to qualify for a mortgage:
    Money to make the down payment. Income that's 2 to 3 times higher than your mortgage payment. (more on figuring mortgage payments in a minute) Two years of solid employment history (same job or field). Decent (not perfect) credit.

There are sometimes ways around this if you lack one or two of those, but usually not if you lack three or four. More on this later.

All the costs involved in buying a home


Closing costs are fees charged by the companies and government offices which process the loan and the sale of the property. They're generally 1 to 8% of the sale price. You might be able to have the closing costs added to the mortgage so you don't have to pay them up front.

Where the money comes from

Here's a summary of what you've learned -- to buy a house you make a down payment in cash, get a bank loan for the rest, and pay the closing costs in cash.

Remember that you might be able to have the closing costs added to your loan instead of paying them in cash.

Remember also that the amount of money you have to put down varies depending on the type of loan you get and what the bank requires, and the closing costs vary too.

Should you buy or keep renting?

Buying a home makes more financial sense in most cases, but that doesn't mean in makes more sense in every case. If your rent is especially low (and you think it will remain so), or you're getting a great return in other investments, it could make more sense to keep renting. Whether you buy or not, it's still worth knowing some of the financial impacts of buying vs. renting. That page returns you here when you're done, so don't worry about getting lost if you want to check it out now.

How to find and buy a home

    Read the rest of this guide, especially the parts about estimating how much home you can afford. The rest of this guide covers everything below.

    Get a copy of your credit report and clean up your credit record as much as possible.

    Fill out a loan application, and we'll provide you what's called a Pre-Qual Letter. There will be now charge.

    Find a property. Apply for half the commission refund. The seller pays the commission to your realtor, so it costs you nothing to have a realtor. WE'll be able to help you by letting you know what houses are available that meet your needs (they have access to a special database) and by answering your questions about the process. Apply for Free email alerts.

    Tell us what part(s) of town you want to live in, and what kind of house you want.
    We"ll give you a list of houses that match your criteria. Go look at them. When you find a house you want ask for the Disclosure from the seller. This is a list of problems with the house that the seller knows about, and which they're required to give you by law.

    If the Disclosure doesn't sour you on the house, ask us how much you should offer, by doing comparable's.
    It's rare that you accept the price given by the seller, usually you'll offer slightly less than they're asking. Get a list of Comparable's (similar homes that have sold in the same area recently) from your realtor so you can get an idea of how much the house is worth.

    You'll make the offer by giving us the information and then sign an agreement.
    If the seller accepts your offer then they'll sign too. At this point you're generally obligated to buy the house and the seller is generally obligated to sell, though depending on the wording of the contract either of you could have the right to walk away from the deal under certain circumstances.

    Have the house professionally inspected.
    You generally have to pay this yourself, at the time, and it will cost $300 or so. If the inspection turns up problems not listed on the disclosure which will cost a lot to fix, try to get the seller to lower the price or fix the problems before the sale -- or walk away from the deal if your contract allows that and that's what you want.

    We will order an appraisal to make sure it's worth what you offer., if not don't worry. We include an appraisal contingency in the offer. You might have to pay this up front, otherwise it will be added to your closing costs. Besides paying for it up front if that's required, you're not involved in this step of the process.

    Find an insurance agent (ask friends for referrals) and get a quote. You can certainly price-shop 2-3 different companies if you like. Pick one and tell them you want the insurance. The cost will be added to your closing costs, you don't have to pay this at the time.

    You go to the office that's handling the closing (a title company is usually selected by the lender or the seller), and bring with you a bank check to cover the down payment and the closing costs (unless the closing costs are being rolled into the mortgage). This can be two checks or one. You don't need to get a check for the mortgage loan, the bank will wire that directly to the office handling the closing.