Once you are ready to buy a home, you will need to be as informed as possible. This guide discusses how much money to save for a down payment, how to work with a real estate agent, how to negotiate, and what you need to know about closings.

Because home ownership is a substantial investment and a long-term commitment, it is important to become as knowledgeable as possible about the process of buying a home. Obviously, you want to avoid ending up with a home you are not happy with. You will want to find out all you can about how much you need to save for a down payment, about the process of finding the right home for you, about negotiating the best possible deal, and about various aspects of the closing.

Deciding How Much To Spend

Many new homeowners make the mistake of borrowing too much money. Before deciding on the price range of the home you plan to buy, think about how much you want to pay out each month in mortgage payments. Try to make as large a down payment as possible.

The Mortgage Payment

The mortgage payment will be composed of the mortgage payment, the property taxes (in most cases), and the mortgage insurance.

Caution: The lender will set a maximum on how much you can borrow. However, this maximum is often too much for the average homeowner to pay out comfortably each month. Therefore, use the maximum only as a starting point to deciding how much you will borrow.

Tip: Ask a real estate agent to help you get “pre-qualified” by a lender (to get an estimate of the maximum mortgage amount).

When deciding how much to borrow, be sure to take into account saving for your retirement, meeting your financial goals, and maintaining your current lifestyle. If your monthly payments do not allow you to meet these needs, buying the home does not make financial sense. Home buyers often end up unable to save enough money, to travel, to pursue their interests, or even to eat out and the purchase turns into a burden. Worse, many people buy a home that is too expensive and end up overwhelmed by debt, since home ownership requires more spending than renting: the home must be furnished and repairs and improvements have to be made.

Caution: To avoid having your dream home turn your life into a nightmare, calculate how much you realistically can spend on the monthly mortgage payment. Do not forget to add in the real estate taxes and mortgage insurance.

Lenders will be happy to pre-qualify you by giving you a preliminary limit on the amount they would be willing to lend you. This pre-qualification is not a commitment on the lender’s part; lenders will not commit to a mortgage until they have the property appraisal and all of your documentation. But the maximum they are willing to offer can be helpful for planning purposes.

The maximum debt is based on your income and debt level. It depends on current interest rates, the term of the mortgage, and the property taxes. To get a rough idea, the maximum debt amount is usually about three times your annual gross income.

The Price

Having decided how much of a monthly mortgage payment you can realistically afford, you are now ready to set a price range for your new home. You will give this range to the real estate agent during your first visit or use it to rule out homes you do not want to look at.

Planning Aid: See the Financial Calculator: How much house can I qualify for?

Tip: Don’t be afraid to look at homes that are 15% to 20% over your price range. In many cases, you will be able to negotiate the price down.

The Down Payment

You will probably want to make as large a down payment as possible. There are two reasons for this: (1) lenders will generally not require you to pay for private mortgage insurance if you can come up with a 20% down payment and (2) the sooner you pay off your mortgage, the better off you will be financially.

To save the 20% down payment, you may need to go on an “austerity plan” for a year or two. Many home buyers also use cash gifts or loans from family members to meet the 20% figure. If you cannot save 20% of the purchase price, you will still be able to get financing. However, it is best to try to save the 20% to avoid paying for private mortgage insurance.

Working With Your Real Estate Agent

You can save yourself much time and trouble by knowing what to look for in a real estate agent.

If you find that your real estate agent is not doing his or her best to find you the home you want or is otherwise not meeting your expectations, don’t hesitate to make a change. Avoid the mistake of staying in the relationship because you have invested time in it. Rather, get out as soon as you can. The real estate agent will cost you money, so make sure you are getting your money’s worth.

You can shop for and buy a home without an agent, but you will need to put in much extra time to do an agent’s work: search for properties, schedule appointments to see them, coordinate inspections, and negotiate. Home buyers who already have a property in mind that they want to buy are the best candidates to do the deal without an agent.

Positive Traits To Look For

Of course, you want a competent and experienced agent whose work habits are compatible with your own. To find such an agent, interview several candidates at different agencies. Look for the following traits:

• Is the Agent Full-Time? Make sure the agent works in the field full-time. Otherwise he or she may not be up-to-date on the fast-changing information and skills required for the job.
• Is the Agent Experienced? Be sure the agent has been doing the type of work you will need him or her to do for at least a few years. For example, if you are looking for a modest single family home in the suburbs, make sure the agent has not spent the last five years handling mostly rentals-or mansions.
• Does the Agent Listen and Communicate Clearly? The agent must be able to understand your priorities in purchasing a home and to tell you what you need to know about a home. For instance, if you tell the agent repeatedly that you must have wood floors and a tree-lined neighborhood, and he or she persists in showing you linoleum floors on crowded streets, you need to get a new agent.
• Is the Agent Willing to Negotiate For You? To get the best home for your dollar you will have to negotiate with the seller on the price. The agent plays a crucial role in the process. If he or she is not willing to show you houses that are 20% over your price range or to vigorously negotiate with the seller, you need to find a new agent.
• Is the Agent Careful In His or Her Work? You need an agent who will cover all the details that go into buying a home. Someone who takes shortcuts in order to “produce”-generate as many home sales as possible-will not do you any good.

Tip: Ask the candidates for references from clients with whom they have recently worked in the area in which you are house-hunting. That will help you determine whether the agent has the traits you want.

Negative Traits To Watch Out For

Here are some traits a good buyer’s real estate agent should not have. Most of them have to do with the conflicts of interest that arise with any commissioned salespeople. Basically, a commission salesperson’s goal is to see that as many deals close as possible while putting in the minimum of hours. However, many agents still provide good service.

• Haste Makes Waste. The agent who tries to push you into making a decision before you are comfortable doing so is to be avoided.
• Spendthrifts. Avoid agents who urge you to go over your price range.
• Favoritism. Avoid agents who push you to buy their agency’s listings over other properties, or who push you to use the attorneys or inspectors they recommend.
• Cover-ups. Dishonest agents have been known to help the seller hide a defect, or to look the other way. The only way to protect yourself from such deceit is to use an objective inspector.

Finding The Right Home

Throughout the search for a home, you must remain focused on what you want (and don’t want) in a home and to investigate for yourself. You may want to keep a list of items that are important to you, such as the location of the neighborhood, the type of materials used in building the home and the schools.

If a particular aspect of the house is important to you, do not take anyone’s word for it. Investigate for yourself. Visit schools, walk around the neighborhood, look under carpets to see what the floors are made of, stay in the basement for awhile to see how damp it is. You may also want to drive through the neighborhood after dark to see if the it is a safe place to live.

Tip: In order to have a benchmark for comparing home prices, find out what the price per square foot is for homes you are looking at. To find the price per square foot, divide the asking price by its square footage. Sources of a home’s square footage include the local tax assessment agency, the real estate agent, and the home builder. You should verify any statement that might be self-serving.

Negotiating The Selling Price

Buying a home calls into play your negotiating ability. Successful negotiation can often save you tens of thousands of dollars. Here are some tips to keep in mind when negotiating for your hoped-for home:

• Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
• Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
• Know what comparable homes are selling for.
• If the seller refuses to budge on price, try to negotiate for something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
• Don’t forget the real estate agent’s commission. It may also be negotiable.