- The Washington Times - Friday, February 1, 2002

Whether you are buying your first home or your fifth, there's a lot involved, and many challenges. Today's market is difficult for home buyers because of higher prices and a shortage of properties on the market.

To help you along, here are the Friday Home Guide's Top Five Tips for Home Buyers:

Use a buyer's agent. Although the trend began in our area just 20 years ago, the majority of local home buyers work with a buyer's agent, making shopping for a home much easier and hassle-free. Still, some buyers venture forth without a Realtor at their side, denying themselves much-needed information and experience.

"You need someone representing your best interests," says Jo Anne Johnson, broker at ERA Executive in Falls Church. "Purchasing a home is financially and emotionally one of the biggest things you do in your life. There are so many things a purchaser has to be prepared to deal with, you really need someone to guide you along."

The rapid growth of buyer agency can be credited in part to the information revolution. Buyers in today's market need plenty of current data. Most of that data is available only from a licensed Realtor, through a Multiple Listing Service that contains all of the homes for sale. In the Washington and Baltimore areas, this database is maintained by Metropolitan Regional Information Systems (MRIS).

Access to the MRIS database is critical. Buyers who drive around looking at "For Sale" signs or surf for homes on the Internet are looking mostly at old information. Online listings and "For Sale" signs remain in place until a home goes to settlement. That may be weeks or months after the home was sold. You can spend a lot of time falling in love with pictures of properties that others already have bought.

Besides, home listings on the Internet do not provide the addresses of the homes because each seller's agent wants you to call him or her. If you want to see those homes, you have to make separate appointments with each seller's agent. Your buyer's agent, however, can take you to see a dozen homes in one afternoon and help you evaluate them in relation to each other.

If you are wondering how much hiring a buyer's agent will cost, rest easy. In most cases, it costs the buyer nothing to be represented by a Realtor. That's because most listing agreements contain a co-op clause, meaning the 6 percent or 7 percent commission paid by the seller will be split between the listing agent and the buyer's agent.

How do you find a good buyer's agent with whom to work?

"Word of mouth is the best way to find a good person to work with," says Bud Harper, a Realtor in Virginia with RE/MAX. "Talk to people who have bought and sold houses before, and you will quickly learn who some good agents are. The agent is more important than the firm, by the way. Then, be sure they are technically up-to-date. In this supercompetitive market, you need a Realtor who will be getting new listing information on a daily basis."

Know what you can afford. Home prices in the Washington area have risen sharply in recent years, pushing many properties out of reach of the average buyer. Many home buyers are disappointed when they begin shopping because they have been dreaming about homes beyond their means.

"Some people get emotional about a home they really like," Mrs. Johnson says. "Convinced they must have the home, they squeeze their budget until they can 'technically' afford it, but what will they have to give up to make that monthly payment? Will it be worth it?"

From a lender's perspective, your monthly housing payment (including principal, interest, taxes and insurance) should not exceed 28 to 33 percent of your gross monthly income. If, for example, you make $3,000 per month before taxes you can afford a monthly payment of about $1,000.

The guidelines a lender uses to qualify you for a loan, however, cannot take into consideration your personal financial situation and goals. You may qualify for a large mortgage, but can you truly afford it?

"If you have good credit, you can borrow as much as the lender's guidelines allow," says Dwight Gordon, a senior vice president with Nations First Mortgage. "But are you leaving enough money for school expenses, day care, hockey lessons and dance classes? These can add up to hundreds of dollars each month. All it takes is a layoff or something unseen, and you could have a real problem."

Get a home inspection. A dangerous side effect of a market as busy as ours has been a lack of rational thinking. One of the most irrational things you can do when buying a home is to skip the home inspection, but when competition for good homes is fierce and time is short, some buyers can be tempted to take hazardous shortcuts. Savings of a few hundred dollars and a little time can result quickly in unforeseen repair bills and tremendous headaches.

"I've seen people skip an inspection, and I truly wish they hadn't," Mrs. Johnson says. "Some sellers who receive multiple offers will take the one without an inspection clause to avoid the headaches. That can make it tempting for a buyer who is tired of losing bidding wars, but that inspection is so important to the buyer."

The purpose of an inspection is to protect you and make you aware of the overall condition of the property. Competent Realtors will suggest very strongly that you have the property inspected; it is only your fault if you ignore the suggestion. Getting an inspection is the buyer's responsibility, no one else's.

"Some people want to hold their agent responsible for the condition of the house they are buying," Mrs. Johnson says, but informing them of its condition is "the inspector's job, not ours," she says. "In fact, in our office, we have a disclaimer form for buyers to sign if they don't want an inspection. It says, 'My agent advised me to get an inspection, and I am declining to do so.'"

Lenders will have an appraisal done on the home, but this is an estimate of the home's value, not an inspection of its condition. Lenders are interested primarily in the value of the property not your future maintenance problems.

Appraisers do not inspect a home for structural or material defects. Your appraisal will compare the age, overall condition, location and size of the home with similar properties to determine its value.

Besides getting an inspection, it also is very important that you have a home-inspection clause put into the purchase contract to protect you in case of problems. Inspectors usually are called in after you and the seller have written a contract but before settlement. You want to be sure you can get out of the contract if the inspector discovers a significant problem.

A "general contingency" inspection clause is your best protection. This will allow you to walk away if the inspector finds anything you don't like. Less protection is afforded by a "specific contingency" clause because it limits your ability to walk away. Typically, a specific contingency will keep the buyer in the contract as long as the seller repairs any problems identified during the inspection.

Finally, be sure you are using a reputable inspector. Your Realtor probably knows someone who is good at what he or she does. You also may want to check www.ashi.com for a list of inspectors who are members of their professional association.

Hiring a reputable inspector is important because you don't have much recourse if items missed during the inspection become problems later. You probably will have to sign a waiver before the inspection, saying the inspector will not be accountable for problems he may have missed.

Most of those waivers state that the inspector can be held liable only for an amount equal to the fee paid for the inspection. Fees typically range from $200 to $500, depending on the company and the size of your prospective home.

Don't speculate about interest rates. There is simply no way anyone can predict with certainty whether mortgage interest rates are going to rise or fall in the next week, month or year.

Current rates are very low, historically speaking. Rates for 30-year loans ranged between 7.5 and 9.5 in the 1990s, making today's rates very good in comparison. Although they fluctuate week by week, trying to nail down the absolute best rate can be a fruitless pursuit.

"I know a lot of folks who have delayed a buying decision and only wound up hurting themselves," Mr. Gordon says. "You can literally cost yourself money in the long run by trying to maximize that last fractional benefit."

Put simply, yesterday's lower rate is gone and tomorrow's could be higher or lower. Although you may be frustrated about missing last month's slightly lower rate, small fluctuations do not make for large differences in payment.

On a $150,000 loan at 7.75 percent, for example, the monthly payment is $1,075. If the rate drops to 7.5 percent, your monthly payment will fall to $1,049 a difference of just $26 per month.

"All things being equal, mortgages might be a tad more expensive in the coming summer months," Mr. Gordon says. "It's hard to say for sure, of course, where rates will go. If you can afford the loan before you now, don't try to beat the odds and get it just a little lower."

Rates vary somewhat from lender to lender, so be careful about any unusually low rates you might find advertised. The mortgage industry has become so sophisticated and efficient that there shouldn't be a wide disparity between the rates offered by neighboring lenders.

A lender may entice you with a 6 percent fixed-rate loan, but the very fact that this is enticing should prompt you to ask questions. Begin with: "How many points will I have to pay?" Follow up with: "What fees are associated with the loan?"

Chances are good that the lender isn't just a generous guy who wants to do you a favor. The points and lender fees may cost you so much that the savings won't add up.

Get a lender referral. Just as you need a buyer's agent working for you and your interests, you need a good lender who is genuinely interested in helping you buy a home with a payment you can afford.

This has become particularly true in the past decade, as many new and confusing types of loan programs have emerged. You want someone who will serve as a financial adviser, helping you understand which loan program is best for you. A good rate on the right mortgage is much more valuable than a bargain-basement rate for a loan that doesn't suit you.

To find a good lender, ask around and shop around.

"The best way to find a good lender is through referrals," Mr. Harper says. "Some agents know really good lenders, but not always. Be sure you compare several potential lenders to see who you are most comfortable with."

A great way to compare lenders is to ask three to give you good-faith estimates on a specific loan. A good-faith estimate will detail all the fees associated with your loan so you can compare apples to apples.

Compare the many fees and charges in each estimate, and you will see quickly how different 30-year fixed-rate mortgages can be beneath the hood. As you go through this process, you will be making another observation, one just as important as your comparison of the estimates. As you speak with loan officers, consider how comfortable you are with them, how helpful each one is. Do they return phone calls promptly? Are they easy to reach?

If you heard about each lender from someone you trust, you may find they all are good folks from whom to borrow money so be sure you get your referrals from someone who knows the business of real estate.

"We know lots of people in the loan industry who are good to work with," Mrs. Johnson says. "I suggest to my agents that they give the names of three good lenders to each client. Your Realtor knows which lenders, home inspectors and settlement offices have done a good job in the past, so their advice is extremely valuable."

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