Accountancy Resources
A house is probably the largest purchase you’ll make in your lifetime, so it’s important to do it right. The purpose of this section is to walk you through the steps so you can be confident that you made the right decisions. By following the steps outlined below, you’ll be on your way to making a sound financial decision.
There are a few quick rules of thumb to consider before purchasing a house. The first is that if paying rent saves at least 35% over the costs of owning (mortgage, taxes, repairs, insurance, etc.), renting is usually the better option.
The second is that it is usually not a good idea to buy a house that will be owned for less than about four years because the transaction costs of buying and selling are high. If the value of the house does not appreciate sufficiently between the purchase and the sale, the result will usually be a net loss (note that houses in communities with good school systems tend to appreciate in value more reliably than houses in less desirable school districts). When calculating the costs of owning, you should also take note that the interest paid on a mortgage is tax-deductible; so be sure to calculate the after-tax costs of buying a home versus the after-tax costs of renting a home. If you have had credit problems in the past, it may be advisable to rent until your record is cleaned up before seeking a mortgage in order to keep rates down and increase the amount you can borrow.
There are also options for owning property other than buying a house. Purchasing a condominium gives the buyer ownership of a living space and the right to use common areas associated with the complex. Monthly fees are paid to the organization to cover upkeep and improvements. Taxes, mortgages, and utilities are also the responsibility of the individual buyers. Co-ops are similar to condos except that the buyer does not assume possession of the physical living space. Instead, he receives a share of the whole complex. Taxes, mortgages, and utilities are paid collectively by everyone in the association.
Another consideration to make before purchasing a home is that most people can afford a house valued at roughly two and a half times their gross annual salary. Of course, this number varies widely depending on individual circumstances, and, of course, it is never a requirement to buy more house than you need. The estimate simply serves as a rough ceiling and should not be substituted for a careful analysis of income, expenses, and investments. Many circumstances can push this estimate in either direction. If you have more money available for a down payment, you can afford a more expensive house because your mortgage will be smaller. Interest rates may also affect your decision. Low interest rates may encourage you to spend more on a house while high-interest rates may limit the total that you can afford. Your lender will probably allow you to pay at most 29% of your gross salary toward your mortgage. At the same time, your monthly debt payments (car loan, credit cards, etc.) should not exceed 41% of your gross income.
When looking for a home, it may be helpful to request the services of a buyer’s agent. Sellers usually list their homes through an agent, but those agents will often not have the interests of the buyer in mind – especially if they are paid a commission based on the amount of the sale, which is typical. Buyer’s agents, on the other hand, can be hired for a fixed or hourly fee, allowing them to represent the buyer impartially. Their commission may, however, still be based on the selling price which can introduce some of the same problems that a seller’s agent carries. A lawyer will also probably be necessary for the purposes of analyzing contracts and advising with any complicated negotiations. Some homes may be seller-financed or for sale by the owner. These homes offer the potential for significant savings because no agent takes a cut. You will still need a lawyer to navigate the buying process, but these opportunities may be worth investigating.
The process of arranging for and receiving financing for a home purchase is an ongoing one. It will continue simultaneously with many of the other steps listed here until the sale is closed.
There are many options available for finding a house to buy. The web can be a helpful resource, providing listings, search tools, and photos, but, in the end, the internet will probably only supplement traditional methods like newspaper listings, agents and simply driving around potential neighborhoods. One way to save some money is to find a home that is “for sale by owner” – provided that the asking price is reasonable. A lawyer will still be necessary to lay out the process and ensure that nothing is overlooked, but many of the costs associated with working with a seller’s agent will be eliminated.
The type of home to be purchased will affect many of the costs and steps in the process. A new home may eliminate near-term repair costs and allow the buyer to provide input into the design process. The new home will also likely come with a warranty. Older homes available for resale will have some imperfections, but new homes are not available in every area and some resale homes may prove to be better values. Finally, for a greater bargain that requires more work and risk, fixer-uppers and foreclosures are available. Foreclosures are sales at auction of homes that the previous owners failed to make sufficient payments on. They are risky because the condition of the home is often in question until after it is purchased.
When it comes time to make an offer, the goal is to determine the smallest amount that the seller will accept for the house. Buyers should begin negotiating below this number so they can end up near it. However, initial offers should be high enough to be considered respectable so as not to frustrate the seller into moving on to other potential buyers. This process entails finding out if there are other interested buyers and learning how much similar houses in the area are worth based on recent sales. The current housing market will have a significant impact on the price because, in a market with high demand, a seller will be able to command a higher price. Negotiating an offer can also include concessions for repairs and other contingencies that may complicate the process. The details of making an offer can be left to an agent, but it is often in the buyer’s best interest to stay as informed as possible to make sure that his or her interests are well-represented.
Once the price has been agreed upon with the seller, an offer to purchase is drawn up. This offer is usually contingent upon the buyer obtaining a mortgage; it also grants the right to a home inspection and a walk-through inspection in the 24 hours before the closing. Any damage or other problems with the home that you discover during the inspection can usually be used to further negotiate on the price, or the seller can be asked to cover the costs of specific repairs. Professional inspectors may be a good investment because they will know everything to look for and will think of dozens of things that you might miss or forget to check. Once the inspection is completed and the terms are drawn up, a lawyer should review the contract before it is signed.
Next, you will make a good-faith deposit that a lawyer will place in escrow until the sale is completed. This simply means that the funds are under the control of a third party until the conditions of the sale are determined to be fulfilled. The deposit is up to 10% of the price and will go to the seller when the deal has closed. A large deposit may convince a seller that the buyer is serious and financially sound, speeding up the closing of the deal. At this point, you must finalize the terms of your mortgage with the lender and arrange for a home inspection. A document called the HUD Settlement Statement, which contains a list of the charges to be paid at closing, will arrive from the lender a few days before the closing. It should be reviewed with a lawyer. Closing costs can include escrow fees, insurance (title, homeowner’s, mortgage, etc.), taxes, and a variety of legal and miscellaneous fees.
The final step is the closing. After you complete the final walk-through inspection to make sure that everything is in working order, you will pay settlement charges and formally agree to repay the loan. The mortgage is signed, and a check is issued and then immediately exchanged for the deed to the house.
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