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The Everything Guide to Home Buying and the #1 Scam to Avoid

This home buying guide will help you find the perfect home at the best price possible

Even after the bursting of the great housing bubble, buying a home is still one of most American’s biggest financial goals. Owning your own home not only makes for a solid investment but also a pride of ownership you won’t find with other assets.

Putting tens of thousands down for a down payment and taking on hundreds of thousands in debt isn’t something you can just jump into though. Finding the perfect house that will be both investment and home requires some work on your part.

Do your homework though and you’ll find a place that will not only put a roof over your head but will help create the memories that will define your life.

It’s a long home buying guide. Even if you don’t read through the entire article, make sure you scroll to the end for a home buying scam that is costing buyers tens of thousands and how to avoid it.

home buying guide quote

Reasons Why You Should Buy a Home

I’ve owned seven homes, three in which I lived and the other four as rentals. The most recent home my wife and I bought in 2010, as a foreclosure and tore everything out to remodel. We built it into our dream home and still think back to the days spent there fondly.

Home ownership won’t be for everyone but there are some powerful reasons you might want to consider buying your own house. You may find other reasons but the those most often cited include a home’s role as a financial asset, pride of ownership and for lifelong stability.

  • Those mortgage payments represent a forced saving program for many people. If you have trouble fitting savings into your budget, buying a home may be the discipline you need to start putting money away for the future.
  • Besides a physical savings account, owning your home can be an investment as well. The return may not be as high as owning stocks but it can keep you from making some of the bad behaviors prone to in other investments like panic selling and buying at market tops.
  • A home may be one of the first real assets you own. A lot of people get a sense of pride from being able to own their home, a financial asset that increases in value, while so many people struggle from paycheck to paycheck.
  • Home owners report greater financial stability than renters. This could be a result of several factors including building equity to a greater feeling of responsibility in the community.

Reasons Why You Should Not Buy a Home

As strong as these reasons are to buy a home, there are also reasons you might want to hold off and continue to rent. Buying a home is a big decision, one of the biggest you’ll ever make, and you must look at both sides of the argument.

  • Even on a shorter 15-year mortgage, buying a home means staying in one place for a long time. If your job requires that you move around frequently or if you want to experience other cities before settling down, hold off buying a home until you’re ready to put down roots.
  • Some jobs may make it difficult to make payments on a house. If your income is irregular or there’s a good chance of layoffs in the future, taking on those mortgage payments might be a bad idea. Whether you’re secure in your job or not, always keep an emergency fund to help pay the bills when in need.
  • Consider renting if you have trouble paying your bills, either because of your income or for you just can’t seem to remember to make the payments. Paying late on your mortgage can destroy your credit score and defaulting means you’ll lose your down-payment and any equity in the home.
  • Finally, don’t buy a home just because you’re tired of looking. Wait for the home that checks all your boxes and don’t settle. Your realtor might get frustrated but you’re the one that will be living here for decades and you want to make sure it’s the right decision.

Is a Home a Good Investment?

Whether a home can be a good investment is a hot topic with good arguments on either side so I thought I would detail the case.

Let’s look at the components and historical returns to home ownership first.

  • You’ll save between 5% to 6% on the rent you would have paid. To find your rent return, divide the annual amount you pay in rent by the price of the home.
  • Home prices keep up with inflation because they are physical assets. Inflation has been weak over the last few years but the longer trend adds another 2.7% to the return on your home.
  • You get a deduction on your income taxes from the mortgage interest you pay. It’s not much but can add another percent return.
  • Slow population growth and suburban building means home prices don’t increase that much from year-to-year. There might be periods of booming prices like we saw in 2002 – 2007 but the real (after inflation) rate of return is closer to 0.2% over decades as reported by the National Association of Realtors.
  • There are costs to owning a home. Property taxes, maintenance and insurance deduct between 4% and 5% each year.

What is the return on home ownership

Add up all these factors and you get a total annual return of about 5% from home ownership. Your own return will depend on specifics like how much you pay in rent, property taxes in your area and costs for maintenance.

That 5% return is low compared to stocks…if you compare it to the 8% annual return on the stock market.

The problem is that few investors ever see those market returns. Between investing costs and poor investor behaviors like panic-selling, the average stock investor booked a return of just under 3% a year over the decade to 2013 according to research firm DALBAR.

Not only can owning your own home save you from poor investment returns but it’s also a diversifying asset. The return on your home will continue to rise even as your stock portfolio takes you on a roller coaster.

What to Do Before You Buy a Home

We’ll get into the home buying process soon but there are a few things you can do before you buy a home. These three steps will lower your payments, lock in an interest rate you can afford and help you in the negotiating process.

  • Try saving as much as you can, up to a 20% down payment for your home. It will take a while to save $40,000 or more but it will save you thousands. Putting 20% down will mean you won’t have to pay primary mortgage insurance (PMI) which can be up to 1% of your loan amount each year.
  • Start working on increasing your credit score. Pay down revolving credit card debt and other loans. Don’t apply for any credit within six months before you plan on getting a mortgage.
  • Get pre-approved for a mortgage before going house hunting. Getting an approval letter from the bank or other mortgage lender will help you negotiate a better price. It means the seller won’t have to worry about your financing and the sale can close quickly.

How to Estimate Your Home-Buying Budget

How much house you can afford is actually an easy calculation but one that gets so many homeowners in trouble.

You are going to be making mortgage payments for decades. It’s absolutely important to commit only to a payment you can afford. Fall behind on payments and you’ll not only lose your down-payment and equity but will put yourself through more stress than you can possibly imagine.

First, figure out what kind of a monthly payment you can afford. It’s best to leave some wiggle room here so don’t go to the very max in your budget. You might use your current rent as a starting point and add a couple hundred dollars if you can easily afford it.

Then use an online mortgage payment calculator like this one on LendingTree to find the loan amount that meets your payment. You can use the current interest rates and guess on the payment amount until the payment comes out to where you want it.

home payment calculator

Home Payment Calculator Example

On top of this loan amount, you can add your down payment to find the total home price that’s within your budget.

It’s important not to stretch this budget too much. You might be able to eke out high payments for a few months but stretching to make your mortgage payment for three decades just isn’t going to happen. It’s much better to buy an affordable house now and upgrade after 10 or 15 years if you can afford it.

Home Buying Traps to Avoid

My first professional job was as a commercial real estate agent. I’ve sold commercial and residential homes as well as owning and investing in property. I’ve made my fair share of mistakes and have seen some home buying traps pop up continuously.

Avoid these common home buying traps or risk getting stuck in a home you don’t like for decades.

  • Don’t let the realtor talk you above your budget. Realtors make money selling houses. They make a percentage commission on the total sales price which means they make more money by getting you to pay as much as possible. You know how much you can afford, stick to that budget and don’t feel like you need to spend up to that amount.
  • Don’t think bigger is better in home buying. A house is so much more than just its size. Get an idea for the number of bedrooms you need and don’t make square feet a criteria in your house hunt. Fixating on finding the biggest house can make you miss out on some great features and overspend your budget.
  • Get to know the neighborhood and neighbors before you buy. The most amazing house can be a nightmare if you don’t like the neighborhood. Visit the house a few times during the day and night to make sure there aren’t problems at specific times. Talk to a few of the neighbors to get more information about the area and if you can get along.

9-Step Simple Home Buying Process to Find Your Dream Home

So, you’ve looked at both sides of the home buying argument, put together a down payment and decided it’s time to start hunting. Now it’s time to start the home buying process.

  1. Start by deciding the neighborhoods where you’d like to live. This means comparing quality of schools, amenities like parks and restaurants as well as looking distance from your job and the city center.
  2. Decide on how many bedrooms, bathrooms and other features you want as well as what style of construction you like.
  3. Talk to a loan officer or a mortgage lender about getting pre-approved up to a certain amount.
  4. Call a couple of realtors or ask your friends for referrals on real estate agents. Be as detailed as possible with what you want in a home and the areas in which you’d like to look.
  5. Real estate agents will come to you with available properties but you can also search online through sites like Zillow.
  6. Plan on spending your weekends looking at houses, maybe for quite a while. Be patient and don’t settle or let the agent talk you into buying a home. Only agree to look at homes in neighborhoods in which you would be 100% comfortable living.
  7. Don’t make an offer for a house on the spot. Go home and do some research. You can use online real estate sites or your local property tax assessor to compare home prices. Find an average price per square foot that similar properties are selling for in the same neighborhood. This will give you a better idea of what the house is actually worth and may give you ammunition in the negotiating process.
  8. Don’t avoid the inspections. Unless you are a licensed professional, home inspections will catch a lot of problems that you won’t see.
  9. The final step in the home buying process is closing. This is where the buyers and sellers meet at the closing agent to sign the final paperwork and transfer ownership. You’ll get the keys and will have a new home.

Most Common Home Buying Questions

There will always be questions when buying a home, many of which will be totally unique to the situation. There are some common questions that come up with almost all purchases.

How long does it take to buy a home?

first time home buying guide stepsIt generally takes between 30 and 45 days to gather all the documents and perform inspections to close on a home purchase unless you are paying cash.

Can I trust my real estate agent?

Real estate agents and Realtors you sign with as representatives have a duty to look after your best interest. Any agent you have not signed with does not necessarily have this obligation. If an agent is representing you and the seller, they must disclose it and are supposed to stay impartial in the process.

This doesn’t mean a real estate agent isn’t going to try to persuade you into buying a home. They only make money when you buy so they want you to find something. They may also try to get you to push your budget a little. Just remember, your budget is the maximum you want to spend, not the amount you have to spend.

It’s always best to take a friend along with you when looking at homes. Find someone that is impartial and isn’t afraid to play devil’s advocate. It might annoy the real estate agent but it will help you answer all your questions before signing that offer.

What credit score do I need to buy a home?

The higher the better but generally you’ll need a FICO score of 620 or higher to get a home loan. This is the cutoff for ‘prime lending’. Banks will make sub-prime loans but the rates will be much higher and the requirements are strict.

Spend a year working on your credit score before you buy a home. The extra points you add to your FICO will save you thousands a year.

Are there special home buying programs that can help me?

Yes. Loan programs from the Veteran’s Administration, the USDA and the FHA can help some borrowers get better rates. Understand these programs and if you are eligible.

What is the minimum down payment I need to buy a home?

Most will say you can get a home loan for as little as 3% down with the help of some programs. This is technically true but sets you up to pay higher rates and thousands in primary mortgage insurance. That’s going to mean a much higher monthly payment.

Aim for at least 10% down as a minimum but putting 20% down will save you from paying PMI.

How low will a seller go in price negotiations?

This can vary but most sellers understand they will have to knock about 5% off from the asking price in negotiating. You can get an even better price if you come with non-price asks and evidence for how much the house is really worth.

Beyond researching similar home sales in the area, come to the negotiating table with things you can ask for that don’t include price. Ask the seller to cover more inspections or that they fix miscellaneous things in the house.

One last warning, how to avoid the biggest home buying scam ever!

We haven’t talked about home buying scams but there is one out there that I need to highlight. A friend of mine nearly lost her $50,000 down payment this summer and the scam is being used across the country.

Mortgage lenders know about it but are doing nothing to stop it.

Here’s how it works. You find your dream home and everything looks ready to go. Your closing date approaches and then you receive an email at the last minute. It’s an email directly from the closing agent, the company that is arranging the transfer of funds and final signatures.

The email includes new closing documents with a change to the wire instructions for your down payment. Everything looks legit so you call your bank to wire the funds before heading off to the closing.

When you get to your closing, the agent says they sent no such email.

What happened? Hackers have been targeting closing agent computer systems for years. They gain access and then wait until a closing date is set for a home purchase. Hours before the sale is set to close, they send the fake email to the buyer about the new bank instructions. The buyer trusts the email because it’s coming from the closing agent so they send their down payment…to the scammer’s bank account.

The closing agent for my friend knew this was a potential problem. They and the real estate agent had seen it happen before but didn’t warn my friend. It was only after five weeks and innumerable calls with several banks that she was able to get her down payment back. Other buyers haven’t been so lucky.

Always call the closing agent personally to confirm any new documents, especially those sent at the last minute!

That’s not to scare you out of buying a home. Scams still account for a fraction of a percent of home sales so don’t feel like it’s a dangerous process.

The home buying process can be a stressful one and it’s one of the biggest decisions you’ll make in your life. That doesn’t mean it can’t also be fun and lead to finding your dream home. Understand exactly what you want in a home and be patient until you find the perfect home.

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