What's Your Homebuying IQ? Take The Test

Photo: Images_of_Money

Are you thinking about buying a home?Before you start checking out home prices in your area or shopping mortgage rates, take this quiz to see if you have the basic know-how to navigate the home-buying process.

Once you’re finished, go find your dream home and estimate your monthly costs with Zillow’s mortgage calculator. Good luck!

Question 1

TRUE or FALSE: Lenders require all buyers to purchase private mortgage insurance (PMI).

Answer: False

Private Mortgage Insurance (PMI) is normally required when a borrower's down payment or equity is less than 20 per cent of the loan value.

Lenders require this insurance as protection against loss if the borrower defaults on the home loan.

Borrowers who put down 20 per cent of the sale price of their home are not required to purchase PMI.

Question 2

TRUE or FALSE: Closing costs are negotiable and can vary by bank and lender.

Answer: True

You can negotiate with your lender to waive certain fees associated with the cost of completing your home purchase. Review every cost line by line as outlined in the Good Faith Estimate that your lender provides. Fees like loan-origination fees, administrative costs and other clerical fees are the most negotiable.

Question 3

TRUE or FALSE: The purpose of an appraisal is to help the buyer determine if the home is in good condition.

Answer: False

An appraisal is an estimation of a property's fair market value prepared by a qualified professional. The purpose is to protect the lender (not the homebuyer) by ensuring the mortgage loan amount is not more than the value of the property. It is not to help the buyer determine if the home's structural and mechanical systems are in good condition.

Question 4

TRUE or FALSE: Buyers typically have the option whether or not to buy homeowner's insurance.

Answer: False

Lenders require that borrowers purchase homeowner's insurance. This insurance protects lenders in case catastrophe strikes. For example, if your home is destroyed by fire, the lender knows the mortgage will be repaid from the insurance proceeds.

Question 5

TRUE or FALSE: A buyer has the right to back out of a sales contract if the appraisal comes in lower than purchase price, if the buyer cannot get a mortgage, or if the home doesn't pass inspection.

Answer: True

A significant portion of the purchase contract consists of clauses relating to conditions, or contingencies that must be satisfied, each within a certain timeframe, in order for the sale to go through. These are the legal loopholes that allow you to back out of the contract under certain circumstances.

Quesion 6

TRUE or FALSE: A home's value typically appreciates at 7 per cent per year.

Answer: False

Typical home value appreciation over the long-term is in the range of 2-5% per year. Generally, real estate will track or just modestly beat inflation or growth in household income.

Home value appreciation between the late 1990s and the mid-2000s was an anomaly. In the eight years between 1998 and 2005, home values increased 10.2% annually.

By comparison, over the eight years prior to 1998, home values increased 1.2% annually. Over the period from 1890 to 2006, the average annual growth in home values was 3.7%.

Quesion 7

TRUE or FALSE: A buyer officially owns the home after the purchase contract is signed.

Answer: False

The purchase and sales agreement merely kicks off the closing phase. As with all things real estate, how the closing is handled and by whom depends on where you live and local custom. But everywhere, the title transfers either: upon the execution and delivery of the deed to the escrow officer for recording, or upon the execution and delivery of the deed to the buyer (though this rarely happens in practice). This is moment is when the buyer officially owns the home.

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