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.
So you’ve decided it’s time to buy a house.
If this is your first time buying a home, you might be wondering where to start. How can you tell if you’re getting a good rate? What are your down payment options? These are absolutely valid questions. To make things easier, we’ve put together our top 10 tips on the home buying process.
Are You Ready to Buy?
First things first: Is this the right time for you to buy a home? A few factors go into this consideration.
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 and credit score may play into your rate as well.
Regardless of your rate, one of the more impactful things you can do is make sure your rate is protected with RateShieldTM Approval||. This lets you lock your rate for up to 90 days while you’re shopping for a home. When you find the home of your dreams, if the rates are lower than they were when you initially locked your rate, you’ll receive the new, lower rate. But if rates have risen, you’ll stay at the rate you previously locked. This ensures that you get the best rate no matter what.
Consider your down payment. A down payment is required unless you’re buying your home using a VA loan.
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. With these options, you’ll pay less up front but you will have to carry mortgage insurance.
If you can afford it, you can avoid mortgage insurance by putting 20% down on your home.
Typically, sellers accept offers from cash buyers or buyers who have already worked with a mortgage lender. This way, the sellers know you’re backing up your offer with cash or verification from the lender on how much you’re approved to borrow.
The strongest approval is a verified approval, which includes having your credit pulled and verifying your income and assets, rather than a preapproval, which does not have these items evaluated by a mortgage expert. This gives the seller confidence knowing you have been verified by the mortgage company.
With Rocket Mortgage, you can get a verified approval. Fill out some basic information about yourself, pull your own credit and share your income and asset information from one of our trusted partners, and you’ve got a verified approval within 24 hours after briefly talking to a home loan expert.
Once you’ve been approved for a mortgage and found the right home, it’s time to put in an offer.
Earnest Money Deposit
When you get ready to submit your offer, you also need to set aside an 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.
Getting a home inspection isn’t always required, but it’s a good thing to do: A trained inspector will go through the home and point out things that need to be addressed (e.g., a leaky sink or broken porch step) or could be issues in the near future (e.g., a decaying roof).
The inspection report provides a negotiation point. If there are problems with the home that are found during the inspection, you can make the sale contingent on having the seller fix the problems before you close. Alternatively, you could negotiate to fix the problems yourself after closing but purchase the home at a lower price.
For most loans, the next step is the appraisal to determine the home’s market value. This is conducted by an independent third party and tells the mortgage company if they’re loaning you the appropriate amount of money for the sale price of the home. Your home is collateral for your mortgage. It’s important that the appraisal comes in at or higher than your accepted 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 few options: come down in price to match the home’s value, abandon the deal or ask you, the buyer, to pay for the difference in cash. If the seller does not lower the purchase price, you can walk away from the sale and recoup your earnest money.
Knowing the Neighborhood’s Market
What’s the local market like for the home you’re trying to buy? One of the best 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 homes 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 home been on the market? If it’s been listed for a long time, the seller might be willing to come down in price.
Let’s say you want the home at a certain price but the seller isn’t going to accept an offer lower than their listed 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 fees due at closing. By prepaying, buyers can get a lower interest rate. One point is equal to 1% of the loan amount, and you can get them in increments as little as 0.125%.
For example, on a $100,000 loan, purchasing two points might save you $100 a month on your payment; two points would cost $2,000, so you’d need to stay in the home 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 choose. Concessions on VA loans are generous.
Another way to keep closing costs down is with lender credits: rolling closing costs into the cost of the loan over time. When you use a lender credit, you agree to 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 paying them with cash upfront to close the loan.
Now that you’ve gone through the mortgage process and closed your loan, it’s time to get moved in. Everyone knows to either hire movers or recruit strong friends to help. 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 you receive bills from, at-home prescription requests and your child’s school. We recommend you do this two weeks before moving.
If you have any advice for our readers on buying a new home, please share them in the comments below.
||RateShield disclaimer: RateShield Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Additional conditions or exclusions may apply.
§Verified Approval disclaimer: Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
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