As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
An exhaustive search for the perfect house has finally led you to the one that just feels right. Now it’s time to actually put an offer in and buy the place. Where do you start?
We’ve put together our top 10 tips on the buying process.
Are You Ready to Buy?
First things first: Is this the right time for you to buy a house? A few factors go in to this consideration.
1. Getting the Best Possible Rate
When people hear about mortgage rates in the news, they’re often hearing about the baseline mortgage rates set by the Federal Reserve. While it can be nice to understand how these are set, they actually have very little bearing on your personal rates because no one gets the baseline.
More important to determining your personal mortgage rate is the acronym IPAC: income, property, assets and credit. When mortgage lenders make loans, they have to judge the relative risk of the loan. That’s what IPAC is all about.
Your down payment may play into your rate as well.
2. Down Payment
Once you know what kind of shape you’re in with IPAC, it’s time to move on and consider the down payment. A down payment is required unless you’re applying for a VA loan.
You may not need to save as much as you think. If you’re looking to get a conventional loan, both Fannie Mae and Freddie Mac have multiple options for paying a small down payment. Fannie Mae has a 3% down program. For an FHA loan, you may be able to commit as little as 3.5% to the down payment.
If you can afford it, there are some advantages to setting aside more for your down payment, such as not having to carry mortgage insurance, getting a lower rate on your mortgage insurance or eliminating your monthly mortgage insurance payment altogether with PMI Advantage.
3. Get Approved
Typically, sellers take offers from people who have already worked with a mortgage lender more seriously. They know you’re backing up your offer with hard data on how much you’re able to borrow.
With Rocket Mortgage, you can get a rock-solid mortgage approval while you’re standing in an open house. Fill out some basic information on yourself, pull your own credit and share your income and asset information from one of our trusted partners and you’ve got a mortgage approval in minutes. You can even use your phone and take pictures of documentation with our app for iOS and Android.
Once you’ve been approved and found the house that feels right, it’s time to put an offer in.
4. Earnest Money Deposit
When you get ready to put in your offer, it’s time to set aside the earnest money deposit. This is a small amount of money you put in when you sign the purchase agreement. This deposit serves as the seller’s assurance that you’re serious about this transaction and want to move forward.
When your loan closes, the earnest money deposit can be applied to your down payment or other closing costs.
For most loans, the next step is the appraisal to determine the home’s market value. This will tell the mortgage company if they’re loaning you the appropriate amount of money. Your house is collateral for your mortgage. It’s important that the appraisal come in at or higher than your negotiated purchase price; lenders aren’t allowed to give you a loan for more than the home is worth.
If the appraisal comes in below the agreed purchase price, the seller has a couple of options: come down in price to match the home value or abandon the deal. Have a backup plan in case the seller chooses the latter.
6. Know the Market
What’s the market like for the house you’re trying to get? One of the best possible negotiation tactics is knowing where you stand.
Some questions to ask yourself in order to determine the best possible offer include the following:
- What are the sales prices like for comparable houses in the neighborhood? Aim for an apples-to-apples comparison; two-bedroom bungalows should be compared with other two-bedroom bungalows of the same square footage.
- How long has the house been on the market? If it’s been listed for a long time, the seller might be willing to come down in price.
7. Get a Home Inspection
Getting a home inspection isn’t always required, but it’s a good thing to do. A trained inspector will be able to go through your house and point out things that are issues or could be issues in the near future.
The inspection report provides a negotiation point. If there are problems with the house that are found during the inspection, you can make the sale contingent on fixing the problems. Alternatively, you could choose to fix the problems after closing but purchase the home at a lower price.
8. Seller Concessions
Let’s say you want the house at a certain price but the seller isn’t going to accept an offer lower than the list price. Instead, maybe they’d be willing to pay for part of your prepaid interest points at closing or your title insurance fees. These are known as seller concessions.
Mortgage discount points are prepaid interest at closing. By prepaying, buyers can get a lower interest rate. One prepaid interest point is equal to 1% of the loan amount, and you can get them in increments as little as 0.125%.
For example, for a $100,000 loan, purchasing two points might save you $100 a month on your payment. Two points cost $2,000, so you need to stay in the house at least 20 months in order to break even. If you can get the seller to pay for all or part of the points, that’s like free money.
The amount a seller can pay in concessions is limited to a certain percentage of the loan amount, depending on the type of loan you’re getting. Concessions on VA loans are generous.
9. Lender Credits
Another way to keep closing costs down is with lender credits: roll closing costs in to the cost of the loan over time. When you use a lender credit, you take a slightly higher interest rate in order to have the lender pay for some or all of the closing costs associated with your loan. You end up paying your closing costs over the life of the loan rather than having to spend a ton of money to close the loan upfront.
10. Moving In
Now that you’ve gone through the mortgage process and closed your loan, it’s time to get moved in. Everyone knows they should either hire movers or recruit strong, young friends. However, there’s a million little things we forget about.
When you move in, make sure the power company knows so that the lights actually come on when you hit the switch. The same principle applies to water, cable and Internet services. Make sure to have everything lined up ahead of your arrival.
Another thing to think about is all the places you need to change your address. Some examples include your driver’s license, places where you receive bills, at-home prescription requests and your child’s school. We recommend you do this two weeks before moving.
These are our biggest tips, but I’m sure there are others. If you have any advice for our readers on buying a new house, please share them in the comments below.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.