There can be a tremendous financial responsibility and a large cost to purchasing a home. Here are 5 tips to financing a house so that you can take down that “For Sale” sign on your new home.
1. Save for your home purchase at least 6 months before you consider purchasing your first home.
With the exception of a few home mortgages, you are going to need to put a minimum of 3% of the home purchase price down toward the home purchase at closing.
In addition, you will have an additional 2.5 – 3% in closing costs to pay for before closing on your home purchase. Closing costs will typically include a home inspection, home appraisal, land survey, lender costs, home purchase taxes, insurance prepaids, mortgage payment prepaids, property taxes and other possible fees (costs may vary).
2. Get pre-approved.
Sub-prime loans may be history, but you’ll probably still be shown homes you can’t actually afford. By getting pre-approved as a buyer, you can save yourself the grief of looking at houses you can’t afford or missing out on your dream house because another buyer has made an offer while you are getting pre-approved.
Unlike a pre-qualification, which is based on a cursory review of your finances, a pre-approval from your lender is based on your actual income, debt and credit history. It is a thorough analysis of your actual buying power, so you’ll be less likely to get in over your head. By being pre-approved for a mortgage loan, you will put yourself in a better position to make a quick, serious offer when you do find the right house.
3. Do not make any large purchases, open new accounts, or change jobs until you have purchased your home.
Making any large purchase over $250 or opening any type of new account could significantly drop your credit score and disqualify you from being able to obtain a mortgage for the purchase of a home. For this reason, you should not open any new credit cards, purchase a new vehicle, buy a new riding lawn mower, etc until after your lender has funded the purchase of your new home.
Likewise, changing jobs before purchasing a home could also cause you to be disqualified from a mortgage or at least delay it several months.
Think of it this way, if you were going to lend a large sum of money to a friend, family member, coworker or whoever, you would want to make sure they are going to be able to pay you back. Therefore, you don’t want to give a lender any reason to throw a red flag and be concerned about your abilitiy to make your monthly mortgage payments.
If you are not sure about a decision that could affect your financial stability, always consult with your loan officer before making any type of change in your normal living habits or employment.
4. Choose your mortgage carefully.
The emphasis, when it came to mortgages, used to be on paying them off as soon as possible. Today, the debt the average person will accumulate due to credit cards, student loans, etc. which means it may be better to opt for the 30-year mortgage instead of the 15-year, depending on your financial circumstances.
If you have higher debt, you may want to opt for a 30-year mortgage to lower your monthly payment, with the option of paying more toward the principal when money is good.
If you have high credit and low debt, then you may want to opt for a better interest rate with a 15 year mortgage. This will allow you to pay off the home in half the time and save several thousand dollars over time.
Additionally, when picking a mortgage, you usually have the option of paying additional points (a portion of the interest that you pay at closing) in exchange for a lower interest rate. If you plan to stay in the house for a long time, taking the points will save you money over time.
Just remember, interest rates are close to the lowest they have been in history. Have a discussion with your loan officer to find out which strategy works best for your unique situation.
5. Do your homework before bidding.
Before you make an offer on a home, do some research on the sales trends of similar homes in the neighborhood by contacting your experienced Realtor. Consider especially sales of similar homes in the past three months.
For instance, if homes in the neighborhood have recently sold for 5 percent less than the asking price, your opening bid should probably be around 8 to 10 percent less than asking price. If they are selling close to asking price, then you will want to bid accordingly.
Know your market. If homes are selling quickly and receiving multiple offers, then you will want to make sure you are making a competitive offer to ensure you are not outbid by another buyer. If homes are sitting on the market for more than 30 days, then you may want to bring in a lower offer and try to negotiate a better, but fair, purchase price. No matter how you bid, make sure you will be comfortable with the monthly payment by consulting with your loan officer before submitting your offer.
A last note: Financing and purchasing a home is a big decision that can give you a sense of security, stability, and equity. It can also put you in a bad position if you are not adequately prepared to purchase a home. So plan ahead, consult with your financial advisor, speak with a lender, and use an experienced real estate agent who can all help put you in the best position to have a wonderful home purchase experience.
Written by Ryan Odenweller
Keller Williams Realty