Buying a home is one of the largest financial transactions most people will ever make. With rents on the rise faster than incomes, many people are looking to enter the buyer's market. Here are a few tips to help you achieve your homeownership dreams.
1. Secure your mortgage first
Finding your dream home before you secure pre-approval for a mortgage is a costly mistake. Check out lenders at least three months before you start house hunting. This gives you time to pay down debt and even improve your credit score -- qualifying you for a better loan.
"Shopping for a mortgage early takes the pressure off when it comes time for you make an offer on your dream home," says Jane F. Shifrin, Real Estate Loan Officer for the Consumers Credit Union, based in Lake County. "Plus, it gives you time to qualify for a more attractive loan. A last minute loan could end up costing you tens of thousands of dollars more in interest and fees over the course of the loan."
2. Know what you can afford
Before buying a home, calculate your monthly debt-to-income ratio. The Consumer Financial Protection Bureau recommends using the 43 percent rule. Take your gross monthly income and multiply by 43 percent. Next, add up your monthly debt (mortgage, property taxes, insurance, utilities, car payment, credit card payments) to determine your total monthly debt. If your total monthly debt is less than 43 percent of your gross monthly income, you're set.
3. Beware of low-interest loan fees
Don't be seduced by a low-interest rate without calculating the cost of fees. To make sure you're comparing apples-to-apples, compare loans by their annual percentage rate (APR), not by "interest rate" only. The APR combines a loan's interest rate with closing costs and other fees. Also check for the monthly payment, total cost of the loan and loan terms.
4. Choose a shorter-term mortgage
For homeowners who can manage the payments, a 15-year fixed-rate mortgage is usually the best deal. Despite the higher monthly mortgage payment, you'll save thousands, if not hundreds of thousands dollars, over the life of the loan when compared to a 20-year or 30-year fixed-rate loan. A 15-year fixed-rate mortgage is almost always lower on interest and aggressively pays down principal.
5. Look into special lender programs
If you can afford a 20 percent down payment, that's great. You won't be forced to buy mortgage insurance -- which can cost hundreds of dollars per year. But many lenders offer programs with a small down payment -- between 3 and 3.5 percent down (expect to add mortgage insurance and/or fees). Shop around. Also, check if your employer participates in "employer assisted housing" programs that offer assistance with down payments and closing costs for low- to moderate-income workers. In some cases, these small loans are interest free.
6. Ask seller for concessions
Though there are limits on concessions depending on the type of mortgage you get, talk to your real estate agent. He or she may be able to negotiate a lower percentage of the overall sales price in concessions with the buyer to help you with closing costs.
7. Know the neighborhood
Researching neighborhood demographics is beneficial. Outside elements like crime and the quality of school districts will impact your property values -- and potential buyers when you're ready to sell. Also, consider the number of renters in the neighborhood. It only takes a few bad apples to drive down property values.
8. Check out property taxes, other fees
Property taxes are assessed by the county and average from half a percent to more than 2.5 percent of a home's value each year -- depending on where you live. Also, find out if the home you are buying comes with homeowner's association fees. Some homeowner's associations charge as high as a few hundred dollars per month.
9. Don't skimp on an inspection
Know the age and condition of the big ticket items of a home before you buy. The cost of later repairs can far exceed the price of a thorough inspection. Make sure your inspector checks the most expensive fixers including the home's foundation, roof, furnace, electrical, plumbing, attic insulation, windows, doors and other high-cost appliances.
10. Demand contingency clauses
Contingency clauses give you the right to void a contract under certain pre-negotiated circumstances without losing your "earnest money." They protect you if your mortgage loan falls through or if the property does not appraise for a specified amount. They also give you the right to cancel the contract or negotiate repairs based on your home inspector's findings and guarantee a specific amount of time for you to sell your existing home.
11. Keep your real estate agent in check
Keep in mind that agents work on commission. Don't tell your agent to make an offer on a house but reveal that you're willing to pay more. Some agents may use this information to their advantage. Also, shop around for an agent and try to negotiate their commission. Standard commission is around 6 percent. Top-tier agents make more, but make sure their fee is justifiable.
12. Shop around for insurance
Once you purchase a home, shop around for home insurance. Inquire about multi-policy discounts, protective device discounts, loss-free discounts and green home discounts. Not all insurers offer the same deals.
This article is sponsored by Consumers Credit Union.
For more information, contact Mark Nunez, real estate loan officer at 847.672.3416