Lemondrop

Whether you're more "Give me a modern loft" or "All I need is a beach house," we're sure you can picture your dream home -- even if you're still saving up pennies to buy it.

And truthfully, buying a house isn't easy. Since the housing bubble popped, mortgage lenders are even Scrooge-ier than usual. Right now, some say it's a buyer's market, since prices are down, but even knowing that, we're sure you have a lot of questions, like: "How much house can I afford?" or "What is a mortgage, exactly?"

Enter, your handy home-buying instruction booklet. "Buying a Home: The Missing Manual" is a clear, detailed guide that covers everything from deciding whether you should buy or rent to knowing what percentage you'd need to put down.

If you're not ready just yet, bookmark this link, because we're sure our interview with author Nancy Conner will come in handy someday. For your sake, we hope it's sooner rather than later!

Lemondrop: Why does buying a home feel so overwhelming?
Conner: I think there are a couple of reasons for that. The biggest one is that it's such a huge amount of money. To make a purchase of something that's several times what you earn in a year can be very intimidating. Also, the paperwork can be very intimidating. By the time you get into the closing and you see this big stack of legal sized paper in teeny tiny font with all this legalese crowded in there, I think people feel intimidated by not always fully knowing what they're signing.




Buying a home was once considered -- and may still be -- the American dream. What are the pros and cons? It's not all roses and backyard barbecues, right?

I think it's very important to remember that it's a big legal and financial commitment. One of the main things people should consider when they're trying to decide whether to buy or rent is the length of time they're likely to be staying in the home. Usually the rule of thumb is five to seven years. [That's how long you should plan to stay] before owning a home starts to make more sense financially than renting, and that's because of the way mortgages are set up. You pay a lot of interest up front. If you're only going to be in a home for a couple of years, it usually makes more sense to rent because you don't start building equity until your fifth or seventh year. Another thing is that if people are living in an apartment, they think owning a home is going to be such an oasis. "Oh, I'll have my own place, nobody on the other side of the walls." But the flip side of that is maintenance and responsibility for taking care of the home, and sometimes people do underestimate how much time and money can be involved in that.

You talk a bit about the 2.5-multiplier rule -- that you take your household's annual gross income and multiply it by 2.5 and that's how much mortgage you can afford. So, say, if someone makes $50,000, they should be looking in the $125,000 range. Why is that unrealistic?
Because there are other factors involved. It's a good starting point, and often it does make sense for people, but that equation assumes a 10 percent down payment, and a lot of people don't have the 10 percent to put down. Plus, there are the ongoing costs, from insurance to property taxes, which vary widely depending on where you live. So, the mortgage payment is only part of the equation, but it shouldn't be the only number that people get stuck in their mind. That's why it's a good idea to get pre-approval before you go shopping.

What does it mean to get pre-approval?
Actually sort of going through the process. You give the bank all the information about your finances so it has all the information except for the actual property that you'll be buying, and the bank says, "OK, we'd be willing to lend you up to that amount." That's a real number to work with.

There's a lot to consider when you're choosing a new home: what style you want, the condition, the neighborhood, the schools, etc. Do most buyers think about all those things?
I think people tend to get focused on one aspect or the other. So, for example, somebody might be absolutely positive they want a swimming pool or a fireplace, so they overlook other things that in the long term they might find more important. The reason I wrote the book is to get people thinking as broadly as possible about what they really want. You have to prioritize.

What are some common mistakes people make when they're looking for a home?
Showing up late or not showing up at all is obviously a bad idea, because you're going to annoy the realtor that you're working with. I also think that during the negotiation process, people make a mistake when they let their emotions come too much into play. You're aiming not to beat the other side but to come up with an agreement that both sides are happy with. People can get very stubborn and emotionally attached to certain contingencies they want to put into the contract. They want new carpets, for example. And sometimes people lose a deal for a house they really want because they feel like they're in some kind of contest for negotiations.

With all the foreclosures on the market lately, it might seem like there are lots of good deals to be had. What should people watch out for?
One is the condition of the home. Most of the time short sales and foreclosures are being sold "as is" and sometimes people mistakenly think that means there's no point in getting a home inspection. But you need to know what you're actually buying. It also takes a lot of patience to buy foreclosures. Things can drag on and on for a long time, and then the bank expects you to be able to move very quickly when they make up their mind. So, you really have to get all your ducks in a row and be ready to move fast when necessary and be patient when the ball is in the bank's court.

How much of a down payment should we be making these days? Twenty percent?
Twenty percent is going to make you look very good to the lender, but for a lot of people it really is unrealistic. It's a lot of money, especially when you bundle in the other closing costs. If you can do 20 percent, definitely go for it -- the advantages are that you get instant equity and you don't have to pay for private mortgage insurance (PMI). And you're very likely to get approved, so it streamlines things. But it's also not a good idea to stretch yourself more than you can actually afford for the down payment, because there are going to be move-in costs, maintenance things, redecorating things and you don't want to have a razor-thin margin of savings when you move into the home.

Is the fixed 30-year mortgage still the best idea?
I like them, personally. It really depends on the individual's situation. One thing to keep in mind is that an ARM (adjustable rate mortgage) has a lower initial interest rate but we're pretty rock bottom right now for mortgage interest rates. If you're planning on being in your home five, seven, 10 years, those rates are going to go up. When interest rates are high, an ARM can be an excellent deal because you're expecting rates to go down over time. Right now I'd tend to go for the fixed rate. Rates are very low, and they'll stay low over the life of the loan.

What mistakes are people making when it comes to mortgages?
One thing is not realizing how much a little bit of difference in a monthly payment can add up over time. A lot of times people say, "OK, my price range is up to $200,000," but then they find themselves looking at houses that are $215,000 or $225,000. It doesn't seem to make too big a difference in their monthly payment, but, over, time that can add up to tens of thousands of dollars.

What should you consider before making an offer on a house?
It's the kind of thing people lose sleep over while they're waiting to hear back. The main thing is to know your market. Real estate is extremely local, so what you're seeing in the news may not apply to your particular local market. This is one of the best reasons to work with a realtor who knows the market, or to go online to sites like Zillow or Trulia, where you can see what houses are selling for and get a sense for whether houses are selling quickly or languishing for a while. And it's not just dependent on the market -- it's also dependent on what you can afford, what you're willing to pay. Another thing that can be worth doing is to ask your realtor to look up recent sales from the listing agent and to compare the asking price with the selling price, because that gives you a sense of how that particular agent prices homes. If the selling price is consistently 6 percent under the asking price, then you know that agent is going to think 6 percent under is a pretty reasonable offer. Find a house you can fall in love with, but also be really level-headed about what you can afford. And hopefully you'll get a good result.


Kate Ashford is a freelance journalist who writes about personal finance and health (and other things). Without online shopping, she wouldn't own anything. Her work has appeared in Money, Women's Health, and Self. For more, check out Her Two Cents.