Facts about Buying a Home

Feb 26, 2002 4:11 PM

Q: I'm thinking of purchasing a home. How can the UFT help me?

A: The UFT has assembled some information on how to shop for a home and mortgage. We also have arranged special programs with several lenders who are interested in business from UFT members and are familiar with their circumstances.

Q: Am I ready to purchase a home?

A: Ask yourself these questions:

• Have I been employed on a regular basis for the last two to three years?
• Will I continue to work steadily, either in the schools or in some other job?
• Do I have other reliable sources of income?
• Do I have a good record of paying my bills on time?
• Do I have only a few outstanding long-term debts, such as car payments?
• Do I have liquid funds (cash or easily sold investments) saved for a down payment?
• Do I have the ability to pay a mortgage every month, plus additional home costs such as utilities, insurance, taxes, maintenance and repairs?

If you answered "yes" to all of these questions, you are probably ready to purchase your own home.

Q: Why should I buy, instead of rent?

A: Buying gives you independence. Renting may give you freedom from most maintenance responsibilities. However, it does not protect you from rent increases, and it leaves you at the mercy of your landlord.

Q: Are there financial benefits to owning?

A: Several.

• When you make a mortgage payment, you build equity — you're making an investment for your future. When you pay rent, that money is gone forever.
• You will save on income taxes, because you can deduct the cost of your mortgage loan interest and property taxes from your federal income tax return and (usually) from your state income tax return, as well. Mortgage interest will comprise nearly all of your monthly payment for more than half the years you'll be paying your mortgage. (If you buy into a cooperative apartment building, you'll also be able to deduct a portion of your monthly maintenance fee reflecting taxes and any mortgage that the co-op itself pays.)
• There's a chance that your home's value will "appreciate," or grow, over time, making your investment more valuable and allowing you to sell at a profit.
• Be aware there can be draw backs. If your house needs expensive repairs it is your responsibility. If you have to move out of the area, you will have expenses and other issues if you have to sell.

Q: OK, I'm ready to buy. How do I determine what to look for?

A: Your home should fit the way you live, with spaces and features that appeal to you and your family. Before you start looking at homes, write down your minimum requirements, your priorities and a "wish-list" — things that you want in a home but are not essential. Ask yourself these questions:

• Do I want to live near certain schools, my workplace, public transportation or any other person or place that is important to me?
• How large should my home be?
• What kinds of amenities do I need, and what do I want?
• How much can I afford to spend each month? (You may want to discuss that with an accountant, who can consider not only your family income, but also the tax advantages that home ownership may bring.)
• What type of home do I want? There are basically four types:
  1. Single family homes. These homes, whether fully detached, attached or semi-attached, offer the most privacy and usually the most space. They usually give you the most flexibility of use, renovation and decoration, but they tend to cost more than apartments and all expenses are your responsibility.
  2. Two-to-four-family homes. The idea is to rent out at least one unit, where the rental income will pay a portion or the entire monthly mortgage payment.
  3. Cooperatives, or Co-ops. A co-op is a type of real property whereby stockholders of the corporation are entitled to use a certain dwelling unit or other units of space. Before you can buy you must be approved by the co-op board, which may consider such factors as your finances, job security and rental history. Once you become a resident, you'll be able to vote for and run for the co-op board and have a say in setting rules that govern co-op residents, such as quiet hours, parking regulations, pet policies and whether or for how long you can rent out your apartment. (Some co-ops require the board to approve renters). You'll pay a monthly maintenance fee , which covers your share of the co-op's costs for a building mortgage, property taxes and (unless your apartment is individually metered) utilities such as water, electric and gas. The co-op is also responsible for the upkeep of the building and grounds, making that a shared expense.
  4. Condominiums. The main difference between a condominium and a co-op is that, with a condo, you actually own your space, as opposed to owning shares in a corporation. Owning a condo affords flexibility similar to what owners of single-family homes enjoy — for example, condo owners can sell or rent to the person they choose and for the duration you want. Generally speaking, there also are a monthly homeowners association) dues, which cover expenses of maintaining common areas of the building.

Q: Should I work with a real estate agent, or just look on my own?

A: It's usually better to work with an agent, for several reasons:

• Agents can answer questions about neighborhoods and homes during your search.
• Agents generally will not charge you a fee, although the cost of using an agent may be reflected in the purchase price. Typically, sellers pay agents a commission based on a percentage — usually 6 percent Ñ of that price.
• In New York and some other states you also have the right to hire a real estate agent who will work for you as the buyer, rather than for the seller. Such an agent is less likely to lean on you to purchase a particular home and will be your representative in negotiating possibly better terms from the seller and the seller's agent. Buyers' agents are paid either with a negotiated fee or with a commission (often a share of the seller's agent's commission) at the time of sale.

Q: If the agent doesn't represent me, why should I trust this person?

A: This is a fair question, and an important one to keep in mind. However, you should also remember that agents have a financial incentive for making you happy, because they earn a commission on every sale.

Q: How can I select the right real estate agent?

A: Start by asking family and friends for recommendations. Compile a list of several agents and talk to each before choosing one. Look for an agent who listens well, understands your needs and seems trustworthy. Rely on your gut instinct, especially if you have a bad experience or sense a "bad fit;" you can always go to another agency.

Q: What other qualities should the ideal agent have?

A: Your agent should know the local area and have resources and contacts to assist you in your search. Your agent should also provide information on the price homes are selling for in certain neighborhoods.

Q: What is the listing agent?

A: When you see a for sale sign it usually names a broker who "lists" the property. They make a commission on the sale, along with your agent. Some buyers interested in a specific house contact the listing agent on their own. That way only one broker is involved and the broker has the potential for a very large commission. It could give the buyer a little negotiating power since the broker has such a large incentive to close the deal.

Q: What should I look for when walking through a home?

A: In addition to the minimum requirements and items on your wish list, consider the following when viewing a home:

• Is there enough room for both your present and future needs? Are there enough bedrooms and bathrooms? Are the rooms big enough?
• Is there obvious evidence that the house may not be structurally sound, such as cracks in the foundation?
• Do the mechanical systems (water, electric, air conditioning, etc.) and appliances work?
• Do you like the layout/floor plan?
• Is there enough storage space?
• Does anything need to be repaired or replaced? If so, will the seller repair or replace the items at no cost to you?
• Imagine the home in good and bad weather, and in each season. Will you be happy with it year-round?

Q: This seems like a lot of work. How do I do it all and stay organized?

A: It is a lot of work. Be prepared to ask lots of questions and rely on your agent for help. Here are some tips:

• Take your time and think carefully about each home you see.
• Ask your agent to point out the pros and cons of each home from a professional standpoint.
• Keep track of all the homes you've seen by taking photographs and detailed notes. (When you've spent a day looking, the homes tend to blur.)
• Do not hesitate to request a second look.
• Ask questions until you fully understand the information you have been given.

Q: Is a home inspector required?

A: No, but it is in your best interest to have a home inspection before you sign a written offer. Inspectors check the safety of your potential new home and focus on the structure, construction and mechanical systems, letting you know of any needed repairs. Qualified, experienced inspectors will also quote prices to make the repairs.

Q: What if the inspection uncovers needed — and costly — repairs?

A: Obviously, this changes your calculations, which is why it's so important to do an inspection before you sign a written offer on the house. With information in hand, you can renegotiate the purchase price or convince the seller to pay for the repairs.

Q: Will one inspection be sufficient?

A: As added security you could hire a specialist to inspect for the possible presence of health-related risks such as radon gas or asbestos, or a faulty water- or waste-disposal system.

Q: Will I need legal representation to purchase a home?

A: While it is not mandatory, it is highly recommended that you have legal representation to assist you in your investment / home. An attorney will help with the complex paper work, review contracts, make you aware of special considerations and assist you with the closing process. Shop around and find out what services are provided for what fee, and look for an attorney with experience representing homebuyers. Family, friends and colleagues are good sources of referrals. Members who sign up for the NYSUT Legal Service Plan are entitled to discounted attorney fees.

Q: When I find my dream house, how do I make an offer?

A: Ask your real estate agent to compare the house to similar homes in the neighborhood, and compare the asking price with the recent selling prices of other neighborhood houses. You also can visit websites such as www.domainia.com to get that information, or check the local county clerk or tax assessor's office. Property sales are public information. Make an initial bid based on this information.

Generally speaking, sellers ask a higher price than they expect to get and buyers initially offer a lower price than they expect to pay. During negotiations, if there are any, be sure to show the seller that you are relying on substantiated data. And be prepared to haggle over the price!

Q: OK, let's say my bid is accepted. What next?

A: Unless you intend to pay for the house in cash, you need a mortgage. A mortgage is simply a loan obtained to purchase real estate. The mortgage itself is a lien (legal claim) on the home or property that secures the promise to pay the debt.

Q: Are there special mortgages for first-time homebuyers?

A: Lenders now offer several options for first-time homebuyers. Even if you don't have a lot of money saved for the down payment and closing costs; or if you have no credit or poor credit (i.e. the inability to get loans or credit cards); or if you have heavy long-term debt (i.e. unpaid loans or installment payments); or income irregularities (i.e. employment gaps) — chances are good that a lender will be able to offer you a mortgage.

Q: So I should go to my local bank for a mortgage?

A: Certainly check out the interest rates that area banks provide, but do not limit your search to them. Several large lenders actively seek business from UFT members and offer discounts. Many loans are now provided by mortgage brokers, who help buyers obtain financing through the wholesale departments of banks and other lenders. Home mortgages are a very competitive industry and it pays to shop around.

Q: What should I look for while shopping for an interest rate?

A: This is not as simple as it sounds.

• First of all, pay close attention to the loan fees. A lender may charge a lower interest rate, but its loan fees may be high.
• Find out what the Annual Percentage Rate (APR) is on the loan, and use this as a guideline to shop for loans. The APR generally includes the interest rate, financing fees and closing costs.
• Don't depend solely on the APR, because different lenders may calculate the APR differently.