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Because home ownership is a substantial investment and a long-term commitment, it is important to become as knowledgeable as possible about the process of buying a home. Obviously, you want to avoid ending up with a home you are not happy with.

You will want to find out all you can about how much you need to save for a down payment, about the process of finding the right home for you, about negotiating the best possible deal, and about closing the deal. Click on the tasks to the left to get help.

Determine If You Should Rent or Buy

Buying a home isn't always a good idea. Sometimes it makes more sense to rent.

Not everyone should own a home. See what factors determine whether you should be a renter or an owner.

Everyone loves the idea of buying a home. But owning a home isn't always a good idea. Sometimes it makes more sense to rent. Consider these factors to help you determine whether you should be a renter or an owner:

Bad Credit Report

Do you have bad credit? If your FICO score is below 550, you're probably not going to receive a good interest rate for a loan. And, that kind of score could put you into the hands of a predatory lender, i.e. a lender who takes advantage of people requesting a loan.

Consider the following:

  • If you have a bad credit report, you should work on fixing it before applying for a loan.
  • Four late payments is enough to disqualify you from obtaining a loan.
  • You can order your credit report free online.

High Debt Ratios

Lenders consider two ratios: front-end and back-end.

  • The front-end is your mortgage payment, plus taxes and insurance divided by your monthly salary.
  • The back-end adds your monthly debt payments to your PITI payment before dividing that total figure by your salary. A 50% debt ratio is a high ratio. A high debt ratio means you may not qualify for the loan.

Job Instability or Relocation

How secure is your job? Is your company laying off? Could you be fired and, if so, how hard would it be to get another job right away?

Unemployment compensation is rarely enough to cover mortgage payments. Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer, your property would need to appreciate at least 10% to cover the cost of selling; otherwise, you would lose money on the sale. When you buy a home, you should plan to stay put for a while.

Maintenance Issues

All homes require upkeep and maintenance. Not everybody has the skills, much less the desire, to tackle home repair projects.

In addition, many individuals can not afford to hire a professional to fix things that break. Ideally you would set aside 5% of the purchase price to cover maintenance and repairs when you buy a home.

When Renting Costs Considerably Less

If your mortgage payment would be triple the amount (or more) you would pay for rent, it might not make financial sense for you to buy. For example, if it would cost you $2,000 a month to rent what would cost you $6,000 per month to own, does it make sense to pay $48,000 a year more to own a home?

If you are in a 30% tax bracket, you might not come close to recouping the difference you paid. Say your deductible expenses are $5,000 a month; 30% of that is only $1,500, which would be your true tax savings per month. Would you spend $6,000 to save $1,500?1

Other considerations

Here are some factors, other than whether you can afford a new home, that you should consider when deciding whether to rent or buy a home:

  • When home prices are down, home ownership is a less valuable investment. (Of course, owning a principal residence is not just an investment.)
  • When comparing the costs of renting against the costs of owning, factor in the valuable income tax deductions available for mortgage interest payments.
  • You may not have to pay tax on the capital gain when you sell your principal residence.
  • In a period of high interest rates, owning a home is more costly.
  • Those who move frequently, for example every four years or less, are often better off renting than buying.2

1©2007 About, Inc., A part of The New York Times Company.
2©CPA Site Solutions

Consider the Tax Advantages

Buying a home is a big commitment. As you weigh your options, don’t forget to consider the tax benefits.

If you're a first-time home buyer, you have probably heard friends, family and coworkers encourage you to buy a home. Yet, you may still wonder if buying a home is the right thing to do.

To help you understand the advantages of buying your own home, here are some tips to consider.

In tax lingo, your principal residence is the place where you legally reside. It's typically the place where you spend most of your time, but several other factors are also relevant in determining your principal residence.

Many of the tax benefits associated with home ownership apply mainly to your principal residence--different rules apply to second homes and investment properties. Here's what you need to know to make owning a home really pay off at tax time.

Deduct your mortgage interest

One of the most important tax advantages of home ownership is the deduction of mortgage interest. If you itemize deductions on Schedule A of your federal income tax return, you can generally deduct the qualified residence interest that you pay on certain home mortgages taken on your principal residence. (This also applies to second homes.)

That is, you may be able to deduct the interest you've paid on a mortgage to buy, build, or improve your home, provided that the loan is secured by your home. Such a mortgage is known as acquisition indebtedness by the IRS. Your ability to deduct interest depends on several factors.

Up to $1 million of acquisition mortgage debt ($500,000 if you're married and file separately) qualifies for interest deduction. (Different rules apply if you incurred the debt before October 14, 1987.) If your mortgage loan exceeds $1 million, some of the interest that you pay on the loan will not be deductible.

Although this deduction also applies to certain home equity loans secured by your home, the rules are different. Home equity debt involves a loan secured by your main or second home that exceeds the outstanding mortgages on the property. Home equity debt is limited to the lesser of:

The fair market value of the home minus the total acquisition debt on that home, or

$100,000 (or $50,000 if your filing status is married filing separately) for main and second homes combined

The interest that you pay on a qualifying home equity loan is generally deductible regardless of how you use the loan proceeds. For more information, see IRS Publication 936.

Don’t pay taxes twice!

Along with mortgage interest, you can generally deduct the real estate taxes that you've paid on your property in the year that they're paid to the taxing authority. Only the legal property owner can deduct the real estate taxes.

In some cases, prepaid real estate taxes can be deducted in the year of the prepayment. Taxes placed in escrow but not yet paid to the taxing authority, however, generally aren't deductible.

Invest in your home

Home improvements and repairs are generally nondeductible. Improvements, though, can increase the tax basis of your home (which in turn can lower your tax bite when you sell your home). Improvements add value to your home, prolong its life, or adapt it to a new use. For example, the installation of a deck, a built-in swimming pool, or a second bathroom would be considered an improvement. In contrast, a repair simply keeps your home in good operating condition.

Regular repairs and maintenance (e.g., repainting your house and fixing your gutters) are not considered improvements and are not included in the tax basis of your home. However, if repairs are performed as part of an extensive remodeling of your home, the entire job may be considered an improvement.

Deduct points and closing costs

Buying a home is confusing enough without wondering how to handle the settlement charges at tax time. When you take out a loan to buy a home, or when you refinance an existing loan on your home, you'll probably be charged closing costs. These usually include points, as well as attorney's fees, recording fees, title search fees, appraisal fees, and loan or document preparation and processing fees.

You'll need to know whether you can deduct these fees (in part or in full) on your federal income tax return, or whether they're simply added to the cost basis of your home.

Before we get to that, let's define one term. Points are costs that your lender charges when you take a loan secured by your home. One point equals 1 percent of the loan amount borrowed. As a home buyer, you can deduct points in the year that you buy your home if you itemize your deductions. However, you must meet certain requirements. You can even deduct points that the seller pays for you. More information about these requirements is available in IRS Publication 936.

Refinanced loans are treated differently. The points that you pay on a refinanced loan generally must be amortized over the life of the loan. In other words, you can deduct a certain portion of the points each year. There's one exception: If part of the loan is used to make improvements to your principal residence, you can generally deduct that portion of the points in the year that the points are paid.

And what about other closing costs? Generally, you cannot deduct these costs on your tax return. Instead, you must adjust your tax basis (the cost, plus or minus certain factors) in your home.

For example, if you're buying a home, you'd increase your basis with certain closing costs. If you're selling a home, you'd decrease your amount realized from the sale (i.e., your sale price). For more information, see IRS Publication 530.

Exclude capital gain when your house is sold

Now let's see what happens when you sell your home. If you sell your principal residence at a loss, you generally can't deduct the loss on your tax return. If you sell your principal residence at a gain, however, you may be able to exclude from taxation all or part of the capital gain.

Generally speaking, capital gain (or loss) on the sale of your principal residence equals the sale price minus your adjusted basis in the property. Your adjusted basis is the cost of the property (i.e., what you paid for it initially), plus amounts paid for capital improvements, less any depreciation and casualty losses claimed for tax purposes.

If you meet the requirements, you can exclude from federal income tax up to $250,000 ($500,000 if you're married and file a joint return) of any capital gain that results from the sale of your principal residence, regardless of your age. In general, an individual, or either spouse in a married couple, can use this exclusion only once every two years.

To qualify for the exclusion, you must have owned and used the home as your principal residence for a total of two out of the five years before the sale.

For example, you and your spouse bought your home in 1981 for $200,000. You've lived in it ever since and file joint federal income tax returns. You sold the house yesterday for $350,000. Your entire $150,000 gain ($350,000 - $200,000) is excludable. That means that you don't have to report your home sale on your income tax return.

What if you fail to meet the two-out-of-five-years rule? Or what if you used the capital gain exclusion within the past two years with respect to a different principal residence? You may still be able to exclude part of your gain if your home sale was due to a change in place of employment, health reasons, or certain other unforeseen circumstances. In such a case, exclusion of the gain may be prorated.

Additionally, special rules may apply in the following cases:

  • If your principal residence contained a home office or was otherwise used partially for business purposes
  • If you sell vacant land adjacent to your principal residence
  • If your principal residence is owned by a trust
  • If you rented part of your principal residence to tenants
  • If you owned your principal residence jointly with an unmarried taxpayer

Note: Members of the uniformed services and foreign service personnel may elect to suspend the running of the 2-out-of-5-year requirement during any period of qualified official extended duty up to a maximum of 10 years.

Consult a tax professional for details.

©2004-2007 The American Institute of Certified Public Accountants

Decide How Much to Spend

Set your house budget BEFORE you start shopping. Otherwise, watch out.

Many new homeowners make the mistake of borrowing too much money. Before deciding on the price range of the home you plan to buy, decide how large a monthly mortgage payment you can handle. Try to make as large a down payment as possible.

Determine your mortgage payment

The mortgage payment will be composed of the mortgage payment, the property taxes (in most cases), and the mortgage insurance.

Many new homeowners make the mistake of borrowing too much money. Before deciding on the price range of the home you plan to buy, think about how much you want to pay out each month in mortgage payments. Try to make as large a down payment as possible.

The lender will set a maximum on how much you can borrow. However, this maximum is often too much for the average homeowner to pay out comfortably each month. Therefore, use the maximum only as a starting point to deciding how much you will borrow.

When deciding how much to borrow, be sure to take into account saving for your retirement, meeting your financial goals, and maintaining your current lifestyle. If your monthly payments do not allow you to meet these needs, buying the home does not make financial sense.

Home buyers often end up unable to save enough money, to travel, to pursue their interests, or even to eat out and the purchase turns into a burden. Worse, many people buy a home that is too expensive and end up overwhelmed by debt, since home ownership requires more spending than renting: the home must be furnished and repairs and improvements have to be made.

Caution: To avoid having your dream home turn your life into a nightmare, calculate how much you realistically can spend on the monthly mortgage payment. Do not forget to add in the real estate taxes and mortgage insurance.

Lenders will be happy to pre-qualify you by giving you a preliminary limit on the amount they would be willing to lend you. This pre-qualification is not a commitment on the lender’s part; lenders will not commit to a mortgage until they have the property appraisal and all of your documentation. But the maximum they are willing to offer can be helpful for planning purposes.

The maximum debt is based on your income and debt level. It depends on current interest rates, the term of the mortgage, and the property taxes. To get a rough idea, the maximum debt amount is usually about three times your annual gross income.

Estimate your preferred price

Having decided how much of a monthly mortgage payment you can realistically afford, you are now ready to set a price range for your new home. You will give this range to the real estate agent during your first visit or use it to rule out homes you do not want to look at. Don’t be afraid to look at homes that are 15% to 20% over your price range. In many cases, you will be able to negotiate the price down.

Maximize your down payment

You will probably want to make as large a down payment as possible. There are two reasons for this: (1) lenders will generally not require you to pay for private mortgage insurance if you can come up with a 20% down payment and (2) the sooner you pay off your mortgage, the better off you will be financially.

To save the 20% down payment, you may need to go on an "austerity plan" for a year or two. Many home buyers also use cash gifts or loans from family members to meet the 20% figure. If you cannot save 20% of the purchase price, you will still be able to get financing. However, it is best to try to save the 20% to avoid paying for private mortgage insurance.

© CPA Site Solutions

Work with a Realtor

Save yourself time and trouble. Work with a real estate professional.

You can shop for and buy a home without an agent. But you will put in extra time to do an agent’s work: search for properties, schedule appointments to see them, coordinate inspections, and negotiate. Home buyers who already have a property in mind are the best candidates for going it alone.

If you find that your real estate agent is not doing his or her best to find you the home you want or is otherwise not meeting your expectations, don’t hesitate to make a change. Avoid the mistake of staying in the relationship because you have invested time in it. Rather, get out as soon as you can. The real estate agent will cost you money, so make sure you are getting your money’s worth.

Look for positive traits

Of course, you want a competent and experienced agent whose work habits are compatible with your own. To find such an agent, interview several candidates at different agencies. Look for the following traits:

  • Is the agent full-time? Make sure the agent works in the field full-time. Otherwise he or she may not be up-to-date on the fast-changing information and skills required for the job.
  • Is the agent experienced? Be sure the agent has been doing the type of work you will need him or her to do for at least a few years. For example, if you are looking for a modest single family home in the suburbs, make sure the agent has not spent the last five years handling mostly rentals—or mansions.
  • Does the agent listen and communicate clearly? The agent must be able to understand your priorities in purchasing a home and to tell you what you need to know about a home. For instance, if you tell the agent repeatedly that you must have wood floors and a tree-lined neighborhood, and he or she persists in showing you linoleum floors on crowded streets, you need to get a new agent.
  • Is the agent willing to negotiate for you? To get the best home for your dollar you will have to negotiate with the seller on the price. The agent plays a crucial role in the process. If he or she is not willing to show you houses that are 20% over your price range or to vigorously negotiate with the seller, you need to find a new agent.
  • Is the agent careful in his or her work? You need an agent who will cover all the details that go into buying a home. Someone who takes shortcuts in order to "produce"—generate as many home sales as possible—will not do you any good.

Ask the candidates for references from clients with whom they have recently worked in the area in which you are house-hunting. That will help you determine whether the agent has the traits you want.

Beware these negative traits

Here are some traits a good buyer’s real estate agent should not have. Most of them have to do with the conflicts of interest that arise with any commissioned salespeople. Basically, a commission salesperson’s goal is to see that as many deals close as possible while putting in the minimum of hours. However, many agents still provide good service.

  • Haste makes waste. The agent who tries to push you into making a decision before you are comfortable doing so is to be avoided.
  • Spendthrifts. Avoid agents who urge you to go over your price range.
  • Favoritism. Avoid agents who push you to buy their agency’s listings over other properties, or who push you to use the attorneys or inspectors they recommend.
  • Cover-ups. Dishonest agents have been known to help the seller hide a defect, or to look the other way. The only way to protect yourself from such deceit is to use an objective inspector.

Agents' Titles and What They Mean

When looking for a real estate agent, you may come across the following commonly used titles. Here is a basic definition of each:

Principal broker: This is a person who is licensed to operate a real estate office. He or she may either work alone or employ other agents. Several years of experience are required to obtain this licensure. Anyone selling realty must work under the supervision of a principal broker.

Realtor: A realtor is a member of the National Association of Realtors, along with a state realtors’ association and a local board of realtors. Realtors are bound by a code of ethics. They are able to access a local computerized database of homes for sale known as the multiple listing service.

Agent: This is the general term for any licensed professional in the real estate sales business.

Listing agent: A type of agent who signs up the home seller and lists the home with the multiple listing service.

Selling agent: An agent who finds a home for sale (through the multiple listing service) and finds a buyer for it.

On a home sale, the listing agent and the selling agent split the commission with each other and with their principal brokers.

© CPA Site Solutions

Find the Right Home

Location, location, location. Yes, it’s important, but there are many other factors to consider in finding a home.

Throughout the search for a home, you must remain focused on what you want (and don’t want). If a particular aspect of the house is important to you, do not take anyone’s word for it. Investigate for yourself.

You may want to keep a list of items that are important to you, such as the location of the neighborhood, the type of materials used in building the home and the schools.

Visit schools, walk around the neighborhood, look under carpets to see what the floors are made of, stay in the basement for awhile to see how damp it is. You may also want to drive through the neighborhood after dark to see if it is a safe place to live.

In order to have a benchmark for comparing home prices, find out what the price per square foot is for homes you are looking at. To find the price per square foot, divide the asking price by its square footage. Sources of a home’s square footage include the local tax assessment agency, the real estate agent, and the home builder. You should verify any statement that might be self-serving.1

Here are some tips to help determine which house is best for you.

Once you've settled on a couple of neighborhoods for your search, it's time to pick out a few homes to view. Your wish list can remind you which features are absolute requirements and which amenities you'd like to have if possible. When narrowing down your home search, consider:

  • Types of homes
  • Home purchase considerations
  • Home comparison chart

What to do when you’ve found the right home for you

Types of homes

In addition to single-family homes (one home per lot), there are other forms of home ownership:

Multifamily homes: Some buyers, particularly first-timers, start with multiple family dwellings, so they'll have rental income to help with their costs. Many mortgage plans, including VA and FHA loans, can be used for buildings with up to four units, if the buyer intends to occupy one of them.

Condominiums: With a condo, you own "from the plaster in" just as you would a single house. You also own a certain percentage of the "common elements" -- staircases, sidewalks, roofs and the like. Monthly charges pay your share of taxes and insurance on those elements, as well as repairs and maintenance. A homeowners association administers the development.

Co-ops: In a few cities, cooperative apartments are common. With those, you purchase shares in a corporation that owns the whole building, and you receive a lease to your own apartment. A board of directors supervises management. Monthly charges include your share of an overall mortgage on the building.

Home purchase considerations

Most buyers' first consideration, after neighborhoods are chosen, is the number of bedrooms. As you begin to view homes, keep the following purchase and resale considerations in mind:

  • Weigh your needs, budget and personal tastes in deciding whether you want a home that’s a newly constructed home, an older home or a home that requires some work -- a "fixer-upper."
  • One-bedroom condos are more difficult to resell than two-bedroom ones.
  • Two-bedroom/one-bath single houses generally have less appeal than houses with three or more bedrooms, and therefore less appreciation potential.
  • Homes with "curb appeal" (a well-maintained, attractive, and charming view-from-the-street appearance) are the easiest to resell.
  • When resale is a possibility, don't buy the most expensive house on the street, or anything that is unusual or unique. The best investment potential is traditionally found in a less expensive, more moderately sized home on the street.

Home comparison chart

While house-hunting, it's a good idea to make notes about what you see because viewing several houses at a time can be confusing. Use our home comparison chart to help you keep track of your search, organize your thoughts and record your impressions.2

1© CPA Site Solutions

Negotiate the Selling Price

Don't fall in love with a home. Be willing to walk away from the deal!

Buying a home calls into play your negotiating ability. Successful negotiation can often save you tens of thousands of dollars. To get a good price, you will want to learn everything you can about the home, know what other homes around it are selling for, and consider negotiating, not only the price, but the real estate commissions and non-price items.

Oral promises are not legally enforceable when it comes to the sale of real estate. Therefore, you need to enter into a written contract, which starts with your written proposal. This proposal not only specifies price, but all the terms and conditions of the purchase. For example, if the sellers said they'd help with $2,000 toward your closing costs, be sure that's included in your written offer and in the final completed contract, or you won't have grounds for collecting it later.

REALTORS® usually have a variety of standard forms (including Residential Purchase Agreements) that are kept up to date with the changing laws. When you use a REALTOR® these forms will be available to you. In addition, REALTORS® cover the questions that need to be answered during the process. In many states certain disclosure laws must be complied with by the seller, and the REALTOR® will ensure that this takes place.

If you are not working with a REALTOR®, keep in mind that you must draw up a purchase offer or contract that conforms to state and local laws and that incorporates all of the key items. State laws vary, and certain provisions may be required in your area.

After the offer is drawn up and signed, it will usually be presented to the seller by your REALTOR®, by the seller's REALTOR® if that's a different agent, or often by the two together. In a few areas, sales contracts are typically drawn up by the parties' lawyers.

What the offer contains

The purchase offer you submit, if accepted as it stands, will become a binding sales contract (known in some areas as a purchase agreement, earnest money agreement or deposit receipt). It's important, therefore, that it contains all the items that will serve as a "blueprint for the final sale." These purchase offer items include such things as:

  • Address and sometimes a legal description of the property
  • Sale price
  • Terms -- for example, all cash or subject to your obtaining a mortgage for a given amount
  • Seller's promise to provide clear title (ownership)
  • Target date for closing (the actual sale)
  • Amount of earnest money deposit accompanying the offer, and whether it's a check, cash or promissory note, and how it's to be returned to you if the offer is rejected -- or kept as damages if you later back out for no good reason
  • Target date for closing (the actual sale)
  • Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
  • Provisions about who will pay for title insurance, survey, termite inspections and the like
  • Type of deed to be given
  • Provisions about who will pay for title insurance, survey, termite inspections and the like
  • Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
  • A provision that the buyer may make a last-minute walk-through inspection of the property just before the closing
  • A time limit (preferably short) after which the offer will expire
  • Contingencies, which are an extremely important matter and discussed in detail below.

Watch for the contingencies

If your offer says "this offer is contingent upon (or subject to) a certain event," you're saying that you will only go through with the purchase if that event occurs. The following are two common contingencies contained in a purchase order:

The buyer obtaining specific financing from a lending institution. If the loan can't be found, the buyer won't be bound by the contract.

A satisfactory report by a home inspector "within 10 days (for example) after acceptance of the offer." The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void. Again, make sure that all the details are nailed down in the written contract.

Negotiate like a pro!

You're in a strong bargaining position -- meaning, you look particularly welcome to a seller -- if:

  • You're an all-cash buyer; or
  • You're already pre-approved for a mortgage; and
  • You don't have a present house that has to be sold before you can afford to buy.

In those circumstances, you may be able to negotiate some discount from the listed price. On the other hand, in a "hot" seller's market, if the perfect house comes on the market, you may want to offer the list price (or more) to beat out other early offers.

It's very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:

  • Every month a vacant house remains unsold represents considerable extra expense for the seller;
  • If the sellers are divorcing, they may just want out quickly; and
  • Estate sales often yield a bargain in return for a prompt deal.

What is earnest money?

This is a deposit that you give when making an offer on a house. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show "good faith." A REALTOR® or an attorney usually holds the deposit, the amount of which varies from community to community. This will become part of your down payment.

Buyers: the seller's response to your offer

You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance. If the offer is rejected, that's that, and the sellers could not later change their minds and hold you to it.

If the seller likes everything except the sale price, or the proposed closing date, or the basement pool table you want left with the property, you may receive a written counteroffer, with the changes the seller prefers. You are then free to accept or reject it or to even make your own counteroffer. For example, "We accept the counteroffer with the higher price, except that we still insist on having the pool table."

Each time either party makes any change in the terms, the other side is free to accept or reject it, or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side's proposal.

Withdrawing an offer

Can you take back an offer? In most cases the answer is yes, right up until the moment it is accepted, or even in some cases, if you haven't yet been notified of acceptance. If you do want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don't want to lose your earnest money deposit, or find yourself being sued for damages the seller may have suffered by relying on your actions.


Arrange for a Mortgage

So many mortgage options. So little time. Start by learning what’s available.

Shopping for a mortgage is like navigating a maze. To keep from getting lost, get familiar with the major types of mortgages before you contact your lender.

If you and the seller finally agree upon a price, and sign a contract, the next step, in virtually all cases, is to get a mortgage. In fact, the sale is usually conditioned upon the buyer obtaining a mortgage. Getting the right mortgage is very important, and can result in savings of tens of thousands of dollars over the term of the mortgage.

Many types of mortgages are now available, and new types are continually being introduced. With all these choices, you may wonder what to look for.

Some of the mortgages now available are traditional plans, with interest rates and payments that remain constant throughout the loan and pay off your debt over a long period.

Others represent a departure from the older plans: they can involve more risk for the buyer and are frequently tied to changes in the market. They also can make home buying possible and may offer lower interest rates.

To find the right mortgage, you need to educate yourself first. There are a variety of options available today, including adjustable rate mortgages and reverse mortgages.

Other sources of information include your state, county, or city consumer affairs office; local realtors, home builders, and lenders; bookstores; and the real estate section of your newspaper.

Buy a book of mortgage payment tables to help you calculate whether you can afford a specific loan.

Traditional Mortgage

Most mortgages today are traditional mortgages with fixed monthly payments, a fixed interest rate, and full amortization (or transfer of equity) over a period of 20 to 30 years. These features worked in the buyer's favor. Inflation made your payments seem less and your property worth more. So, although the payments seemed hard to meet at first, over time, it became easier.

Traditional mortgages are fixed rate mortgages, which have an interest rate and monthly payments that remain constant over the life of the loan. This sets a maximum on the total amount of principal and interest you pay during the loan. Traditionally, these mortgages have been long-term. As the loan is repaid, ownership shifts gradually from lender to buyer.

Example: You borrow $50,000 at 8% for 30 years. Your monthly payments on this loan would be $366.89. Over 30 years, your total obligation for principal and interest would never exceed this fixed, predetermined amount.

Fixed rate mortgages are usually available at higher rates than many other types of loans. But if you can afford the monthly payments, inflation and tax deductions may make a fixed rate mortgage a good financing method, particularly if you are in a high tax bracket and need the interest deductions.

Non-Traditional Mortgages

On the other hand, many home financing plans today differ materially from traditional mortgages. They may help you buy a home you otherwise couldn't, but they may also involve greater risks for buyers.

For example, the interest rate and monthly payments may change during the loan to reflect what the market will bear. Or the interest rate may fluctuate while the payments stay the same, and the amount of principal paid off may vary.

The latter approach allows the lender to credit a greater portion of the payment to interest when rates are high.

Some plans also offer below-market interest rates, but they may not help you build up equity.

In shopping for financing sources today, keep in mind the terms which are keys to the affordability of the home:

  • The sales price minus your down payment, i.e., the amount you finance
  • The length, or maturity, of the loan
  • The size of the monthly payments
  • The interest rate or rates
  • Whether the payments or rates may change
  • How often and how much the payments or rates may change
  • Whether there is an opportunity for refinancing the loan when it matures, if necessary

These concepts will be discussed in greater detail as we explore the different types of non-traditional financing.

15-Year Mortgage

The 15-year mortgage is a variation of the fixed-rate mortgage that is becoming increasingly popular. This mortgage has an interest rate and monthly payments that are constant throughout the loan.

But, unlike other plans, this loan is fully paid off in only 15 years. And, it is usually available at a slightly lower interest rate than a longer-term loan. But it also requires higher payments.

Example: You buy a house for $100,000, and after making a $15,000 down payment, you still need to borrow $85,000. You find a 30-year mortgage for 8%. This means your monthly payments would be $623.70. But, another lender offers you a 15-year plan for a lower rate, 7%. However, under this plan, your payments would be $764.01, $140.31 higher than the longer-term financing.

In the 15-year mortgage, you pay off the loan balance faster than a long-term loan. Because of this, a smaller proportion of each of your monthly payments goes to interest.

If you can afford the higher payments, this plan will save you interest and help you build equity and own your home faster. (However, you are paying less interest, though, you may also have fewer tax deductions.)

Adjustable-Rate Mortgage

If you see an ad for a low-rate mortgage, it might be for an adjustable rate mortgage (ARM). These loans may have low rates for a short time—maybe only for the first year. After that, the rates can be adjusted on a regular basis. This means that the interest rate and the amount of the monthly payment can go up or down.

With an adjustable-rate mortgage, your future monthly payment is uncertain. Some types of ARMs put a ceiling on your payment increase or rate increase from one period to the next. Virtually all must put a ceiling on interest-rate increases over the life of the loan.

Whether an ARM mortgage is right for you depends on your financial situation and the terms of the ARM. ARMs carry risks in periods of rising interest rates, but can be cheaper over a longer term if interest rates decline. You will be able to answer the question better once you understand more about adjustable-rate mortgages.

Today, many loans have interest rates (and monthly payments) that can change from time to time. To compare one ARM with another or with a fixed-rate mortgage, you need to know about indexes, margins, discounts, caps, negative amortization, and convertibility. You need to consider the maximum amount your monthly payment could increase.

Most important, you need to compare what might happen to your mortgage costs with your future ability to pay.

Interest Rate Variation. Adjustable rate mortgages have an interest rate that increases or decreases over the life of the loan based upon market conditions. Some lenders refer to adjustable rates as flexible or variable.

Caution: Because adjustable rate loans can have different provisions, evaluate each one carefully.

In most adjustable rate loans, your starting rate, or "initial interest rate," will be lower than the rate offered on a standard fixed rate mortgage. This is because your long-term risk is higher—your rate can increase with the market—so the lender offers an inducement to take this plan.

Changes in the interest rate are usually governed by a financial index. If the index rises, so may your interest rate. In some plans, if the index falls, so may your rate. Examples of these indexes are the Federal Home Loan Bank Board's national average mortgage rate and the U.S. Treasury bill rate. Generally, the more sensitive the index is to market changes, the more frequently your rate can increase or decrease.

Example: Suppose your interest rate is tied to the Bank Board index. Your mortgage limits rate changes to one per year, although it doesn't limit the amount of the change. Assume your starting interest rate is 8% on September 1, of last year. Based on these terms, if the Bank Board index rises 2 percentage points by September 1, of this year, your new rate for the next year will be 10%.

Rate Caps. To build predictability into your adjustable rate loan, some lenders include provisions for rate caps that limit the amount of any interest rate change. These provisions limit the amount of your risk. A periodic rate cap limits the amount the rate can increase at any one time. Because they limit the lender's return, capped rates may not be available through every lender.

Example: Your mortgage provides that even if the index increases 2% in one year, your rate can only go up 1%. An aggregate rate cap limits the amount the rate can increase over the entire life of the loan. This means that even if the index increases 2% every year, your rate cannot increase more than 5% over the entire loan.

Many flexible rate mortgages offer the possibility of rates that may go down as well as up. In some loans, if the rate can only increase 5 %, it may only decrease 5%. If no limit is placed on how high the rate can go, there may be a provision that also allows your rate to go down along with the index.

Payment Caps

If the interest rate on your adjustable rate loan increases and your loan has a payment cap, your monthly payments may not rise, or they may increase by less than changes in the index would require.

Example: Your mortgage provides for unlimited changes in your interest rate, but your loan has a $50 per year cap on payment increases. You started with an 8% rate on your $75,000 mortgage and a monthly payment of $550.33. Now assume that your index increases 2 percentage points in the first year of your loan.

Because of this, your rate increases to 10 %, and your payments in the second year rise to $658.18. Because of the payment cap, however, you'll only pay $600.33 per month in the second year.

Caution: If your payment-capped loan results in monthly payments that are lower than your interest rate would require, you still owe the difference. Negative amortization may take place to ensure that the lender eventually receives the full amount. In most payment-capped mortgages, the amount of principal paid off changes when interest rates fluctuate.

Thus in the above example, your monthly payment should increase to $658.18, but because of a cap, it increases to only $600.33. Because this change in interest rates increases your debt, the lender may now apply a larger portion of your payment to interest. If rates get very high, even the full amount of your monthly payment won't be enough to cover the interest owed; the additional amount of interest you owe will be added to the principal. This means you now owe and eventually will pay interest on interest.

Negative Amortization. If your ARM contains a payment cap he sure to find out about "negative amortization." Negative amortization means the mortgage balance is increasing. This occurs whenever your monthly mortgage payments are not large enough to pay all of the interest due on your mortgage.

Because payment caps limit only the amount of payment increases, and not interest-rate increases, payments sometimes do not cover all of the interest due on your loan.

This means that the interest shortage in your payment is automatically added to your debt, and interest may be charged on that amount. You might therefore owe the lender more later in the loan term than you did at the start. However, an increase in the value of your home may make up for the increase in what you owe.

Prepayment and Conversion

If you get an ARM and your financial circumstances change, you may decide that you don't want to risk any further changes in the interest rate and payment amount. When you are considering an ARM, ask for information about prepayment and conversion.

Prepayment. Some agreements may require you to pay special fees or penalties if you pay off the ARM early. Many ARMs allow you to pay the loan in full or in part without penalty whenever the rate is adjusted. Prepayment details are sometimes negotiable. If so, you may want to negotiate for no penalty, or for as low a penalty as possible.

Conversion. Your agreement with the lender can have a clause that lets you convert the ARM to a fixed-rate mortgage at designated times. When you convert, the new rate is generally set at the current market rate for fixed-rate mortgages. The interest rate or up-front fees may be somewhat higher for a convertible ARM. Also, a convertible ARM may require a special fee at the time of conversion.

Variations of Adjustable Rate Mortgages. Other variation of the adjustable rate mortgage is to fix the interest rate for a period of time—3 to 5 years, for example—with the understanding that the interest rate will then be renegotiated. These variations are:

Rollover mortgages are loans with periodically renegotiated rates. Such loans make monthly payments more predictable because the interest rate is fixed for a longer time.

Pledged account buy-down mortgage is another variation with an adjustable rate. This plan was introduced by the Federal National Mortgage Association (Fannie Mae), which buys mortgages from lenders and provides a major source of money for future mortgage offerings.

In this plan, a large initial payment is made to the lender at the time the loan is made. The payment can be made by the buyer, the builder, or anyone else willing to subsidize the loan. The payment is placed in an account with the lender where it earns interest. This plan helps lower your interest rate for the first year.

This plan may not include any payment or rate caps other than those in the first years. But, there also may not be negative amortization, so possible increases in your total debt may be limited. Because of the buy-down feature, some buyers may be able to qualify for this loan who otherwise would not be eligible for financing.

Shopping For a Mortgage

In shopping for any type of adjustable rate mortgage, remember to ask about the following:

  • The initial interest rate
  • How often the rate may change
  • How much the rate may change
  • The initial monthly payments
  • How often payments may change
  • How much the payments may change
  • The mortgage term
  • How often the term may change
  • How much the term may change
  • The index that rate, payment, or term changes are tied to
  • The limits, if any, on negative amortization

Balloon Mortgage

Balloon mortgages have a series of equal monthly payments and a large final payment. Although there usually is a fixed interest rate, the equal payments may be for interest only. The unpaid balance, frequently the principal or the original amount you borrowed, comes due in a short period, usually 3 to 5 years.

Example: You borrow $30,000 for 5 years. The interest rate is 13%, and the monthly payments are only $325. But in this example, the payments cover interest only, and the entire principal is due at maturity—in 5 years. That means you'll have to make 59 equal monthly payments of $325 each and a final balloon payment of $30,325. If you can't make that final payment, you'll have to refinance (if refinancing is available) or sell the property.

Some lenders guarantee refinancing when the balloon payment is due, although they do not guarantee a certain interest rate. The rate could be higher than your current rate. Other lenders do not offer automatic refinancing.

Without such a guarantee, you could be forced to start the whole business of shopping for housing money once again, as well as paying closing costs and front-end charges a second time.

A balloon note may also be offered by a private seller who is continuing to carry the mortgage he or she took out when purchasing the home. It can be used as a second mortgage where you also assume the seller's first mortgage.

Graduated Payment Mortgage

Graduated payment mortgages (GPM) are designed for home buyers who expect to be able to make larger monthly payments in the near future. During the early years of the loan, payments are relatively low. They are structured to rise at a set rate over a set period, say 5 or 10 years. Then they remain constant for the duration of the loan.

Even though the payments change, the interest rate is usually fixed. So during the early years, your payments are lower than the amount dictated by the interest rate. During the later years, the difference is made up by higher payments. At the end of the loan, you will have paid off your entire debt.

One variation of the GPM is the graduated-payment, adjustable-rate mortgage. This loan also has graduated payments early in the loan.

But, like other adjustable rate loans, it ties your interest rate to changes in an agreed-upon index. If interest rates climb quickly, greater negative amortization occurs during the period when payments are low. If rates continue to climb after that initial period, the payments will, too. This variation adds increased risk for the buyer. But if interest rates decline during the life of the loan, your payments may as well.

Growing-Equity Mortgage (Rapid-Payoff Mortgage)

The growing equity mortgage (GEM) and the rapid payoff mortgage are among the other plans on the market. These mortgages combine a fixed interest rate with a changing monthly payment. The interest rate is usually a few percentage points below market. Although the mortgage term may run for 30 years, the loan will frequently be paid off in less than 15 years because payment increases are applied entirely to the principal.

Monthly payment changes are based on an agreed-upon schedule of increases or an index.

Example: A Mortgage plan uses the U. S. Commerce Department index that measures after-tax, per capita income, and your payments increase at a specified portion of the change in this index, 75%. You're paying $500 per month. In this example, if the index increases by 8%, you will have to pay 75% of that, or 6%, additional. Your payments will increase to $530, and the additional $30 you pay will be used to reduce your principal.

With this approach, your income must be able to keep pace with the increased payments. The plan does not offer long-term tax deductions. However, it can permit you to pay off your loan and acquire equity rapidly.

Shared Appreciation Mortgage

In the shared appreciation mortgage (SAM), you make monthly payments at a relatively low interest rate. You also agree to share with the lender a sizable percent (usually 30% to 50%) of the appreciation in your home's value when you sell or transfer the home, or after a specified number of years.

Because of the shared appreciation feature, monthly payments in this plan are lower than in many other plans. However, you may be liable for the dollar amount of the property's appreciation even if you do not wish to sell the property at the agreed-upon date.

Unless you have the cash available, this could force an early sale of the property. Also, if property values do not increase as anticipated, you may still be liable for an additional amount of interest.

There are many variations of this idea, called shared equity plans. Some are offered by lending institutions and others by individuals.

Example: Suppose you've found a home for $100,000 in a neighborhood where property values are rising. The local savings and loan is charging 9% on home mortgages, assuming you paid $20,000 down and chose a 30-year term, your monthly payments would be $643.70, or about twice what you can afford. But a friend offers to help. Your friend will pay half of each monthly payment, or $321.85 for 5 years. At the end of that time, you both assume the house will be worth at least $125,000. You can sell it, and your friend can recover his or her share of the monthly payments to date plus half of the appreciation. Or, you can pay your friend that same sum of money and gain increased equity in the house.

Another variation may give your partner tax advantages during the first years of the mortgage, after which the partnership is dissolved. (You can buy out your partner or find a new one.) Your partner helps make the purchase possible by putting up a sizable down payment and/ or helping make the monthly payments. In return, your partner may be able to deduct a certain amount from his or her taxable income.

Shared appreciation and shared equity mortgages were partly inspired by rising interest rates and partly by the notion that housing values would continue to grow over the years to come. If property values fall, these plans may not be available.

Before proceeding with this type of plan, check with a tax advisor to determine deductibility of interest.

Assumable Mortgage

An assumable mortgage is a mortgage that can be passed on to a new owner at the previous owner's interest rate.

During periods of high rates, most lending institutions are reluctant to permit mortgage assumptions, preferring to write a new mortgage at the market rate. Some buyers and sellers are still using assumable mortgages, however. This has recently resulted in many lenders calling in the loans under "due on sale" clauses. Because these clauses have increasingly been upheld in court, many mortgages are no longer legally assumable. Be especially careful, therefore, if you are considering a mortgage represented as assumable.

Read the contract carefully and have an attorney or other expert check to determine if the lender has the right to raise your rate in this mortgage.

Seller Take Back Mortgage

This mortgage, provided by the seller, is frequently a second trust and is combined with an assumed mortgage. The second trust (or second mortgage) provides financing in addition to the first assumed mortgage, using the same property as collateral. (In the event of default, the second mortgage is satisfied after the first).

Seller take-backs frequently involve payments for interest only, with the principal due at maturity. Some private sellers are also offering first trusts as take-backs. In this approach, the seller finances the major portion of the loan and takes back a mortgage on the property.

Another development now enables private sellers to provide this type of financing more frequently. Previously, sellers offering take-backs were required to carry the loan to full term before obtaining their equity. However, now, if an institutional lender arranges the loan, uses standardized forms, and meets certain other requirements, the owner take-back can be sold immediately to Fannie Mae. This approach enables the seller to obtain equity promptly and avoid having to collect monthly payments.

Wraparound Mortgage

Another variation on the second mortgage is the wraparound. Wraparounds may cause problems if the original lender or the holder of the original mortgage is not aware of the new mortgage. Upon discovering this arrangement, some lenders or holders may have the right to insist that the old mortgage be paid off immediately.

Land Contact

Borrowed from commercial real estate, this plan enables you to pay below-market interest rates. The installment land contract permits the seller to hold onto his or her original below-market rate mortgage while "selling" the home on an installment basis. The installment payments are for a short term and may be for interest only. At the end of the contract the unpaid balance, frequently the full purchase price, must still be paid.

Caution: The seller continues to hold title to the property until all payments are made. Thus, you, the buyer, acquire no equity until the contract ends. If you fail to make a payment on time, you could lose a major investment.


A buy-down is a subsidy of the mortgage interest rate that helps you meet the payments during the first few years of the loan. There are several things to think about in buy-downs:

  1. Consider what your payments will be after the first few years. If this is a fixed rate loan, the payments in the above example will jump to the rate at which the loan was originally made. If this is an adjustable rate loan, and the index to which your rate is tied has risen since you took out the loan, your payments could go up even higher.
  2. Check to see whether the subsidy is part of your contract with the lender or with the builder. If it's provided separately by the builder, the lender can still hold you liable for the full interest rate, even if the builder backs out of the deal or goes out of business.
  3. See if the sales price has been increased to cover a builder's interest subsidy. A comparable home may be selling around the corner for less. At the same time, competition may have encouraged the builder to offer you a genuine savings. It pays to check around.

There are also plans called consumer buy-downs. In these loans, the buyer makes a sizable down payment, and the interest rate granted is below market. In other words, in exchange for a large payment at the beginning of the loan, you may qualify for a lower rate on the amount borrowed. Frequently this type of mortgage has a shorter term than those written at current market rates.

Rent With Option To Buy

In a climate of changing interest rates, some buyers and sellers are attracted to a rent-with-option to-buy arrangement. In this plan, you rent property and pay a premium for the right to purchase the property within a limited time period at a specific price. In some arrangements, you may apply part of the rental payments to the purchase price.

This approach enables you to lock in the purchase price. You can also use this method to buy time in the hope that interest rates will decrease. From the seller's perspective this plan may provide the buyer time to obtain sufficient cash or acceptable financing to proceed with a purchase that may not be possible otherwise.

Reverse Mortgage

If you already own your home and need to obtain cash, you might consider the reverse annuity mortgage (RAM) or equity conversion. In this plan, you obtain a loan in the form of monthly payments over an extended period of time, using your property as collateral. When the loan comes due, you repay both the principal and interest.

A RAM is not a mortgage in the conventional sense. You can't obtain a RAM until you have paid off your original mortgage. Suppose you own your home and you need a source of money. You could draw up a contract with a lender that enables you to borrow a given amount each month until you've reached a maximum of, for example, $10,000. At the end of the term, you must repay the loan. But remember, if you do not have the cash available to repay the loan plus interest, you will have to sell the property or take out a new loan.

Some Cautions

Before going ahead with a creative home loan, have a lawyer or other expert help you interpret the fine print. You should consider some of the situations you could face when paying off your loan or selling your property. And make sure you understand the terms in your agreement—such as acceleration clauses, due on sale clauses, and waivers.

In addition to any legal issues, financial considerations, also come into play. Therefore, financial guidance is suggested helping before a final decision on the type of mortgage to take.

Acceleration Clause

An acceleration clause allows the lender to speed up the rate at which your loan comes due. Suppose you've missed a payment, and your contract gives the lender the right to "accelerate" the loan when a payment is missed. This means that the lender now has the power to force you to repay the entire loan immediately.

Sample acceleration clause: "In the event any installment of this note is not paid when due, time being of the essence, and such installment remains unpaid for thirty (30) days, the Holder of this Note may, at its option, without notice or demand, declare the entire principal sum then unpaid, together with secured interest and late charges thereon, immediately due and payable. The lender may without further notice or demand invoke the power of sale and any other remedies permitted by applicable law."

Note: The use of the term without notice above. If this contract provision is legal in your state, you have waived your right to notice. In other words, you've given up the right to be notified of some occurrence, for example, a missed payment. If you've waived your right to notice of delinquency or default, and you've made a late payment, action may be initiated against you before you've been told; the lender may even start to foreclose.

Know whether your contract waives your right to notice. If so, obtain a clear understanding in advance of what you're giving up. Try to get the clause removed. Have your attorney check state law to determine if the waiver is legal.


A due on sale clause gives the lender the right to require immediate repayment of the balance you owe if the property changes hands. Here's an example of a due on sale clause: "gall or any part of the Property or an interest therein is sold or transferred by Borrower without Lender's prior written consent. . . Lender may, at Lender's option, declare all the sums secured by this Mortgage to be immediately due and payable."

Due on sale clauses have been included in many mortgage contracts for years. They are being enforced by lenders increasingly when buyers try to assume sellers' existing low rate mortgages. In these cases, the courts have frequently upheld the lender's right to raise the interest rate to the prevailing market level. So be especially careful when considering an "assumable mortgage." If your agreement has a due on sale provision, the assumption may not be legal, and you could be liable for thousands of additional dollars.

Mortgage Terms

To buy or sell a home today, it's important to know the vocabulary. Understanding terms like amortization or appreciation can save you time and money; it can also prevent you from obtaining a mortgage ill-suited to your needs.

When you first buy a home you're likely to make a down payment on the property. However, because you financed the purchase, you are now in debt and the lender owns most of the property's value. In traditional mortgages, the monthly payments on the loan are weighted. During the first years, they are largely interest; in time, more of each payment is credited to the loan itself, or the principal.

Gradually, as you pay off principal, you build up equity, or ownership. Your equity also increases if the value of the home increases. This process of gradually obtaining equity and reducing debt through payments of principal and interest is called amortization.

Repaying debt gradually through payments of principal and interest is called amortization. Today's economic climate has given rise to a reverse process called negative amortization. This means that you are losing, not gaining, value, or equity, because your monthly payments may be too low to cover the interest rate agreed upon in the mortgage contract. Instead of paying the full interest costs now, you'll pay them later, either in larger payments or in more payments. You will also be paying interest on that interest.

In other words, the lender postpones collection of the money you owe by increasing the size of your debt. In extreme cases, you may even lose the equity you purchased with your down payment, leaving you in worse financial shape a few years after you purchase your home than when you bought it.

Example: Suppose you signed an adjustable rate mortgage for $50,000 in 1996. The index established your initial rate at 9.15%. It nearly doubled to 17.39% by 1999. If your monthly payments had kept pace with the index, they would have risen from $408 to $722. But because of a payment cap, they stayed at $408. By 1999 your mortgage had swelled from $50,000 to $58,350, even though you had dutifully paid $408 every month for 48 months. In other words, you paid out $20,000 but you were $8,000 more in debt than you were three years earlier. During the next few years despite the fact that the index fell gradually, you were still paying off the increases made to your principal from earlier years.

Certain loans, such as graduated payment mortgages, are structured so that you regain the lost ground with payments that eventually rise high enough to fully pay off your debt. And you may also be able to pay off the extra costs if your home is gaining rapidly in value or if your income is rising fast enough to meet the increased obligation. But if it isn't, you may realize a loss if, for example, you sign a below-market adjustable rate mortgage in January and try to sell the home in August when interest rates are higher. You could end up owing more than you'd make on the sale.

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Inspect the Home

Don't buy a home on trust. Get a third-party inspection first.

The purchase of a home is probably the largest single investment you will make. Protect that investment by getting the home inspected by a third party. It will reveal the condition of the property and the need for major repairs before you buy.

The home inspection is an objective visual examination of the physical structure and systems of the house, from the roof to the foundation. The standard home inspector’s report will include an evaluation of the condition of the home's:

  • heating system;
  • central air conditioning system (temperature permitting);
  • interior plumbing and electrical systems;
  • the roof,
  • attic, and visible insulation;
  • walls, ceilings, floors, windows and doors;
  • the foundation and basement; and
  • the visible structure.

Of course, a home inspection will also point out the positive aspects of a home as well as the maintenance that will be necessary to keep it in good shape. After the inspection, you will have a much clearer understanding of the property you are about to purchase and will be able to make a confident buying decision.

Cost is not the only factor

The inspection fee for a typical one-family house varies geographically, as does the cost of housing. Similarly, within a given area, the inspection fee may vary depending upon the size of the house, particular features of the house, its age, and possible additional services, such as septic, well, or radon testing.

Do not let cost be a factor in deciding whether or not to have a home inspection or in the selection of your home inspector. The knowledge gained from an inspection is well worth the cost, and the lowest-priced inspector is not necessarily a bargain. The inspector's qualifications, including his experience, training, and professional affiliations, should be the most important consideration.

Why you can’t just "Do It Yourself"

Even the most experienced homeowner lacks the knowledge and expertise of a professional home inspector who has inspected hundreds, perhaps thousands, of homes. An inspector is familiar with all the elements of home construction, proper installation, and maintenance. The inspector understands how the home's systems and components are intended to function together, as well as how and why they fail.

Further, most buyers find it very difficult to remain completely objective and unemotional about the house they really want, and this may affect their judgment. For the most accurate picture, it is best to obtain an impartial third-party opinion by an expert in the field of home inspection.

How to find a home inspector

The best source of recommendations is a friend or business acquaintance who has been satisfied with a home inspector they have used. Real estate agents are also generally familiar with home inspectors and should be able to provide you with a list of names from which to choose. In addition, the names of local inspectors can be found in the Yellow Pages where many advertise under "Building Inspection Service" or "Home Inspection Service." (However, it's generally risky to rely on an inspector obtained through the Yellow Pages.)

Whatever your referral source, be sure to ascertain the home inspector's professional qualifications, experience, and business ethics before you make your selection. You can do this by checking with the local Consumer Affairs office or Better Business Bureau, as well as by verifying the inspector's membership in a reputable professional association.

Since there are currently no licensing requirements for home inspectors (with the exception of Texas) make certain that such an association has a set of nationally recognized practice standards and a code of ethics. This provides members with professional inspection guidelines, and prohibits them from engaging in any conflict of interest activities which might compromise their objectivity, such as using the inspection as a means to obtain home repair contracts. The association should also have rigorous membership and continuing education requirements to assure consumers of an inspector's experience and technical qualifications.

When Do You Call In The Home Inspector?

A home inspector is typically called right after the contract or purchase agreement has been signed, and is often available within a few days.

It is not necessary for you to be present for the inspection, but it is recommended. By following the home inspector around the house, by observing and asking questions, you will learn a great deal about the condition of the home, how its systems work, and how to maintain it. You will also find the written report easier to understand if you've seen the property first-hand through the inspector's eyes.

Before you sign, be sure that there is an inspection clause in the contract, making your purchase obligation contingent upon the findings of a professional home inspection. This clause should specify the terms to which both the buyer and seller are obligated.

What If The Report Reveals Problems?

No house is perfect. If the inspector finds problems, it does not necessarily mean you should not buy the house, only that you will know in advance what to expect. A seller may be flexible with the purchase price or contract terms if major problems are found. If your budget is very tight, or if you do not wish to become involved in future repair work, this information will be extremely important to you.

What if you find problems after you move in? A home inspection is not a guarantee that problems will not develop after you move in. However, if you believe that a problem was already visible at the time of the inspection and should have been mentioned in the report, your first step should be to call and meet with the inspector to clarify the situation. Misunderstandings are often resolved in this manner. If necessary, you might wish to consult with a local mediation service to help you settle your disagreement.

Though many home inspectors today carry Errors & Omissions liability insurance, litigation should be considered a last resort. It is difficult, expensive, and by no means a sure method of recovery.

© CPA Site Solutions

Get Insured

Buying a home means you have more to protect. Time to think about insurance.

As a homeowner, you don’t want an unforeseen event to weaken your family’s finances. Make time now to identify—and fill—the gaps in your insurance program.

Now that you have a new home, make sure you have enough insurance. This will protect you against the major risks your family faces:

  • Dying too soon
  • Getting hurt or sick
  • Not being able to work because of an illness or accident
  • Having a visitor get hurt in your home or on your property
  • Having your home damaged by a storm or other event

Each of these events can have a strong negative impact on your finances. To protect yourself, know what your risks are, familiarize yourself with insurance against those risks, and get expert help.

As a first step, learn more about the five main types of insurance.

Homeowners or Renters Insurance

Remember to update your homeowners insurance or apply for a policy if you are buying a home for the first time. This may also be a good time to shop around and make sure that you are paying the best premiums for your policy.

Life Insurance

Think about the financial impact if you or your spouse or partner were to die. Could the surviving parent make do on one income? If the person had to find a job, how would he or she pay for daycare? And what about continuing to save for college or retirement? A good rule of thumb is to buy enough life insurance to equal four to five times your annual salary. Stay-at-home spouses may need their own policy to help pay for childcare in case of their death.

Disability Insurance

Although life insurance is important, you’re far more likely to get injured on the job than to die. So make sure you have enough disability insurance to pay your bills and maintain your standard of living in case you can’t work. You already may have coverage at work. Long-term disability plans typically cover up to 60% of your salary. Check with your employer to see exactly what’s provided. Then look at your budget to see how much of a disability benefit you’d need to meet your monthly obligations. If there’s a gap between what your employer provides and what you need, ask about supplemental or voluntary coverages. If your employer offers no disability benefits at all, consider purchasing your own individual policy.