How do I prepare for home purchase?

By: Dian Hymer

October 13, 2003

Interest rates moved up recently. You may be thinking this is a good time to buy before rates climb further. But, before you take the plunge, there are steps you can take to simplify the task.

First carefully consider whether home ownership is for you. It's expensive and time-consuming to own rather than rent. The responsibilities of home ownership far exceed those of renting. You can't call the landlord if a sink clogs or the roof leaks. However, the rewards of home ownership tax relief, equity build-up, control over where you live and pride of ownership are well worth it, as long as you're realistic about what's involved.

When you're convinced you're tired of renting, the next step is to determine what you can afford to pay. To qualify for a mortgage, a lender needs to check your credit and review your finances and employment record. Self-employed individuals will have to provide copies of tax returns for the last two years.

You can get a preliminary opinion of what you can afford by having a conversation with a loan agent or mortgage broker. Before you make the call, be sure you know the amount of cash you have available for a down payment and closing costs. Also, itemize your debts car loans, student loans and charge card balances. This informal mortgage qualification process is called prequalification.

HOUSE HUNTING TIP: It's advisable to get preapproved for the mortgage you'll need to buy a home as soon as you know you're ready to start your home search. This involves submitting a complete loan application to a mortgage broker or lender.

The time is well spent. Preapproved buyers know exactly how much they can borrow, and they have an easier time negotiating with sellers. If you're attempting to buy in a market where multiple offers are common, you won't be able to compete unless you're preapproved.

Some buyers are having difficulty lining up homeowner's insurance, which a lender will require before funding a mortgage. Repeat buyers should check with their current home insurer. It may be easier for first-time buyers to obtain homeowner's insurance if they already have a renter's policy. If you don't already have renter's insurance, consider taking out a policy with an insurer who also provides homeowner's insurance.

The next step is to decide what and where you want to buy. How much you can afford will to some extent determine this for you. For example, if you're determined to live in a high-priced city like New York City or San Francisco, you may have to buy a condo rather than a single-family residence to be able to afford to buy at all. There's often an inverse correlation between home prices and proximity to a major urban center. The closer you are to the center, the higher the prices, and vice versa.

As soon as you know where you want to buy, you're ready to find a real estate agent to help you in your home search. Ask friends who bought a home recently for recommendations. Find out if they were pleased with the service they received. You may want to interview several agents until you find one that will work well for you. Rapport is an essential ingredient to a good working relationship, as are trust and mutual respect.

Buyers often wonder how they'll know a good deal when they see it. The key to understanding local pricing is to look at a lot of property. Find out what the listings you liked sold for and keep a record of this information.

THE CLOSING: Then, when you see a home you want to buy, you'll know what to offer.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers," and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

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