Before You Buy a Home (2006)

Checklist of items for homebuyers who have already found a home they wish to buy. Topics include checking neighborhoods, verifying building permits, using a home inspector, and considering all costs of homeownership.

Before you buy a home

Your home will probably be the most important purchase you will ever make. Homebuying can be an exciting and rewarding experience, but it is also hard work. You may have found your dream home, but you need to protect yourself before your dream home becomes your nightmare home. Carefully consider these questions before you buy.

Can you afford it?

There are many costs associated with buying a home, not the least of which is paying your mortgage. When you shop for a home loan, compare fixed rate mortgages—not just adjustable rate mortgages (ARMs).

With a fixed rate mortgage, you will always know what your payment is going to be.

With adjustable rate mortgages, your payment can go down or up—sometimes way up! Especially avoid two kinds of ARMs—interest-only loans and “payment option” mortgages—these have put many a homeowner on a path to foreclosure.

Before taking out any mortgage, make sure you understand what can happen to your payments over time. Ask if the loan contains a bad provision called “negative amortization,” which could result in you owing more than you borrowed when you need to sell the home. Always compare several loans, apply at one or two major banks and check out the background of mortgage broker by calling your state real estate department.

Property taxes. In most areas, property taxes are a large chunk of your yearly housing costs. Property taxes must be paid annually, usually in two installments due in April and November. Property taxes are sometimes collected with your mortgage. In this case, you will pay approximately 1/12th of your annual property taxes to your mortgage company each month.

Homeowner’s insurance. You need homeowner's insurance to protect you from losses due to fire, riot, burglary or visitors who are injured while on your property. Insurance premiums are sometimes collected with your mortgage. In this case, you will pay approximately 1/12th of your annual homeowner’s insurance premium payment to your mortgage company each month.

In earthquake prone areas, earthquake damage coverage can be very costly. If your property lies in a flood zone, you should purchase flood insurance, which is sold by the federal government through insurance brokers.

Emergency funds. While the interest on your loan is deductible from your income taxes, this deduction alone usually won't make up for all expenses associated with buying a home. It is recommended that you keep an amount equal to at least two months of mortgage, property tax and insurance payments in the bank in case of an emergency such as illness or job loss.

What's the neighborhood like?

The place looked great the day you visited. But before you buy, go back at different times and at night. Are there parking, noise or crime problems in the neighborhood? If you see nearby residents, ask them how they feel about the neighborhood.

Nothing beats a first-hand look, but the Internet provides some good tools for researching neighborhoods. Homefair is a web site that offers free reports on schools, cities and a feature called “Relocation Crime Lab,” which compares local crime statistics to a national average. To find these free features, look for “Reports” on the left hand side of the page, and click on the report you need.

Do any hazards exist?

Natural and environmental hazards reports investigate hazards you can’t always see, ranging from earthquake faults to contaminated soils. While often invisible to the human eye, these hazards could affect you and your family now or in the future. Your real estate professional can give you the names of companies that provide natural and environmental hazards reports.

Is the house in good condition?

Always reserve the right in your real estate contract to have the property inspected by a professional inspection service. Your real estate professional can give you the names of companies that provide home inspections. Accompany the inspector through the house and ask questions. The $250-$500 cost is well worth it and you can negotiate to try and have the seller pay the cost. Most states recommend that you have the house inspected for termites.

Make sure you obtain a copy and disapprove questionable items within the time allowed in your contract. Negotiate to have the seller purchase a home repair plan for you to pay the cost of any unforeseen repairs to the plumbing, heating and electrical systems, roof and structure, or purchase the plan yourself.

Are there permits on file for all repairs and improvements?

Have your real estate agent and the home inspector obtain copies of all building and other permits for the property and check to see that a permit was obtained for all repairs and remodeling work. If any of this work was done illegally, you will have a problem later. You will either have to remove the illegal improvements or pay to have them done properly plus any applicable fines. Homeowners often add illegal bathrooms, additions, sheds and in-law apartments, so make sure to check building reports.

If you plan on making major changes after you buy, will they be legal?

If you plan to add improvements to the property or operate a business or convert a non-living space into a living space or rent out part of the property later, check out all applicable zoning and building codes before you buy. Even if your real estate agent says no problem, you cannot rely on such statements. Local zoning and building laws may prohibit your dream plan.

Is the owner offering to lease the house with an “option to buy"?

Never enter into a lease with purchase option transaction unless you have obtained the advice of a reputable attorney and all terms are in writing and signed by all parties. Many first-time homebuyers have lost their life savings after entering into a badly written lease-with- option-to-buy transaction. If the seller is keeping title to the property in his/her name, you are taking the risk that the seller will not live up to his or her bargain or will default on the mortgage payments and lose the property in foreclosure.

Have you checked your credit?

Before shopping for a home, ask for free copies of your credit report at Annual Credit Report. You can get a free copy from each of the three major consumer credit reporting companies once per year.

For a small fee, you can also obtain your credit score, a number derived from your credit report. If you have a good credit score you will qualify for lower interest rates on mortgages.

Have you obtained all available information?

Take advantage of the many seminars for first-time buyers put on by banks, consumer credit counseling organizations and various legal aid programs. Be realistic about what your income is now and what you can afford.

Visit the U.S. Department of Housing and Urban Development (HUD), web site to search for HUD-approved housing counselors in your area.

A version of this brochure was originally created by the Legal Aid Foundation of Los Angeles (www.lafla.org). It has been updated and expanded by Consumer Action with funds from Consumer Action's Housing Information Project. © 2006.

Published / Reviewed Date

Published: January 04, 2007

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Filed Under

Foreclosure   ♦   Housing   ♦   Buying A Home   ♦   Home Financing   ♦   Housing Insurance   ♦   Mortgages   ♦  

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