In the complicated process of finding and buying a home, the uninformed shopper can get caught up in costly missteps along the way. From establishing a budget to closing the deal, here are 18 tips to help keep homebuyers on track and on budget.
Current homeowners moving to a new city might assume buying is better than renting, but that's not always the case. It may make more sense to rent than to pay the one-time costs associated with buying if you have to move again soon. There are tax benefits to staying in a home for at least two years. Sellers can exclude up to $250,000 in capital gains ($500,000 for married couples filing a joint return) from a home sale, but only if they owned and lived in the home for at least two of the previous five years. The exclusion can be used once every two years.
Negotiating can be difficult and uncomfortable, but one way to ease the tension is to have options. Find several properties that would make good homes and negotiate hard on the price, concessions, and repairs, knowing that a backup is ready if one deal falls through.
A real estate agent should find and share homes that are a good fit, but buyers can use online resources to do independent research. Look through recent sales and current listings to get a sense of the market in different neighborhoods. HomeFinder.com, Realtor.com, Zillow, and Trulia (owned by Zillow) are all worth checking.
Use the experience gained from owning a home to know what is and what's not a big deal. "Buyers sometimes decide against a house based on something as minor as a bad paint job," says Monica Ajer, an agent with Coldwell Banker Residential Brokerage in the San Francisco Bay Area. Some issues are easy and relatively cheap to fix.
Cash sales are down, according to RealtyTrac, but all-cash sales still account for over 22 percent of transactions for single-family homes and condos. If sellers have to decide between an all-cash buyer and one with a mortgage, the all-cash buyer is often more appealing. There is less paperwork to deal with, less potential for delays, and no risk of loan denial. Some sellers may be open to negotiating the selling price, even lowering it, for cash buyers. Cash buyers also save money by avoiding title insurance, bank appraisals, and mortgage-related fees.
Homebuyers who can't afford to pay all cash can increase their appeal to sellers by getting pre-approved for a mortgage. Although the mortgage application could still be denied, the pre-approval shows that a lender checked the buyer's credit and financial situation. Buyers who want to show an even more serious offer can submit a loan application for the particular property to a mortgage lender and get a loan commitment letter.
Many lenders review applicants' credit reports before offering a loan or extending a new line of credit. The resulting hard inquiry stays on a credit report for two years and can lower credit scores for up to a year. Try to avoid applying for new credit cards or loans before shopping for a mortgage. Be cautious about starting other types of contracts, as well. A new mobile phone, Internet, or cable plan can result in a hard inquiry.
The Consumer Financial Protection Bureau found that nearly half of all homebuyers go with their first mortgage offer. However, comparing offers from several mortgage lenders can pay off big time. A difference of half a percentage point can result in thousands of dollars in savings during the first five years alone. Buyers needn't worry about the effect on their credit, either. For credit-scoring purposes, Fair Isaac Corp., or FICO, considers multiple hard inquiries from mortgage applications within a short period of time as a single hard inquiry. Depending on the scoring model used by lenders, the range is 14 to 45 days. VantageScore, a competing credit-scoring agency, considers multiple hard inquiries within 14 days as one inquiry.
Homebuyers who put less than 20 percent down may have to purchase private mortgage insurance, which protects the mortgage lender in case the borrower can't make payments. The borrower has to either pay for the insurance upfront or make monthly premium payments until the mortgage's principal is less than 80 percent of the selling price.
Homebuyers who can't afford to put 20 percent down on a home purchase may qualify for other types of mortgages. The Federal Housing Administration loan requires as little as 3.5 percent down and doesn't require a high credit score. Bank of America recently announced a type of mortgage that requires as little as 3 percent down and doesn't require borrowers to purchase private mortgage insurance, but the loans requires a credit score of at least 660, 80 points higher than the FHA requires.
Several government-sponsored mortgages may be well suited for homebuyers who can't afford a down payment. Current and former military members may qualify for a Veterans Affairs loan or a loan from Navy Federal Credit Union. Neither requires a down payment, and the borrower may not need private mortgage insurance. The U.S. Department of Agriculture's Rural Development program also offers no-money-down mortgages to low-income buyers in rural areas.
When sellers have an emotional attachment to a home -- perhaps they built it or were raised in it -- they may want to know a little bit about the buyer. Buyers can write a letter explaining their intentions and why they want that home in particular. When comparing otherwise identical offers, sellers may prefer to sell their home to an individual or family who plans to live in it rather than someone looking for an investment opportunity.
Some sellers are in a hurry to move; others may need a little more time. Buyers who can feel out the situation and be flexible may have an advantage. For example, some sellers may want to remain in the property for a month or two while searching for their next home. An offer to let them stay for free may seal the deal.
Buyers who are pre-qualified or pre-approved or received a loan commitment letter from a mortgage lender are one step ahead, but it's not a done deal yet. The mortgage lender will want an official appraisal of the property, and problems may arise if the appraised value is below the sale price.For example, a buyer purchasing a home for $200,000 and planning to put 20 percent down would apply for a $160,000 mortgage. But if an appraisal shows the home is worth only $180,000, the lender may offer the buyer a loan of only $144,000 (80 percent of the appraised value). That's $16,000 additional the buyer will have come up with out of pocket to meet the seller's asking price.If an appraisal comes back low and the buyers can't afford the additional cost, they may need to try renegotiating the sale price, request a second appraisal, or call off the deal. Some lenders may allow buyers to put less than 20 percent down if they purchase private mortgage insurance.
Buyers often pay for a thorough inspection of the home after an offer is accepted. This added cost can protect the buyer if a major problem is uncovered. Hire an inspector who is licensed, insured, and unaffiliated with the sellers or their agent. The inspector should report back on the home's condition, internal makeup, and any necessary repairs.
If the inspector uncovers an issue, the buyer and seller can go back to the negotiating table. For example, the seller may need to fix a leaky roof before finalizing the sale, or deduct the cost of the repairs from the sale price. A termite infestation might be a valid reason to call off the deal entirely.
Buyers and sellers may not receive all of the necessary documents until a day or two before the closing. Both parties should review the fine print and make sure there aren't any errors that could cost them money or lead to delays. Some states require attorneys to prepare documents or be present at closing, an expense homebuyers should be prepared to budget for.