How to Buy a House: The Basics
Learn the basics
3. &(w/Taxes & Insurance)
Do the groundwork
The Process
After the purchase
More about Mortgages
Other Topics
This site is used as a homework reference in:
Stoughton High School (Pat Schneider's economics class)
How to Buy a House
As seen in
a free 39-page guide by Michael Bluejay
Welcome students of Pat Schneider's Stoughton High School economics class!
of Buying a House
Instead of making you read this whole website just to get
the general idea of how the process works, here's a short summary of
everything that follows.
I buy or keep renting?
In most cases it's better to buy instead of rent,
and to buy as soon as you can afford to do so. The only exceptions
are for people who have very low rent, or who plan on moving in
a few years. So the first thing you need to do is to figure out whether
buying is even a good idea for your situation. My rent
vs. buy calculator will help you do that very thing. Unlike many
calculators of this type, I've already filled in all the blanks with
sample values, all of it realistic. You need change only a few items
(current rent, home price, and mortgage rate) to get a good idea of
whether renting is better than buying.
Most people think the benefit in buying is to "stop
throwing your money away on rent," but in fact the equity you build
from buying is mostly offset by the money you will "throw way" on
taxes, insurance, maintenance, and mortgage interest, which renters
don't pay. The real benefit from buying is that you freeze your
monthly payment for 15 to 30 years, and then you stop paying it
altogether.
The Basics
You don't pay cash when you buy a house. If
you had to do that then nobody could afford a home.& Instead you
make a small down payment in cash (3.5 to 20% of the sale
price), and you get a loan from a bank called a mortgage for
the rest. You make payments on
this loan every month for 15 or 30 years, and then you get to stop
making payments.& (If you're rich and don't need a loan,
congratulations. You
can skip every part of this guide relating to loans.)
You used to be able to get zero-down payment loans, but after the
lending crisis (caused by banks giving out easy loans like candy),
those are pretty rare.& In 2006, a whopping 43% of first-time
homebuyers put no money down (USA Today,
2006), but those days are gone.& Veterans with good credit
scores can still get no-down-payment loans, but that's about it.
The higher the down payment you can make, the
easier it is to get a loan, and the lower the interest rate is, and the
lower the monthly payment is.&
What kind of home can I
In general you can afford a home worth about three
times your annual household income. If your combined income is
$60,000, you could afford a $180,000 house. ("Income" is your AGI, line 37 on your tax return.)
If it looks like you can't afford a home then consider
getting a bigger home than you need and renting out part of it.
This is especially applicable to single people, where the smallest home
they can find might be too big for their needs. Later as your income
increases and you can afford to live without renters you can do so, and
you'll come out ahead by having bought sooner rather than later.
Anyway, here's how the costs compare when you rent out part of a home
House Size
Total Cost
Rent out...
Your Net Cost
1 room for $400/mo.
$800/mo. for 1 room
2 rooms for $800/mo.
$1000/mo. for 2 rooms
Duplex (2 rooms each side)
One side for $900/mo.
$900/mo. for 2 rooms
In 2006 a friend of mine was paying $600 to live in a
tiny 1-bedroom apartment.& She bought a 4-bedroom house that cost
$1100/mo., and rented out two of the rooms for $600/mo. total. So her
net cost per month is only $500. She's spending $100/mo. less,
and she has twice as much room, a yard for her dog, and she owns her
own house.
Earlier I said you can afford a home worth three times your
income. Here are factors that could allow you to buy a home worth more
or less than that.
your buying power
your buying power
Debt, esp. big debt
Large down payment
Small down payment
Good credit
Bad credit
Duplex where you can get rental income
Single-family home, no bedrooms rented out
On the next page you can use my
to see exactly how much you can
How much a home costs
The median price for a home was $171,000 in U.S.
metro areas as of September 2011. (Kiplinger)& Of
course the price varies according to the part of town, and even the
state you're in.& Homes in California cost lots more than
homes in West
Virginia and Arkansas.& And naturally if the median
price is $171,000, there are houses available for much less.& In
bought two tiny houses on the same lot for $86,000 total, or $43,000
per house.
Prices were much higher until recently.& Prices surged from 2000
to 2007, then the housing bubble burst, and prices crashed, falling by about 40% by 2012.& (Some markets were even
worse, with Las Vegas prices falling 61% from their
peak.)& That means it's easier to buy a home now than it was just
a few years ago, since houses are a lot cheaper now.
How much will my monthly
payments be?
Your monthly payments will probably be 0.75% to 1.15% of
the purchase price. On a $150,000 home that's $1125 to
$1725/mo.&
This includes taxes and insurance. We'll cover how to estimate your
monthly payment more accurately on the next page.
The bigger your down payment, the lower the monthly
The lower the interest rate, the lower the monthly payments.
The longer the loan, the lower your monthly payments. But
it's better to get a shorter loan so you pay it off quicker and save on
interest, if you can afford the higher payments.
Don't forget that you can lower your monthly obligation by
renting out a room or two (or a whole side, if you buy a duplex).
To afford a house you'll
need the up-front money as well as money for the monthly payments
Here's a summary:
Money you need up
• Down Payment (probably)
• Closing Costs (possibly)
• Misc. Costs
Monthly costs
• Mortgage Payment
& (inc. taxes & insurance)
Money you'll need up front
3 to 20% of the purchase price for a down payment.
The actual amount depends on what kind of loan you get and how good
your credit is. Your bank might offer a zero-down loan, but if you can
afford to make a down payment, you should do so, because you'll get a
lower interest rate and because your monthly payments will be lower.
1 to 8% of the purchase price for closing costs.
You might not have to pay this up front. The bank might be willing to
add it to your mortgage. (Add them to the mortgage if you need the
cash, but pay the closing costs up front if you don't.) The actual
amount of closing costs depends on how good a deal your lender is
willing to give you, and the price of the house. The more expensive the
home, the less the closing costs are as a percentage of the total price.
$250 to $800 in Miscellaneous Costs. These are
things like the application fee for the loan, the fee for the bank to
run your credit report, professional inspection of the home, and an
appraisal (if you can't get the appraisal added to the closing costs).
Putting these three things together, on a $150,000
house you'll need
$4500 to $30,000 for the down payment (unless
you get a 0% down loan)
$0 to $12,000 for the closing costs
$250 to $800 for miscellaneous costs
Total: $4750 to $42,800. Yes, that's quite a
difference. You'll learn more about estimating the costs for your own
situation as you go through this guide.
How to get a mortgage (a
You generally need four things to qualify for a
Money to make the down payment.
Income that's 2 to 3 times higher than your mortgage
payment. (more on figuring mortgage payments in a minute)
Two years of solid employment history (same job or field).
Decent (not perfect) credit.
There are sometimes ways around this if you lack one or two
of those, but usually not if you lack three or four. More on this later.
All the costs involved in
buying a home
$150,000 avg.
3-20% Cash down
80-97% Mortgage
1-8% of sale price
Paid in cash at closing, or rolled into mortgage
For app. fee, credit report, inspection, appraisal.
Paid in cash
Closing costs are fees charged by the companies and
government offices which process the loan and the sale of the property.
They're generally 1 to 8% of the sale price. You might be able to have
the closing costs added to the mortgage so you don't have to pay them
Where the money comes from
Sale Price
Down Payment
(mortgage)
Closing Costs
Cash, or added to mortgage
Misc. costs
At right is a summary of what you've learned—to buy a house you make a
down payment in cash, get a bank loan for the rest, and pay the closing
costs in cash.
Remember that you might be able to have the closing costs
added to your loan instead of paying them in cash.
Remember also that the amount of money you have to put down
varies depending on the type of loan you get and what the bank
requires, and the closing costs vary too.
How to find
and buy a home
Read the rest of this guide, especially the parts
about estimating how much home you can afford. The rest of this guide
covers everything below.
Get a copy of your credit report and clean up your
credit record as much as possible.
Go to your bank, ask to talk to a loan officer, tell
them you want to buy a house, fill out an application, and get what's
called a Pre-Qual Letter.& You may have to pay an application fee
of $40 or so.
Find a real estate agent (get
referrals from friends).& The seller pays the commission to your
agent, so it costs you nothing to have an agent.& Your agent
serves you by letting you know what houses are available that meet your
needs (they have access to a special database) and by answering your
questions about the process.& In theory a agent should also help
you get the best price but not necessarily, because the more you pay
for the house, the more the agent makes in commission.
Tell the agent what part(s) of town you want to live in,
what kind of house you want, and how much the bank said they'd loan
you. Your agent will give you a list of houses that match your
criteria. Go look at them.
When you find a house you want get the Disclosure from
the seller.& This is a list of problems with the house that
the seller knows about, and which the seller must give you by law.
If the Disclosure doesn't sour you on the house, ask the
agent how much you should offer.& It's rare that you accept
the price given by the seller, usually you'll offer slightly less than
they're asking.& Get a list of Comparables (similar homes that
have sold in the same area recently) from your agent so you can get an
idea of how much the house is worth.
You'll make the offer by signing a contract.&
If the seller accepts your offer then they'll sign too.& At this
point you're generally obligated to buy the house and the seller is
generally obligated to sell, though depending on the wording of the
contract either of you could have the right to walk away from the deal
under certain circumstances.
Have the house professionally inspected.& You
generally have to pay this yourself, at the time, and it will cost $350
or so.& If the inspection turns up problems not listed on the
disclosure which will cost a lot to fix, try to get the seller to lower
the price or fix the problems before the sale -- or walk away from the
deal if your contract allows that and that's what you want.
The bank will have the house appraised to make sure it's
worth what you're paying for it.& (They don't want to loan you
$200,000 to buy a house that's worth only $150,000.)& You might
have to pay this up front, otherwise it will be added to your closing
costs.& Besides paying for it up front if that's required, you're
not involved in this step of the process.
Find an insurance agent (ask friends for referrals) and
get a quote.& You can certainly price-shop 2-3 different
companies if you like.& Pick one and tell them you want the
insurance.& The cost will be added to your closing costs, you
don't have to pay this at the time.
Closing.& You go to the office that's handling
the closing (a title company or an attorney, usually selected by the
lender or the seller), to take care of the paperwork.& You'll owe
some money, such as the down payment, and closing costs unless you got
those rolled into the mortgage.& You've either already arranged
with your bank to wire the funds to the closing company, or you bring a
bank check with you to closing.& You don't need to get a check for
the mortgage loan, the bank will wire that directly to the office
handling the closing.
That's the short version
of how to buy a house.
To learn the details of all those things, keep reading...