Buyer’s Guide to Home Ownership-First Step

Rent v Buy

Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market. At least that was a major factor prior to the financial crisis of 2008, when the U.S. housing market suffered widespread losses. Homeowners and prospective homeowners may now look more closely at the costs and benefits of such a large transaction.

Yet while the sobering effects of the housing crisis may have prompted a more cautious approach by buyers who are more realistic about the level of equity they can build in their homes, the drive to be a homeowner remains strong. It's mostly about freedom: The ability to paint the walls whatever color you want, or know that a landlord is not going to raise your rent or ask you to leave.

Here are a few points to consider when deciding whether homeownership or renting makes better sense for you.

Reasons to rent

But there is a downside, too: You may have no control over the fluctuation of your rent, a big-budget item that can change often. Long-term budgeting becomes more difficult.

Reasons to buy

While a home is a good investment -- and let's face it, you have to live somewhere -- many financial experts caution against purchasing a home simply as an investment. Historically, real estate market increases have been slow and steady, not the meteoric spikes seen between 1998 and 2008, when the economy buckled. Some experts like to point out that while housing prices and declines are cyclical, the stock market, on the other hand, had generated average annual returns of between 8 and 10 percent pretty steadily for decades. While those stock market gains may be less secure now, even conservative money planners try to deliver 5 to 7 percent returns, which is better than home value increases in many U.S. housing markets.

Is renting cheaper?

This is not an inconsequential question. Whether renting or buying is more cost effective depends on your market, where you choose to live and whether you like to do home improvement and maintenance projects yourself. Use Waterman Realty Rent Vs Buy Calculator to help determine if owning a home will be cheaper than renting over time.

Homes cost money: Appliances break, roofs leak, and if you own, you are the lucky soul who gets to pay the bill. If you are renting, landlords pay the plumber and roofer.

That is why many homeowners who have taken out a mortgage in order to buy do so in anticipation of the tax breaks that come with homeownership. Depending on your tax bracket, a first-time purchaser's 1040 tax deductions can heavily subsidize many of the expenses you have poured into your new home.

Also, since a 30-year fixed mortgage comes with an amortization schedule with the highest interest payments coming in the first years of the loan repayment, mortgage holders have been able to claim deductions in the early stages of ownership.

Can you afford to buy?

Buying a home is exciting, and it's often the biggest financial transaction many people will ever make in their entire lives. That's why when it's time to consider purchasing your own home, the best first step is to take some of the emotion out of the equation. And speaking of equations, when it comes to figuring things out, the best place to start is with the numbers.

How much money do I need to purchase a home?

It depends on the cost of the home, the type of loan you get and the amount of your down payment. From the moment you write an offer on a house and it is accepted by the seller, you will need something called earnest money. This is the first check a buyer will need to write to accompany the offer to buy a home. Then there's the cash needed to pay for a home inspection as well as upfront fees for credit reports and an appraisal.

Next comes the down payment, which is the amount of cash required by the lending institution securing your loan. Based on your credit score, debt-to-income ratio and available cash, lenders will advise which loan products, if any, are available and whether a down payment will be necessary. A down payment is separate from earnest money, and depending on the lender, it can be money gifted from parents or other sources.

In some instances, if you qualify as a first-time home buyer, you can receive down payment assistance and closing cost monies from the county you choose to live in. You can also qualify for below market value fixed interest rate loans.

The next consideration when buying is closing costs. These fees are not part of the financed amount of a purchase and can add 3-5 percent on top of the sale price of the home. While there are Veterans Affairs loans and some conventional loan products that offer "100 percent financing," closing costs are still additional costs that can't be completely wrapped up in the loan. (Note: Some fees, such as the VA funding fee, may be wrapped up in the loan.)

In some instances, closing costs can be part of the home purchase negotiations. Depending on market conditions, some sellers may consider paying for a buyer's closing costs out of their proceeds. In fact, buyers can discuss with their real estate agents or whoever is representing them in the transaction whether to ask the sellers to cover the cost of a home warranty, HOA fees or other expenditures.

Are there any reasons why I should NOT buy a home?

Yes, there are many reasons why you should not buy a home:

Get started

One of the best places to start analyzing whether you can afford to buy a house is with a detailed expense breakdown. Go over your budget by looking at how much you make and spend each month. This will serve as a reality check about what are fixed expenditures and where there's wiggle room in your budget to accommodate the expenses associated with home ownership.

Debt-to-income ratio

Lenders use this ratio to see what kind of mortgage payment you can qualify for. It is good to note that what you qualify for may NOT BE the mortgage payment you are comfortable making. Many buyers have grown wisely cautious about making sure they are not locked into payments that cut too close to their bottom line.

For example, if you can comfortably afford your existing $1,600 rent payment (or existing mortgage if you are trading up), chances are you'll qualify for a mortgage in the same range, or even higher. Lenders will determine how much loan you can afford by using debt-to-income ratios — basically what's left in your budget after your monthly bills are paid. These include credit card payments, car payments, child support, etc.

Debt-to-income ratio standards differ from lender to lender and vary based on the loan program, but most lenders will give more weight to your credit history when determining your particular situation. Here is typical ratio for a first-time buyer:

Monthly gross household income


Mortgage debt ratio: 28 percent


Expenses and overall debt: 36 percent


The mortgage debt of $1,596 is right in line with the current monthly rent payment in the example above. As long as the monthly debt obligations and household expenses are no higher than $2,000-2,300, this borrower should have no problem qualifying.

If your credit is stellar, you will be rewarded. Lenders may stretch these ratios to 38/45, allowing you to purchase more home and take advantage of more lending programs. And if you are a first-time home buyer applying for an FHA or VA loan, you may also be able to qualify with a higher back-end ratio — up to 41 percent of your monthly gross income — and get approved for these federally-insured loans.

How It Works

So, back to the question: How much home can I afford?

Keeping in mind the variables on debt-to-income ratios and the many lending programs available, here are sample breakdowns for a mid-range home and a lower price-range home, both purchased with the same loan terms and interest rate.

You can research mortgage interest rates and property tax rates (usually by county) on the Web to find averages for your area, and make the table more accurate for your situation.

Monthly gross household income (pre-tax)


Mortgage debt ratio: 28 percent


Home price


20 percent down payment




Interest rate on 30-year mortgage


Mortgage payment (principal and interest)




Monthly gross household income (pre-tax)


Mortgage debt ratio: 28 percent


Home price


10 percent down payment




Interest rate on 30-year mortgage


Mortgage payment (principal and interest)


And the other costs

In addition to the monthly mortgage payment, remember to factor in the added costs of home purchase and ownership. If you don't put 20 percent down, you will need to add private mortgage insurance, also known as PMI, to your monthly payment.

You'll also need to tack on homeowners' taxes, insurance and condo/homeowner's association fees (if applicable).

Keep some money in reserves

Many buyers invest every cent they have into their new purchase, but it's a good idea to keep some emergency cash, or "leaky faucet money," aside in the event of emergency repairs or a job loss. With home ownership, it's best to expect the unexpected.

What is Your Credit Rating?

When it comes to obtaining a mortgage at the best interest rate, your credit rating, also known as credit score, may be the single-most important piece of financial information. In fact, your credit rating goes a long way toward determining what interest rate you qualify for from your lender.

Your credit rating is a number that is determined from information in your credit report. Credit ratings range from 300 to 850, depending on the credit scoring agency. The higher the number, the better your credit rating. So, before you start house hunting and getting pre-approved for a home loan, it’s a great idea to first check your credit report and get your credit rating.

FICO vs. credit report

What is a credit report? What is a FICO score? Is a credit report the same as a FICO score? No – they are two different things, but they are related.

Your credit report is exactly as it sounds – it’s a report of your credit history. It contains all kinds of personal financial information such as your credit accounts (mortgage, auto, department store, etc.), listing when they were opened, their current balances, credit limit and whether they were paid on time; any outstanding taxes or liens against you; late civil or child support payments; court judgments (parking tickets, etc.) and any city, county, state and federal liens for unpaid taxes and bankruptcies.

Three major reporting bureaus (Equifax, TransUnion, and Experian) who furnish credit reports and they also furnish your credit rating or credit score. This rating or score can also be referred to as your FICO score. FICO stands for Fair Isaac Corporation, a company that was the first to create a credit score in the 1980s. Now simply known as FICO score, it is a number derived from your credit reports and is considered the standard. About 70 to 80 percent of mortgage lenders use the FICO score. Since there are three credit-reporting bureaus, you have three FICO scores.

Here’s what a FICO score is based on:

What qualifies as a high score?

The FICO scores range from 350 to 850, with an 850 as the Holy Grail of credit scores and 723 serving the median score in the U.S. You can expect good mortgage interest rates starting at the 720 level.

While you may not know your exact FICO score before you request it, you may have an idea where you stand. For instance, you’re probably in good credit standing if you’re receiving a lot of zero- percent credit card offers, or if you are being offered lines of credit for zero or very low interest rates.

Not everyone has to have reached the Holy Grail! Home buyers who pursue an FHA loan, one of the most common loan types for first-time purchasers, can usually secure a loan if their credit is 630 or higher.

If you are applying for a no-income-verification loan, whereby you forgo providing income documents to the lender because your income is not consistent or you are in a crunch for time, the lender will be looking for a minimum FICO score of 680 or higher. Banks don't like to assume all the risk, so your good credit history is key, although other types of lenders may have more flexibility in determining your mortgage interest rate. In any case, credit reports are critical in these kinds of transactions, as lenders have tightened their standards since 2008.

Free Reports

The Federal Regulation

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies -- Equifax, Experian and TransUnion -- to provide you with a free copy of your credit report, at your request, once every 12 months. The Federal Trade Commission (FTC), the nation's consumer protection agency, has prepared a brochure, Your Access to Free Credit Reports, explaining your rights under the FCRA and how to order a free annual credit report.

Fixing It

If your credit reports or FICO score make you want to hide under the covers, resist! You can take concrete steps to turn things around. Many financial experts suggest the same common sense strategies to turn your credit report around:

If bad credit continues to dog you, the FHA loan programs may be your ideal option. New lending standards instituted by the Federal Housing Administration in 2012 for its loan programs require new borrowers to have a minimum FICO score of 580 to qualify for the FHA's 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent.

Coming Up With Down Payment

The Lowdown on Down Payments

Since the 2008 recession, many changes have occurred in the home buying and mortgage industries, including requirements regarding down payments. All segments of the home mortgage industry have seen significant tightening of lending standards, and, in general, home buyers looking to use a conventional mortgage product can expect to need 10 to 25 percent of the home’s sale price as a down payment. Government loans can still be secured for significantly less money down than conventional loans. However, even down payment and credit history requirements for FHA and VA loans have been altered to the degree that it can impact how much money you can borrow, and at what rate.

Protecting Consumers

Luckily for hopeful buyers, advocates in the home and lending industries, including the Center for Responsible Lending, have sought to even the playing field for credit-worthy buyers who may lack the cash necessary for 20 percent and 10 percent down payments.

Even as federal agencies are seeking to regulate against predatory lending, especially in the sub-prime categories that contributed to the massive economic collapse in 2008, the path to homeownership for most credit-worthy buyers is taking more firm shape.

Housing market up, but cash tougher to come by

National data shows that since October 2011, the U.S. housing market has, overall, shown modest and incremental gains. Prices have moved higher, and demand and consumer confidence have grown. With low mortgage rates, more buyers can now afford to own a home.

Few first-time buyers, however, have the cash on hand to make a down payment, and many homeowners who would like to trade their homes will not net the kind of equity to cover the cost of a 20 percent down payment on a new home. That makes the availability of government loans through the FHA and VA programs attractive options for many buyers.

Conventional loans

Down payments for conventional mortgages typically require at least 20 percent down. That holds true for jumbo mortgages, too, which are loans that exceed $417,000.

First-time buyers

First-time home buyers enjoy lower minimum down payment requirements. Many prospective new homeowners can get a mortgage with a 3.5 to 5 percent down payment. Prior to the real estate crash, more options existed for no-money-down loans, but most of these have become extinct. Still, a 3.5 percent mortgage down payment helps many more people afford homes.

FHA loan rules require a minimum down payment of 3.5 percent

According to

“Your down payment can be as low as 3.5 percent of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”

“Many borrowers find there are additional factors that affect the amount of the down payment. For example, those who do not qualify for the most competitive loan terms may not be able to get the lowest required down payment. Credit issues or other factors may affect the lender’s perception of your credit worthiness. That can affect the terms, rates and down payment you’re qualified for from that particular lender.”

VA mortgage = 0 percent down payment

The VA loan program is available to military borrowers and is insured by the U.S. Department of Veterans Affairs. This program is for active-duty and honorably discharged service personnel as well as those who have spent at least 6 years in the Reserves or National Guard. Spouses of service members killed in the line of duty are also eligible.

This loan program takes into consideration intermittent occupancy, which allows for deployment issues, and it does not automatically disqualify those who have filed for bankruptcy or had other credit issues. No mortgage insurance is required.

Mortgage insurance

One reason that many who apply for conventional loans try to make the 20 percent down payment threshold is to avoid having to take out private mortgage insurance. PMI insures the lender for the amount of loan-to-value above 80 percent. Buyers putting down less than 20 percent pay a monthly PMI premium, which is added to their mortgage payment.

Condos mean more down

Unlike single-family homes, for which buyers can find mortgages that will require as little as 3 or 5 percent down, most condominium purchasers can expect to need at least 10 percent down to secure their loan. Because of the more complicated ownership factors associated with a condominium unit, mortgage lenders tend to perceive these properties as a higher risk than detached, single-family houses.

Buyer’s Guide to Home Ownership-Get Financing


Basic Mortgage Questions

Mortgages are probably the most crucial piece to buying, selling, or just plain owning a home. And, honestly, they are not as hard to understand as you might think. You can benefit from the experience of others who have mortgages (which is just about everybody you know), and with a little homework, you can make the best financial decisions.

1.) What is a mortgage?

It's pretty simple: A mortgage is a loan, with your house and land used as security; if you don't pay back the loan, the lender forecloses on your home. The loan is secured by a lien (the "mortgage") against the property (your house and land). The lender doesn't own the house, you do. They just have the lien with your house as their collateral (i.e., the security).

When you are looking for a first mortgage, there are two things to think about: what you can actually afford, and what you can borrow. Why are they different? Because the lender is not going to look at how much you spend in a month on gourmet wine or movies, or how comfortable you'll be with a big payment. They may be willing to loan you much more than you think you can spend on your mortgage. Only you know how much flexibility or not that your lifestyle has, which determines how much you can afford in a home.

A lender looks at your income (and income potential) vs. your debt, as well as your savings and credit history. Then they determine how big a risk you'd be for the lender to take on. They're also going to look at the value of the house you want to buy, and the interest rate of the loan you'll be getting. And then they arrive at a loan amount their firm can live with. In a perfect world it will match (or exceed) what you need to bridge the gap between your down payment and the price of the house you want.

2.) Why are there so many kinds of mortgages! How will I ever figure it out?

When it comes to looking at mortgage types, ask yourself one giant question: What is your goal? Will you be in this new home when the grandkids come to play, or is this a starter home that you'll trade up in the next five years? The answer to that question will help narrow your mortgage choices.

3.) Why does my length of time in the house matter?

It matters for two reasons: It will determine which type of loan is better for you, and it will dictate whether you look hardest at interest rates or at points.

If you are going to stay in your house and plan to pay off your mortgage over its lifetime, you can get a fixed rate loan where the payments will not change. (Of course, taxes and insurance are usually included in this type of loan and they might change.) The interest is a little higher than with an Adjustable Rate Mortgage but you have the security of knowing what your loan payments will be.

But if you know you won't be in the house long, you can get a lower interest rate on an ARM. If rates take a big jump in a few years, it won't matter because you're planning on selling then anyway. You'll also have the option of a hybrid ARM that is fixed for, say, five years, and then adjusts annually.

The lender may charge points (each point is equal to 1% of your home loan amount), and required third parties charge for their services, which increases the cost of the loan. If you sell your home in a few years and have paid points to get a better interest rate, you may not recoup the cost of those fees. And your equity in the house will be minimal, but you are betting the home will appreciate enough to cover the fees, or that the money you save in interest will balance out the additional cost of the loan. (If you stay in the house longer than you expect, you take the risk that you can't afford the higher payments as the interest rates adjust, or you risk not being able to refinance.)

There's no free lunch: You can choose between higher rates with no points or lower points, or lower rates with higher points. The key is to compare different types of loans to see what works for your needs.

Tip: In general, you should never pay more than 1 to 1-1/2 points to a lender, depending on the loan. (In certain circumstances, you might pay 2 percent, but only if there is a good reason (e.g., bad credit, complex loan, or you are buying a great interest rate.) You should discuss with an independent mortgage professional the effect discount point have on your rate.

4.) Where can I find today's rates?

First, check with your Agent from Waterman Realty, which offers rate quotes for free, and anonymously. Also, lenders and your local bank will have the latest rates for each type of loan. The most important thing is to shop around for rates in your city to see who is offering the best deal locally. Looking at the advertised rates will not tell you which loan you qualify for and often times the lowest rates ("teaser rates") can be misleading, so you should investigate several lenders.

5.) Why are some rates shown as a percentage and as an APR too?

The Annual Percentage Rate is what you will actually end up paying in addition to the principal. It wraps up the interest, points and fees in an effective annual rate. (When a lender quotes you a rate, it will be for interest only, so ask to see the APR.) As above, when you are using the APR to compare loans, make sure you are comparing apples to apples. You need the same loan from different lenders to make the comparison work.

Tip: Compare the APR on two identical loans and choose the one with the lesser rate.

6.) What is amortization?

It is a true measure of what you are paying per year against your loan. A loan has a life -- whether it's 15, 30, or even 50 years. You pay in installments, and the principal decreases until the loan is paid off by the end of the term. The payments are evenly spread over the life of the loan, with the interest payments making up the majority of the payment at the beginning, and then principal paid off toward the end of the term. Pay attention to the amortization schedule, which shows the payments for the life of the loan including interest.

Tip: Pay half your house payment every two weeks instead of one monthly payment. This results in 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.

7.) What else should I watch out for?

Prepayment penalties. Think it's a good thing to pay off a loan? Well, it might be, but certain lenders charge a penalty if you do. Penalties apply for a specific period of time, usually 1, 2, or 3 years after the loan is originated. How much is the penalty? Could be six months of interest or 2 percent of the principal remaining on the loan, but it varies.

You might think that it's stupid to get a loan with a prepayment penalty, but some lenders offer very low (and therefore tempting) interest rates in exchange. Also, some borrowers agree to loans with penalties if they have bad credit and it's the only way they can get the loan. Mostly, a prepayment penalty is a financial decision. There are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.

8.) What's mortgage insurance? Do I need it?

If you are making a down payment on our home of less than 20 percent, you will most likely have to get Private Mortgage Insurance (or PMI). It ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. The insurance premium amount varies by the loan to value of the house and type of loan.

Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI. There is no monthly mortgage insurance on VA loans, however you will have monthly mortgage insurance on a new FHA loan.

Types of Mortgages

To quote a mortgage broker: "There is a different loan for a different need." In other words, the type of mortgage you get depends on your individual situation. A good lender will get a sense of your needs from your credit report, your assets, and your employment history. He can then recommend some options for you. Here's a rundown on the most common loan types.

Fixed-Rate Mortgage

Interest is fixed for an amount of time; e.g., 10, 15, 20, 30, or even 40 or 50 years, at which point the amortized principal is paid in full.

Pros: Security. You know what your payments will be. You can refinance if rates drop significantly.

Cons: If rates go down, you'll still be paying the initial rate unless you refinance.

Watch out: This is a long-term prospect; if you are keeping your home for 15 or even 30 years, it's a conservative way to go. But you can end up paying more short-term than if you had an ARM.

Adjustable-Rate Mortgages (ARMs)

The interest rate fluctuates with an indexed rate plus a set margin; adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment.

Pros: Initial rates are lower than fixed. Popular with those who aren't expecting to stay in a home for long, or in a hot market where houses appreciate quickly, or for those expecting to refinance. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Annual ARMs have historically outperformed fixed rate loans.

Cons: Always assume that the rates will increase after the adjustment period on an ARM. You are betting that you'll save enough initially to offset the future rate increase.

Watch out: Check out the frequency of the adjustments. The more often, the lower the starting rate, but the more uncertainty. The less often, the higher the rate, but a little more security. Check the payments at the upper limit of your cap (your rate can increase by as much as 6 percent!); you can get burned if you can't afford the highest possible rate. And planning that a refinance will bail you out is risky; what if you can't afford (or can't qualify) when the time comes?

1-yr. Treasury ARM

The rate is fixed for one year, then becomes adjustable every year. The new rate is determined by the treasury average index plus the loan margin (usually 2.25-2.5%). 30-yr. term.

Pros: Lower rates than a fixed mortgage. When rates go down, you benefit.

Cons: Watch the margin; the margin is added to the index to come up with the new rate after the adjustment period. When rates are going up, you could end up paying more interest than with a fixed.

Watch out: If you are a gambler and think the rates won't increase, this might work for you. But if you are into it for the long or even intermediate run, fluctuating interest rates can mean higher payments over time.

Intermediate ARM

With an intermediate or hybrid ARM, the rate is fixed for a period of time, then adjusts on a predetermined schedule. This is shown by the number of years the loan is fixed, and the adjustment interval (.e.g., 3/1 ARM is 3 year fixed, and 1 adjustable annually). The new rate is determined by an economic index (usually treasury or treasury average index) plus the loan margin (usually 2.25-2.5%). 30-yr. term.

Pros: Lower rates than a fixed mortgage. When interest rates rise, you see more ARMs because they are easier to qualify for.

Cons: When rates are going up, you could end up paying more interest than a fixed-rate mortgage after the initial period.

Watch out: If you aren't planning to keep your house for long this might work for you because you will receive lower rates initially. Be sure to check the rate caps so you know exactly how high your payments can go. Fluctuating interest rates can mean higher payments over time.

Flexible Payment Option ARM

The borrower chooses from an assortment of payment methods every month. There is a "change cap" limiting how much payments can vary in a year.

Pros: Frees up cash when you need it. Good for buyers with variable incomes (e.g., salespeople who work on commission).

Cons: Some options won't cover your interest. With lower payments, your balance increases each month, and eventually your payments will increase substantially. This could lead tonegative amortization.

Watch out: Eventually you will be required to pay down the principal and your payments will increase drastically. If you can't make them, you lose the house. Most experts say, "Don't do it."

Interest-only ARM

For a period of time, you pay only interest, and do not pay down the principal. This loan type was discontinued by Freddie Mac in 2010 and is offered by very few lenders.

Pros: If you don't plan to stay in a home long, you can buy something you ordinarily couldn't afford. If you are in a hot market, or a hot neighborhood, you'll have low payments while your house appreciates in value. You can always pay more on the principal while enjoying the low payments. One other great thing about an interest only mortgage is that payments made to the principal reduce your monthly payment. So, if you have a job that has a heavy non-scheduled bonus or commission based compensation plan, you can pay the interest every month and when you get your bonuses pay down the principle to reduce your monthly payment.

Cons: The day will come when you need to pay down the principal. If your home value has fallen, or your income decreased, you could have trouble making the new payments. One strategy is to invest the difference between an interest-only loan and a fixed-rate loan to build up cash reserves.

Watch out: If you can't pay interest and principal at the same time, chances are you can't afford the house. You can only put off the inevitable for so long: the principal has to be paid down. If you can't make payments, you could lose the house. If you plan to sell your house and can't sell it for what you owe, you are in trouble.

Convertible ARM

An ARM that can be converted to fixed rate after a period of time.

Pros: Saves on refinance costs, assuming you would have been switching anyway.

Cons:You will have a higher rate for the fixed with a convertible loan. You can't look around for a better deal, which you can with a refi.

Watch out: Saving the cost of the loan and the hassle of shopping loans are a plus, but you might be crying if the refinance rates are lower than your new fixed. Experts say, "Just refinance."

Jumbo Loans

Above Freddie Mac and Fannie Mae conforming guidelines, therefore the big secondary lenders will not secure jumbo loans. 2013 maximum amount for a conforming loan: $417,000.

Pros: When the market is out of sight, the jumbo loans make a purchase possible.

Cons: Higher down payments, and higher interest rates.

Watch out: If you can afford the higher payments, then go for it. But make sure you can afford them.

Assumable Mortgage

An adjustable-rate loan, the balance of which can be assumed by a home buyer.

Pros: Sellers can offer a low interest rate to entice buyers.

Cons: This is almost never a fixed rate mortgage, so the savings might not be all that great.

Watch out: These are rare today. If the buyer who assumes the loan defaults, the bank will go after the original borrower.

FYI - FHA loans are assumable, but are fully-assumable and are not always ARMS.

Balloon Conforming Mortgage

Interest rate is fixed for a period of time, but the principal is not completely amortized. For the remainder of the term, it adjusts to a new fixed rate determined by the Fannie Mae net yield index plus the margin. 30-yr. term.

Pros: Lower monthly payments initially. If your career (and salary) has a good future, or you are in a hot market and plan to sell before the balloon comes due, you can save money.

Cons: Who knows what that new rate will be? There's a looming debt in your future.

Watch out: You can refinance when the balloon comes due, but you are gambling that you can afford the refi loan.

Balloon Mortgage

The rate is fixed for a period of time, but the principal is not completely amortized during the period. The entire balance of the principal is due as a balloon payment at the end of that period.

Pros: Lower monthly payments, with the idea you can always refi or sell before the balloon.

Cons: A big elephant waiting in the wings

Watch out: It's easy to procrastinate, or your life changes, and then your balloon pops. Refinancing costs might offset any savings you made.

VA Home Loans

A zero-down loan offered to veterans only; the VA guarantees the loan for lenders.

Pros: Nothing down, and no mortgage insurance. The loan is assumable.

Cons: The rate might be higher than conventional loans or FHA loans.

Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

Federal Housing Administration Loans (FHA)

Government-subsidized loan with low down payment (i.e., 3.5 % of the sales price) and closing fees included; the government guarantees the loan.

Pros: Low rates for those who can't come up with the down payment or have less-than-perfect credit; great for first-time home-buyers. The loan is assumable.

Cons: If you can afford 5 percent down, you might find better rates with conventional loans

Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.

How to Get Pre-Approved

What is a pre-approval?

A pre-approval is a commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information. Most pre-approval letters are good for 60 to 90 days.

Why you should get pre-approved?

There are many reasons why you should get pre-approved. The most important reason you should get pre-approved early in the process of purchasing a home is that you will get an accurate idea of how much you can afford. This will ensure that you only look at houses that are truly in your price range. A pre-approval letter is also essential in a competitive real estate market. If you make an offer on a house without a pre-approval, your offer will not be taken as seriously as an offer from another person with a pre-approval and you could lose out on purchasing the house of your dreams. Additionally most bank-owned homes will require a pre-approval letter from a lender before accepting an offer.

What is involved with getting pre-approved?

In order to obtain a pre-approval letter you will need to contact a lender. You will typically be approved in 24 to 48 hours if you provide the lender with all the necessary paperwork.

Click here to calculate how much you can get pre-approved for and to get connected with a trusted lender today.

Documents you'll need to provide to get a true pre-approval

Credit Report and Credit Score

The lender will also pull your credit report and score for you and your co-borrower (if you have one.) Most lenders charge an upfront fee of around $30 to do this.

The lender will analyze your credit report for any red flags such as late or missed payments or charged off debt. Your credit score will affect your ability to qualify for a loan and determine how low of a rate you can get. Generally a score above 720 will get you the most favorable mortgage rates. Your overall debt (minimum credit card payments, student loan payments, car payments, etc.) will be analyzed to calculate your overall debt-to-income ratio. You will also need to provide any alimony or child support payments you are required to pay.

What if I can’t get pre-approved?

There are three areas you will likely need to work on if you are not able to get pre-approved from a lender:

Be sure to ask your lender for tips on how you can improve your chances for qualifying for a loan.

Choosing a Mortgage Lender

Determine what matters most to you when selecting a mortgage lender

Waterman Realty you can sort quotes you receive by whatever matters most to you: APR, interest rate, monthly payment, lender fees, loan program, lender rating or cheapest cost over a certain amount of time.

Observe the way the lender responds to you when you first contact him or her

Are they prompt to respond to your initial contact? Are they friendly and courteous? Do they honor their quote that you saw online or in an offline ad? Are they willing to explain things to you or educate you about different choices? Do they proactively discuss the timeline of the loan (estimated closing date, when to lock the rate)? Do they discuss when/how rates will change?

Check out the lender's reviews

One of Waterman Realty main goals is to empower consumers with information to help them make mortgage-related decisions. We think lender reviews are an incredibly useful tool to help consumers choose a lender to work with because the experiences others have had with a particular lender are good indicators of subsequent experiences with the same lender.

Our lender reviews are based on four categories - responsiveness, knowledge, helpfulness and follow-through - and all include detailed descriptions of their experience. The reviews are left by past and current clients of the lender. All reviews are moderated by a specially trained team of moderators who evaluate all reviews before they are published.

Types of Mortgage Lenders

1. Lenders

Lenders are the ones who give you the money — either directly or through a third-party — to fund your loan. Lenders have various names based on how they acquire their clients and what they do with your loan after it is funded.

Retail vs. Wholesale vs. Correspondent Lenders (How Customers Are Acquired)

Mortgage Bankers vs. Portfolio Lenders (What Happens to Your Loan)

2. Mortgage Brokers

Mortgage brokers are like a matchmaking service: They match you, the borrower, with a lender. They review your personal financial information and look over an array of lenders and try to match you with one who will give you the best rate and terms. The advantage is choice because the broker will have lots of lenders to match you with; the disadvantage is that once the match is made, the broker out of the picture, so you may have difficulty staying in close touch with the person who is underwriting and funding your loan.

3. Loan Officers

Loan officers find new clients, counsel borrowers on how to choose the best mortgage and fill out loan applications. They typically make their money through commissions on the loans. Loan officers can also be mortgage brokers if they also process and broker loans. Loan officers are sometimes called mortgage consultants, mortgage loan originators, home loan consultants, and mortgage planners.

You will find a wide array of different types of lenders from Waterman Realty

Start shopping for customized quotes at, or check our directory for lenders in your area.

Qualifying for a Mortgage

A basic truth: A mortgage loan holds your house and land as collateral; it's not pound of flesh, but the loss can seem just as life-threatening.

In most cases, a lender does not really want to end up with your house. They want you to succeed and make those monthly payments that make the world (or at least the U.S. world) go 'round. So when you apply for a loan, the lender will scrutinize your financial situation to make sure you are worth the risk.

You need to get your paperwork in order before you find a lender, but first you should understand the basic facts.


Buyer’s Guide to Home Ownership-Find a Home

Where to Live?

Now that you've figured out what you can afford and how much you're going to have to budget for those monthly mortgage payments, you ask yourself, “Where should I live?”

Obviously, you want to find the right home, but before you do, you need to find the right neighborhood – the one that fits your needs.

Choosing a neighborhood

Before looking for the home that fits your taste and budget, it's important to get the facts on neighborhoods. In the end, you're not just buying a house, you're also buying into a larger community. What happens outside your door has great impact on the value of your home. That makes a difference especially in terms of resale value, should you ever choose to sell the house.

In addition to the financial impact that a neighborhood has on home values, there's an emotional component, too. That's why it's important to make a good choice for value and resale as well as a good choice for where you feel comfortable, whether it's a cozy cottage on a suburban cul-de-sac or a classy condo in a downtown high-rise.

How do you know whether a neighborhood is right for you? First, consider your lifestyle and interests. Where do you work, how do you get there and how much time are you willing to spend on your commute? One thing to keep in mind: Psychology experts who have studied happiness argue that you're more likely to be happy if you buy a smaller house with a shorter commute than a bigger house with a longer commute.

When it's time to relax, do you like to walk the dog, browse the shops or hit the clubs and cafes? Are there good services, amenities and schools? When you start to prioritize your preferences, you'll likely find your choices can quickly shrink to just a few neighborhoods that fit the bill.

When you've narrowed down your choices, then it's time to see how the neighborhoods stack up. Walk around and ask the people you meet about local parks and traffic patterns. Get online and research real estate data about the neighborhoods you're interested in. See the median home value for neighborhoods, median list and sale prices and much more.

Of course, few neighborhoods will meet all your criteria — and even fewer at prices most of us can afford — so don't be surprised if you have to make some compromises. (Everybody does.)

Predicting the future

Here's a situation you don't want to see: When Marcie bought her first home several years ago, she loved the fact that most of her neighbors had lived there for decades. They all knew each other, they'd watched each others' kids grow up and many even worked at the same company on the other side of town.

At least, that is, until the company closed, property values plummeted and for-sale signs began to sprout like mushrooms. Like many people, Marcie had bought her home for both its livability and its potential for long-term appreciation; now neither looked too promising.

Clearly, most home buyers purchase a home because they believe they'll enjoy living in it, but smart home buyers also buy for the future; i.e., as an investment that will appreciate over time and produce a profit when it's time to sell. And while it's hard to think about selling your home when you haven't even bought it yet, remember that an American typically moves 11 to 12 times in his or her lifetime. You probably will, too.

So, think about it: When you're ready to move on or move up, and potential buyers come to look at your home, would you rather they drove past junk cars and boarded-up storefronts or well-kept homes and vibrant businesses? Predicting the future of anything is tricky, but when it comes to neighborhoods, there are definitely clues.

Signs of the times

Many "macro-economic" factors can influence whether home values go up or down. Among the things to consider:

In the end, neighborhoods are always changing, and house values change right along with them. So when you're house shopping, look for one that you'll consider a comfortable home today and a smart investment tomorrow.

Buyer location checklist

Brokers and Agents: What Are the Differences?

What is a real estate broker? What is a real estate agent? What is a Realtor®, or a salesperson?

These titles can get confusing, so let's look at the differences between these terms and the role these professionals can play in a real estate transaction.

What Kind of Home?

There are many different types of homes, but the vast majority fit into one of several broad categories. Depending on your particular situation, it may be best to focus on one of the following:

Single-family detached

This can be anything from a 100-year-old handyman’s special to a designer home in the most posh planned community in town. Whether it’s a starter home or a starter castle, it is, by definition, a single house on its own parcel of land.

As the owner of a single-family detached home, you get to make all decisions (within reason) regarding exterior style, yard improvements and household rules (parking, pets, late-night noise, etc.). The flip side, of course, is that you also get to pay for all repairs and routine maintenance.


Condos, too, take many shapes and forms attached townhouses, warehouse lofts, high-rise apartments, etc., but all adhere to two basic principles:

For some buyers, a condo can be an excellent choice. They tend to be more affordable (lower construction costs, shared expenses), require less maintenance (someone else cleans the gutters and mows the lawn) and often have amenities (a pool or fitness center). The downside? More density, which can lead to greater noise, less privacy and potentially, less appreciation when you’re ready to sell.


It’s short for cooperative apartment, and although they’re not common (except in high-cost, high-density areas such as New York City), they are an option. They typically resemble condominiums, but instead of owning their own unit, co-op owners become shareholders in the corporation that owns the entire property. The corporation (through a board of directors) assesses monthly dues, manages the property and pays the mortgage and other bills.

More to the point, perhaps, shareholders get to vote on all major decisions, including who gets to live in the co-op. In other words, your fellow owners can turn down prospective buyers based on everything from financial concerns to perceived reputation (although, by law, they can’t discriminate). In other words, getting out (i.e., selling) can be just as difficult as getting in.

Town houses

The term “town house” or “town home” isn’t a legal one, but rather a decorative one. Simply put, it refers to homes that are individually owned (along with the land beneath them) but that also share common walls with one or more neighboring homes. From inner-city row houses (think “Rocky”) to downtown duplexes to golf-course villas, they occupy a sort of middle ground between condominiums and single-family detached homes.

Are they a good idea? It depends on your tastes and interests. Like detached homes, most provide a yard (although usually quite small); like condos, they often provide communal amenities (e.g., a swimming pool, tennis courts) but with the same noise, privacy and stylistic issues. And, assuming you’ll sell someday, it is wise to be aware that, all things being equal, town houses generally appreciate more than condos, but less than detached homes. However, they are usually cheaper than a detached home.

Buying Old Homes vs. New Construction

Picture the home you'd like to live in. Chances are it bears a passing resemblance to the one you grew up in. A traditional “Leave It to Beaver” colonial or, perhaps, a brownstone townhouse straight out of “The Cosby Show.” Then again, maybe that is not what you are looking for. Maybe you'd prefer something newer, something with contemporary style, the latest amenities and a lot less maintenance. Or maybe you're not ready for that whole “3 bedrooms, 2 bathrooms and 1.5 kids" thing at all, and a condominium or co-op fits the bill. When it comes to home buying, one size does not fit all. But it does pay to understand the differences when it comes to options between an older house and a new construction.

They Said It

"We wanted to live in one of those cool, funky neighborhoods, but we didn't want to have to renovate. It just made more sense to get into a new place." – Jeff W.

New House, New You?

Unless you are looking at a custom-built house on an individual lot, most new homes are built in developments with a unified style. These developments can be as small as a cul-de-sac, or as massive as a former farm field filled with dozens, if not hundreds of homes. Built to the latest codes and standards, they tend to be contemporary styled, energy efficient and often are more expensive than resale homes of a similar size. Sometimes, these types of developments can represent a savings over established developments with existing homes. Either way, the decision about whether to forgo an establish community is worth taking time to consider. Specific details vary, of course, but consider the pros and cons.

Pros and Cons of New Construction



Of course, one home buyer's pro ("No one has lived in it before us, so we won't inherit any problems.") can be another's con ("No one has lived in it before us, so we have no way of knowing about any problems."). Fortunately, there are ways to make sure the house you're buying is really the house you want:

Finally, consider the intangibles. Similarly styled homes attract like-minded buyers, and most developments are built with families in mind. Depending on your point of view, the consistency, conformity and kids playing in the street can be a blessing or a curse.

Existing /Resale Homes

They Said It

"We liked the charm factor of an older home -- even if it meant living in a construction zone for months during our renovation." - Leslie C.

Old = Charm?

With new developments springing up seemingly overnight, it's obvious that new construction is popular. And yet, most people buy a resale home; i.e., a home that someone else has lived in but is now on the market again. Call them used if you must — existing home sounds better — but they're the kind of houses that many people would like to call home.

Of course, there are pros and cons with existing homes, too. (That darling farmhouse with the big windows? It can be mighty drafty come winter.) Generally speaking, resale homes tend to be more available and less expensive than new homes, but they are also full of surprises.

The Pros and Cons of Resale Homes



As with new construction, there are ways to make buying a resale home less scary:

The bottom line on resale homes is this: Don't buy someone else's problems unless you can tackle the solutions. Find a house you like, consider its pros and cons — objectively, as well as emotionally — and think about the compromises you're willing to make. The more logically you approach buying the house, the more you're going to love living in it.

None of these licenses and designations by themselves can guarantee that any particular real estate professional is the right person to do the job for you. Many other factors weigh in: personal chemistry, location and experience, for example.

Who's on your side?

If you want your real estate agent to work for you, then it is important to understand their incentives and conventions, and the rules and laws under which they work. Some of these are universal, but real estate laws vary by state. Additionally, agents are individuals who can maintain various perspectives on their profession. If you want to be clear on the relationship you will have with your agent and the role they will play for you, ask them to clarify their position and which considerations they will take into account during the buying or selling process.

The "Law of Agency" says that the agent or broker's fiduciary responsibility is to the client. In legal terms, the client may be the person who pays the commission, or in states with assumed buyer's agency, the buyer may be the client. That means the agent you think is working for you, the buyer, may have a primary responsibility to the seller.

In that case, the agent must put the interests of the seller above yours, and even above the agent's own self-interest. This can restrict the flow of vital information, such as how eager a seller is to sell, from reaching you.

One way to avoid this is to hire a buyer's broker. In states with assumed buyer's agency, you must consent to this relationship, or the seller may yet become the client. An exclusive buyer's agent may be your best chance at 100 percent loyalty.

In the real world, there are also incentives, and a real estate agent has some competing incentives. In the short term, any sale sooner rather than later means a commission sooner rather than later for the agent. Yet in the long term, referrals are where most agents get their leads. In other words, they want to make sure their clients are happy with the price, house and service, so they recommend the agent and build their reputation in a community. And in any case the agent only makes a commission when the deal closes, so there is incentive to get the two parties to agree.

The buyer has influence over which incentives an agent responds to. Find your agent through referrals and recommendations. Once you have picked your agent, commit to them for a time, be honest about your expectations and give feedback about the search progress. If your agent knows that you will eventually buy a house using them in the process, then your agent will invest attention, time, effort, knowledge and money.

Dual agency

Dual agency exists when one agent represents both the buyer and the seller. It can also exist when the listing and buyer's agents work in the same office. This is tricky because the buyer's agent's allegiance is torn between the buyer and the brokerage.

In the case of one agent representing both parties, the agent can provide information about the property to the buyer, disclose all defects in the property, disclose the financial qualifications of the buyer to the seller, explain costs and procedures, compare financing alternatives and provide comps to both parties.

What the agent cannot disclose to clients under dual agency is more complicated. The agent cannot disclose confidential information about the clients without permission. Nor can the agent recommend to the buyer the price the seller will take other than the listing price. Conversely, the agent cannot recommend to the seller a price to accept or counter.

Some states prohibit dual agency. Many states require a written disclosure in the case of dual agency. The only upside to this setup is that because the agent is earning on "both sides" of the deal it's possible they will take a lower total commission, which could benefit the buyer in terms of the overall price paid. But don't ignore the issue: Pay attention to whose side the agent is representing. It may not be yours.

The buyer's agent

Some agents specialize in representing buyers and are not primarily obligated to the seller. Note the word "specialize." These agents could end up as dual agents; however, if the company they work for listed a home you are interested in buying, a buyer's agent's fiduciary responsibility is to you, not the seller. Unlike traditional ways of doing business, you may or may not sign an exclusive contract, and the agreement may state you are liable to pay a commission to the agent even if you find a home through other channels. Read contracts carefully to see if you have to pay the agent a commission if you find a FSBO (for sale by owner home) or other house by yourself. A buyer's agent can be paid by either the buyer or the seller.

Exclusive buyer's agents

Exclusive buyer's agents work for real estate companies that never represent sellers or list properties for sale. By utilizing the services of an exclusive buyer's agent, you can avoid conflicts of interest that may arise if a buyer client becomes interested in a property that is also listed for sale by a traditional buyer's agent or a property listed for sale by the company that traditional agent works for.

Saving on commissions

With more and more data about housing now available on the Internet, and with many consumers trying out new ways of transacting real estate, there are many more focused and prepared clients on both the buying and selling side of real estate transactions. Instead of touring with an agent, buyers do the legwork themselves — online. For the agents, this means working with clients who are probably more prepared to fast-track the home buying and selling process.

What had been a fairly standard 5- to 7-percent commission has been pushed down. In 2011, real estate tracking data showed that the average commission was just under 5.5 percent. This downward trend has been brought about by tougher economies in which buyers and sellers have pushed to save as much money as possible during what is often one of the largest financial transactions in their lives.

Additionally, new discount real estate firms have bucked the system and set up cheaper alternatives. These brokers say they offer sellers some of the same services as a full-service agent, but at greatly reduced commissions; traditional brokers say you get what you pay for.

Real estate firms that charge a minimum monthly fee and a few hundred dollars per transaction to the agents open the door to reduced commissions. Agents working with this system sometimes pay more out-of-pocket expenses, but they are not paying a big chunk of their earnings to the sponsoring broker.

Typically, a seller is the party who pays the brokerage fee. Buyers typically do not, as the listing broker pays a portion of his/her commission to the agent representing the buyer. However, the cost to pay the commission could be built into the price of the home. So, while buyers are not directly paying for commission, they are indirectly.

Fee-for-service brokers have a smorgasbord of services to pick and choose from. Just pay for the services you want to use. (This can get confusing at times because services seem to overlap when you aren't familiar with how real estate transactions work.)

House auctions are popular in some areas. Properties are posted on auction sites, and agents can bid, then negotiate commissions or fees in the event the bid is accepted.

All of these services can save you money, if you live in the right state. In some states, these kinds of services are curtailed or banned entirely.

A quick guide to agents and brokers

Real estate broker: Licensed by each state to act as an agent for principals in real estate transactions. A broker can be an individual or a large company or franchise.

Associate broker: Individual who has a broker's license but works under another broker.

Real estate agent: Licensed by the state to act as an agent for buyers or sellers but must work under broker supervision.

Dual agent: Represents both the buyer and the seller in the same transaction. Dual agency must be disclosed upfront to both parties in order to be legal. It is not allowed in some states.

Buyer's agent or buyer's broker: Represents the buyer in a transaction. A buyer's agent, under an agreement with the buyer, acts solely on behalf of the buyer. Buyer's agents will disclose to the buyer known information about the seller that may be used to benefit the buyer. Buyer's agents have duties of loyalty, confidentiality and obedience to their buyer clients. By law, buyer's agents must represent, advise, negotiate and advocate on behalf of their buyer clients.

Exclusive buyer's agent: Represents only the buyer in all transactions and works for a company that never represents sellers or lists property for sale.

Seller's agent or listing agent: Represents the seller in a transaction. A seller's agent, under a listing agreement with the seller, acts solely on behalf of the seller. A seller can authorize a seller's agent to work with subagents and/or buyer's agents. Seller's agents will disclose to the seller known information about the buyer that may be used to the benefit of the seller. Seller's agents have duties of loyalty, confidentiality and obedience to their seller clients. By law, seller's agents must represent, advise, negotiate and advocate on behalf of their seller clients.

Subagent: An agent who writes an offer for the buyer but who is not the buyer's agent. The subagent owes allegiance to the seller.

Transaction broker: A mediator who has no allegiance to either party and is hired to help the buyer and seller reach an agreement.

Single agent: Represents either the buyer or the seller in a transaction, but never both.

Realtor®: A member of the National Association of Realtors (NAR), the national trade association of Realtors that sets standards and ethics. A real estate agent does not have to be a Realtor.

Realtor–Associate: Some boards of Realtors™ use this term for salespersons or agents affiliated with member brokers.

GRI, CRS, CRB: Advanced designations earned by agents who have met certain continuing education and performance requirements. The acronyms stand for Graduate REALTOR Institute, Council of Residential Specialists, and Council of Real Estate Brokerage, respectively. There are many, many designations agents can earn; these are just a few.

Buying Foreclosures and Fixer-Uppers

"Free real estate!" "Save thousands on your next home!" "Make millions with no money down!!" Those ads and late-night commercials make it sound easy, don't they? The truth is, sometimes you can save money by buying a foreclosed home, but you need understand the process and determine whether the potential rewards are worth the inherent risks.

The Facts About Foreclosures

Simply put, foreclosure is the process by which a bank or other lender repossesses a home when the owner fails to make payments on their loan. And since banks make their money lending money, not managing property, they're often eager to unload their repossessed properties. The market did see a flood of foreclosed properties after the 2008 recession, but that did not diminish the need for potential buyers to be versed in the intricacies of buying one of these properties and the particular legal and financial constraints associated with them. Before you even consider buying a home in foreclosure, be sure to:

Finally, be aware that those late-night ads and inside guides have enticed a lot of people into pursuing foreclosure homes. Increased competition means more pressure (and yet even more stress) as well as fewer bargains. Like instant wrinkle removers and machines that promise four-minute, six-pack abs, the reality rarely lives up to the promise.

Fixer-Uppers: The Sweet Smell of Sweat Equity

Still looking for something priced lower than the average home in a certain area? If you're handy, have the time, and want to avoid the hassles of foreclosure sales, perhaps a fixer-upper is more your style. Neglected and in need of work, they're the kind of houses where a little "sweat equity" can create a wonderful home and a substantial return on your investment.

How can you tell if a fixer-upper is worth fixing up? There's no hard and fast formula, but there are several factors that can help you decide:

That last one may be the most important of all. Let's face it, repairs and renovations always take longer, cost more, and involve more stress than expected. That may also be why it feels so wonderful when they're done.

The Principle of Progression

A good fixer-upper offers a prime example of one of the main tenets of buying real estate: Whenever possible, buy the worst house in the best neighborhood you can afford. The reason is the principle of progression, a fancy way of saying that nicer, more expensive homes have a positive effect on the perceived value of their smaller, less expensive neighbors. Why? Because most people want to live in nice neighborhoods and will pay a premium to do so, even if it means getting less home than they might somewhere else. So, even if that long-neglected cottage has a bit more "character" than you'd really like, it may pay off in the long run.

For Sale By Owner Homes

Interested in buying a home for sale by the owner? The only thing to remember is that the people selling them are just like any other seller — only more so!

What sellers want: To make the most they can

For sale by owner (FSBO) sellers figure they can save money by not paying a commission to an agent. Contrary to what many buyers believe, however, this doesn't mean the FSBO seller wants to pass any of those savings on to you.

This is certainly the case with a seller who, for whatever reason, doesn't have much equity in the home; he doesn't feel he can afford to pay the agent's commission, much less give you a break on the sale price.

In a hot "seller's market," when homes are selling at or above the listing price, the FSBO seller has even more incentive to pocket as much of the sale price as possible.

All sellers want every penny of the asking price

FSBO sellers often set that price by looking at listing prices in the area, not at comparable actual sales prices. As a first-time buyer, you should be armed with good comps when you enter negotiations.

If the housing market is slow in your area, even a FSBO seller should be willing to negotiate. With a set of comps in hand, you should feel comfortable making an offer that might be well below the asking price. Make your case using sold properties – not homes currently listed for sale.

Do your due diligence

As a buyer you need to do all the same things you would if the house were being sold through a real estate agent:

Potential anomalies to bear in mind

Sellers who are not using a real estate agent may be doing so for reasons that can make for truly difficult dealings. Some sellers are so stubborn and unrealistic about pricing their property that they have passed from one agent to another until no agents will take the listing.

Or the seller may have been told that he needed to bring the home up to code, or to make sufficient repairs to bring it up to an acceptable standard to put on the market. Rather than go to this trouble and expense, the seller may have decided to sell the home himself.

With a FSBO you need to get answers to some additional questions:

FSBO and your agent

Say you've been surfing the FSBO sites online and have found one or two homes that look interesting, or you've seen some while driving around your desired neighborhood. Let your agent initiate contact with the seller and get all the usual information about the home. (If not, you can approach the seller yourself, of course.)

A qualified buyer is nothing to sneeze at, so in many cases, the FSBO seller will be willing to work through your agent. The agent would handle all the paperwork and ensure that the closing process moves along smoothly.

This arrangement — a "one person listing" — means the agent will be paid a small commission, or a flat fee (ranging from $500 to $1,500), if the sale goes through to the specific buyer (you) named by the agent. (Check with your agent to be sure this type of listing is allowed in your state.) Flat fees are not unusual in situations where the buyer and seller have found each other independently of an agent, but where one or both parties want a real estate professional to handle some or most of the rest of the transaction.

Usually the agent will negotiate his or her fee with the seller. If the seller refuses to compensate your agent, however, and if you think this is the house for you, you can work out an agreement to pay the agent yourself. As a buyer's agent, working for you and not the seller, the agent is obliged to do his or her best to get you a good price.

How to Value a House

Two things to consider in valuing a home:

The Zestimate® home value is a good starting point in figuring out the value of a home. It shows you how the home compares relative to others in the area, but you then need to add in all the other qualities that only someone who has seen the house knows.

Looking at "comps"

Knowing whether an asking price is fair will be important when you're ready to make an offer on a house. It will be even more important when your mortgage lender hires an appraiser to determine whether the house is worth the loan you're after.

Check on Zillow to see recent sales of similar, or comparable, homes in the area. Print them out and keep these "comps." You'll be referring to them quite a bit.

Note that "recent sales" usually means within the past six months. A sales price from a year ago probably bears little or no relation to what is going on in your area right now. In fact, some lenders will not accept comps older than three months.

Market activity also determines how easy or difficult it is to find accurate comps. In a "hot" or busy market, you're likely to have lots of comps to choose from. In a less active market finding reasonable comps becomes harder. And if the home you're looking at has special design features, finding a comparable property is harder still. It's also necessary to know what's going on in a given sub-segment. Maybe large, high-end homes are selling like hotcakes, but owners of smaller houses are staying put, or vice versa.

Real-Life Example

Who: A brother and sister were looking for a house to buy together in Honolulu a few years ago.

Circumstances: They wanted a place with room for their mother as well as for the brother and his wife to live.

The house: They found a good candidate near the university, tucked away with a few other small homes in an area surrounded by mid-rise apartment buildings.

The dilemma: Their agent (and, later, the bank's appraiser) had a difficult time finding comparable properties. Even though the housing market in Hawaii was jumping, none of the other small, older homes in the neighborhood had been sold recently, and no others were being offered for sale. However, the siblings had been house hunting for several weeks and believed the asking price was fair.

Solution: The bank's appraiser had to search for sales in other neighborhoods of about the same age and to make a number of allowances in order to place a value on the house. As it happened, the final appraised value was quite satisfactory to the bank.

Critical elements

The elements most critical to an accurate comparison are:

Sometimes, unknown or unexpected circumstances can skew prices:

What's it worth to you?

If you're working with an agent, you may find yourself experiencing some upward pressure: "Yes, it's priced a little higher than you were looking for, but it's got [pick one: an extra bedroom, a really great backyard, a family room, a pool]."

To be fair, first-time buyers, and even experienced buyers, can apply this pressure all by themselves: "Gee, look at this one: For just a little bit more we could get ..."

Amenities such as new wall-to-wall carpet or a swimming pool might be a real selling point for some buyers. If you're not one of them, you need to make this clear to your agent.

For one thing, you'll establish that you're serious about your budget. It will also help the agent negotiate for you later. The new carpet is actually a negative if you'll want to tear it out to get to the hardwood floor underneath.

Also, be sure to compare the listing description to what you see. Is everything there that was promised? Do those new appliances come with the property, or are they leaving with the seller? This can mean the difference of several thousand dollars in upfront costs to you.

Question anything that's not clear. Sometimes a listing will say something like, "square footage doesn't match tax records." What does that mean, exactly? Is there an addition that was made without permits, for example? That might be OK for now, but how will that affect the resale value of the home?

Anatomy of a Buyer's Offer

Purchase offers are known by different names in different parts of the country, including:

The documents themselves vary according to the provisions and requirements of state and local jurisdictions. These days they usually are quite long.

In some states, only attorneys are allowed to prepare real estate contracts. In others, real estate agents may prepare such contracts using state-approved, pre-printed real estate forms. If this is the case where you are, your agent will have the printed forms that are standard in your area.

Do not skip this step

Most buyers are working with a real estate agent who supplies forms for entering into a real estate purchase agreement with a seller. The terms of the contract involve many significant points in addition to the purchase price, including financing, contingencies, title work and closing date. Due to the detail and liabilities associated with this transaction, it is important to consider enlisting the services of your own attorney to review the contract. The so-called “standard” contract may contain clauses that are not in your best interest. Real estate attorneys will often review or consult on a purchase agreement for a nominal fee, which is well worth paying.

As with any business transaction, each party has certain responsibilities. In real estate, the script goes something like this:

How to decide what price you will offer

To prevent worry on your part about your offer price, ask your real estate agent to prepare a CMA, or comparative market analysis. A CMA report will compile information from the comps you should already have seen — individual descriptions of similar properties that are or have recently been on the market.

The report will include the list and sales prices for properties that have recently sold as well as list prices for pending sales, meaning the seller has agreed to sell the house to a buyer, but the transaction hasn’t closed yet. (A property in this situation is sometimes described as “in escrow.”) The CMA can also include active listings and expired listings — houses that didn’t sell and were taken off the market.

Typically, the CMA report is designed to let you quickly compare elements such as square footage, age of the home, number of bedrooms and baths, size of major rooms and amenities such as fireplaces and swimming pools. It may also list property taxes and school districts, and it should also tell you how long each property has been or was on the market.

Using all this information, you and your agent can add or subtract dollars for the plusses and minuses of the other homes to come up with a probable market value for the home you’re interested in. (And be sure to check for the latest market values for your target house and others in its neighborhood.)

Factors to consider


Buyer’s Guide to Home Ownership-Buying the Home

Buying a Home: Negotiation Strategies

Negotiation strategy is different from negotiation style. From pit bull to diplomat, each of us has a personal style. But the strategy for negotiating the purchase of a home is based on facts: the real estate market at the moment of your attempt to purchase, the seller's requirements and the property itself (condition, amenities and comparative value in relation to other sold or listed properties).

The best real estate agents have tremendous expertise when it comes to market value in particular areas. In many instances, the most experienced agents have seen just about all the homes that have come on the market over the years. They also work with other agents and speak the same language. For buyers, that is the primary reason to work with an agent: They have the information and background to engage knowledgably in what can be a very intense, fast process.

Now, does that mean you can't undertake your own negotiation? Absolutely not. In fact, many buyers do. It means:

Tips for staying sane with or without an agent

Setting strategy

The local market's condition is the single-most important factor in negotiation strategy. And just like the weather, the landscape is a crazy quilt of micro-climates. Markets vary from place to place and neighborhood to neighborhood. The first thing you need to know is what kind of market you are in: a buyer's market; a seller's market, a balanced market or a market where red-hot bidding wars ensue.

Negotiating in a buyer's market

You have more leverage in a buyers' market than any other market type because there are more homes for sale than buyers to make offers. For sellers, especially those who have to move for whatever reason, this is the most nerve-wracking market. Properties take longer to sell, so sellers are less likely to allow potential buyers to slip their grasp. They may hate your demands, but they need to sell, so you can assume control of the negotiation.

Buyer's market strategy: Ask for the moon

Buyer's tip: You're most likely to win concessions and personal property in a buyers' market.

Negotiating in a seller's market

Pit bulls beware. In a sellers' market, buyers don't have much clout, and style matters. If the seller has a desirable home and doesn't like your offer, he won't invest time in negotiating with you. In a sellers' market, a good strategy is to make a straightforward, “clean” offer.

Buyers cannot procrastinate once they've found a home they want. Any agent worth his commission will urge you to make a quick decision, perhaps drawing up an offer the same day you tour the property.

Sellers’ market strategy: Keep it simple

Buyer's tip:Forget the wrangling and go for the house. You'll feel lucky to get it.

Negotiating in a balanced market

A balanced market feels less like a pressure cooker because there is a more equal supply of homes and buyers. Because neither side is feeling market urgency, personal priorities reign. Expect the back-and-forth counteroffer phase to take longer than it does in either a buyers' or sellers' market. After several rounds of paperwork, buyer and seller might agree to do a 50-50 split of their differences on price, terms and personal property.

Balanced market strategy: Split your differences

Buyer's tip: Both buyer and seller are likely to feel good about the transaction. They will each gain and give up something in the spirit of compromise during the negotiation.

Contingencies Are the Buyer's Friend

A significant portion of the purchase contract consists of clauses relating to conditions, or contingencies. These are items that must be satisfied within certain time frames in order for the sale to go through.

Think of contingencies as the legal loopholes that allow you to back out of the contract under certain circumstances. They serve as protection and apply a practical brake to the emotional rush that often drives a home purchase.

Keeping track of due dates

A useful tool during the weeks leading up to closing is a calendar or schedule that reminds you of dates by which certain tasks must be completed. Contingency clauses also specify when and how notice of cancellation must be given and received. Your real estate agent and the escrow company handling the transaction should be staying on top of this schedule, but it will help if you keep an eye on it as well. The others are juggling many schedules; this one isyour baby.

Contingencies are a double-edged sword. Some of them are designed to protect you from major disaster, letting you cancel the contract without penalty. By the same token, of course, the seller is allowed to rescind the contract if you don't meet your obligations.

Disclosure requirements

Many states now require sellers to give buyers a completed disclosure form within a few days of both parties having signed the purchase contract. Often the form contains a statement that the seller knows that the buyer is relying on the form's contents. Some real estate companies require seller disclosures, and agents can be held legally responsible for not disclosing defects to buyers.

Even where disclosure is voluntary and even if the sale is deemed “as-is,” sellers must disclose all material problems and defects that would affect the value of the home and the buyer's decision to purchase.

The disclosure statement covers everything from roofs, appliances, plumbing and termites to environmental hazards (abandoned oil or septic tanks, for example) and zoning changes or assessments that might affect the cost of living. If the property is in an earthquake hazard zone, flood zone or other area where government regulations apply special building restrictions or requirements, that must be disclosed as well.

The seller must declare whether he or she has knowledge of any of these problems or others such as past water or fire damage, even if repaired.

If you have not received a disclosure form by the deadline, you have the right to cancel the contract and get your deposit back. Once you receive the disclosure form, you have a limited time to decide what you want to do, including rescinding your offer.

The financing contingency

Perhaps the most essential contingency clause for most buyers is financing. This makes the offer conditional upon your getting a mortgage for the amount and at the terms you specified in the offer, including the interest rate, whether the rate is fixed or adjustable, the duration of the loan and the amount of the monthly mortgage payment. If you're assuming the seller's existing mortgage or the seller is “carrying back” a second deed of trust, those terms would be spelled out as well.

Having your financing pre-approved before you make an offer gives you an enormous step up, but other necessary items in the loan process — appraisal and homeowner's insurance — can cause the deal to fall apart.

How appraisals affect you

Your mortgage lender will require an appraisal of the property before issuing the loan. Most lenders require that the loan-to-value ratio be no greater than 80 percent. That is, the bank usually will not lend more than 80 percent of the appraised value. If the appraisal comes in lower than the purchase price you've agreed to, you may suddenly find yourself several thousand dollars short of needed cash at closing.

If the purchase price is in line with CMA (comparative market analysis) numbers, you could ask the mortgage lender to have another appraisal done or to override the appraisal value and issue the original amount you requested. If that doesn't work, a properly written appraisal contingency clause would allow you to renegotiate the purchase price so that it matches the appraisal, or to cancel the offer and get your deposit back.

Homeowner's insurance

To protect their investment, lenders require you to carry fire and hazard insurance. If you don't have insurance in place before closing, the lender won't come through with your loan. If you don't purchase your own policy, you will have to pay for the more expensive one the lender will take out for you. Failure to pay insurance premiums will result in foreclosure.

In certain parts of the country, lenders will require additional coverage for events — hurricane, flood, earthquake — excluded from ordinary policies. If your house is in a labeled flood zone, you will need to take out special flood insurance. This is sometimes available from the federal government's National Flood Insurance Program. Earthquake insurance is sometimes difficult to come by, so if you need it and can't find it, contact your state insurance commission.

To avoid last-minute problems, apply for homeowner's insurance as soon as the purchase contract is signed. Get price quotes from at least three companies and have the policy delivered to the escrow company or closing agent a few days before the scheduled close.

Make the purchase contingent upon a satisfactory Comprehensive Loss Underwriting Exchange (CLUE) report, or upon your being able to obtain affordable insurance. Your agent may need to attach a rider or an addendum to the purchase contract.

Don't be CLUE-less

Insurance companies have lately been running the equivalent of credit reports on properties to see how often these homes have been involved in insurance claims. If the home you wish to buy is deemed a bad insurance risk, you may be unable to get insurance at all or have to pay much higher rates.

One way to guard against this situation is to ask the seller for a CLUE home seller's disclosure report. CLUE, or Comprehensive Loss Underwriting Exchange, is a national database containing more than 40 million personal property insurance claims. The CLUE report for the house you wish to purchase will show all claims reported over a five-year period. This will show the date, type of loss and amount paid for claims such as water damage, mold and fires.

Only the homeowner or the insurance company can request the CLUE report, so you need to request it from the seller.

Sale of buyer's property

This is a contingency some buyers might feel safe in waiving if they've got a buyer for their other property. However, if you need the proceeds from this sale in order to close on your new home and the other sale has not yet closed, you'd be wise to leave the contingency in place. Otherwise, you could lose your deposit if your other deal falls through and you can't close on the new house. But recognize that this makes your offer much weaker to the seller.

Satisfactory survey

A clause making the purchase contingent on a satisfactory survey ensures that you know whether any structures of your new home encroach on your neighbor's property or vice versa. Your mortgage lender may want a valid survey as well. The question of who pays for it may be negotiated between you and the seller. If you're thinking of installing a major improvement such as a swimming pool or replacing a chain link fence with a beautiful rock wall, you will definitely want to know precisely where your property lines are. You will also want the seller to obtain written statements from any neighbors with whom there are encroachments that have previously been accepted.

Clear title and other claims

The title insurance company is charged with researching the title on your property to determine that you will have clear ownership and that there are no outstanding claims against the property. The most common type of lien against real estate is a mortgage, but liens for unpaid work performed on the property also occur. If you are purchasing a home from an estate, make sure that the estate has paid all estate taxes. If the estate defaults, the IRS can and will come after the new owner (that would be you) for delinquent estate taxes; the estate tax lien lasts 10 years. However, if you have title insurance, the insurance company will have to foot that bill.

Buyer's tip: Pay attention to the "exclusions" in your title insurance policy. They might make you wonder what the title insurance policy does cover. In general, it covers anything that is legally recorded and excludes anything that is "on the ground" (e.g., a fence that crosses the property boundary). It's the latter that could get you in trouble later on. If you see anything that makes you wonder about the property lines, ask for a survey paid for by the seller.

Condominium Documents

If you're buying a condo, you will at some point be handed a thick packet of documents from the condo association detailing the condo rules and regulations, covenants and financial documents. Your purchase can be contingent on your approval of these documents.

Review contingency

You can include a clause specifying that the purchase contract be subject to the review and approval of your attorney or subject to the approval of your spouse after he or she has had a chance to see the house in person. Review contingencies are often used to give you an “out” if you suddenly realize you've made a mistake. In some cases, you can also include a "neighborhood review" as a contingency, meaning that you have a certain amount of time to review the neighborhood to make certain it's where you want to live. However, given that most sellers are looking for the “cleanest” contracts, it's probably wise to thoroughly research a neighborhood prior to making an offer on a home.

Are Home Warranties Necessary?

A home warranty is a kind of insurance against defects or malfunctions that might occur in the home after the sale. Your real estate agent can advise you about the kinds of home warranties available in your area, including what they cover and what they cost. You can also look for home warranty companies online or in the real estate section of your local paper.

Typically, home warranties protect buyers (or homeowners) for such items as:

Some sellers include a home warranty as part of the sale — and if not, you might be wise to ask for one. Sometimes buyers and sellers split the cost since it offers peace of mind to both parties. Be sure to educate yourself as to what a warranty in your area covers and what it costs.

Some warranties exclude appliances from coverage. Some warranties also specifically exclude swimming pools and spas, or else require an additional fee to cover them.

Warranty policy example

How one warranty policy describes what is covered and what isn't:


Covered: All parts and components that affect the operation of the unit

Not covered: Ice-makers (except where noted, subject to all other agreement limitations), crushers, dispensers and related equipment, internal shell, racks, shelves, food spoilage, independent freezers (except where noted, subject to all other agreement limitations)


Covered: All parts and components

Not covered: Interior lining, door glass, shelves, rotisseries, meat probes, portable countertop units, lights


Covered: Motor, wiring, switches, receiver unit

Not covered: Garage doors, remote transmitters, track drive, sensors


Covered: Outlets, switches, junction boxes, breakers, main panel, sub panels

Not covered: Power failure/surge, D.C. components, low voltage, and accessories. All intercoms, fixtures, inadequate wiring capacity, cable wiring, fiber optic, access to wiring

What to look for

Whether the seller buys the warranty or you purchase your own, read it carefully. If what you read is not satisfactory, choose a different policy or a different company. Make sure the policy spells out:

Making an Offer on a House

In most areas, you will not be presenting your offer directly to the seller in person. Your goal when your agent presents your offer is to give the seller few reasons to say “No” and many to say “Yes.”

One effective technique, called “loading,” involves sending a separate statement with your offer that concisely recaps information gleaned from your comparative market analysis (CMA). This is especially important if your offer is below asking price; accepting a lower offer can be emotionally unpleasant for some sellers, and your letter should help ease them through that process.

Sample Letter to Seller

Dear Mr. and Mrs. Barnes,

Your property is listed for $189,000. To arrive at our offer of $178,500 we performed the following analysis.

The five homes below are comparable properties that have sold within the past six months. Since no two homes are identical, we have noted the unique amenities each offers.

[Addresses of five comps, each with the sale price and two or three amenities, such as a renovated kitchen, walk-in closets, a pool, a cabana, professional landscaping, new paint, new carpet or a three-car garage. Sale prices of most of the comps cluster around the buyers' lower offer price; the one or two properties whose sale price is at or near the sellers' higher asking price each has several of the more expensive amenities.]

The following five homes are also comparable to yours and are currently for sale in your area. Again, we have noted the amenities of each home:

[Addresses of five active listings and their asking prices, again with two or three amenities that the sellers' home does not have. Similar clustering of prices around the buyers' offer price.]

Among all these choices, we have decided that we wish very much to make your property our new home, and we are willing to pay a fair price for it. We are also committed to seeing that the closing process goes smoothly and quickly. To that end:

Thank you for your consideration, and we are hopeful you will accept our offer.

Bill and Barbara Wilson

Why should you need such a letter? To make sure the seller has all the facts. When your agent presents your offer to the seller's agent, he or she may or may not review the CMA with the seller's agent to bolster the case that your offer is a fair price. The seller's agent in turn may or may not present that analysis to the seller. In short, there's a high likelihood the seller never hears the supporting case for your offer.

However, both agents are required to convey all written documents to the seller, so putting it in writing and attaching it to the written offer ensures the information gets through.

If your offer is substantially below the asking price, a larger earnest money deposit may tip the scales in your favor. Or you could add a provision to increase the deposit to 5 percent of the purchase price upon removal of the mortgage financing or home inspection contingencies.

The other critical piece of presenting your offer is to give the seller a limited amount of time to respond. There is very little reason sellers shouldn't be able to make a decision within 24 hours, even if, for example, one spouse is out of town. The more time the seller has to respond to your offer, the more opportunity for other offers to be presented.

And don't underestimate the power of a message that appeals to the seller's emotional attachment to the house. Sometimes sellers will take a lower price just to be sure the house is going to someone who will treat it well.

To waive or not to waive?

Because each contingency in your purchase offer represents a chance for the deal to fall apart, sellers may be leery of offers with a number of contingencies. This is especially true in markets where several buyers are competing for the same house.

Buyers who have lost a couple of bids may be tempted to waive all contingencies. If you find yourself considering this step, think long and hard. Most real estate professionals counsel strongly against it.

One solution is to retain the necessary contingencies but shorten the compliance time. Rather than 15 days to respond to the seller's disclosure form, for example, you might specify giving your response in four days. Or you might specify having the home inspection performed within a week instead of 10 to 14 days.

By reducing the amount of time needed to work through all the contingencies, you are demonstrating your commitment to the purchase. This strategy also acknowledges the seller's desire not to have the property tied up overly long by a contract that might fall through.

Be realistic!

In a perfect world, your offer price will be based on facts, so that even if it's significantly lower than the asking price, the seller should be rational and recognize its validity. However, the seller's response is beyond your control.

If the seller rejects your offer without making a counteroffer, all you can do is move on.

At the same time, if you hear from your agent or the seller's agent that the seller has accepted or has countered with a purchase price you're willing accept, keep your elation in check. Don't do anything drastic like give notice to your landlord. Sellers have been known to tell their agent one thing on the phone and change their minds later. Remember: Nothing is enforceable until you see it in writing, and you respond in writing.


Buyer’s Guide to Home Ownership-Close the Deal


Closing on a House for the Buyer

There is closing and there is "the closing," the ultimate moment when you finally and legally become the owner of your new home. As with all things real estate, how the real estate closing is handled and by whom depends on where you live and local custom. But everywhere, when the deed is recorded, the title passes from seller to buyer.

This is called "closing" or "settlement" or "close of escrow." It sounds so simple, as if a single piece of paper could be handed from one person to another along with the keys to the front door! To that we say: Dream on. During the closing phase of your transaction, there are lots of folks involved in everything from making sure the seller really has the right to sell you the house to recording documents at the proper county office.

Who's Who?

Let's begin by explaining who handles the closing and what happens leading up to “closing day."

When you and the seller signed the purchase and sales agreement, you kicked off the closing phase. In fact, you even agreed on who would handle your closing in the contract. Often that's an escrow or title company recommended by one of your real estate agents. In some parts of the country an attorney handles closing. The point is that an impartial third party, the closing agent, will take care of things from now on. The closing agent handles all the paperwork, money and instructions.

Things will move along several tracks toward closing day, which is typically four to six weeks after you and the seller sign the contract. So what's happening during those weeks?

The Closing

When the closing agent is satisfied that everything is in order and all the instructions are prepared and distributed, it's time for "the closing."

The closing meeting structure varies by region. In many places the buyer and seller never see each other. You and your agent or attorney may meet with the closing officer, or just you and the escrow officer may take care of closing.

If you live where an attorney handles closing, all parties may be gathered around the same table.

Or you may be buying a house across the country and your closing is being handled by a branch office of a title company.

Because the federal government allows electronic signatures, it is now possible to conduct a paperless, online closing. Some experts are predicting a revolution in how real estate transactions are done in the near future; others see this day farther out because original signatures are the preferred method of document preparation so as to ensure that every interested party involved in the closing was able to read and verify all the documents. Closings usually take from one to two hours.

What to bring to closing

The documents

As the buyer, you actually have two closings: The closing on your loan AND the closing on your real estate transaction. Again, the documents you sign vary by where you live and the specifics of your transaction. Some may have different titles than those used here.

Documents related to closing your mortgage

You could have up to 24 different documents to read and sign related to closing your loan. Usually the number is smaller. Here is a description of a handful of them.

Documents related to your real estate closing

Now that you've signed for the money you have borrowed to buy the house, it’s time to sign the documents that make the house legally yours. Again, there may be a dozen different documents that need your signature.

Buyer's tips for "the closing day"

Buyers' Closing Costs Breakdown

At closing you will be given a stack of paperwork that shows line-by-line the cost of completing your real estate transaction. (These costs are in addition to your down payment, minus escrow money, that you also bring to closing.) It will be a staggering amount — totaling 3 to 5 percent of your purchase price.

Called 'closing costs' or 'settlement costs,' these fees mean you need to bring a certified check or personal check to your closing ceremony whether it takes place at a title company, a bank, or an attorney's office. The final costs to you may be quite different from your lender's original 'good faith estimate,' especially in the categories involving attorney or title fees.

The fees below are what is generally required, but every buyer will not pay every fee listed. Maybe you worked a deal with the seller to pick up part of the closing costs. And there are many geographic differences. Finally, all lenders do not charge every fee shown.


How much: Traditionally 6% split between buyer and seller agents; usually 3% to buyer's agent, 3% to seller's agent

Description: Payment for the work agents have done. All real estate agent/broker sales commissions are paid at closing.

Who pays: Seller pays unless local custom dictates otherwise, or a deal to split commissions was negotiated and written into the sales and purchase contract.

Note: These costs are not included in your lender's 'good faith estimate.'

General Loan Fees

Loan Origination Fee

How much: Usually at least 1 percent of the total loan amount. This fee is also called 'point' or 'points.' One point equals 1 percent of the loan.

Description: Lenders cover their administrative costs by taking this fee up front.

Who pays: Buyer

Note: In some areas seller pays half. Also, there are loans with no origination fee.

Loan Discount (Points)

How much: Discount on interest

Description: This fee refers to a one-time charge imposed by the lender or mortgage broker to lower the interest rate and therefore the monthly mortgage payment. The more points paid up front, the lower the interest rate. The loan discount is also called 'point' or 'discount point.' Note that the interest rate does not drop by one percent per point.

Who pays: The buyer pays unless the seller agreed to help in some way.

Application Fee

How much: Average is under $300, though some experts report charges up to $500.

Description: Most lenders charge an application or 'lender's processing' fee.

Who pays: Buyer

Appraisal Fee

How much: Expect about $300. It can be higher or lower, depending on the size of the property and appraisal fees in your area.

Description: The bank hires an independent appraiser to determine whether the property is worth the sales price you've offered for it.

Who pays: Buyer

Credit Report Fee

How much: This fee, also called a 'credit check fee,' averages about $25 per credit report checked, although some borrowers have paid three times more.

Description: The lender analyzes your credit history by scrutinizing credit scores and reports — a critical step toward deciding whether to loan you money and how much.

Who pays: Buyer

Lender's Inspection Fee

How much: Under $100

Description: If you are building a new home or buying a home that's under construction, the lender may charge an inspection fee.

Who pays: Buyer

Mortgage Insurance Application Fee

How much: Varies

Description: When the down payment is less than 20 percent of the purchase price, you are required to carry Private Mortgage Insurance (PMI), to protect the lender should you default on your loan.

Who pays: The buyer pays monthly payments for PMI until equity reaches 20 percent.

Note: Some lenders charge a fee for processing the application paperwork.

Assumption Fee

How much: Varies

Description: Buyers sometimes take over (assume) the seller's existing mortgage. If so, the lender may charge a fee.

Who pays: Buyer

Lender's Attorney Fee

How much: About $400

Description: If the lender involves an attorney in the loan transaction, the buyer can expect to be charged.

Who pays: Some buyers have balked successfully. Their lenders have dropped this fee.

Advance Loan Fees

How much: Varies

Description: The buyer may be required to make these payments at closing.


How much: Can range from one to 30 days' worth of interest

Description: Most lenders require the buyer to pay the interest that will accrue on their loan from the date of settlement to the first monthly mortgage payment due date.

Who pays: Buyer

Mortgage Insurance Premium

How much: Varies

Description: Some lenders require borrowers to pay their first year's mortgage insurance premium up front. Other lenders ask for a lump sum insurance premium payment at closing that covers the life of the loan.

Who pays: Buyer

Hazard Insurance Premium

How much: A full-year hazard (homeowner's) insurance policy premium payment

Description: This policy protects the lender against loss from fire, wind, or other natural disasters.

Who pays: Buyer

Flood Insurance Premium

How much: Varies

Description: Lenders may require flood insurance, depending on the property location.

Who pays: Buyer

Earthquake Insurance

How much: Varies

Description: Depending on the property location, it is possible the lender will require earthquake insurance.

Who pays: Buyer

Reserve Account Funds

Description: Your monthly mortgage payments are likely to include a pro-rated amount to cover payments for property taxes and homeowner's insurance, also called 'hazard' insurance. This money is held in a 'reserve' or 'escrow' account by the lender who makes the payments for you. At closing, your lender may require you to pony up advance payments just to be sure the reserve fund has enough money to pay the bills.

Homeowner's Insurance

How much: Two months' worth

Who pays: Buyer

Mortgage Insurance

How much: Two months' worth

Who pays: Buyer

City Property Taxes

How much: Two months' worth

Who pays: Buyer

County Property Taxes

How much: Two months' worth

Who pays: Buyer

Annual Assessments

How much: Two months' worth

Description: Annual assessments made by your condominium or homeowners association also may be included in your monthly mortgage payments.

Who pays: Buyer

Title Charges

Title Search

How much: About $200-$400

Description: A title search is done to make sure there aren't any unpaid mortgages or tax liens on the property.

Who pays: Negotiable

Title Insurance Fees

How much: This fee averages about $350 but can be as high as one percent of the loan, depending on your state of residence.

Description: Title insurance is a policy that protects the owner by guaranteeing the title to the property is clear.

Who pays: Buyer

Note: There may be a second fee listed on the closing document to cover a separate policy that protects the lender.

Documentation Preparation Fee

How much: Average about $200

Description: Lenders and title companies sometimes charge this fee, saying it covers the cost of preparing final legal papers.

Who pays: Buyer

Note: Experts call this a 'junk fee.' You can negotiate this away from title insurance or lender.

Notary Fees

How much: Varies

Description: This fee buys sworn testimony from a licensed notary public who has witnessed that the people named in the documents really are the people who signed them.

Who pays: Buyer

Attorney Fees

How much: The fees could be under $500 or more than $1,000, depending on the situation.

Description: In some parts of the country an attorney, not a title company, handles closing, and sometimes an attorney is hired by the lender to review certain documents.

Who pays: Buyer

Government Recording and Transfer Charges

There are great differences in the practices of state and local governments. Who pays which of these fees also varies, according to the terms negotiated in the sales contract.

Recording Fees

How much: Average about $100

Description: Covers getting the sale recorded in the public record.

Who pays: Usually paid by the buyer

Transfer Taxes

How much: Varies

Description: These can be significant in places where they are collected. Some governments also require the purchase of tax stamps.

Who pays: Buyer

Miscellaneous Settlement Charges

Whether buyer or seller pays the following fees depends on what sort of deal was negotiated in the sales contract.


How much: About $1,000

Description: Sometimes a lender requires a survey of the property.

Who pays: Buyer

Pest Inspection

How much: Varies

Description: Depending on location, a termite or other pest inspection may be required.

Who pays: Usually seller

Lead-Based Paint Inspection

How much: Varies

Description: Covers the cost of evaluating lead-based paint risk.

Who pays: Usually buyer.

Courier Fee

How much: Varies

Description: Charged if a courier picks up and delivers documents.

Who pays: Buyer

When Buyer Closing Goes Wrong

Real estate transactions can close in as little as a half hour, although most take longer. Some closings take hours, even days, longer than planned. It's a little like getting out a map and estimating cross-state driving time without knowing about a major construction project that has tied up traffic for miles.

Like the driver who asks about potential delays, the buyer who spends time researching potential problems in advance is the buyer most likely to reach the destination on time. Just remember that real life interferes with even the best-laid plans. There is no guarantee you will close on time.

Some of the delays in closing could be errors in documents, money arriving late or in the wrong amount and discoveries made during the buyer's final walk-through.

Common problems

Here are some common problems and solutions:

Problem: Errors in documents

Document problems can be as simple as a name misspelled or a transposed number in an address, or as serious as incorrect loan amounts or missing pages. All of these glitches can cause delays of hours or even days because everything has to be in order before closing.

Solution: Communicate and review

Ask to see every piece of paperwork as far in advance as you can. Pay particular attention to loan documents. Double-check loan and down payment amounts, interest rates, spellings and all personal information. Question anything you don't understand or that seems odd.

Problem: Money, money, money

You could have guessed that a number of potential problems have to do with money. Here's what happens:

You go to the bank the day before closing and arrange to have your down payment transferred directly to the closing agent. Sounds simple. But your transaction falls through some inexplicable crack at the bank, and either the money doesn't arrive by your appointment time, or it arrives short of the amount you need.

If it arrives short, you have the option of making up the difference, but personal checks are not accepted, so you'll have to go somewhere to buy a certified or cashier's check. Your closing is probably going to be rescheduled.


There are two ways to avoid this problem. One is for you to bring the down payment to closing yourself in the form of a certified or cashier's check. The other is to arrange the wire or bank transfer of funds so it reaches the closing agent a couple of days early. If you don't yet know the exact amount needed at closing, have more than enough money transferred. You'll get a refund later.

Problem: Where are the loan documents?

Let's say your loan package is being delivered to the closing agent by overnight express service. You arrive for the closing appointment to find that "pony express" is a better description. Is it lost? Misplaced? Will it arrive an hour from now? All you and the seller know is that closing has come to a screeching halt.

Solution: Your closing agent as best pal

Talk to your closing agent well ahead of your appointment - at least a few days. If you are working through a mortgage broker, they are often more than eager to assist you and your agent in expediting paperwork and guaranteeing its completion and arrival to the closing appointment. But you can assist in this process! Ask if everyone on all ends has everything they need. Between bank statements, tax returns and other documents, there are ample opportunities for items to go missing. On the morning of closing, if your agent and or lender is not in charge of corralling all parties and documents, you can make a call to verify that the file for your transaction is complete, and the documents are ready to sign.

Problem: It's a cloudy day in title land

Let's say the title company discovers that the seller never paid the contractor for the backyard fence, so there is a lien on the property, or that her estranged brother filed a suit claiming mom and dad left the house to him. The bottom line is that you, the buyer, have a problem. You need to insist on a clear, unclouded, problem-free title before closing. Your lender will insist on it, too.

Solution: Do your homework

You've heard it before and now again. Advance homework is your best defense against last-minute title surprises. You need to study the preliminary title report completed shortly after escrow opened. In fact, you need to read it as soon as you can get a copy. Often, the report goes directly to the lender. Arrange to receive your own copy.

At closing you'll buy title insurance to protect yourself in case the title company missed anything in its search, but that policy is only effective from the day of closing forward.

Problem: Last-minute requests

Lenders are cited by the experts as sometimes asking for more information at the last minute - copies of a rental agreement, a canceled deposit check, the original hazard insurance payment. Last-minute requests make for delays at closing.

Solution: Stay in touch

Talk to your loan officer in advance. Is there anything else you can supply to complete the file? Another idea is to bring every piece of paper you can think of to closing.

Problem: Oh, dear - discoveries during the final walk-through

You are one day from closing, and during the final walk-through in what is almost your home you find that the seller left piles of trash in every room, ripped the basin off the bathroom wall and gouged a fist-sized hole in the family room wall when removing the television set.

Solution: Jump on it right now

Your agent should work with the seller's agent to solve the problems. First of all, figure out what's acceptable, how much it might cost and how to make the seller pay. One way would be to negotiate a credit on your closing fees, meaning the seller pays more at closing. Another would be to have the appropriate amount from the seller's proceeds placed in escrow until the problems are fixed.

The point is, don't wait until closing to bring up any issues. Get them resolved beforehand. If you can't, postpone the closing while you work it out.

Buyer's tips

Title Insurance for the Buyer

The title is what gives you ownership of a property. As a buyer you want a clear or clean title — one that doesn't have liens for unpaid taxes against it, or claims of ownership by a faraway aunt or uncle, or a surprise easement through the backyard to reach power lines or a cell phone tower.

As for your lender, he wants to know that the loan is going to a legitimate transaction — the seller really does own the property and therefore can sell it to you.

The Title Search

In other words, nobody wants an unpleasant surprise after the settlement. So a couple of things happen. First, a title search is conducted. Public records are examined manually or by computer or both. It depends on how pertinent records are kept in your area. The searcher looks at deeds, wills, and trusts, tracing the history of the property back many, many years. Among the important questions is whether all past mortgages and liens have been paid. Does anyone hold an easement? Are there any pending legal actions?

But what if the title search misses something and it comes back to bite after you've moved in? This could happen. Buyers have even been known to lose their houses because of clouded ownership — some past problem that wasn't discovered.

Title Insurance

The way to avoid losing everything is to buy title insurance, which is available from title insurance companies, title agents, or, in some states, attorneys.

Title insurance is a one-time, up-front investment with rates based on the purchase price of your home and the type of policy you buy. Some are more comprehensive than others.

The policy protects you by making the insurance company liable for most claims against your ownership. If a critical document was overlooked during the title search and you actually lose the house, you'll likely receive damages — but only if you bought an owner's title insurance policy at closing. You can see why experts advise you to do this.

Make sure you understand the policy you're buying — what it covers and what's excluded. The owner's policy should cover your full sales price. If you want a policy that covers the value of your home as it increases, ask about adding an inflation rider.

Your lender wants a policy, too. He or she won't even loan you money unless you buy a separate lender's title insurance policy to cover the bank's interest in your property. The lender's policy should be for the amount of the mortgage.

Shopping for Title Insurance

The only time you can purchase insurance is at closing. Whether buyer, seller, or both pay for the coverage varies according to local custom. In some areas the seller buys the owner's policy and the buyer pays for the lender's policy. Both policies take effect on closing day.

A congressional subcommittee hearing on title insurance in early 2006 looked into why consumers were paying so much for title insurance. They found the industry rife with joint ventures between title insurance companies, real estate brokers, and lenders and heard that these deals are a factor contributing to rates higher than they should be.

The Federal Citizen Information Center website offers advice on title coverage and cost savings from the Department of Housing and Urban Development.

Buyer's Tip: You need a clear title on closing day and two title insurance policies — one to cover the owner, the other the lender.

How to Take Title

Many home buyers, especially first-time buyers, are at the closing ceremony signing the mysterious documents when the closing agent asks how they want to take title to the property — sole owner, joint tenancy, tenants-in-common ... Oops! Another new subject that sounds like a foreign language. Will this never be over?

Don't let your eyes glaze over. This really is important. There are tax and estate considerations to ponder prior to deciding. And you also need to ask whether you need to protect your home from, say, a lawsuit against your business or a malpractice suit against a partner or spouse.

Here are three of numerous ways to take title:

Buyer's Tip: Decide before you attend the closing how you wish to take title to the property. Consult an accountant, real estate attorney, or estate planner to learn the advantages and disadvantages of each type of ownership.

Recording the Deed

When you have title to your property, you own it. But the deed is the written document used to transfer the title from seller to buyer. It is only when the deed is recorded at the appropriate county office that your ownership is official.

Here's what happens. On the day of closing, buyer and seller sign numerous documents and the closing agent disburses the money. Then, depending on the time of day and practices in your area, someone from the title company takes the deed and other documents that must be recorded to the county office. This is usually done first thing in the morning or at the end of the business day. A recording fee is paid.

The county recorder assigns each document a number and records the time of entry to the minute. A copy is made for the county file. Your real estate transaction is now part of the public record.

The Keys, Please

Your sales and purchase contract spells out when you can take possession of your new home. But ask your real estate or closing agent whether you'll get the keys to the house at your closing ceremony or after the deed is recorded.

If you live where all parties gather with a closing attorney to sign documents, you might leave the meeting with keys. But if your seller is signing paperwork after you, it might be later in the day or even the next day before you get the keys, garage door opener, and security alarm codes.

Homeowner's Insurance for the Buyer

Ready to buy a home? One of the lender's conditions for loaning you money is that you buy a homeowner's insurance policy, also called hazard insurance. You must bring proof to closing that you have insurance in effect and that it's paid for 12 months, or your loan won't close.

What is proof? Your policy's declarations page, which shows the date your insurance went into effect, the policy period and the cost for 12 months. So bring either your whole policy or just the declarations page to closing. In addition, you'll need a receipt or letter from the insurance company to prove you've paid the bill.

It's just protection

The reason lenders require insurance is to protect their interest if catastrophe strikes. For example, if your home is destroyed by fire, the lender knows the mortgage will be repaid from the insurance proceeds.

But even if you don't have a lender, you should insure your home. It's a major investment that contains all your worldly possessions. Just imagine what it would cost to replace them.

You also need to protect yourself against lawsuits if someone is injured on your property. Let's say you hire a neighborhood kid to help you clean debris from your roof after a windstorm, and he falls and breaks an arm and ankle. If his parents are the type to file a lawsuit, you could find yourself needing an attorney and fighting for your very house and retirement savings.

Securing coverage

So how do you find the insurance to protect yourself and all you own? Many companies offer homeowner's insurance, so research and follow through on it prior to closing.

1. Your best bet is guaranteed replacement cost coverage, not an actual cash valuereplacement policy. An actual cash value policy covers the value at a depreciated rate.

2. Ask about and understand the personal property protection offered. You may be able to get a personal property replacement guarantee as part of your basic policy. If not, ask whether the company offers that feature as an add-on, called a rider. Again, the value of your used possessions is less than the cost of replacing them.

3. The amount of liability coverage you need depends on your personal worth and circumstances. The more you're worth, which is to say the deeper your pockets, the more you have to lose if you're sued. Some experts say you need coverage equal to double your assets. There are excess-liability policies available for those who need the protection.

4. Some possessions may need to be insured on separate riders. Say, for example, that you inherited a collection of antique tea cups that appraise at $50,000. They need a separate rider.

5. Standard homeowner's policies do not insure against floods, earthquakes, hurricanes or wildfires, among other things. If your house is in a flood zone, your lender will require flood insurance. Otherwise, specific hazard insurance is up to you and will require riders separate from your basic policy.

Buyer's tip: You need to research and buy homeowner's insurance far enough in advance that it is in effect by closing day and you have proof in hand.

Explaining Escrow for Buyers

Escrow is not an everyday word for most of us. In fact, it's a confusing word because in a real estate transaction it has several meanings.

All of the above are accurate uses of the word. An escrow is something of value such as your earnest money check, or documents such as your purchase and sales agreement, that are given to an impartial third party to hold until specific conditions are met. When everything is finished — everybody paid and the deed recorded with the county, the escrow will close.

If you remember nothing else about the word escrow, remember the concept of the impartial third party — someone with nothing to gain or lose from your real estate transaction. Depending on where you live, that third party — an escrow agent, title agent, or closing attorney — is the person handling your escrow process.

They will juggle all incoming paperwork and money from buyers, sellers, agents, lenders, and assorted others. They will arrange the title search, give each party instructions, schedule the closing meeting, disburse all funds, and see to it that everything that needs to be recorded with the county is completed.

Hold-Back of Funds

There are circumstances when funds will continue to be held in escrow after the ownership transfers to the buyer.

For example, perhaps you've agreed to let the seller's family stay in the house for another week until school is out. You signed a "rent back" agreement, and under its terms the seller is paying you a daily rate to stay in the house. You likely were advised to have the escrow agent hold back a portion of the seller's proceeds until they've moved out and left the house in the condition specified in your contract.

Or perhaps you found something wrong on your final walk through the house. The seller agreed to make the repair, but the work couldn't be completed by closing day. Money is then held back in escrow to cover the cost.

If you're purchasing a new home, it is quite common to have funds held back in escrow until unfinished work is complete.

Close of Escrow

When buyer and seller have signed all the paperwork and all the funds have come in, the closing agent disburses the funds and oversees the recording of the documents with the county.

When the deed is filed, title to the property is transferred to you, the new owner. The deal is complete. The escrow is closed.

You and the seller will receive a final closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. File the statement with your most important papers. You'll need it when you file your next income tax return.