Buying a home can be very exciting. You stop giving your money to a landlord every month and start investing in something that’s actually yours. You have your own place to entertain friends and family, serve as your personal Fortress of Solitude and act as a home base to put down your roots in a community.
Purchasing a home is a big step, though. For most people, their mortgage represents the biggest financial transaction they’ll ever make. With that in mind, it’s important to make sure you’ve considered all angles.
Here are 10 things to consider before you hit the neighborhoods.
1. Buying a home is still a worthy dream
If you can afford it, it makes sense in many U.S. markets to buy a home. Let’s say you are on yearly contracts to rent. Odds are, your rent is going to go up a bit every year. How much depends on demand, but you don’t have payment certainty.
With a house and a fixed-rate mortgage, payments stay steady over time.
Property taxes and homeowners insurance could change over time. However, even here there are advantages over renting. If you’re renting an apartment or a home, you would likely be paying for renters insurance anyway, so this can be a bit of an even trade. And sure, taxes are a fact of life, but remember you’re contributing to your community, helping to pay for things that benefit everyone, like public education, fire protection, streetlights, parks and playgrounds.
Because it’s your house, every time you make a payment on your mortgage, you gain a little more equity. Some homeowners choose to convert this equity into cash and use the cash in a variety of ways. For instance, you could build that sweet home theater you’ve always wanted.
Beyond the financial benefits, there’s also something to your home being yours. You can paint the entire house maize and blue if you want to (or if you don’t want to go too crazy, just the man cave).
2. The down payment requirement is probably lower than you think
One of the more daunting obstacles for those thinking about buying a home is saving for a down payment. However, you may not need as much as you think.
It used to be commonly accepted logic that you needed at least 20% down in order to buy a home. While there are advantages to a higher down payment including the potential for better interest rates and the ability to avoid paying for mortgage insurance, you can often get into a home for as little as 3%–3.5% depending on your median FICO® Score.
Don’t get me wrong. On a $200,000 house, a 3% down payment is still quite a bit of money, but it’s much more attainable. You just need a little bit of diligence and a savings strategy.
There are special loan options that don’t require a down payment. For example, if you’re an eligible active-duty servicemember, veteran or surviving spouse, you may be able to get a VA loan. Also, if you live in a qualifying rural area or one that’s just on the outskirts of suburbia, you may be able to get a loan through the USDA if your income is within certain limits.
3. You have to be comfortable with your budget
You’ve decided it’s time to take the plunge into homeownership and have started saving for a down payment. But how much you actually afford?
You can and should do some back-of-the-napkin math by looking at your monthly income and expenses to see what you would be comfortable with in terms of your monthly payment, but you should also get a mortgage approval from your lender.
Also referred to as a preapproval by some in the industry, a mortgage approval is the process by which a lender takes a look at your financial situation and determines exactly how much it is willing to lend you.
Because you could be in a competitive offer situation, your mortgage approval will always be based on the absolute highest amount you can afford for a monthly payment, according to underwriting calculations. You should always think about your overall financial state and not immediately look at houses at the top end of your budget. Careful consideration of your budget, no matter what anyone says you can afford, could help you create more wiggle room for those unexpected life events like a medical emergency or future job loss.
4. It helps to find a real estate professional
When you’re home shopping, it’s tempting to look at listing websites and think you know exactly what’s going on in your local housing market, but real estate agents are pounding the pavement everyday buying and selling homes. They have an understanding of prices and what’s available out there that someone who only looks at homes once every 10 or 15 years couldn’t possibly hope to have. A real estate agent can help you with all of the following tasks:
- Finding a home that’s the best balance of your budget, needs and wants
- Putting in the best possible offer
- Completing your purchase agreement
- Suggesting a good home inspector if necessary
You’ll want to find a real estate agent with a good understanding of your needs and desires, knowledge of your local market and experience handling transactions for homes in your price range.
5. You may be able to get a better deal in the fall and winter
If you’re willing to brave chilly weather when shopping, your pocketbook may thank you. It’s no secret that there’s been a lack of inventory in housing for the last several years as existing homes aren’t coming onto the market very quickly and builders are also struggling to keep up with demand. Although the inventory problem is getting better, it’s been a slow process.
Still, there are peak home-buying seasons. People tend to want to purchase homes in the spring and summer. Young families want to get settled in their new homes before kids go back to school.
If you find a property that goes on the market in October or November, the sellers may be motivated to get rid of the house and be moved into their new place by the holidays. If the property has been on the market since the summer, the seller may be willing to negotiate on the price, although you should make sure the price is the reason it’s been on the market that long.
There’s empirical data to back up the fact that prices level off in the winter. Although prices have been steadily rising due to a lack of supply, there are still points in the winter months when price increases slow down or even level off.
6. Put forth your best offer
When it comes to your offer, you should know there’s more to it than the price of your bid. There are a few intricacies to making the right offer.
- Escalation clause: If you’re in a multiple offer situation, it helps to have an escalation clause in your offer. You put in your initial bid, but you say that for any bid that comes in above yours, you’ll go $X higher up to a cap amount that’s your top offer.
- Consider dropping contingencies: Another way to make your offer stronger is to drop as many conditions as possible. For example, an appraisal contingency is popular because a lender can’t loan you more than a percentage of the appraised value of the home. If you don’t want to drop this entirely, you might write into the offer that you’ll pay a certain dollar amount above the appraisal. You could also consider dropping a home inspection contingency in a multiple offer scenario.
- Limit requests: One of the ways buyers try to keep closing costs down is to have sellers pay for closing costs through concessions. However, the less the seller has to pay for, the more attractive your offer will be.
- Be flexible: if the homeowner wants to move out after school ends or before the next school year starts, the more flexible you can be in your offer, the better.
- Add a personal touch: Homeowners take great pride in their home and want to see that it’ll go to someone who cares. Sometimes you can make your offer stand out simply by writing a letter saying how much you like the house.
7. Sometimes appraisals come in low
When you buy a home, the appraisal establishes the home’s market value by comparing it against recent sales of comparable homes. For example, three-bedroom ranches are compared against other three-bedroom ranches, usually within a mile or two of the home you’re buying. It can be a little further out if you’re in a rural area.
This valuation is to ensure that the amount of money requested is appropriate for the property you want to buy. If the appraisal comes in lower than the agreed upon purchase price, you may not be able to borrow enough to buy the home. When the appraisal comes in low, you have five alternatives.
- The seller could agree to the new appraisal value and you move forward with a lower purchase price
- You could renegotiate
- As the buyer, if you feel the appraiser didn’t take into account the right comparables, you can work with your lender to appeal the appraisal. The seller cannot do this.
- You can choose to bring the difference between the purchase price and the appraisal in cash to the closing table
- You can walk away from the deal if you can’t reach an agreement. Without an appraisal contingency, you may lose your earnest money deposit.
8. You should get a home inspection
Unlike an appraisal, a home inspection isn’t required to get a mortgage, but you should absolutely get one.
A home inspection is where you as a buyer get the chance to tour a home with an inspector and find out what you need to look for in terms of problems with the house as well as any issues that may currently exist. If there are any deal breakers, you can walk away if you have an inspection contingency. You also may be able to have the seller fix issues or knock some money off the purchase price for you to make the fixes. It doesn’t always happen, but it’s possible.
9. There are ways to keep closing costs down
If you’re looking to reduce closing costs, there are multiple ways to do this. Here’s how:
- You can take a lender credit and have the lender cover some of your cost. In exchange for this, you’ll pay a slightly higher interest rate.
- Some costs, like the upfront mortgage insurance and guarantee fees associated with certain loans, can be rolled into the mortgage balance and paid off over time.
- You can negotiate with the seller to have them pay for certain closing costs as seller’s concessions. Although your offer can be more attractive if the seller doesn’t have to pay as much, sellers commonly pay certain fees depending on where you live. You can ask your real estate agent what’s typical.
10. You’ll need insurance
Mortgage investors require that you have homeowners insurance in order to protect their investment. If your house is hit by a tornado and needs major repairs, that affects the value of the home. If you fell on hard times and the lender had to sell that property, they need to make sure that it’s repaired to the level it was when you bought it.
You need to have coverage that will at least cover the value of the property repair. In certain areas, you may need special flood or earthquake coverage.
In addition to structural damage, homeowners insurance also typically covers damage to other structures on your property, personal property loss (up to a certain amount, and if you have any high-value items, you may need a rider for additional coverage) and liability in case someone hurts themselves on your property.
Once you buy a home, you’ll get several persistent mailers about purchasing mortgage insurance, which, for most people, is a more expensive version of life insurance. Once you buy a home, consider how a life insurance policy, in at least the amount of your mortgage, is a way to keep your home from becoming a financial burden on your heirs. For example, a 30-year (length of the loan), $250,000 term life insurance policy could cost a healthy 35-year-old woman $25.61 per month. That money could be used by her beneficiaries (a spouse or family members) to pay off the mortgage and comfortably stay in the home.
Kevin Graham is a Blog Writer for Quicken Loans Zing Blog, specializing in mortgage content. In his spare time, Kevin is a tech enthusiast who is a big fan of Star Wars and all things Detroit sports.
Haven Life Insurance Agency does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, accounting or real estate advice. You should consult your own tax, legal, accounting advisors or appropriate professionals before engaging in any transaction.