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    Home Buying 101: From Mortgages and the MLS to Making the Offer and Moving In, Your Essential Guide to Buying Your First Home
    Home Buying 101: From Mortgages and the MLS to Making the Offer and Moving In, Your Essential Guide to Buying Your First Home
    Home Buying 101: From Mortgages and the MLS to Making the Offer and Moving In, Your Essential Guide to Buying Your First Home
    Ebook319 pages4 hours

    Home Buying 101: From Mortgages and the MLS to Making the Offer and Moving In, Your Essential Guide to Buying Your First Home

    By Jon Gorey

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    About this ebook

    Learn all the ins and outs of buying a home and give yourself an advantage in the real estate game with this essential house-buying guidebook.

    Buying a first home can be both exciting and nerve-wracking. Will you qualify for a mortgage? Is your dream home achievable? How do you make sure your offer will beat others? Don’t worry—now you can arm yourself with the information you need to know before you begin the hunt!

    In Home Buying 101, you will learn all the skills you need to find the right house at the right price, with financing that fits your budget. Full of nuts-and-bolts advice and organized in an easy-to-read format, this book will teach you all the basics of:
    -Deciding the right time to buy
    -Getting your finances in order
    -Choosing a realtor—or going solo
    -Assessing neighborhood/comps
    -Deciphering the MLS/reading the listings for clues
    -Buyers’ vs. sellers’ markets
    -Types of mortgage loans
    -Property insurance
    -Making a smart offer

    With the help of this guide, you’ll learn how to find the house of your dreams at a price you can afford!
    LanguageEnglish
    PublisherSimon & Schuster
    Release dateFeb 15, 2022
    ISBN9781507217412
    Author

    Jon Gorey

    Jon Gorey is an award-winning freelance writer covering real estate, home improvement, travel, family, and personal finance. Based in Boston, Jon writes most frequently for The Boston Globe and The Boston Globe Magazine, as well as his real estate and home improvement blog, House & Hammer; other notable bylines include Apartment Therapy, Mommy Poppins, and Boston Magazine. Jon has received a dozen awards from the National Association of Real Estate Editors (NAREE), including the President’s Gold Award for Best Freelance Collection in 2019. 

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      Book preview

      Home Buying 101 - Jon Gorey

      Chapter 1

      Are You Ready to Buy a Home?

      You’re about to embark on a momentous journey. If all goes well, by the time you finish reading this book you may literally be in a different location, even if it’s just across town.

      But you’re in for an emotional odyssey as well. Buying your first home is one of the most exciting things you can do—a whole new world of possibilities. It may also push your budgetary boundaries to the breaking point and test your patience and resilience. You are bound to face moments of disappointment and worry along the way—together with relief, excitement, and immense pride and satisfaction. So: Are you ready?

      WHY BUY A HOME?

      Define Your Dreams

      Owning a home has long been considered a cornerstone of the American Dream—one that doesn’t appear to be going away anytime soon. A recent survey of teens and young adults in Generation Z revealed that 86 percent plan to own a home one day.

      So there’s a good chance homeownership is something you’ve always wanted and imagined for yourself. But as you begin the exciting process of turning that vision into reality, it’s worth reflecting on the contours of your particular homeownership dream.

      The enduring image of home is that of a single-family house (an increasingly larger one) with a white picket fence outside. But that version of the American Dream is hardly the only one available, and it may not fit your wants, goals, or circumstances. So don’t force yourself into someone else’s idea of what home should look like. Think about what you want from a home.

      Home is what and where you make it. It can be a cabin in the woods or a condo in a high-rise building downtown. It can be a place to set down roots and make lasting memories, or part of a long-term investment strategy (or both). Buying a home is your chance to define your dreams.

      Most Buyers Would Prefer a House to a Condo—If They Can Afford One

      Nine out of ten home buyers (89 percent) said they would prefer a single-family home with a backyard to a condo closer to their workplace, according to a 2019 study by the real estate brokerage Redfin.

      REASONS TO BUY A HOME

      Homeownership isn’t just about achieving a personal life goal, however. There are some very practical reasons to purchase a home, and they boil down to two important considerations.

      Take Control of (and Pride in) Your Housing Situation

      In some ways, renting affords great freedom: You can bounce around to find a better deal, move back in with family to cut expenses if you lose a job, or even sublet your apartment if you want to skip town for the summer (if your lease agreement allows it).

      At the same time, you’re at the mercy of the market and your landlord. Your rent can spiral higher and higher each year, whether or not there have been any upgrades to your apartment. And if your landlord decides to sell the building, you may have to find a new place to live on fairly short notice, no matter how much you like your existing home.

      Homeownership pins you down to some degree, but it also puts you in the driver’s seat. As rents rise, your mortgage payment will pretty much stay the same (assuming you’ve locked in your interest rate), aside from potential increases in your property tax bill.

      Owning your home also puts you in charge of your future. You can stay in your home as long as you like, sell it when you’re ready to move, and, unless you stop paying your mortgage, nobody’s going to force you to find a new place to live.

      When it all comes down to it, there’s something innately fulfilling about being the king or queen of your castle, so to speak. Most homeowners report feelings of self-improvement and emotional investment after buying a home, as well as a deep sense of pride and satisfaction.

      Start Building Equity

      Over the past century, homeownership has been the leading engine of wealth creation among middle-class Americans. It’s such a powerful tool for generational wealth building, in fact, that much of the vast racial wealth gap in our country today can be traced to policies such as twentieth-century redlining practices, which denied Black Americans the same home buying opportunities that white Americans enjoyed.

      But despite what you might see on house-flipping shows, owning a home is not a get-rich-quick scheme—even if it seems that way when nearby homes inspire bidding wars. Hot markets can cool down fast: During the Great Recession of 2007–2009, many people, including both ordinary homeowners and savvy investors, lost a lot of money on their homes when prices cratered.

      The real wealth-building magic of home ownership is very simple: It’s a forced savings vehicle.

      We all need a place to live, and when you own your home, much of the rent you pay goes to your future self. As you pay down the principal of your mortgage, and as the home appreciates in value, you gain more and more equity in your home.

      What Is Home Equity?

      Equity is your ownership stake in your home. It’s the difference between what you owe on it and what it’s worth. For example, if you buy a $350,000 house with a $300,000 mortgage, your initial equity stake is $50,000. If, after a few years, you’ve paid down your mortgage balance to $250,000, and your home has appreciated in value to $400,000, now you have $150,000 in home equity.

      Home equity is a cornerstone of middle-class wealth. Many homeowners later borrow against their home equity to make other investments in their financial future, whether it’s paying for college, starting a business, or funding a remodel that further increases their home’s value.

      While real estate is generally a very good investment, and home values have outperformed inflation over the long term, it’s not a guaranteed money maker. But that’s almost beside the point. Because even if your home’s value somehow never goes up—even if it decreases in value, as many homes did during the Great Recession—if you simply pay down the mortgage, after thirty years you’ll have a free place to live. (Okay, almost free: You’ll still owe taxes and insurance, which we’ll discuss next.)

      WHAT IT MEANS (AND COSTS) TO BE A HOMEOWNER

      If You Don’t Have a Go-To Plumber, You Soon Will

      The leap from renting to owning your own home is a big one. In a sense, it’s like leaving a salaried job to be your own boss: You’re taking on more work and responsibility in exchange for more control and the potential for bigger financial gains.

      But here’s another way to think about it: Consider the difference between playing with your three-year-old nephew for an afternoon and raising a toddler yourself. Both can be wonderful experiences—but in very different ways.

      Babysitting can be challenging, to be sure. In between the giggles and hugs, there may be a tantrum or a scraped knee, and you may have to pay for movie tickets or ice cream cones. But when it comes down to it, you’re off the hook once you bring the kid back to his folks.

      His parents, meanwhile, are the ones who might be woken up at 3 a.m. if the little guy has a nightmare, who may themselves have stress dreams about his safety, and who probably pay hundreds of dollars a month for his healthcare, food, and preschool. Yet most parents would no doubt tell you their child is the best thing that’s ever happened to them.

      Like raising a child, owning a home typically inspires immense pride and joy. But because you’re so invested, it can also be a source of nonstop worry and ongoing expense.

      THE BUCK STOPS HERE

      As a homeowner, you’re the boss. That means you can paint your walls whatever color you like without asking anyone’s permission. Heck, you can even knock some of them down if you really want to (but please ask a licensed contractor first).

      It means that, not only can you get a dog but you can install a fence in the yard and cut a big hole in the back door to install a pet door. And you’re the one who will reap the resale rewards of any home improvements you make.

      But unless you buy a condo in a full-service building, it also means that when the shower turns cold on a chilly winter morning, you’re the one who has to hire and pay for a plumber to replace the hot water heater. You’re the person on call when something leaks, whether it’s the kitchen sink or the roof. When the refrigerator or the oven breaks, you’re the one suddenly spending hundreds of dollars at the hardware store on a Tuesday when you should be at work.

      How Long Do Appliances Last?

      An older study by the National Association of Home Builders estimated the life expectancy of various home components from furnaces to flooring. Among the shorter-lived appliances were dishwashers, which last about nine years on average; washers (ten years); and water heaters (ten to eleven years). Refrigerators and dryers could be expected to last thirteen years. A wood deck ought to make it to twenty years, while wood floors can be expected to last a lifetime.

      THE COSTS OF HOMEOWNERSHIP

      While house hunting, you’ll understandably focus on your monthly mortgage payment and how much home that budget can buy (something we’ll cover in Chapter 3). But there are other expenses you need to prepare for too.

      Home Insurance and Property Taxes

      These costs are lumped on top of your monthly mortgage payment or included in the condo fee, so hopefully you’re already aware of them; most online mortgage calculators include estimated values to help you set your budget, but they will vary based on your home’s value and location.

      The average homeowner’s insurance policy costs north of $1,300 a year, according to Bankrate. Meanwhile, the Tax Foundation estimated that annual property tax rates ranged from 0.3 percent to 2.21 percent of a home’s assessed value in 2020. And unlike the fixed portion of your mortgage that goes to the bank, taxes and insurance premiums will generally rise as time goes on.

      Water, Sewer, and Utilities

      Water, of course, is almost always included in rent; sometimes even heat or electric service is too. These utilities may be included in your condo fee, but one way or another, you’ll be paying for all of them as a homeowner, in addition to your mortgage.

      Maintenance

      Experts suggest budgeting 1 percent of your home’s value a year for maintenance—on a $400,000 home, that’s a whopping $4,000 a year.

      That might seem a ludicrous price for basic upkeep—which you might imagine includes, say, painting the deck every few years or getting the gutters cleaned. But the fact is, most home systems only last about thirty years, and if you spread out their replacement costs, they add up.

      Over the course of fifteen years, for example, you might have to replace the roof ($10,000) at some point, the furnace or boiler ($5,000), and maybe the water heater or refrigerator too. Spread out over time, and that’s over $1,000 a year right there, even before you pay for a chimney sweep or septic clean-out.

      Time

      Owning a home—especially a house with a yard—will also eat into your free time. There’s grass to mow, leaves to rake, snow to shovel. There are drains to unclog, lights to fix, railings to repaint. And there’s no landlord to do any of it for you.

      You might find a soothing sense of satisfaction in this work, but there’s no question that it will demand some of your weekends. As one home inspector said, only half-jokingly, If you’re buying an older single-family house, sell your golf clubs, because you’ve got a new hobby now.

      HOME BUYING READINESS CHECKLIST

      Are You Ready to Buy a Home?

      Between the benefits, responsibilities, and financial obligations, the decision to buy a home is a big one. And it’s not for everyone—at least, not at all times. Ask yourself these questions to determine whether you’re ready to buy a home right now.

      Are You Prepared to Stay in One Place for Four Years or More?

      Most experts say you should plan to own a home you buy for at least three or four years, and longer if possible, to hedge against economic risks. Homes are generally a safe investment—but that’s over the long term. In the short term, housing prices can fall just like the stock market. And it’s a lot more tedious, time-consuming, and expensive to sell a home than a share of Apple stock.

      It’s Expensive to Sell a Home

      Realtor commissions average more than 5 percent of a home’s sale price—and they’re paid entirely by the seller in most cases. That means you need to sell your home for at least 5 percent more than what you paid for it just to break even. So unless your home has had time to appreciate in value, you may lose money when you go to sell. Meanwhile, even if the home has risen in value, you may need to pay capital gains tax on any home sale profits if you’ve lived in the property for less than two years.

      Do You Have a Down Payment and an Emergency Fund Saved Up?

      While there are first-time home buyer loans that don’t require the traditional 20 percent down payment, even the more generous programs generally require some down payment, often around 3 percent to 5 percent of the purchase price. On a $400,000 home, that’s $12,000 or more. In addition, most lenders want you to have enough cash left over to handle emergency repairs or to make a few months of mortgage payments if you should lose your job.

      If you don’t have that much in savings, you’re not alone—it’s the biggest obstacle for first-time home buyers everywhere. Turn to Chapter 2 for tips on saving for a down payment.

      How Much of Your Monthly Income Goes to Debt, Like Student Loans and Car Payments?

      When you apply for a mortgage, lenders will look at how much debt you’re obligated to pay each month—including your potential mortgage—and compare that to your gross monthly income. This is called your debt-to-income ratio, or DTI, and they want it to be 43 percent or less.

      If you earn $5,000 a month before taxes, for example, and $1,000 of that goes to various debts—such as car payments, student loans, and minimum credit card payments—that represents a 20 percent debt-to-income ratio. Add a $1,500 mortgage to the mix, and your debts will amount to $2,500 each month, for a debt-to-income ratio of 50 percent; most lenders won’t approve that loan. You’ll either need to make more money, take out a smaller home loan, or pay off your credit cards or car loan before you apply for a mortgage. (See Chapter 3 for tips on paying down debt.)

      Is Your Credit Score 620 or Better?

      It’s possible to secure a mortgage with a lower credit score, but you’ll generally have a harder time gaining approval. Even with a score in the mid-600s, you may have to pay higher interest rates or fees than someone with a better score. That might not sound like a big deal, but half a percentage point difference on a $300,000 mortgage can cost you an extra $30,000 in interest over the life of the loan. It’s worth trying to get your credit score into the 700s before you buy a home. Find tips for raising your credit score in Chapter 3.

      Have You Been in the Same Job or Line of Work for Two Years or More?

      When it comes to your employment situation, lenders like to see steadiness. If you haven’t been in the same job for the past two years, you’ll need to provide prior job and salary history as well. Qualifying for a mortgage can be particularly tricky for independent contractors and small business owners; they need to provide two years of tax returns that show a solid income history.

      Are You Prepared to Stay Rational and Levelheaded Through Some Emotional Setbacks?

      Home buying is a financial investment, but it’s also an emotional roller coaster. To get to the point where you’re prepared to offer hundreds of thousands of dollars for a home, you have to really fall in love with the place—and yet your offer might lose out to someone else’s, leaving you crushed.

      Finding the right home at the right price can take months and will almost certainly test your patience. Be prepared to suffer some disappointment, but try not to let the resulting frustration cloud your financial judgment or strain your relationship if you’re searching with a partner.

      IT’S OKAY TO KEEP RENTING

      You’re Not Throwing Money Away

      If you answered no to any of those questions, you might not be 100 percent ready to buy a home right now. And that’s okay. Most first-time home buyers aren’t. (Who has $20,000 or more just lying around?) It might take time, but don’t worry; you’ll learn how to get ready in the chapters ahead, starting with strategies for saving up a down payment.

      But know this: It’s perfectly okay to continue renting or living with family members if you’re not ready to purchase a home just yet.

      Stepping back from the house hunt doesn’t mean that you’ll never buy a home. It just means you’ll be better prepared when you do. In fact, holding off and renting for another year—and getting your home purchase right the first time—could be the difference between owning your dream home five years from now and feeling trapped in a home you can’t afford.

      It can be hard to sit on the sidelines, though. A buzzing housing market and spiraling home prices can create a feeling of urgency—like you’re late for the bus, and you can see it pulling away (with your friends or coworkers aboard). The FOMO is real.

      But although people may say you’re throwing money away every year that you don’t buy a home, renting has real advantages—notably, the freedom to pick up and move in pursuit of a more lucrative job opportunity (or just for fun). In fact, some financial advisors recommend renting, insisting that you can ultimately earn more money by investing your down payment and other saved costs in the stock market instead of in a high-upkeep home. If you’re on an upward trajectory early in your career, you never know when the job of a lifetime might open up a thousand miles away; as a renter, it’s a lot easier to break a lease and pursue such life-changing opportunities.

      Even if you have no intention of moving across the country, renting allows you to audition different communities or neighborhoods without committing your life’s savings to them. And depending on

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